Union Budget 2018: Pre-budget expectations

Survey report for personal taxation and corporate tax

Corporate Tax Survey

2017 was in many ways a defining year for the Indian economy. Preceded by the completely unexpected move of demonetization, it finally brought to life the much discussed GST. However the change did not stop there. Many Indian companies prepared accounts using Ind AS, got ready for newer compliances under BEPS. With so many regulatory changes, the business landscape also had to deal with rising economic uncertainty as oil prices moved up, Indian economy grew at a slower pace and US saw its biggest tax reform take shape. With elections slated for 2019, we asked Indian businesses as to what their expectation was from the last full budget of this government.

We got several interesting responses from approximately 120 professionals, which have been discussed in this report. On the whole, the survey has a mood of cautious optimism with the Indian businesses enthusiastic about the reforms but wanting to have an environment of easier compliances and audit processes.

Personal Tax Survey

With the Union Budget 2018 announcement around the corner, Deloitte India commissioned a survey aimed at understanding budget expectations of the common man. The survey covers a broad spectrum of respondents including salaried professionals, home owners and other general tax payers.

The report encapsulate key findings from this survey and people’s perspective on:

  • Incentivising savings
  • Increase in deductions
  • Jurisdiction free e-assessment

Expectations from the Union Budget 2018

Personal Tax 

The Government will be presenting their last comprehensive Budget in February 2018. With the Lok Sabha elections round the corner in 2019 a common belief is that the Government is likely to come out with a populist budget, something that provides relief to the “aam aadmi”.

While the slabs are not expected to be varied drastically, the Government could look at reintroduction of standard deduction so as to provide some relief to salaried class. The overall limit for deduction under Section 80C needs a relook considering a slash in the Fixed Deposit Interest Rates and limited avenues for investment; it is time that the same is increased from INR 1.5 lakhs to INR 2 lakhs. The ever increasing medical costs may get the policy makers thinking to enhance the current Section 80D limit of INR 25,000. Similarly, the medical reimbursement limit needs a revisit, with the current limit standing at a meagre INR 15,000. 

It will be interesting to see how the Budget fares for the common man and whether the Hon’ble Finance Minister lives up to the expectations of the “aam aadmi”.

Direct Tax

Budget 2018 arrives in the backdrop of the urgent need of reviving private investment demand through policy levers targeted to incentivize capex and job creation. There is also a need to propel the “Make in India” program with concerted push on 4-5 critical sectors based on their potential to create employment opportunities. This could be done in alignment with the much awaited New Industrial Policy to attract investments for job creation for e.g. in electric vehicles manufacturing, local defence procurement etc. In addition, the Government is keen to ensure that reforms in insolvency and bankruptcy mechanisms succeed.

The direct tax measures could be directed to achieve these outcomes. This would involve reduction in the corporate tax rate to 25 per cent in line with the Finance Minister’s four year old announcement; U.S. has substantially reduced its corporate tax rate to 21 per cent from January 2018. The mechanism for Minimum Alternate Tax could be modified to firstly provide that the write-off of bad debts will not create a MAT liability, and secondly, capital gains from STT paid listed equity shares and dividend income be excluded from the working of MAT. To allow companies to re-organise in a tax exempt manner, it would be helpful if the carry forward of tax losses is permitted to all corporates where majority ownership remains with the same ultimate parent entity. Last year the tax laws were amended to limit the tax deductibility of interest on debt raised from related parties – similar provisions have been included also by the US recently. Industry has recommended that NBFC, infrastructure and energy companies be excluded as these capital intensive industries are materially and adversely impacted.

Finally, it is hoped that the Budget will simplify some of the tax provisions, and their working. Such as exempting foreign companies from filing tax returns on passive sourced income like royalties and fees for technical services, defining pragmatic rules for secondment of expatriates and provide clarity on the patent box regime, such that the objective of Ease of Doing Business is also addressed. 

