The finance minister has a tough challenge of reviving consumption and investment for putting India on a higher growth trajectory.
From being the fastest growing economy in recent years, India is grappling with a slowdown in growth and immense pressure on government revenues. The real growth for 2019-20 is estimated at a seven-year low of 5 percent as against 6.8 percent in 2018-19. The nominal growth for this fiscal is also expected to be at a low of 7.6 percent compared to 11.3 percent in the previous year. Considering that the tax collection target of Rs 24.6 lakh crore for 2019-20 was set with the assumption of a 12 percent nominal growth in GDP for the year, the tax revenues are likely to take a hit. The Budget 2020 will, therefore, strive to maintain the delicate balance of reviving growth through higher consumption and investment while reigning in the fiscal deficit.
For the corporate sector, the most defining development of 2019 was the slashing of corporate tax rates to 22 percent for all companies and 15 percent for new manufacturing companies, in lieu of the incentives and deductions. As a supplementary measure to truly bring down the effective tax burden on companies, taxation of dividends in the hands of the shareholders as per the applicable tax rate may be reintroduced. With the current dividend distribution tax (DDT), even after the rate cuts, the company bears a tax burden of 38 percent to 48.5 percent, depending on whether it is a subsidiary or not. The classical system of dividend taxation has the advantages of simplicity, transparency and equity. It also eliminates the problem of no-credit for foreign investors, thereby making India a more competitive destination for investments. The government will certainly evaluate the revenue impact of the proposal as the DDT currently contributes about Rs 40,000 crore.
Capital gains taxation is highly complex due to inconsistent tax treatment of income based on varied parameters. For instance, the holding period for an asset to qualify for the long term varies across assets and ranges from 1-3 years. Tax rates on capital gains range from 10 percent to 30 percent. Indexation is allowed only in respect of certain assets. It is expected that the government may rationalise capital gains taxation in line with the recommendations of the Task Force on new Direct tax law.
There are many issues where clarity in law will provide much relief to the taxpayers. For instance, even though the mergers/demergers of LLPs are subject to the same regulatory oversight as those applicable to companies, the law does not specifically grant tax neutrality to merger/demerger of LLPs. It also does not permit the transition of losses for merger/demerger of LLPs and for merger of companies in the services sector. To facilitate business reorganisation of LLPs, tax neutrality should be allowed by permitting loss transition in case of merger/demerger of LLPs. Similarly, to facilitate reorganisation and revival of all undertakings, loss transition should be permitted for companies in the services sector too.
With a view to boost employment and income, the current emolument threshold of Rs 25,000 for providing an additional deduction of 30 percent under section 80JJAA may be enhanced. An increase of the limit to at least Rs 1,00,000 per month will encourage employment of employees providing more value-added services.
For claiming income tax deduction, start-ups need to be registered with the Department for Promotion of Industry and Internal Trade (DPIIT). DPIIT prescribes the conditions required for availing tax deduction. The condition for minimum turnover threshold was enhanced from Rs 25 crore to Rs 100 crore in February 2019. The qualifying period for which the turnover will be considered was increased from 7 years to 10 years. However, the commensurate change was not made to the income tax law. For claiming deduction under the income tax law by start-ups, the condition still remains Rs 25 crore for a qualifying period of 7 years. It is expected that the government may align these two conditions under the income tax law with those prescribed by DPIIT.
As on September 30, 2019, almost Rs 10 lakh crore was stuck in disputes for direct taxes alone. Encouraged by the success of Sabka Vishvas Scheme, the government may announce a direct tax litigation settlement scheme to unlock some amounts stuck in litigation. Other alternative dispute resolution mechanisms such as a mediation mechanism to resolve tax disputes at the assessment stage itself, in a time-bound manner will also be helpful in minimising disputes.
The finance minister has a tough challenge of reviving consumption and investment for putting India on a higher growth trajectory. A short-term fiscal slippage will be acceptable if it could be made up by growth and efficiency in the coming years.
Shalini Mathur is Director, Tax and Economic Policy Group, at EY India.
First Published: IST