As the adage goes, no news is good news. It is with a sigh of relief that one looks at the Union Budget 2017-18 and, as I often say, the resemblance between rumours doing rounds of what would likely find its place in the budget vs the actual provisions of the budget is purely coincidental and unintended!
Let us look at some of the negatives which were expected and which have mercifully not come in. There is no proposal of taxing long-term capital gains, nor a proposal to tax short-term capital gains at rates applicable to business income. The holding period for shares to qualify as long-term capital gains has also remained unchanged; rather, the holding period for land and building to qualify as a long-term capital gain stands reduced from 3 percent to 2 percent. There was a huge apprehension on whether non-resident citizens could be taxed in India on global income, or their period of stay in India to qualify as non-residents reduced. These provisions remain unaltered. There were rumours regarding introduction of inheritance tax and the budget hasn't done that.
Let us look at some of the significant positives that the budget has introduced. On top of the list I would include the abolishing of the FIPB
or Foreign Investment Promotion Board. When India liberalized the Foreign Direct Investment or FDI regime, FIPB was a necessary gatekeeper. A lot has happened since then, and it is just logical that a few of the things such as secondary transactions which still need FIPB approval are now approved on electronic filing or subject to a DIPP (Department of Industrial Promotion and Policy) oversight. This will send strong positive signal to overseas investors. The recognition of affordable housing as an infrastructure industry addresses a very critical segment of the market. It would make available to this industry significantly higher funds at a much lower cost and will give a boost to this segment. The proposal to list the shares of the Public Sector Undertakings (PSUs) is interesting. The Finance Minister spoke of helping price discovery. I would also hope that the listing will make the PSU management and boards accountable and provide transparency. It will also help better realization of prices on divestment. Two other proposals of interest are the proposed amendment of the Negotiable Instrument Act to hold to account those who issue cheques which get dishonoured. The current provisions in this regard are largely ineffective.
The proposal to reduce acceptance of cash donations by political parties is, by far, the most heartening one. The government has been significantly criticized on its move on demonetization as affecting the middle class and the poor without any corresponding accountability at a political level. This amendment addresses this concern coupled with the proposal under which bonds can be purchased by tax payers and transferred bearer to political parties, which should see a significant transparency in the accountability of political parties.
Moving to tax proposals, the widely expected reduction in the rate of tax of corporates did not happen. Post the budget, the Revenue Secretary reiterated the implementation of the commitment given by the Finance Minister on the floor of the house of a 5 percent point reduction in the rate of tax by March 2018. Would that mean that we are going to see a significant reduction next year! The reduction in the rate of tax from 30 percent to 25 percent for MSMEs (small - and medium-sized businesses) with a turnover of less than 50 crores in March 2016 is welcome. Similarly, the exemption from provisions of overseas indirect transfers to certain FIIs (Foreign Institutional Investors) and where there are overseas redemption consequent upon realization of proceeds in India is welcome. The contrary circular in this regard has generated significant negative perception in the overseas investing community. The retractment of the circular will be viewed very positively.
The two provisions which the Finance Minister did not deal with in his speech and which are significant is the thin capitalization rules which seek to restrict the tax deduction of interest in excess of 30 percent of EBITDA (with carry forward provisions) for borrowings from overseas associated enterprises - this could have significant impact on corporates which are very leveraged with overseas borrowings. Also, the proposed provision that long-term capital gains tax exemption will not apply to shares which have been acquired without payment of STT (Securities Transaction Tax) could have an impact on unlisted equity sold post-listing. These provisions could impact Private Equity investments, ESOPs and the like.
The minor tinkering of the rates of tax for individuals earning income below 5 lakhs and the enhanced surcharge for those in the higher tax bracket are not of much significance.
Finally, it remains to be seen whether the buoyancy in the tax collections experienced in the current fiscal on account of enhanced rate of tax will continue in the next fiscal. A lot of government proposals for expenditure are built on the buoyancy of tax collections and if collections are not as projected, enough headway may not be available to implement the budget proposals. All in all, a reasonable budget given the current economic scenario in India and globally.(Dinesh Kanabar is CEO, Dhruva Advisors LLP)Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.