The Union budget 2019 would be the first full budget during the second term of the Modi government and would be presented on 5 July 2019. To those who believe that Mrs. Nirmala Sitharaman shall be the first women finance minister to present the budget , you should know that the first women to present a Finance Budget was Mrs. Indira Gandhi who presented the budget in 1970-71 when she held an additional charge as Finance Minister along with the post of Prime Minister of India. The present Budget poses a number of challenges for the re-elected National Democratic Alliance (NDA) government, ranging from a slowdown in the economy to weak consumption and shrinking tax collections however the following seems to be some measures from Direct Tax angle which according to me should be taken on the spur of the moment to align the real world to the vision of Honourable Prime Minister of India Mr. Narendra Modi of New India of making India a tax friendly regime.
1. Lower Corporate Taxes
In India, at present , the profits of corporates are taxed at 3 levels:
- Corporate tax on profit before tax is 34.94% ( including surcharge of 7%/12%)
- DDT is Dividend Distribution tax as 17.46 % on after tax profits available for dividends distribution (100 – 34.94) resulting in effective tax rate of 11.36% on original profits.
- Tax on shareholders receiving dividend income is 11.96% vide recently introduced provisions of Section 115BBDA subject to some conditions
This is one of the steepest tax structures in the world with the overall tax rate on fully distributed corporate earnings being as high as 52.5%!
Thus this seems to be an opportune time to reduce corporate tax rate to 25% (plus applicable surcharge and education cess) for all corporate taxpayers, and also for LLPs and partnership firms. The reduction in corporate tax rates will boost investment and economic activity as companies shall have greater investible surplus and it shall also help improve India’s business global competitiveness.
With the reduction in corporate tax , there should also be a need for rationalisation of DDT by doing away with the concept of grossing up and reduction in DDT to 10% and infact the better idea shall be to convert DDT into a withholding tax structure for Companies distributing dividends with ultimate tax incidence on the shareholders. The re-characterization of “Dividend Distribution Tax” as “Dividend Withholding Tax (DWT)” for Non-Residents will also enable foreign Shareholders to claim credit for such withholding tax under the Tax Treaty in their country of tax residence.
2. Introduction of Tax Slabs for Startup Companies
Addressing the joint sitting of Parliament, President Ram Nath Kovind said on 21st June that India has joined the league of countries with the most number of startups in the world and the goal is to establish 50,000 Startups by 2024. As at the time of writing this article on the mid night of 4th July, the Startup India website shows that there are 19,666 startups recognised by DPIIT who are granted “Certificate of Recognition” certifying that their idea is innovative or scalable, but do you know that how many of these Startups are granted the Tax Exemption which is one of the advertised benefit of Startup India Scheme ? You will be surprised to know that as per last published Status Report of Government in November 2018, only 91 Startups have been granted certificate of Eligibility of Tax Exemption !
Is n’t it an irony, that on the basis of submission of same set of documents, one Department of Government considers an idea as Innovative and based on same documents, another Department of the same Central Government, rejects the Idea per se on the grounds of not being that innovative!
If the Government is dicey on giving any blanket tax exemption, the idea should be to introduce a Slab structure of corporate tax for recognised Startups like Singapore which exempts Startup Companies on the first $1,00,000 of profits and then has 50% reduced corporate tax rate as compared to tax rate applicable to normal companies till $2,00,000 in the first three years of operations.
Further, a reduction in GST rates for Startups would help to boost the Sales.
In any case, to foster the Startup ecosystem, there should be blanket exemption from “Angel tax” u/s 56(2)(viib) for Startup companies.
3. Remove the Draconian Tax rate prescribed in Section 115BBE
The law in Section 115BBE was amended post demonetisation with respstropective effect from A.Y 17-18
Section 68 of the Act provides inter alia that if any sum is found credited in the books of a taxpayer and he either does not offer any explanation about nature and source of such sum, or the explanation offered by him is not satisfactory in the opinion of Assessing Officer, then such sum can be taxed as his income and chargeable to tax at an effective tax rate of 83.25% as per Section 115BBE!
Suppose, Mr X has deposited Rs. 1,00,000/- in cash in his bank account. Now if Mr. X gives the reason that the said cash is out of winnings from casino , he shall be taxed at 30% tax rate applicable to winnings form casino however conisder in the same scenario, the individual claims that he has earned Rs. 1,00,000/- from taking tuitions in rural area but such individual is unable to demonstrate / substantiate the source of such income (and the Assessing Officer rejects the explanation, being not properly explained to his satisfaction after asking Mr. X to produce the students or their parents before him for recording their statements. Under such circumstances, it appears that the Assessing Officer may now be tempted to trigger the provisions of Section 115BBE of the Act read with Section 68 of the Act with unfettered powers. This means that such income, though already offered to tax by the taxpayer, would be taxable at flat rate of 60 per cent on gross basis plus surcharge and penalty u/s 271AAC making the effective tax rate of 83.25%.
Now I call it draconian because this provisions can be made applicable to cash sales also where you may be asked to prove the identity , genuineness and credit worthiness of buyer to whom you have sold goods by raising a cash memo with his name and have no other contact ! The same provision can be invoked for receipt of unsecured loans, gift received from relatives or any credit in the bank account.
The above law enacted to catch 1 notorious shall engulf within its ambit another 5 honest taxpayers projecting them as notorious and thus is not a good law and should be abolished.
4. Rationalising MAT and AMT
MAT was introduced to bring into tax net “zero tax companies” which inspite of having earned substantial book profits and having paid substantial dividends, did not pay any tax due to various tax concessions and incentives provided under the income tax law. It may be noted that over the period of time, while the concessions and incentives have gradually reduced on one hand, the MAT rates have progressively increased from 7.5% in 2000 to 18.5%.
In order to promote competitiveness and boost manufacturing sector which facilitates job creation, the MAT can be abolished or alternatively, rates should be rationalized and burden of MAT could also be gradually reduced from current level of 18.5% to say 15%. This would also be in consonance with the reduction in the corporate tax rates.
5. Boosting Commercial Real Estate
Apart from the usual real estate segment, the budget should especially focus on the commercial segment, which has the potential to attract foreign investment and FDI. Commercial office stock is likely to cross 600 million sq ft and office space leasing in major cities is expected to cross 100 million sq ft during 2018-20. Co-working spaces in major cities has seen a sharp increase as it reached around 3.44 million sq ft as compared to 1.11 million sq ft in 2017.
Hopefully, the Ministry of Finance will help the co-working space to flourish. The concept is at nascent stage and requires government intervention to become a rage. It is profitable not only for the stakeholders involved but for the small businessmen too. The best part is that it goes in line with the Government’s Startup India concept as almost all the start-ups look for co-working to save extra cost. We hope that Finance Minister will do something to help this segment of real estate.