Union Budget 2019
– The budget leans on curbing the increasing fiscal deficit.1 It retains the fiscal deficit target for 2020-21 at an ambitious 3% of the GDP. This indicates a focus on growth through consolidating and revamping existing programs and improving ease of doing business.
USD 5 Trillion Economy
– Short on details: The Finance Minister has laid out a vision that focusses on Infrastructure, Start-ups and MSMES, Innovation and Research, Education and Skilling and adoption of Digital Payments. These are some of the right ingredients, however, the budget is short on specific measures.
– Challenging target: India is today a USD 2.71 trillion economy.2 The Finance Minister expects us to cross the 3 trillion dollar mark in 2019-20. This should be possible with the current growth rate.3 The Government in the interim budget had set an objective of making India a USD 10 trillion economy in year 2032 and USD 5 trillion economy by year 2024. This looks increasingly challenging and the next budget in February 2020, would need to come up with bolder measures to boost growth.
– SEZ policy: A key aspect missing in the budget is the way forward on the new SEZ policy. In November 2018, a Committee, set up by the government, has made detailed recommendations for a tax friendly SEZ policy.4 The budget could have been a good platform to announce that the Government is working on this, even if the announcement itself was to come in later. Other countries provide significant tax incentives for exports. China offers an incentivised tax rate of 15% to companies in its specified zones. Similarly, S. Africa offers a 15% tax rate. Indonesia, Mexico, S. Korea offer reduction in income tax rate up-to 100% to companies in special zones.
– R&D and talent: The budget does not provide specific measures to boost R&D and talent development, including reskilling in the IT sector.
– Progress on corporate tax reduction: The progress on the glide path to reduced corporate tax rate of 25% is appreciated with the coverage now increased to companies with turnover of up-to INR 400 crore. However, a globally competitive tax regime continues to elude the large companies. Despite the economic survey highlighting the impact that the large companies have on productivity and employment, the budget has not translated that into measures which recognise this. There are several companies in our industry who are above the INR 400 crore revenue threshold. These companies contribute a significant share of economic growth including taxes. They have established India as the global leader in the IT-BPM space. Further, given the surcharge of 12% and health and education cess of 4%, the tax rate for the companies, after the above reduction, still works out to be 29.12% and stands at a whopping 34.94% for other companies.
– Focus on automation and transparency: The continued focus on automation and streamlining of the tax administration, both on the direct taxes and the Goods and Services Tax (GST) is welcome.
Innovation and Research
– The focus on innovation and research, though limited and short on details, is welcome. The budget has proposed a new education policy to transform India’s educational system, a National research foundation to consolidate and strengthen the research initiatives and focus on skill training for global jobs – emphasis on language training and emerging technologies, namely, AI, IOT, VR, 3-D Printing and robotics.
Investment friendly steps
– Harmonised investment experience for foreign portfolio investors, Merge NRI portfolio investment scheme route with foreign portfolio investment route, Merge NRI portfolio investment scheme route with foreign portfolio investment route and the intent to organise global investors meet to attract cross border investors.
– Possible liberalisation of the FDI regime in aviation, media, animation AVGC and insurance, permitting 100% foreign direct investment in insurance intermediaries announcing easing of local sourcing norms for the FDI in the single brand retail sector.
– Increased public holding in listed companies. The proposal to consider increasing the minimum public shareholding in listed firms to 35 per cent from 25 per cent needs to be studied in detail, in terms of its rollout plan. Overall, this should help deepen the markets.
Boost for Infrastructure
– Promote Electric Vehicles. Earmarked Rs 10,000 crore over three years. Investment in infrastructure combined with reduction in GST to 5% (from 12%), a tax rebate of 1.5 lakh to customers on purchase of EVs and Reduction in customs duty rates on different parts of electric vehicle are expected to boost this industry.
– Public-Private Partnership to unleash faster development of railway infrastructure. An estimated investment of INR 50 lakh crores is needed during 2018-2030.
– Developing payment ecosystem focussed on mobility. India’s first indigenously developed payment ecosystem for transport, based on National Common Mobility Card (NCMC) standards has been launched in March, 2019. This will enable people to pay multiple kinds of transport charges, including metro services and toll tax, across the country.
Addressing Startups and MSMEs
– Interest subvention: Allocation of INR 350 crore for FY 2019-20 for 2% interest subvention for all GST registered MSMEs, on fresh or incremental loans under Interest Subvention Scheme.
– Increase in threshold for presumptive taxation of businesses from INR 1 crore to INR 2 crore.
– Easing Angel tax concerns: No income-tax scrutiny would be done with respect to the valuation of shares (angel tax) of start-ups provided the requisite information and declaration is provided along with the income-tax return. Establishing identity of investors and source of funds will be resolved through an e-verification process. For tax return already filed where scrutiny is pending, any enquiry or verification by income-tax officer will require approval of higher-ups. Category II AIFs (private equity funds) are also now added to the list of eligible investors whose investments are completely exempted from angel tax.
