India Tax Talks - Episode 4: Expectation on Budget 2019

Hon’ble Finance Minister, Mrs. Nirmala Sitharaman, will be presenting full budget 2019 on 5^th July 2019 which the first budget of the second term of the Government. What are the expectation of Investors, India or global, from this full budget, our 4^th tax talk discussed the key expectations in terms of policy changes, tax changes, etc.:

1. Broad expectation in terms of tax policies:
   She has limited room in terms of changes in how she can reduce the rate or give exemption. She should lay down the road map in terms of what she will achieve or seek to achive in her tenure just like previous minister which provides certainty and builts appropriate expectation in the market in terms of where this moving keeping in mind the challenge. This road map provides a direction to the investors and overall markets.
   
2. Dividend Distribution Tax (‘DDT’)
   DDT is not a tax which is levied globally, atleast not to the extent of Indian law and especially to the extent of having double taxation in certain cases (now from the previous year) where the individuals and firms are liable to tax on receipt of dividends.
   Just to understand the background of DDT, one need to understand why DDT was introduced. The government was struggling to collect taxes from people who are receiving dividend as there was no robust compliance. But today we have shifted that needle quite significantly and compliances are more robust, the tax authorities have access to many data. So the reason for bringing-in the DDT in the Indian tax laws no longer exist. DDT started at 7.5% and now levied at a rate of 20%. It just increases the tax burden on the company and investors and moreso it harms the small tax payers.
   Today, we have ability to monitor the compliance, its time to move back to earlier regime to tax dividends in the hands of the shareholders.
   
3. Major tax changes in terms of encouraging foreign investments
   There is an era of tax competitiveness. Most of the major jurisdictions are going through the phase of making their jurisdiction extremely competitive for investors, for businesses and at the cost of tax collections.
   At the same point of time one need to consider the issue playing around the rightful share of tax for the value which is generated in a country. So there are two sentiments which on contrary to what attracts or discourages foreign investors in that particular jurisdictions.
   In this scenario, the government has to take a call in terms of what is that we need i.e. capital or investment or do we need that boost instead. One can consider the example of China tax policy announced after changes in US tax  regime (discouraged investment overseas, bring all the money back to US, etc.). China went ahead and announced that for all the profits that is reinvested in China, there will be no dividend tax @10% on the same. Their corporate tax rate is around 20%. So that is the rate they are offering to foreign investor in their country.
   The government need to recognize our compettors. We need to put this in place in terms of the fact that even if we are going to loose out on some amount of tax revenue. If you want to encourage the investment what is the path we want to take.
   
4. Digital economy
   There is over arching issue in terms of how to define digital business in the first phase because there are companies which are 100% digital but everyone else is moving into digital space in one way or another. So how do you actually go about defining digital business
   In global context in terms of what OECD is doing, the definition is going to get critical. The government should bring a level of clarification on the terms and secondly, we have the SEP in the domestic laws but the fact remains that most of the players still remains covered by the tax treaties that India has with those various jurisdictions. Treaty overrides prevailing law. So again the question is if that is the case the more important thing again is intent, purpose, certainty, clarity, direction.
   
5. Change in tax rate
   The government should do away the whole concept of surcharge and cess and keep it simple, keep a rate which is understandable, don’t have these add ons which are coming in.