Taxing Times They Are A-Changin’ Now

A couple of months ago, Finance Minister Arun Jaitley’s faint reference lifted the spirits of the general public despite the gloom and doom scenario post-demonetisation. He said that if the government’s measures on demonetisation bore fruit, there was a case for moderation of taxes in the budget. Two-and-a-half months after the historic move on ­demonetisation, which the government claimed to be a huge success, there is widespread expectation that the ­finance minister will ‘reward’ people with tax breaks.

The expectations are realistic given that the last tax breaks happened two years ago and the economy is also presenting the government with an opportunity to play with the taxes and reward the tax-paying citizens. After the hardships faced by the people because of demonetisation, it is also payback time for the government and it is expected that some major tweaking with personal and corporate taxes would happen in this budget that would be announced on February 1.

Tax experts across the board expect this year’s budget to be defining in terms of personal and corporate taxes with prospects of reduction in both. According ­to sources, the government is working ­towards giving an array of tax incentives to the people. This is not being pushed just by increased tax collections following demonetisation but also the fact that the government needs to take some populist measures ahead of assembly elections in five states. There is also the fact that since this is the fourth budget of this government, it will have to show something that benefits the people.

To begin with, there is a strong case for a reduction in corporate tax this year. The government had already stated that it is committed to reducing corporate tax from the present 30 per cent to 25 per cent. With two years remaining before the 2019 polls, the government has to move in the direction of reducing corporate tax this year.

“A roadmap for reduction of corporate tax from 30 per cent to 25 per cent is possible in this budget,” says Girish Vanvari, head of tax, KPMG India. “The rates in the US and the UK are going down and India needs to align its corporate tax rates as well. A drastic reduction to 25 per cent in one go is not possible as there is no headroom for it. A gradual approach may be announced in this budget.”

The industry has also been clamouring for a reduction in corporate taxes for some time. In its pre-budget memorandum, apex industry chamber CII said that the effective corporate tax rate was 19.8 per cent because of the slew of exemptions and wanted it to be lowered to 18 per cent after exemptions and after including surcharges. It has also urged the government to withdraw other incentives or exemptions if this proposal was accepted.

“This is a big year where the FM would realise the intent of reducing corporate tax,” says Gokul Chaudhri, leader, tax, with BMR & Associates. “He has to move to a 25 per cent regime by 2018, so he has to make a beginning this year. In America, President-elect Donald Trump has said that corporate tax would be cut to 15-20 per cent. That would have an impact on India.”

A lot of other measures are also ­expected in this sphere. Chaudhri says the Income Computation and Disclosure Standards (ICDS) and Place of Effective Management (POEM) rules for taxation, which the government had brought in earlier have both struggled and could be done away with. On the contrary, there is a possibility that the General Anti-Avoidance Rules (GAAR), India’s anti-tax avoidance rules, may be brought in this year. “We expect some clarity on GAAR and on what will happen to the treaties that are already there. We expect the government to concentrate on easing things on treaties, tax compliance and on litigation in the budget.” says Vanvari.

There was also a case, felt experts, for the government to improve the environment for investors to invest in India through tax rules. This would include removal of new tax provisions on indirect transfers which have dogged many companies in the past.

Not many changes are, however, ­expected in the indirect taxes domain, especially in excise duties and service tax as they would be subsumed in the Goods and Services Tax which will set in from July, according to the new deadline set by the government as the budget would be transitioning towards GST and rules and regulations in terms of excise and service tax would be aligned towards it.

Changes are however, expected in the customs duties. “Changes in customs duties are expected to come in the budget particularly to encourage ‘Make in India’ and to boost manufacture in India,” says Mahesh Jaising, partner at BMR and Associates. “This may be through a lower rate of customs duty on components and a higher rate on finished products.”

But for India’s tax payers, there is a lot of hope that the Union Budget 2017 will bring in cheer for them in terms of lower taxes. With the upcoming GST limiting the scope for the government to do much in the indirect taxes sphere, it is in direct taxes that we may see the maximum changes.

They may not be disappointed by the ­finance minister as the government may be looking at increasing the basic exemption level. “Post-demonetisation there is hope and hype that there will be tinkering with the taxes,” says Kuldip Kumar, partner, personal tax with PwC.  The basic exemption level can be increased from Rs. 2.5 lakh to Rs 3 lakh.” This expectation comes from the fact that the last time the basic exemption limit was increased was in 2014, when it was increased by Rs 50,000 from Rs 2 lakh to Rs. 2.5 lakh. Beyond that, tax rates have only been ­increasing, from the peak rate of 33.99 per cent in 2013-14 to 34.61 per cent in 2015-16 and further ­increased to 35.54 per cent in 2016-17. Although the basic rates and slabs ­remained the same, the rates ­increased ­because the surcharge kept on increasing from 10 to 12 to 15 per cent for the super rich.

There is a lot of expectation this year also for a realignment of the tax slabs by increasing the income threshold for the topmost slab of 30 per cent to incomes of over Rs 20 lakh. This could be a move by the government to moderate taxes for a large number of taxpayers as also to create a special group of those earning above Rs 20 lakh.

Experts also expect that it was perhaps time for the government to review the standard deduction scheme which was discontinued by then finance minister P. Chidambaram in 2006. Standard ­deduction allowed taxpayers deduction of a lump sum amount from taxes irrespective of actual expenses by the tax payer and was an intrinsic part of the Income Tax Act till 2006.

“Standard deduction may come back and the salaried tax payer may be treated on par with the self-employed. There has been a constant demand for this,” says Parizad Sirwalla, partner, tax, KPMG India,

There is also a possibility that the government will look at removing many of the exemptions available to tax payers now. This is also in accordance with the Direct Taxes Code (DTC) which had called for the removal of most of the tax exemptions and a moderation of taxes. “There are meaningless exemptions which have outlived their utility,” says Sirwalla. “The Rs 15,000 medical ­expenses, the one on children education, should all be removed and brought under standard deduction.”

Similarly, another area that badly needs change is that of Leave Tra­vel Allowance (LTA), where rules have not changed for a long time and which is largely irrelevant in today’s times. “LTA was allowed to be taken twice in a block of four years. That should change and LTA exemption should be allowed every year on a fiscal year basis and not on a calendar year basis. Not only airfare, hotels and dining can also be allowed for inclusion in the exemption apart from foreign trips under LTA. If there is globalisation, this limitation should not be there more so when more people are now travelling abroad,” says Kumar.

Of course, the real scenario would be clear on February 1 when the finance minister announces the budget proposals in Parliament. There is a lot of hope that people’s expectations would be fulfilled and that the budget would bring in the prime minister’s promise of ‘Acche Din’.