The expectations from this decisively re-elected Central government’s first Union budget are quite diverse and understandably quite optimistic.
But considering the sops already offered by the populist Interim Budget, the overhauling of the income tax law by the impending Direct Tax Code and the need for a pragmatic approach to tackle the current fiscal conundrum, one needs to tame the expectations from the July 5 event.
Having said that, certain financial services sectoral tax wish list warrant attention and action.
De-stressing the distressed
The NBFC sector is reeling under a crippling liquidity crunch. The exemption from thin capitalisation rules granted to banking and insurance sector, if extended to NBFCs, will facilitate tax efficient access to off-shore funds and thereby grant much-needed respite to the shadow-banking industry. Similar exemption can also be granted to Asset Reconstruction Companies (ARCs).
Where the shareholding carrying more than 51 percent voting power of a company undergoes a change, the accumulated losses incurred by it in the prior years is not allowed to be carried forward and set-off against future profits. For the ARCs dealing with distressed entities, resolution strategies involve change of majority shareholding of the distressed entity which in turn results in paying up of taxes for lapsed losses. To promote turnaround of distressed entities, an exemption can be granted to them to continue to carry forward accumulated losses, in spite of change of more than 51 percent shareholding.
Fight for foreign funds
Restrictive caps on FDI need to be relaxed (for instance, in the insurance sector) for proliferation of FDI inflows.
Further, to encourage investments by FPIs in debt, the sunset clause for lower withholding tax rate of 5 percent on interest income earned on certain bonds and government securities can be extended beyond June 30, 2020.
To provide tax clarity and certainty, exemption from overseas transfer provisions was granted to Category I FPI and Category II FPI. The same needs be extended to Category III FPIs as well.
With the withdrawal of long-term capital gains tax exemption, levy of Securities Transaction Tax (STT) needs to be reconsidered. STT can be completely abolished. Alternatively, either a rebate of STT paid can be allowed or a claiming of deduction of STT paid for computation of capital gains can be permitted.
The tax benefits available for promotion of affordable housing can be fruitfully realised if the onerous conditions required to be satisfied are relaxed. For instance, the maximum permissible carpet area limit of 30 sq.mts. for residential units located in Delhi, Mumbai, Chennai and Kolkata be enhanced, to say, 40 sq.mts.
Restriction on amount (only up to Rs 2 lakh) of loss from house property permitted to be set off against other heads of income should not be made applicable to commercial properties.
Similarly, for computation of income from house property, the cap of Rs 2 lakh as permissible deduction of interest on housing loan can be either removed or enhanced.
To promote investments in Real Estate Investment Trust (ReIT), the holding period of ReIT units to qualify as long-term capital asset can be reduced from 36 months to 12 months.
Alternative investment, alternative relief?
Alternative Investment Funds (AIFs) are Sebi-regulated investment pooling vehicles which serve as a vital investing and financing medium to cater varied types of investors and investees. Acceding to industry demands, Category I AIF and Category II AIF were granted income-tax pass-through status. Similar exemption and clear tax code need to be extended to the close-ended Category III AIFs and its investors to promote and sustain the unique investment and financing opportunity offered by these AIFs.
To provide impetus to the nascent International Financial Services Centre (IFSC), foreign investors investing directly and only in IFSC need to be exempted from arduous compliances of obtaining PAN and filing of return of income.
Finally, while we can keep piling on the wish list, the Union Budget is no exception to the old adage, ‘you can’t meet everyone’s expectations’. One can only hope that the new finance minister’s maiden attempt brings in maximum benefits to the maximum number of stakeholders.
Bhavin Shah is Partner and Leader, Financial Services – Tax, at PwC. The author was assisted by Vaibhav Patani, Manager, PwC.