COVID-19 has caused significant havoc in terms of illness and deaths, and indeed to several parts of the economy. In the above context, the need for facilitating Ease of Doing Business (‘EODB”) becomes even more important and one is fervently hoping that the Union Budget addresses some of these issues.
Union Budget 2022-2023 is round the corner, and as always, there are expectations and a wish list. We are also in the middle of one of the most difficult periods in the last several decades, and although, there is some silver lining in terms of likely tapering, it has caused significant havoc in terms of illness and deaths, and indeed to several parts of the economy.
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In the above context, the need for facilitating Ease of Doing Business (‘EODB”) becomes even more important and one is fervently hoping that the Union Budget addresses some of these issues.
Business reorganization is important at any point of time, but in the current context, the need is even more strongly felt. One aspect is splitting up unrelated businesses, the other is consolidation into a large business whether within a group or outside. In this context, here are a few provisions that urgently need attention:
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Clarity on taxation of cryptocurrencies
A major pain point for many years has been taxation of ESOPs; the stages of ESOPs are grant, vesting and exercise, and sale can happen at any point after exercise. However, taxation is at the point of time of exercise; at this stage, there is no monetization and logically, the point of time should be the point of sale. Of course, one could break up the gain between the salary taxable at higher rate (fair value minus exercise price) and capital gain (selling price minus fair value on exercise), but the point of time of taxation should be the point of sale.
For companies, the tax rates are very reasonable now at 25%, but the difference between tax rate of a partnership / LLP at 36% and company at 25% seems unjustified. While there is no tax on distribution by LLP (unlike in case of dividend payouts), substantial profits of a company, in most cases, are locked up in working capital or expansion and typically only 30% - 40% of PAT is distributed as dividend, sometimes not even that. If one considers an average dividend tax burden of 20% on 30% - 35% of PAT, it would be 5% - 7%; accordingly, at the most, the partnership/LLP rate should be 30%. Incidentally, most partnerships / LLPs are in the MSME category, and MSMEs account for 30% of India’s GDP and 100 mn jobs! This sector badly needs a real EODB push!
The tax rate for individual incomes above Rs 50 lacs is almost 35%. One would think that this limit of Rs 50 lacs should be at least Rs 1 cr and total rates should be not more than 30%, since punitive rates of 35%-43% are a direct incentive for evasion.
To sum up:
Tax laws are inherently complex, but within that complexity, one would wish that the above issues can be addressed since they would go a long way in making life less difficult for the taxpayer, particularly MSMEs which have been badly hit by the pandemic and could get some relief if tax rates are more reasonable and complexity is reduced.
-The author Ketan Dalal is the founder of Katalyst Advisors LLP. The views expressed are personal.
(Edited by : Priyanka Deshpande)
First Published: Jan 31, 2022 8:23 PM IST