The Budget 2018-19 has primarily
focused agriculture, rural development, health, education, employment, MSME and
infrastructure sectors. It came against the backdrop of a raft of reforms,
economic slowdown and fiscal stress.
These series of structural
reforms will propel India among the fastest growing economies of the world. the
Budget seems rather lacklustre for the investor community, especially global
investors as their long standing demands such as clarity over indirect transfer
tax, General Anti-Avoidance Rules (“GAAR”) and reforms for start-up investments
have remained unfulfilled. The Government has strived for balance but it
appears that a large section of the economy has remained unsatisfied.
There was a palpable expectation
about 2018 Budget. However, the Budget appears to be, not a game changer but a
document that has tried to balance expectations of all sectors, and left a
significant part of our economy unsatisfied. Various reforms have been proposed
in agriculture with emphasis on generating higher incomes for farmers and for
health and rural sectors without possibly analyzing the long term ramifications
of many such proposals mooted in the document. With respect to Tax and
Regulatory aspects, the budget proposals have been minimal, and somewhat
regressive especially for the domestic and global investor community.
The Budget has largely focused on
the uplift of agriculture, healthcare and education sectors. It mainly
highlighted that the rural economy was to be adequately benefitted. While
budget announcements for the healthcare and education sectors are laudable,
financing such schemes may create pressure on the already unhealthy fiscal
deficit. The fiscal deficit has been pegged at 3.3% but expenses to implement
healthcare benefits to the poor is expected to have a negative impact on this
parameter of financial health.
“The Budget 2018-19 has
primarily focused agriculture, rural development, health, education,
employment, MSME and infrastructure sectors. It came against the backdrop of a
raft of reforms, economic slowdown and fiscal stress.”
Concerns
There was expectation on
simplification of personal income tax. Personal income taxes structures have
not been altered save reintroduction of standard deduction of INR 40,000. But
abolition of medical insurance, conveyance and increase in health and education
cess to 4% has taken the sheen off any purported savings for the salaried
class.
The Finance Bill has replaced the
Education Cess (2%) and Secondary and Higher Education Cess (1%), with a
‘Health and Education Cess’ at the rate of 4%. It will be applicable on the sum
of income tax and surcharge payable by a taxpayer.
Long Term Capital Gains (LTCG)
tax was replaced by STT in 2004. It has been introduced at a 10% rate (without
indexation) so that in the future no notional losses are borne by the
exchequer. It has and will possibly be a key factor in dampened investor
sentiments towards our capital markets. Globally, developed economies are
likely to see a possible increase in rates of interest. The attractiveness of
investing in India is likely to take a hit because of LTCG. The most
significant impact will be on foreign portfolio investments. The first major
hit to FPIs were the amendments to the Double Taxation Avoidance Agreement
(DTAA) (Tax Treaties) with Mauritius and Singapore, last year, which gave India
the right to tax capital gains from sale of shares. Another major impact is by
way of introduction of LTCG which will result in higher tax costs for FPIs as
the treaty benefits earlier available will no longer be available. This will be
a deterrent for foreign investors and could potentially result in a movement of
trading activity away from India to other offshore jurisdictions such as
Singapore which offer better tax rates and sophisticated financial products.
Our considered view is that
increasingly the government is relying more on indirect taxes, passing the burden
onto ordinary citizens and taxpayers. Despite talks of cooperative federalism,
the central government is raising revenues from cesses and surcharges which are
not shared with the state governments. Efficient distribution of taxes could
have been addressed in this budget.
In the Finance Bill it has been
proposed to extend the benefit of section 80-IAC to start-ups incorporated on
or after April 1, 2019 but before April 1, 2021. Under section 80-IAC, a
startup engaged in an eligible business can elect to exempt its income from
income tax for any three successive years within a block of seven years
commencing from the date of its incorporation. The concerns of angel and
venture capital investors, whose portfolio startups often receive notices from
the tax authorities seeking to characterize growth capital received as income
taxable in the hands of the start-up under section 56 (income from other
sources) and section 68 (income from undisclosed sources) have not been
alleviated. Start-ups continue to remain subject to the MAT, which makes it
difficult for them to avail the benefit of losses carried forward in a
meaningful manner.
Step Forward
The Budget has some positive
announcements. It has proposed to reduce Corporate Tax rates to 25% for Indian
Companies whose turnover is less than INR 250 Cr. The exemption is broad enough
to cover 99% of all tax-paying companies. This reduction in tax rate is in line
with the earlier proposals of the Ministry of Finance and shall enhance the
competitiveness and encourage global investors to ‘Make in India’. It is
important that in an era of tax competition where countries have been lowering
corporate tax rates, India does not get left behind. While the move to reduce
corporate tax rates is welcome, it would have been ideal if the corporate tax
rates for large companies were also reduced to make them more competitive in
the global marketplace. In actual terms though, it leaves out large companies
which probably make up for 90 percent of the total corporate tax generated. So
while reduction is a step in the right direction, the government is still to
keep its promise that the tax for all companies will come down to a level of 25
percent.
One area where the Government
seems to have proactive has been in the context of bankruptcy and insolvency
laws, which have always been a point of concern for investors and creditors.
While 2017 witnessed a large number of cases being referred to bankruptcy
courts (NCLT), concerns have been raised on the fact that tax law has not yet
caught up with the changes. The Budget proposes to promote the restructuring
plans by introducing tax incentives such as the ability to carry forward losses
despite change in ownership and Minimum Alternate Tax (“MAT”) relief to the
extent of unabsorbed depreciation and carried forward loss where a company has
been admitted into the bankruptcy process. These proposals should further
increase interest amongst investors in distressed assets. Other budget
proposals include introduction of a new scheme for assessments. The proposed
scheme eliminates interactions between the tax officer and the taxpayer through
an e-assessment model which will result in greater transparency and efficiency.
The effort seems to in line with the dual aim of ‘ease of doing businesses’ and
promoting transparency.
Conclusion
Overall, the Budget seems rather
lacklustre for the investor community, especially global investors as their
long standing demands such as clarity over indirect transfer tax, General Anti-Avoidance
Rules (“GAAR”) and reforms for start-up investments have remained unfulfilled.
Though this Budget didn’t have
the big-bang people always hoped for, it also lacked the consolidations direly
needed by the country especially in the fiscal management domain. The
Government has strived for balance but it appears that a large section of the
economy has remained unsatisfied.
For more detail:
Download: Acquisory News Chronicle January 2018
