A pro-development Budget with many ambitions

Modi 2.0’s maiden Budget with several ground breaking announcements has set the tone for a fit for future India with an intent to make the country a USD 5Tn economy by 2024.

The Hon’ble Finance Minister reiterated the Government’s ten point vision for achieving the desired growth. Amongst others, the Budget laid emphasis on developing infrastructure, strengthening the banking and financial services sector and attracting foreign investments. Tax proposals have been introduced with an aim to stimulate growth, incentivize affordable housing and encourage start-ups by releasing entrepreneurial spirits. The direct tax collections have witnessed a growth of 78% over the last five years and are now growing at double digit every year. To keep up this momentum, certain interesting changes on the corporate tax front have been proposed.

In order to stimulate the SME sector, companies with total turnover up to Rs. 400 crores during financial year 2017-18 shall be subject to a reduced tax rate of 25% (as against normal rate of 30%) plus applicable surcharge and cess. The earlier threshold for this reduced tax rate was Rs. 250 crores which has now been hiked to Rs. 400 crores. As per statistics, the benefit of this reduced rate of tax will now be available to 99.3% of all domestic companies.

Recognising the need to promote and incentivize start-ups, the Budget has announced a slew of measures. Amongst others, the Budget has attempted to put to rest the fear of ‘angel tax’ to provide that where start-ups and their investors who furnish requisite declarations and provide information in their tax returns will not be subject to any addition or disallowance on account of valuation of share premiums. Further, eligible start-ups shall be allowed to set-off tax losses even if all the shareholders existing during the year(s) in which losses were incurred do not continue to hold their shares during the year so long as 51% commonality in shareholding is retained.

The Budget continues to push forward the Government’s tax transparency and anti-abuse agenda. Keeping this in mind, buy-back tax of 20% which was originally introduced to tax unlisted companies resorting to buying back their shares instead of distributing dividends has now been extended even to listed companies with immediate effect.

Further, to promote digital payments and move towards less cash economy, cash withdrawals exceeding Rs. 1 crore during the year from a bank account shall be subject to TDS @ 2% to be applied by the bank on payments exceeding this sum. Interestingly this provision will come into operation with effect from 1 September 2019 although the cash withdrawal limit that has been prescribed is an annual limit.

Another welcome amendment is the rationalization of secondary adjustment provisions in the Indian Transfer Pricing regulations and aligning them with international best practices. An option has now been given to the assessee to make a one-time tax payment of 18% of the excess money as increased by a surcharge of 12%. This will be considered as a final payment of tax post which the assessee will not be required to make continuing secondary adjustments.

Further, with a view to provide a much needed impetus to the financial services sector, specific income-tax incentives have been proposed for companies operating in International Financial Service Centre (IFSC) as also Non-Banking Financial Companies (NBFCs). In addition, a few rationalization measures have also been introduced for facilitating resolution of distressed companies.

To sum up, the Budget has made a clear statement that, aside from the socio-economic reforms, this Government will equally focus on tax reforms to spur growth.