FEBRUARY 14, 2020

By Jatin Kanabar

THE Finance Minister submitted the Union Budget 2020 amidst concerns of a slowing down economy. However, the Economic Survey dispelled concerns of any long term slowdown stating that there are tentative signs of a bottoming out in manufacturing activity and global trade, which will have a positive impact on growth in the next fiscal.

The Union Budget 2020 revolves around 3 key themes- aspirational India, economic development for all and becoming a caring society.

Over the past few years, the government's policy on taxation has been consistent, i.e., move towards a regime of lower rates coupled with lower or no deductions/exemptions. There is some merit in this approach- for one, it will reduce tax litigations going forward as most litigations arise out of different interpretations around deductions and exemption provisions.

The Budget 2020 proposals on direct taxes should be seen in the backdrop of the radical measures taken by the government vide Taxation Law (Amendment) Act, 2019, wherein corporate tax rates have been significantly slashed in order to remain globally competitive. The effective tax rate applicable to new manufacturing companies is 17.16 percent and that applicable to other companies is 25.17 percent. The effect to rate reduction though has impacted revenue collections in the short term, should have a positive effect in the long term.

Talking about the specific Budget proposals, abolition of DDT and taxation of dividends in the hands of the shareholders was talked about in the run-up to the Budget. The proposal may benefit some and lead to higher tax outflow for others - from no tax in certain cases to taxation at as high as 42.74 percent. However, there appear to be certainareas which have been overlooked, perhaps unintentionally. For instance, taxation of ReITs/InviTs structure is less attractive under the new proposals. Under the existing provisions, dividends from SPV to unit holders can flow through without tax incidence. Hopefully, this anomaly is resolved before the Bill is enacted. Also, the Budget proposals seek to limit the deduction of interest expense against dividend income. This artificial limit imposed on deduction of interest is unwarranted and should be done away with. To remove the cascading effect of dividend, companies will get a deduction of dividend received from other domestic companies. This benefit should also be extended to dividends received from overseas subsidiaries.

The Budget proposals relating to granting of stay by Income tax Appellate Tribunal on payment of atleast 20 percent will create unnecessary hardship to taxpayers. Even the CBDT Instruction recognises that 20 percent payment of demand may not be necessary in all cases. The Appellate Tribunal considers the merits of the case before granting stay and there should be no mandatory requirement to pay 20 percent in all cases. This proposal needs to be revisited as it may severely impact cash flows in high-pitched assessments and impacts the government's efforts towards improving ease of doing business in India.

The government continues to think about encouraging start-ups. Proposals relating to relaxation in tax holiday conditions and deferment of ESOPs taxation are cases in point. Deferment of ESOP taxation to the date of actual sale of shares has been a long standing demand of the industry and it would have been good if this was extended across and not just to those employed with a start-up.

About 5 lakh direct tax cases are locked up in litigation. Not surprisingly, the government continues to explore options to reduce tax litigations. However, the not-so-long-ago experience of the Direct Tax Dispute Resolution Scheme, 2016 which garnered only about Rs 1200 crores is not very encouraging. We will, therefore, have to wait to see the success of the proposed ' Vivad se Vishwas scheme' especially relating to post demonetization period.

On the personal tax front, the proposed 'simplified' personal income tax regime comes at the cost of foregoing reliefs and exemptions. The salaried class in the organised sector has, therefore, reason to feel a bit disappointed as effectively there isn't much for them. However, the optional tax slabs will still benefit certain section of taxpayers on a case-to-case basis.

Last but not the least, the government has acknowledged that measures need to be taken to create confidence in wealth creators. The announcement to have a Taxpayer's charter is a welcome move in that direction. This should be coupled with continued reforms in tax administration to have visible effect. Measures which lead to increase in the trust quotient between the revenue and the taxpayers are most welcome.

(The author is a Partner with Deloitte Haskins and Sells LLP. Views are strictly personal.)