Indirect Tax 

Being first budget after implementation of historic Goods and Services Tax (GST) across the country, excitement of India Inc. for the 2018 Budget is hardly suppressible. From an indirect tax perspective, this budget will be of extreme interest since it will demonstrate the extent to which Central Government has a say in the larger indirect tax policy of the country. Also, since the authority on GST is the ‘GST Council’, budget to be presented by the Central Government would be a good watch this time.

Government’s policies consistently focused towards ‘Make in India’ and ‘Digital India’ initiatives indicate possibility of further reforms in similar direction. Indirect tax structure is imperative for this objective to ensure that indigenous manufacturing remains attractive as compared to imports. Due to replacement of Countervailing Duty and Special Additional Duty of Customs with GST last year, import duty structure across various sectors has significantly changed. Amendments are expected in cases where domestic industry is facing negative protection from the imports or there is an inverted duty structure.

At the GST front, there are several issues which require resolution. The industry has particularly expressed lack of clarity on critical tax issues such as inter-branch supply of services within same legal entity, anti-profiteering compliance mechanism, scope of input service distributor etc. It is expected that this budget should likely solve these issues by issuing necessary clarifications. Also, input tax credit restrictions, relief on procedural compliances, for instance filing of letter of undertaking by exporters, should be relaxed to endorse ease of doing business.

Hopes are high on upcoming Budget to endorse a sustainable growth environment for the Indian industry providing much needed tax certainty and resolution of initial teething issues being faced on account of GST implementation.

Transfer Pricing 

Since the last two Union Budgets have brought about major changes in the transfer pricing regulations in India, thus not many significant amendments are expected from Union Budget 2018.

The documentation requirements as per BEPS project were introduced by Finance Act 2016 and the secondary adjustment law by Finance Act 2017.

Further to advance the BEPS initiative, the final rules on country-by-country reporting and master file were brought out in FY 2017-18. And documentation as per these is required to be done for the first time for FY 2017-18. Due to this, the taxpayers are facing many practical challenges and although, the recently issued final rules address these queries, however, a lot of them still remain unanswered.

Thus, it is expected that Union Budget 2018 will provide clarifications to resolve the same.

M&A tax 

1. Insolvency resolution

To facilitate the insolvency process and recognizing the business imperatives of the process, certain tax relaxations are needed. Key among these are, MAT should not be applicable, loans waived should not be taxable as income, losses should be protected and deemed gift and tax on share transfers should be exempted, etc.

2. Demerger transaction between non common controlled parties [Section (2)(19AA)]

Demerger between non common controlled parties have to be accounted on fair value basis as per IND AS. The definition of the term ‘demerger’ under section 2 (19AA) needs to be realigned for the accounting requirements to be as per the accounting standards applicable.

3. Tax on share premium [Section 56(2)(viib)]

Valuation is a highly subjective matter especially for start-ups and also for new technology industries, where traditional valuation methodologies fail. Where unrelated parties are subscribing to shares at a premium, such premium should be respected and not questioned.

4. MAT rationalization to account for Ind AS (Section 115JB)

Many capital and notional items need to be credited to profit and loss account under Ind AS. These ought not to be taxable and should be suitably excluded from MAT.

5. Carry forward of losses in mergers for all businesses (Section 72A)

Mergers of all kinds of undertakings should be treated at par. The present restriction of allowing carry forward of losses only to industrial undertakings should be done away with.

6. Contingent and deferred consideration (Section 45)

Capital gains tax on contingent and deferred consideration should be at the time that the consideration is received and hence spread over multiple years if needed.

7. 10% tax rate on sale of unlisted shares to residents

Resident shareholders in closely held companies should also get the beneficial tax rate of 10% on sale of shares as available to non-resident shareholders.

8. Transfer of assets to a Invit / REIT

Transfer of shares to a REIT and an INVIT has a favourable tax regime. Transfer of assets into these trusts should also get the same treatment. 

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