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Budget 2018: Furthering ease of doing business in India

The government may consider reducing the holding period for debt funds from 36 months at present to 12 months to qualify as Long Term Capital Gains. This would bring the debt funds at par with equity funds and increase retail investor’s participation in the debt market

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One of the key targets set by the current government was to be ranked in top 50 nations in the Ease of Doing Business ratings issued by the World Bank. Pursuant to various measures taken by the government, there has been a significant improvement in India’s ratings, moving up from 130th rank in 2016 and 2017, to 100th rank in 2018. The efforts made by the government on this front have been lauded by international business communities.

The government has also undertaken various legislative measures in this direction. For instance:

•    Introduction of the Goods and Services Tax (GST), a significant tax reform introduced last year with one of the intended benefits being consolidation of various indirect tax legislations into a simplified single levy. The purpose of GST is to promote ‘One Country, One Tax’ regime. While the nationwide implementation has not been smooth, surely these are teething troubles and the benefits of the new legislation may be expected to be seen in the coming months.

•    Amending the regulation governing foreign investment in India, policy amendment to permit investment in single brand retail trading under automatic route, etc.

•    Abolition of Foreign Investment Promotion Board (FIPB) to simplify the approval process for foreign investments.

•    Regulatory boost to new investment through the newly-introduced Masala Bonds (overseas rupee dominated bonds). The government was also quick in extending the beneficial tax rate of 5% (plus applicable surcharge and education cess) to the income from Masala Bonds and exclusion from Non-resident to Non-resident transfer in last year’s Budget enactment, thus giving a boost to the said investment route.

•    Further rationalizing investment in Limited Liability Partnership (LLP) by permitting 100% foreign investment in a LLP under automatic route (in sectors where 100% automatic approval is already available for companies). The ministry has also indicated its intention of permitting External Commercial Borrowings (ECB) by LLP, although the same is required to be legislated in the exchange control regulations governing ECBs.

•    Enactment of the Insolvency and Bankruptcy Code, 2016 which consolidates the law relating to reorganization and insolvency resolution in a time bound manner. The said law should ensure quick resolution and swift winding up.    

•    Ease of compliances by introducing the option for completion of income tax scrutiny electronically, restricting the scope of income tax scrutiny only to reasons for which the income tax return filed was originally selected for scrutiny by introducing mechanism of  “Limited Scrutiny”, rationalizing the requirement for domestic transfer pricing, simultaneous application for Permanent Account Number (PAN) i.e. India Tax ID and Tax Deduction Account Number (TAN) i.e. Withholding tax ID along with application for incorporation of company, etc.  

•    Relaxation for Category I and II Foreign Portfolio Investors from application of indirect tax provisions

The government has set the wheels in motion for a positive transformation. Budget 2018 being the last full Budget for the current government, there is an expectation that the government would surely push the accelerator to full throttle. Although there are few roadblocks such as high fiscal deficit, economy still reeling from the twin impact of demonetization and GST, and the expectation of a populous Budget considering the upcoming Lok Sabha elections 2019, it is unlikely to deter the government from its focus to make India a friendly investment destination and maintain an enviable GDP growth rate.

The government has already constituted a six-member task force under the chairmanship of Mr. Arbind Modi (Member, Central Board of Direct Taxes) in November 2017, to draft a new Income-tax law. Mr. Arvind Subramanian, Chief Economic Adviser, has been appointed as permanent special invitee in the task force, which will submit its report in six months.The new law, if legislated, may replace the Income-tax Act, 1961 which is over five decades old. Ease of doing business would surely be a priority in the efforts to simplify existing tax laws.

Against this backdrop, considering that there may be an overhaul of the existing  Income-tax provisions in the near future, the few expectations from the Budget 2018 towards easing of doing business in India which also provide a fiscal equilibrium to the exchequer are as under:

1.    Reduction of the corporate tax rate 

It is expected that the Finance Minister will fulfill his long delivered promise for reduction of corporate tax rate to 25%. A reduction in the corporate tax rate would result in higher disposal income in the hands of the companies which may stimulate capital investment.

The benefits of demonetization undertaken in November 2016 should also be realized in the coming years as the information collected during the demonetization activity should help the government widen its tax base. This should enable the government to align tax rates in India with global standards.

The government would also take cognizance of the significant reduction in the US corporate tax rate passed by the US Senate through the passing of the Tax Cuts and Jobs Act, 2017 (TCJA).

2.    Reduction in Minimum Alternate Tax (MAT) rate

The MAT rate should be aligned with the reduced corporate tax rate.

The TCJA has already proposed the abolition of Alternate Minimum Tax levy in US. While it may not be feasible for the Indian economy to completely eliminate the MAT levy, a gradual reduction over a period of time may surely be viewed favorably by the taxpayers.  

3.    Exclude Special Economic Zones (SEZ) from the ambit of MAT

Currently, units in SEZ enjoy a tax holiday under the normal provisions of the Income-tax Act, 1961. However, they are subject to tax under the provisions of MAT which is against the intention of providing tax concessions to units located in SEZ. Accordingly, units in SEZ should be excluded from the purview of MAT to boost exports and creation of jobs.

4.    Make in India initiative 

The ’Make in India‘ initiative has been a strategic vision introduced by the government. The said initiative has received significant backing across India and is also viewed as an employment generator for Indian millennials.

The initiative is however yet to achieve the desired momentum.Foreign participation would be a key prerequisite for its success and thus, easing the business environment may be a focus area.

The government can consider introducing tax-based stimulus to promote the agenda such as capital utilization based deduction or a target based deduction for those enterprises which are able to achieve the targeted growth and/or are employment generators. Those enterprises which can achieve the target may be a bellwether for the future and nurturing them can give impetus to the Make in India revolution.

5.    Reduction in dividend distribution tax (DDT)

Considering that the companies have already paid taxes on the profits which are distributed as dividend, the levy of DDT on dividend results in economic double taxation. A reduction in DDT would encourage higher distribution of dividend which would result in better return on investment.

6.    Tax on agricultural income 

The government may consider taxing agricultural income beyond a threshold limit. The said move would help curb the menace of unaccounted income in the sector as well as widen the tax base.

7.    Reduce the holding period for Long Term Capital Gains for debt funds

The government may consider reducing the holding period for debt funds from 36 months at present to 12 months to qualify as Long Term Capital Gains. This would bring the debt funds at par with equity funds and increase retail investor’s participation in the debt market.

As a widely anticipated Budget which may have economic and political ramifications in the coming months, it needs to be seen how the government would target and achieve its goal of easing doing business in India.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Union Budget 2018 opinion

CA Gupta

The author is Partner, Deloitte India

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Samir Parekh

The author is Senior Manager with Deloitte Haskins and Sells LLP

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