The Finance Minister had a rather daunting task of presenting the Budget this year, amidst macroeconomic indicators pointing to a challenging situation. The Economic Survey, on the Budget eve, presented a report card underlining moderated GDP growth data and targets for next year, tapered tax collections and divestment proceeds, and the resulting fiscal deficit. Whilst there are headwinds thwarting growth momentum, one can see the silver lining in the fact that slowdown trends have largely and may come to an end, by the next quarter.
Given the backdrop, the Finance Minister has sought to pull off a delicate balance between the socioeconomic agenda of the Modi government, and rolling out a line of measures for restarting consumption and investment cycle, to push ahead with economic growth. The focus clearly, is on widening the reach amongst beneficiaries of government's social programmes on one hand, while on the other, the Finance Minister has done quite well in laying out a set of measures to pull through structural reforms, particularly in the infrastructure space.
Considering that the National Infrastructure Pipeline was rolled out only a month ago, the Budget has shown promise of a couple of new initiatives. A National Logistics Policy is going to be a significant driver for organising this rapidly growing sector. Development of new airports in light of growing fleet size is an important policy driver for realising double-digit growth of the aviation sector.
From tax policy standpoint, the Finance Minister has toed on expected lines and proposed a slew of changes to the existing Income tax legislation, with a view to align with emerging international tax policy landscape, led ably by the OECD's
Base Erosion and Profit Shifting (BEPS) works. Deferral of the 'significant economic presence' (SEP) legislation, and introduction of a new preamble in the domestic law to align purpose of bilateral tax treaties with Multilateral Instrument signed by India more than a year ago, are few such examples. Also, the proposal to legislate a taxpayers' charter within income tax law underlines a progressive policy behaviour and bodes well for taxpayers at large. One would although expect the spirit to be followed through all the way into actual implementation.
The Finance Minister has delivered another important tax policy change by proposing to replace the Dividend Distribution Tax (DDT) by the classical system of dividend taxation in the hands of shareholders. The move will generate a significant upside, particularly for foreign investors and will most certainly peg India as one of the most competitive tax jurisdictions, amongst its Asian and OECD peers. The move allows the foreign shareholder to leverage tax treaty for lower dividend taxation, generally at 10 per cent, with a potential upside of foreign tax credit in their home country. It is possible that in certain cases, the debate could now shift to anti-abuse rules/GAAR in applying lower tax rate under bilateral treaties, but more significantly, this policy switch insofar as dividend taxation is concerned, practically rids the world of endless litigation around deductibility of expenses incurred to earn dividends.
Insofar as the headline corporate tax rate is concerned, the Budget explicitly allows the benefit of 15 per cent rate to power generation business. This is a massive boost to the sector that has more recently struggled to get the projects off the ground. The combined effect of lower corporate tax rates and dividend taxation could make many such projects more financially viable. From financing cost standpoint, the Budget delivers a massive relief, as the concessional 5 per cent tax withholding rate applicable on interest paid to select lenders or on overseas borrowings, is now extended till June 2023. This is a huge relief to not only existing projects but also makes the funding more cost competitive for new investments in the infrastructure sector.
The government's focus on nurturing the start-up ecosystem is indeed commendable. The Budget brings more cheer for start-ups in the form of higher turnover limit of Rs 100 crore (from Rs 25 crore at present) to be eligible for profit-linked tax incentive, and a longer eligibility period of 10 years, up from the current seven years. In tandem, these two changes will provide a far more predictable and certain tax framework for new age business to flourish.
There are a slew of administrative measures rolled out to reform extant tax administration which has been labelled as regressive and slow, in many instances. Proposal to digitise tax appeals in addition to first level assessment is yet another incremental step that can bring more credibility to tax administration. Also, the proposal of one-time dispute resolution scheme will definitely help unclog the appellate forums.
From personal tax standpoint, an optional regime allowing progressive reduction of tax rates will leave marginally more disposal income to boost consumption, and that goes well with the overall theme of this year's Budget.
Overall, a fine balancing act by the Finance Minister as the need of hour was to reinstate investors' confidence in the Indian growth story, inspired by growing consumption demand and rapid wealth creation.
(Sumit Singhania is Partner and Mansi Kakkar is Manager at Deloitte India)
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.