Union Budget 2017: Pre-budget expectations

Pre-Budget Expectations Survey Report: Corporations

All eyes are set on the Union Budget 2017 announcement in the wake of the current economic scenario and our government’s efforts in ensuring a speedier implementation of schemes. Deloitte Touche Tohmatsu India LLP commissioned a survey aimed at understanding budget expectations of India Inc from the standpoint of taxes, regulatory policy, and key industry issues. This report aims to encapsulate key findings from this survey.

Pre-budget Expectations Survey Report: Individual taxation and personal finance

Take a quick look at the Deloitte India's Pre-Budget Expectations Survey report to know about the expectations of the general tax payers, working women, salaried employees, house owners, and others.

Corporate Social Responsibility (CSR)

The provisions of Explanation 2 to sub-section (1) to Section 37 should be amended and expenditure on CSR should be allowed as a business expense. To avoid any abuse of expenditure on CSR, necessary safeguards should be incorporated.

General Anti-Avoidance Rule (GAAR)

The Indian Tax Laws are on the verge of a mega shift to a more advanced tax system, putting the burden on taxpayers for various compliances. The provisions of GAAR may be deferred for a couple of years. In case of residents, there are ample anti-avoidance provisions in the Act. Therefore, the provisions of GAAR may be restricted only to non-resident tax payers.

Place of Effective Management (POEM)

Draft guidelines of POEM have been issued in December 2015, however, final guidelines have not been issued till date. Therefore, the provisions of POEM should be deferred for one more year.

Rationalization of Minimum Alternate Tax (MAT) Rates

With the phasing out of incentives and reduction of corporate tax rates, the burden of MAT should also be gradually reduced from the current levels of 18.5 percent to a rate matching the reduction of tax rates and phasing out of tax exemptions and incentives. The MAT credit is recommended to be allowed as carried forward and set-off without any time limit.

Dividend Distribution Tax

Removal of cascading in a multi-tier corporate structure and absolute removal of cascading by doing away with shareholding percentage and bringing it at par with erstwhile 80M: Bring parity between foreign dividend and domestic.

Grand-Fathering / Sunset of Exemptions / Deductions

To amend the provisions of section 80IA of the Income-Tax Act, 1961, so that the existing benefits available to various enterprise/undertakings under section 80IA of the Act is continued till 31 March 2020.

Base Erosion and Profit Split (BEPS)

Clarification on other BEPS action points to be suitably incorporated in the domestic legislation as a move toward effective BEPS project implementation.

Review of domestic Transfer Pricing (TP) provisions

To do away the applicability of Domestic TP provisions, where both the companies are taxable and consequential adjustment to be allowed in the other company.

E-commerce industry

The characterization of income is a key issue faced by the e-commerce industry, both by residents and non-resident players. The income can be characterized as business income, royalty or fees for technical services. The taxability and withholding tax provisions for each differ, more particularly for payments such as use or sale of goods (such as software, videos, electronic database), payment for use of equipment, website hosting, cloud computing, etc.

Even in the case of a resident player, if tax is withheld especially as definition of royalty is very wide, they can face administrative and cash flow issue (if they are incurring losses or the profit margins are small). It can also provide significant uncertainty of doing business in India for non-resident player.

There should be appropriate amendments in the Budget to provide clarity on the characterization of income and consequent tax treatment for such payments to put at rest significant ligation.
 

Working women

• Tax exemption for day-care expenses: For stress-free working, parents these days rely on good quality day-care/crèches, which are expensive and require substantial payments. Hence, a tax exemption for such expenses to the extent of INR 3,000 per child per month can be provided for.

Salaried employees

• Revival of Standard Deduction: There are various expenses that the employees incur during the course of employment, which they cannot claim as deduction. The erstwhile standard deduction could be reintroduced.
• Children Education Allowance: The allowance of INR 100 per month per child can be raised to INR 2000 per month per child, given that there has been significant increase in the costs of education over the last 15 years.
  
• Hostel Expenditure Allowance: The allowance raised from INR 150 per month to INR 300 per month with effect from 1997. Considering that there has been a steep increase in the costs, the allowance of INR 300 per month per child can be raised to INR 6000 per month per child. 
• Transport Allowance: The allowance of INR 1600 per month can be raised to INR 3000 per month given that the costs of travelling has increased substantially.
• Medical Reimbursement: In the recent past, there has been a sharp increase in the cost of medical facilities, thus, additional benefit/deduction towards medical expenses can provide some relief to an individual. The exemption limit was last revised from INR 10,000 to INR 15,000 by the Finance Act 1998. Hence, the limit can be raised to INR 30,000.
  
