'Overall, it is a fairly balanced budget'

The Finance Minister presented the regulatory and tax proposals in the Lok Sabha today – much along the expected lines, with a view to promote investment and consumption without compromising on fiscal discipline

Updated: Feb 1, 2017 07:27:57 PM UTC

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A view of the Indian parliament building (B Mathur / Reuters)
A view of the Indian parliament building (B Mathur / Reuters)

The Finance Minister presented the regulatory and tax proposals in the Lok Sabha today – much along the expected lines, with a view to promote investment and consumption without compromising on fiscal discipline. He acknowledged that there is a pressure of protectionism being felt from other countries.

Focus on real India – rural economy

Quite sensibly, instead of launching multiple new welfare schemes, the FM has chosen to increase budgetary allocations in the existing flagship schemes. Realising the importance of soil health and with a view to increase farm produce, the FM has proposed to set up Krishi Vigyan Kendras and create a Micro Irrigation Fund and Dairy Processing and Infrastructure Development Fund.

Key tax proposals

Against the popular expectation of corporate tax rate cut for all companies, the FM has proposed to lower the corporate tax rate only for domestic companies having total turnover / gross receipts not exceeding INR 50 crores in FY 2015-16 from 30% to 25%.

With a view to provide relief to the assessees paying MAT, it is proposed to amend section 115JAA to extend carry forward of MAT credit to 15 assessment years instead of 10.  Further, similar amendment is proposed in section 115JD so as to allow carry forward of AMT in case of non-corporate assessees.

The income-tax rate for individuals earning income between INR 2.5 lakhs to INR 5 lakhs has been reduced to 5%.  For subsequent income slabs, a uniform benefit of INR 12,500 is proposed to be provided.

Recognising the sensitivity of the Indian securities markets, the FM has not tinkered with the capital gains tax regime.  Further, the base year for computing the indexed cost of acquisition has been proposed to be shifted from April 1, 1981 to April 1, 2001.  The FM has clarified that the Indirect Transfer provisions shall not apply to any asset or capital asset being investment held by a non-resident, directly or indirectly, in a FPI registered as Category-I or Category II as these entities are regulated and broad based.  The welcome part is that this clarification will apply retroactively from assessment year 2012-13 onwards.

With a view to promote the real-estate sector and to make it more attractive for investment, it is proposed to reduce the period of holding from the existing 36 months to 24 months in case of immovable property, being land or building or both, to qualify as long term capital asset.

In line with the recommendations of OECD BEPS Action Plan 4, it is proposed that deduction for interest expense claimed by an Indian company in respect of debt issued to a foreign associated enterprise shall be restricted to 30% of its earnings before interest, taxes, and depreciation..  Such provision will be applicable only if the interest expenditure exceeds INR 1 crore.  Such provisions will not apply to banking and insurance companies.   NBFCs have not been excluded.

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, it is proposed to reduce the existing rate of deemed profit of 8% to 6%.

Certain welcome changes with respect to Masala Bonds have been proposed.  Transfer of masala bonds by a non-resident to another non-resident will be exempt.  5% concessional tax rate on interest earned from Masala bonds is now proposed to be codified under the law.  Such tax rate will be available upto June 30, 2020.

With a view to ensure parity among all categories of tax payers deriving income from dividend in excess of Rs 10 lakhs, it is proposed to levy tax at the rate of 10% to all resident assessees except domestic company and certain specified funds, trusts, institutions etc.  This will lead to double taxation of dividends.

–Highly rumoured announcement on estate duty or banking cash transaction tax have not found any mention in the budget proposals.

Key financial sector reform proposals

As more than 90% of the total FDI inflows are now through the automatic route, the Foreign Investment Promotion Board is proposed to be phased out.  Also, further liberalisation of the FDI policy is likely to be undertaken.

Listing and trading of Security Receipts issued by a securitisation company or a reconstruction company under the SARFAESI Act is proposed to be permitted in SEBI registered stock exchanges.  This will augment capital flows into the securitisation industry and will particularly be helpful to deal with stressed assets of banks.

The process of registration of financial market intermediaries like mutual funds, brokers, portfolio managers, etc. will be made fully online by SEBI.  Also, a common application form for registration, opening of bank and demat accounts, and issue of PAN will be introduced for FPI.

It is proposed to allow systemically important NBFCs and above a certain net worth, to be categorised as Qualified Institutional Buyers for participating in IPOs.  This will assist in channelizing more investments.

Other key proposals

Affordable housing is set to enjoy infrastructure status – this will open the doors of associated benefits and work towards ‘Housing for All’.
To usher in greater accountability, the FM has proposed to put in place a revised mechanism and procedure to ensure time bound listing of identified PSUs on stock exchanges.  The shares of Railway PSUs like IRCTC, IRFC and IRCON will be listed in stock exchanges.

Overall, it is a fairly balanced budget.

- By Shefali Goradia, Partner, Direct Tax, BMR & Associates LLP (with inputs from Ankush Bhutra and Pooja Dhokad)

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