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Budget 2019: Here is what corporate India wants from the Finance Minister

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Our Finance Minister, Nirmala Sitharaman is all set to present her first Budget. Though she has the benefit of unhindered support from the legislation due to a stable government, coming to power with a clear and substantial majority, there are a lot of expectations from her.

She has to ensure that the Union Budget not only fulfils the electoral promises made by the ruling party but also ensure a revenue-neutral budget so that there are no substantial losses incurred by the exchequer; and the long term economic objective of the government can be met.

Therefore, in consideration of these current contexts, the Indian corporate sector, with which the present finance minister has engaged on several occasions to discuss budgetary provisions, has the following expectations:

  • Reduction in corporate tax rates:

India has one of the highest corporate tax rates, amongst competing economies, which clearly affects its score in the ‘Ease of Doing Business’ index. To address this issue, the erstwhile Government, in 2015, had proposed a reduction in corporate tax rates, along with the corresponding withdrawal of exemptions in the next four years.

Presently, the diminished tax rates are only applicable to a certain category of corporates which fulfil some specific criteria. Corporates expect that the government will implement a universal corporate tax rate of 25 percent.

They also expect the benefit to be extended to partnerships firms and Limited Liability Partnerships, as well thus allowing the benefits to flow into the Micro, Small and Medium Enterprises (MSME) sector.

  • Road map to Direct Tax Code:

The stipulated date for the task force to submit its draft report on the Direct Tax Code has been extended till July 31, 2019. Since this is close to the Budget day, it is expected that the government may clarify the possible direction of the code so that the nation and general populace gets a preview of what may be the direct tax structure of the country in the near future.

  • Angel Tax woes:

Start-ups have been a part of the political agenda since the erstwhile NDA-led government declared its flagship, Make in India programme.

Start-ups are seeking greater convenience of creating and doing business, which in turn allows them to focus more on innovation rather than compliance issues, thus fostering growth in the economy.

They expect single-window clearance to be available for compliance. Moreover, to boost employee retention and wealth creation of employees, they seek undemanding regulations on Employee Stock Option Schemes (ESOPs).

From a tax perspective, the present scenario with regard to the issuing of shares by closely held companies is fraught with unnecessary challenges.

If a closely held company issues its shares at a price more than its fair market value, then the amount received in excess of the fair market value is taxable as income from other sources, under section 56(2) (vii) (b) of the Income Tax Act (the Act).

To motivate and invigorate budding entrepreneurs, the government relaxed the interpretation attributed to the definition of start-ups and has made companies with sales of up to Rs 100 crore (previously, the exemption limit was Rs 25 crore) eligible for angel tax relief.

However, in this budget, the start-up community expects a complete exemption from tax under Section 56(2) (vii) (b) of the Act.

  • Transition to Ind-AS:

One of the major developments in the accounting arena recently has been the migration of companies from I-GAAP accounting standards to Ind-AS. This entails a major shift from the principles of traditional accounting with which Indian corporates are still in the process of reconciliation.

In addition, the Indian tax laws are geared to handle items of adjustments under I-GAAP. However, there are no clear principles of treatment of typical adjustments arising from Ind-AS.

A majority of the Ind-AS adjustments are fair value adjustments and it would be desirable to have specific treatments being prescribed in the Act to account for such adjustments, to ensure uniformity of taxation and reduction in potential litigation.

  • Thermal power sector:

The sector, which is the major contributor to India’s energy demands, faces gnawing concerns over the availability of fuel, the poor financial health of distribution companies and competition from the renewable energy sector.

The sector is expecting a re-institution of the deduction of an amount equal to 100 percent of the profits and gains derived from power generating business. The government may consider extending the sunset clause to provide relief to the power industries.

However, such expectations may be overly optimistic, considering the government’s clear intention to rationalise corporate tax rates and eliminate incentives gradually.

  • Anti-avoidance and anti-abuse measures:

India has been the tip of the spear, in the battle against tax avoidance, with Indian policymakers constantly augmenting the legal framework counter mechanisms used for tax avoidance and treaty abuse.

A recapitulation of the Budget proposals made in the last decade is a clear indication of this intention and showcases several important measures adopted by India in consonance with the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) Action Plans.

The key anti-avoidance measures include General Anti-Avoidance Rules (GAAR), Place of Effective Management (POEM), indirect transfer taxation. The prominent BEPS related measures include equalization levy, Country by Country Reporting (CbCR) for transfer pricing, and Significant Economic Presence (SEP) based concept. One may expect further such adoptions, in the upcoming Budget.

India, in an attempt to tackle the problem of taxing the digital economy (Under BEPS Action Plan 1), introduced the concept of SEP in the Union Budget 2018. This was a gratifying step as far as taxation of the digital economy was concerned. However, the implementation of SEP provisions, especially in its current form, may create some concerns.

Previously, the government had invited comments and suggestions from stakeholders on the revenue and user thresholds, for the application of SEP provisions, but the final clarification/notification from the government is still awaited.

As these provisions are likely to impact key global digital economy players, the international tax community is watching with interest. The government is expected to introduce the clarifications/rules in the upcoming Budget.

  • Issue of tax refunds:

Currently, there exists the practice of issuing a tax refund through cheques. This method should be completely substituted by direct online fund transfers. This change should be implemented on a war footing, as this would end many taxpayers’ grievances regarding refunds. This change in method will also reduce/eliminate manipulation and corrupt practices.

It remains to be seen if the government can meet all these expectations while ensuring sound economic growth.

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