• House Rent Allowance (HRA) Exemption: HRA exemption is calculated as the amount which is least of rent paid minus 10% of basic salary, actual rent paid and 50% of basic salary where a person resides in a metro city, or 40% if the person stays in any other city. Currently, metro cities include Delhi, Mumbai, Chennai and Kolkata. It may be noted that cities like Hyderabad, Bangalore, Gurgaon, Pune, though not metro cities, now have accommodations with skyrocketing rents. Therefore, the rule of 50% of rent can be extended to other cities as well. 
• Medical treatment outside of India: Expenditure by employer on medical treatment outside India of the employee or his family member is excluded from perquisite subject to condition that gross total income does not exceed INR 2,00,000. The limit may be increased to INR 5,00,000.
• Perquisite with respect to a) perquisite for interest free loan in excess of, b) lunch/refreshment: The limits are imposed since 2001. To now be revised as a) 20,000 to 40,000; b) 50 to 100.

• Exclude superannuation contributions from the ambit of perquisite: The amount of any contribution to an approved superannuation fund by the employer in respect of the assesse, to the extent it exceeds one lakh fifty thousand rupees is taxable in the hands of employees as perquisite. Receipt of superannuation benefit in the form of regular pension payments is taxable in the hands of the employee. Employees are subjected to double taxation, on their superannuation benefit. To avoid double taxation, contributions by the employer to approved superannuation funds may be excluded from the purview of perquisite taxation.
  

House owners

• Deletion of deemed to be let out provisions: As per well-established canons of taxation, income tax is levied on any income actually earned by an assesse. In other words, there should not be any levy of income-tax on notional or hypothetical income. One such case is of taxability of a house property which is deemed to be let out. Deemed income for unoccupied house property seems unfair as there is no ‘real income’. At times when there is not much income from other sources, it also poses a challenge for paying the tax for an individual. Deemed income concept to be deleted. Income actually earned should be taxed.

• Increase in deduction up to INR 5 Lakhs for self-occupied home owners: In metropolitan and urban areas, construction is generally undertaken by builders and developers where high-rise towers and mega projects take 5 to 7 years to complete. This long tenure may deprive assesses of higher deduction for reasons beyond their control. Moreover, the rising interest costs leaves assesse with most of their interest amount not eligible for deduction where the house property is self-occupied. Condition of completion of construction within 5 years from the year of borrowing can be done away with. In case of self-occupied property, the limit for deduction of interest on housing loan to be increased to INR 500,000.

Mobile employees

• Foreign Tax Credit (FTC) at the time of tax deduction at source: Section 192 of the IT Act does not provide for claiming benefit of FTC at the time of withholding tax. This results in deduction and depositing of higher tax at the withholding stage leading to the employee claiming refund at the time of filing return of income. This poses hardships such as cash flow issues and administrative challenges in the follow-up of refunds.
  
  It is recommended that Section 192 of the IT Act is amended to expressly provide that while calculating TDS at the time of payment of salary, benefit of claiming FTC is available. This amendment would also be in line with the existing provisions under Section 234A, 234B and 234C of the IT Act which explicitly provides for claiming relief under Section 90/ 90A/ 91 of the IT Act at the time of calculating the tax in default on which interest is to be calculated.
  
  Consequential amendments should also be made in related rules and forms such as Form 24Q, Form 16, etc.
• Non-resident individuals have to provide dummy bank account numbers and refunds get delayed: Currently, there is no specific mechanism to issue the refunds determined in case of any non-resident individuals, and neither the tax return allows to provide foreign bank account details for these individuals.
  
  Central Board of Direct Taxes (CBDT) should issue a circular providing a mechanism to issue refunds to the non-residents not having a bank account in India. A mechanism may be provided to directly credit the refund amount to the foreign bank accounts held outside India which will be in line with the current digitization campaign of the Government, and would also reduce undue hardship caused to the foreign companies. Also, such non-residents shall be able to furnish their foreign bank accounts as a mandatory bank account number.
• Enactment of provisions for split residency in the Income Tax Act, 1961: Double Taxation Avoidance Agreement (DTAA) provides the rules for determining the residency of an individual becoming resident in both the contracting states. However, the rules nowhere address the timing difference arising on account of the different tax years followed by the contracting states.
  
  In many situations it happens that an individual is a resident of both contracting states for part of the year and one of the contracting states for the remainder of the year. The concept of split residency is not recognized in the IT Act. Hence, the position may not be accepted by the tax authorities. This leads to dual taxation of income as both the contracting states charge tax for the period for which an individual qualifies as a resident of that contracting state.
  
  It is recommended that the concept of split residency should be recognized by introducing an amendment or through a circular.

