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Eyes On The Budget 2020

Here we have highlighted the key expectations from the forthcoming budget.

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Finance Minister Nirmala Sitharaman is expected to present her second finance budget on 01 February 2020. The Government has already introduced various tax & fiscal reliefs during 2019 and has engaged with the industry to understand the key hindrances, taxpayers, corporate as well as individuals, are facing and their expectations from the Government to bring India back to a high growth trajectory. Here we have highlighted the key expectations from the forthcoming budget.

COMMON MAN WISHES

Revision of personal income slabs and rationalisation of tax rates

At present, the basic exemption limit is INR 2.5 lacs per annum and income between INR 2.5-5 lacs is taxed at 5%. Those in the income bracket of INR 5-10 lacs are taxed at 20% and those above INR 10 lacs are taxed at 30% rate. There is a three-layered surcharge for the super-rich in the salary brackets of INR 1 crore, INR 2 crore and INR 5 crore. Taskforce constituted to provide recommendations on the new Direct-tax Code recommended sweeping changes in the slabs & rates:

Existing Tax Rate

Tax Rate Recommended by Task Force

Income Slabs (INR)

Tax Rate *

Income Slabs (INR)

Tax Rate

Up to 2.5 lacs

Nil

Up to 2.5 lacs

Nil

2.5 lacs - 5 lacs

5%

2.5 lacs - 10 lacs

10%

5 lacs - 10 lacs

20%

10 lacs - 20 lacs

20%

Above 10 lacs

30%

20 lacs - 2 crores

30%

Above 2 crores

35%

* Plus, applicable surcharge and cess

Increase in threshold limit of investment-based deductions 

At present, a taxpayer is allowed the deduction of Rs 1.50 lacs for investment in Public Provident Fund, fixed deposits, tuition fee expense, housing loan repayment (principal component), etc. In order to encourage the culture of savings and investments, the FM could consider increasing the deduction limit to INR 03 lacs per year.

Removal of limit on set-off of loss arising under the head “Income from house property”

Finance Act 2017 reduced the allowable loss set-off (primarily arising on account of interest on housing loan) under the head ‘Income from house property’ against any other head of income to INR 02 lacs per year. In order to eliminate the hardship caused to home buyers as also to boost the real estate sector, the FM may consider removing the limit on the allowable loss; or increase the limit to INR 03 lacs per year.

  1. Exemption on Long-Term Capital Gain from sale of Equity or Equity-oriented Mutual Fund

In order to promote investment in the capital market and encourage individuals to make long-term investments in it, current tax exemption of Rs 01 lakh on long-term capital gains from the sale of equity or equity-oriented mutual fund should be enhanced INR 03 lacs. 

Increase in limit of exemptions for salary-related allowances 

As per existing provisions, certain allowances are exempt from tax in the hands of employees subject to prescribed thresholds. For example, the exemption limit for children education allowance and children hostel allowance is INR 100 per month per child and INR 300 per month per child respectively. These threshold limits were fixed decades ago and are very low in comparison to the cost of living; and therefore, need to be increased substantially.

WHAT BUSINESS EXPECTS

Deductibility of CSR expenses

The Company law requires certain corporates to mandatorily spend specified amounts towards eligible CSR causes. However, currently such CSR spend is not tax deductible. Considering that the objective of CSR expenditure is to share the burden of the Government in providing social infrastructure, the least the Government could do is allow tax deduction for such spends. The Government should consider restricting tax deductibility for expenditure towards specific purposes say, education, skill development, etc. this will also help in promoting attention towards identified social causes. 

Rationalisation of withholding tax rates 

The recent tax amendment following the ordinance introduced last year has reduced the tax rates for corporates to 15%/22%. However, there has been no change in the tax withholding (TDS) rates. A lower corporate tax rate, for some taxpayers, could mean a more higher claim for refunds. A natural remedy is a rationalisation of withholding tax rates and thresholds, at least for duly identified businesses. It would go a long way in easing the working capital woes for some cash trapped businesses. 

Withholding on year-end provisions

Mercantile basis of accounting requires a provision to set aside for expenses correlating to the revenue of the relevant year. As per the current provisions of the Income-tax law, businesses are required to deduct tax on all qualifying expenses including year-end provisions, even where invoices for such expenses are received in later periods. Failing tax deduction, part of the expenditure is disallowed while computing taxable income. Penal and provisions may also apply. While there are judicial precedents which hold that tax withholding is not required as vendor/invoice details may not be available; the law currently requires the taxpayer to deduct tax on such provisions. This results in difficulties for the taxpayer in filing withholding tax returns, reconciliation of balances with vendors, etc. The FM may consider introducing an appropriate amendment to the current law to allow tax deduction for such year-end provisions on meeting with certain conditions.

Restoring the LLP Advantage

Introduced in 2008, Limited Liability Partnerships (LLPs) have leverage over other business forms on account of ease of formation, lean management structure, limitation of liability, tax advantage related to dividend distribution taxation and FDI eligibility. However, there are certain lacunas in the income tax law which sometimes overshadow these advantages. In order to restore the LLP advantage, the FM may look to undertake the following measures:

  • Reorganisation/merger of LLP should be brought under the list of transactions not treated as transfer and thus not giving rise to capital gains. This would help bring LLPs at par with companies

  • Option of presumptive taxation (fixed proportion of turnover presumed as taxable income) is currently available only to small businesses run by resident individuals, Hindu Undivided Family (HUF) and Firms but not to LLPs. Extending this to an LLP would encourage small businesses to consider LLP as a preferred business vehicle

  • The reduced tax rates of 15% /22% introduced through the tax ordinance in September 2019, which is currently available to a Company, should also be made available to LLPs. 

Tax Dispute Settlement Scheme

In order to bridge the fiscal deficit gap and monetise a part of the amount stuck in tax litigation, the government may consider introducing a litigation settlement scheme that will allow businesses to put an end to legacy tax disputes pending beyond a specified number of years, by paying a portion of the money demanded by the revenue department. This could be along the lines of the Sabka Vishwas-Legacy Dispute Resolution Scheme, which is aimed at reducing old service tax and central excise cases. While the Sabka Vikas scheme could collect about INR 30,000 crore, an income tax settlement scheme can be more impactful. It is estimated that approx. INR 7-8 lac crores are stuck indirect tax litigation (apart from the cost of litigation itself).

THE BALANCING ACT

While playing to the sentiments of the already stressed economy and catering to the expectations of the demanding voter, the Government will have to wisely measure the impact that tax proposals could have on the fiscal deficit. Striking a balance, the Government must continue its efforts to widen the tax base and encourage compliance. In the inward-looking global environment, the Government must continue to remain focused on promoting growth and increasing the ease of 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 2020 what to expect in 2020

Jiger Saiya

The author is Partner and Leader, Tax & Regulatory Services, BDO India

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