Budget 2018 : A slingshot moment for India

Budget 2018 vindicates the necessary focus on agriculture, healthcare, employment, education and infrastructure. The creation of the world’s largest health protection scheme is a landmark move and could have a tremendous multiplier impact.

For India Inc., the Budget has responded positively with a corporate income tax rate reduction to 25% for companies with turnover of upto INR250 crores in FY 2016-17, consistent with the global theme on tax competitiveness. While other corporates may be disappointed, the government’s move is expected to have the widest positive impact, considering 99% of corporate tax filers fall in the upto INR 250 crore bracket. It should lead to greater surplus and confidence, improving private investment.

Further, the benefit of additional 30% deduction available to corporates on emoluments for new employees has been relaxed both for period of employment and with regard to employment spread over two financial years.

As promised in its earlier press release, the government has sought to address the tax issues surrounding companies seeking resolution under the Insolvency and Bankruptcy Code. The rigors of restriction by having to consider lower of unabsorbed depreciation or brought forward business loss for calculation of book profits under Minimum Alternate Tax has been relaxed to enable such companies to club both together.

The budget has introduced Long term capital gains tax, proposed at 10% on long-term assets being listed equity or a unit of an equity-oriented mutual fund or business trusts.  The concessional rate of 10% tax for equity shares, is conditional on acquisition being subject to the Securities Transaction Tax.  This can lead to confusion regarding applicability to shares acquired as bonus, preferential issue, prior to listing, etc. Further, will the benefit extend to companies seeking listing going forward, is debatable. Hopefully these will be addressed before enactment or through a circular.

The expectation on rationalisation of the Dividend Distribution Tax (DDT) does not find favour in the budget and corporates  would have to continue to contend with the cascading impact of DDT for now which puts India at a disadvantage in a present global context.

In line with the OECD’s BEPS Action agenda, the Budget seeks to provide an evidence of the Government’s resolve towards protecting the tax base in cross border scenarios. It has sought to redefine the contours of a taxable presence in alignment with the broadened definitions under the Multilateral Instrument to which India has subscribed. Further, it has introduced the concept of significant economic presence to address the emerging digital economy.

The proposal to introduce a new scheme of e-assessment for eliminating the interface between the department and tax-payers should enhance efficiency and transparency, thereby improving ease of doing business.

All-in-all, the Budget holds the line of stability and predictability in tax proposals. With a consistent and steadfast stance on fiscal discipline, it is commendable what is being proposed for MSMEs and business at large. This is evidently a ‘slingshot’ moment for India since the transformational reforms like GST, Bankruptcy Code and Recapitalisation of Banks, Black Money Act, the much debated Demonetisation, flexible inflation targeting and adoption of Fiscal Discipline (FRBMA), etc. have temporarily and purposefully pulled us back only to propel us forward with greater velocity. As we wait to surge ahead, the headwinds of crude prices and the tailwinds of revival of private investment and global growth will play a pivotal role for the economy.

This article was published in Business Standard on 2 February 2018