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India Inc arguably had abundant expectations from the Budget 2017 especially after demonetisation, various regulatory changes witnessed in the country and the global political and economic situation. To name a few – reduction in corporate tax rates as also personal income tax rates to boost consumption, weighted deduction for R&D expense in IT sector especially considering impetus for digital India and the US situation impacting the Indian IT sector, incentive scheme for scrappage of old cars in automobile sector, abolishment of MAT provisions, rationalization of domestic transfer pricing provisions etc.
The key budget proposals for India Inc from direct tax perspective can be broadly classified into sector specific proposals, clarificatory proposals, and proposals enabling ease of doing business.
The budget enlists certain explicit proposals for real estate sector, banking sector, start-ups and MSME, clean energy and some implicit proposals for digital sector.
• Real estate sector:
- To incentivize investment in real estate the holding period for capital gains computation with respect to immovable properties is proposed to be reduced from 36 months to 24 months.
- Affordable housing to be given infrastructure status which is likely to boost debt investment thereby.
- Rationalization of time period for completion of construction development projects (to claim 100% profit deduction in affordable housing sector) from 3 years to 5 years. As also, conditions relating to size of residential units to be relaxed by considering carpet area versus the built up area as earlier.
- Clarifications have been provided regarding taxability of joint development agreements which has for long been subject of litigation.
- Relief is proposed for developers from taxability of notional rental income in respect of unsold residential stock for a period of one year from receiving the completion certificate.
• Banking sector:
- Interest on NPAs is proposed to be taxed on actual basis and not accrual basis which will address the cash flow issue in payment of taxes.
- Tax deduction for bad and doubtful debts increased by 1%.
• Start-up and MSME sector:
- Carry forward of tax losses on change of shareholding to be protected for 7 years for start-ups, as long as all shareholders continue to hold their shares irrespective of percentage change in their holding which may have diluted due to fund raising.
- Extension is proposed in the window for claiming 3 year tax holiday from first 5 years of operation to first 7 years of operation.
- Tax rates for companies with turnover upto Rs 500 million to be rationalized to 25%.
• Clean energy: Gross income from transfer of carbon credits proposed to be taxed at 10%. This is likely to rest the positions arising out of various judicial precedents.
• Proposals implicitly promoting digital sector and disincentivising black money:
- Restrictions on cash donations to Rs. 2,000.
- Cash revenue expenditure limit reduced from Rs. 20,000 to Rs. 10,000.
Provisions to disincentives cash capex - to the effect of disallowing depreciation in case the capex is made in cash.
- Presumptive taxation for businesses with turnover upto Rs 20 million to be reduced from 8% to 6% to the extent the turnover represents collection by digital modes.
- In addition, cash payments exceeding Rs. 0.3 million to be prohibited and may result in penal consequences subject to conditions.
- Computation of deduction under section 10AA for SEZs to be allowed from total income of taxpayer computed in accordance with provisions of Income-tax Act before giving effect to provision of Section 10AA. This has been a long litigated issue.
- Where a term is defined under a tax treaty the meaning would be imputed from the treaty first and in case the tax treaty does not define a term provisions of Income-tax Act shall apply or any explanation issued by the Central Government.
Proposals facilitating ease of doing business:
- Provision relating to domestic transfer pricing compliance are proposed to be dropped which will ease such tax compliance hassles for companies. However, companies claiming profit linked tax deductions will have to continue to comply with these provisions.
- The time limits for completion of tax assessments, reassessments, filing of revised returns etc are proposed to be rationalized to the effect of speedy closure of assessments.
Transfer of rupee denominated bonds (issued by Indian corporates) between two non-residents exempted from tax as also gains on account of rupee appreciation if any at the time of redemption of such bonds proposed to be ignored in computation of capital gains.
Foreign Investment Promotion Board (FIPB) proposed to be abolished which is a body for approval of foreign direct investments in India.
In addition, the budget proposes to increase the MAT credit period from 10 to 15 years. Several rationalization measures are proposed for computation of MAT in line with the new Indian Accounting Standards which has been made applicable to companies in India in phases.
From an individual taxation perspective and the overarching expectation of increasing consumption; the tax rate for the first taxable slab is reduced to 5% from 10% and rebates are proposed to be provided. In addition, tax exemptions are proposed for partial withdrawals from National Pension Scheme.
While all sectors of the economy have expectations from the tax proposals of Budget, this Budget address certain sectors rather upfront and directly. The priorities as apparent from the above proposals are Digital India, ease of doing business and consequently elimination of black economy. Perhaps, the policy measures over past couple of years may eventually realize the dream of India’s mystic growth and prosperity subject to successful implementation of such policies.
By Kamlesh Chainani (partner), Urmi Rambhia (Manager) from Deloitte Haskins & Sells, LLP