– Relaxing carry forward of losses: Startup founders have now been allowed to sell their shares (and still protect the tax losses) so long as they continue to hold 51% equity and voting power in the startup. For carry forward of losses by eligible startups, one of the existing condition was that all the shareholders of such company who held shares in the year when losses were incurred, had to continue holding the same number of shares in the event of an equity dilution. Even in cases where equity dilution was less than 49%, this condition applied.
– Extension of LTCG exemption: Startup founders were eligible to get long term capital gains (LTCG) tax exemption if they were to invest sale proceeds from residential properties in their startups provided the investment was made before March 31, 2019. The other condition being that such founders retained 51% equity in the startup. The sunset clause of March 31, 2019 has now been extended to March 31, 2021 and the minimum equity requirement has been reduced to 25%.
Less Cash Economy
– Business establishments with annual turnover of INR 50 crores to mandatorily provide no-charges based digital payment modes to customers;
– Two percent TDS for all cash withdrawals exceeding INR 1 crore from bank accounts;
– Electronic/digital payment modes are now included in the list of permissible payments in relation to avoiding tax disallowances or to claim allowances, in many places in the Income-tax Act, 1961.
– No change in the headline rate of 30%. The reduced corporate tax rate of 25% has been extended to companies having a turnover of up-to INR 400 crores in the financial year 2017-18 (which was earlier INR 250 crores);
– Buyback tax, currently only for unlisted companies, has been extended to include even listed companies. This could have an impact on companies not pursuing this option and in effect impacting shareholder returns.
– Tax increase for individuals with income in excess of INR 2 Crores
– Global companies to be invited by way of bidding to set up “mega manufacturing plants” for specific IT products like semi-conductors and to be given investment based tax incentives
– Proposals relating to secondary adjustment:
> Secondary adjustment clarified to apply from April 2016. Applicable only if the adjustment is in excess of INR 1 crore;
> Secondary adjustment for APAs to apply from those signed after April 1, 2017;
> Money can be received from any of the group entities and not necessarily from the entity with which the transactions were undertaken;
> Taxpayer can opt for a one-time tax at 18 percent plus surcharge applicable in lieu of secondary adjustment. In that case, no requirement of repatriation of excess money. No deduction available in respect of one-time tax.
– Master file filing requirement is proposed to be extended to (Indian) constituent entities of multinational groups even if they have no international transactions.
– Power of Assessing Officer in respect of modified return of income filed pursuant to APA is proposed to be limited to modifying the total income, having regard to APA.
– To remove difficulties, accounting year for the purpose of alternate reporting of country-by-country report in India proposed to be taken to be that of the parent entity’s accounting year.
– Customs rate changes focusing on the key agenda of “Make in India”.
>Increase of basic duties on products such as on CCTV cameras and IP cameras, Network & Digital video recorders (NVRs) and Chargers/ power adapters of CCTV camera/ IP camera/ DVR
>Exemption from customs duty on capital goods used for manufacture of:
(a) Specified Electronic items like populated PCB, cameras, chargers/ adapters, set-top box etc; and
(b) Cathode ray tubes, CD/ DVD, CRT monitors and plasma display panels.
– Reduction of customs duty on parts of electric vehicles in line with ‘Pollution free India with green Mother Earth and Blue Skies’ which is one of the points for the Vision for the decade.
– Dispute settlement scheme introduced for closure of legacy disputes (Sabka Vikas (Legacy Dispute Resolution) Scheme, 2019 covering taxes which have been subsumed under GST like excise and service tax. The scheme allows for waiver of tax/ duty between 30% – 70%.
– GST law amendments made to implement decisions taken by the GST Council in the last few meetings.
Summary of key measures that were not announced
NASSCOM is working with the industry and the Government to ensure that the issues/ concerns are suitably addressed
– Extension of the SEZ sunset – With the sunset clause for SEZs nearing (March 31, 2020), no proposals in the current budget to extend the same
– Reduced corporate tax rate – Although the reduced corporate tax rate cover has been extended to 99.3% percent companies, the same has not been extended to all companies. Hence, large companies are still left out despite the recognition of these companies to the economy.
– R&D and re-skilling – There are no proposals to incentivize R&D or reskilling/ training expenditure;
– E-waste management not addressed;
– No reduction in MAT rate – Since the corporate tax rate has anyway been reduced to 25 percent for 99.3% of the companies, the Minimum Alternate Tax rate seems to have not been reduced
- The fiscal deficit for 2019-20 is projected at 3.3% of the GDP as against the original target of 3.1%.
- GDP at current prices of INR 190,10,164 crore, 2018-19 (PE), Central Statistics Office, Ministry of Statistics and Programme Implementation.
- Growth rate is computed on GDP at constant prices.
- PIB release, SEZ Policy review report dated 12.12.18. See: http://pib.nic.in/newsite/PrintRelease.aspx?relid=186308