Small taxpayers

• Decreased rates or exemption of Tax Deducted at Source (TDS): The small taxpayers generally falling in the bracket of taxable income of INR 5 Lakhs or below end up having taxes deducted at source on their interest, commission and rental income at the rate of 10%. Generally, these small taxpayers make investments qualifying for chapter VIA deductions and, therefore, end up paying marginal or no taxes. This leads to refund of taxes already deducted at source which not only puts hassles of cash flow on individuals, but also leads to increased administration burden on the government.
  
  Hence, increasing the threshold of tax deduction at source for streams of income such as interest earned from fixed deposits, commission, rent, etc., or reduction in TDS rates to 2% would address the aforesaid issues.
• Long-term and short-term capital gains up to INR 5 Lakhs should be taxed at the rate of 10%: It has been observed that small taxpayers who have only long-term or short-term capital gains income end up paying higher taxes at the rate of 20% or 15% respectively as compared to the slab rates of 10% applicable to them. This leads to unnecessary burden on these small taxpayers who lose the benefit of slab rates on account of special rates applicable on capital gains.
  
  Hence, the small taxpayers should be given the benefit of being taxed only at the rate of 10% where the taxable income is arising out of capital gains and is below the taxable income of INR 5 Lakhs.
• Applicability of payment of advance tax when tax payable exceeds: Limits of INR 10,000 existing since 2009 to now be revised to INR 20,000.
  
• Enhancement of Section 80C Limits: The increase in the limits of Section 80C since the Financial Year 2014-15 has witnessed participation of many salaried employees for utilising the entire INR 1.5 Lakh deduction. This not only inculcates the habit of making investments amongst individuals, but also prepares them for their future spending.
  
  To boost savings and to give the benefit of increased spending on specified expenditure, government may think of revisiting this limit to INR 200,000 besides rationalizing Section 80 C to segregate investment and expenditure, and provide separate deduction for investment and expenditure.
• Reintroduction of Infrastructure Bonds - 80CCF: The deduction on infrastructure bonds should be reintroduced with a higher ceiling limit. This not only addresses providing an additional deduction to salaried employees, but also helps the government raise funds for infrastructure projects. Hence, Section 80CCF to be reinstated with a higher ceiling limit of INR 50,000 as allowed deduction.
  
• Eligible investments for 80C deduction—reduce tenure of term deposit: The time limit of investment in a term deposit to be reduced from 5 to 3 years in line with other saving instruments qualifying for 80 C deduction.
  
• Increase the basic exemption limit in case of individuals: The last increase in the exemption limit was made from FY 2014-15, which needs to be revisited considering the increased cost of living.
  
  An individual is required to pay education cess of 3% of the total tax amount. Education cess was introduced in FY 2004-05 @2% to finance the Government’s commitment to universalize quality basic education, and was further increased by 1% in FY 2007-08 to finance secondary and higher education.
  
  Keeping in view the cost of living trend in the economy, it is recommended to widen the current tax slab as follows:
  
  - Up to INR 3 lacs: Nil
  - INR 3–INR 5 lacs: 10%
  - INR 5–INR 10 lacs: 20%
  - Above INR 10 lacs: 30%
  
  Correspondingly, an increase of INR 50,000 should also be made in the exemption limit for senior citizens, bringing the overall exemption limit for them to INR 3.5 lacs.
  
  Education cess was introduced to address the need to provide basic education to all. As it has been over a decade and the infrastructure is in place, the Government may look at removing the education cess.
• Increase the limit of deduction: The limit of deduction under Section 80TTA (currently INR 10,000) be increased to INR 20,000.
  
• There is a clear disparity in the rate of interest granted by the Government vis-à-vis the rate of interest charged by the Government as well as on its treatment: Failure on payment of appropriate taxes on part of a taxpayer attracts interest at the rate of 1% per month such as in section 234A, 234B, 234C, 201(1A) of the Act. Whereas interest is computed and paid on tax refunds under section 244A of the Act by the tax authorities at the rate of 0.5% per month.
  
  Also, interest paid by the taxpayer is not tax deductible whereas interest received is considered as a taxable income.
  
  Uniform rate of interest, i.e., either 1% or 0.5% per month, both for interest payable by the taxpayer and Government may be prescribed.
  
  The interest paid should also be allowed as deduction from income. It will ensure consistency in treatment of both the interest charged and granted by the Government.
  
  Similarly, interest under section 244A is given only if the refund exceeds 10% of the tax as determined under section 143(1) or on regular assessment whereas there is no such restriction when it comes to charging interest by the tax department.
• Rationalization of statute: Interest is payable from date of deduction to date of payment of TDS.
  
  Part of month is considered as full month for calculating such interests. Even in a situation where the delay is of 1 day, interest will be calculated for 2 months.
  
  Provisions should be amended such that interest is charged in such cases only for 1 month.