As the countdown for the Union Budget has begun, the atmosphere among India Inc and general public is fraught with anxiety. Apprehensions about the declining growth rate, stagnating domestic demand, tumbling private investment, jobs crisis and rising inflation have set the tone for the present economic discourse. The successive economic disruptions caused by Demonetisation, GST bottlenecks and structural slowdown have invited the angst of micro and small enterprises. This has led to them anticipating reformative government policies to compensate for such shocks. The dilemma arises when we take a stock of the tax collections. The tax revenues have been adversely affected due to a significant reduction in corporate taxes recently, which is further aggravated by low tax revenue growth estimates because of the looming stagflation risk.

Currently, the moot point for the government is how to twitch the financial levers to get the economy back on the growth trajectory while simultaneously being mindful of the mounting inflationary pressures and fiscal slippages. With this backdrop of a myriad of macro-economic challenges, Hon’ble Finance Minister Nirmala Sitharaman braces herself to present her second Union Budget on February 1.

 We hope to hear some of the below points in the Hon’ble Minister’s agenda for the upcoming Budget 2020 from a direct-tax perspective –

♦ Revamping the personal and non-corporate income tax rates– Ever since the bonanza of corporate tax rate cut was announced, there is a clarion call from the middle class and the unorganised sector for rationalisation of tax slabs and reduction in tax rates. This would perhaps be the fastest way to put more money in the hands of individuals and MSMEs in a bid to augment private consumption.

♦ Revision in the deduction limit under section 80C– Deduction under section 80C amounting to INR 1.5 lakhs has not kept pace with the inflation and has required reconsideration for a long time. An upward revision would certainly provide an impetus to investments and generate savings for taxpayers.

♦ Abolishing Dividend Distribution Tax (DDT)– Abolishing DDT would lead to additional funds being available at the disposal of corporates that can be utilised for industry expansion and infrastructural development.

♦ DDT exemption for Special Purpose Vehicle (‘SPVs’) distributing dividends to Holding Company under REITs– Currently, the distributions made by SPVs to business trusts are exempt from DDT. However, in case of a dual layer structure, DDT is applicable on distributions made by SPV to a holding company. DDT exemption for such structure would bring consistency within the Real Estate Investment Trust (‘REIT’) framework and improve the yields to investors.

♦ Abolition of STT– The introduction of 10% tax on Long term Capital gains (‘LTCG’) on meeting a specified threshold should have been coupled with the abolition of STT since this results in the same income being subject to two taxes and discourages foreign investors from investing in India.

♦ Deductibility of CSR expenditure– CSR expenses are currently not tax deductible. Given that these funds are channelised towards social welfare, companies should be allowed such deduction to incentivise such spends.

♦ Extending the Sunset Clause for Affordable Housing Projects– Developers are granted tax holiday for affordable housing projects approved on or before 31 March 2020. Conditions for such projects were modified, and new conditions were added vide Finance (No. 2) Act of 2019. Since changes were substantial, the existing time limit for obtaining approvals should be extended to provide some relief to an already pale sector.

♦ Carry Forward of Tax Losses– With the services sector contributing more than 50% to India’s GDP, it is time that the carry forward of tax losses on amalgamations be allowed for the services sector as well and limiting it to industrial undertakings.

♦ Extending tax neutrality to reorganisation/ merger of Limited Liability Partnership (‘LLP’)– LLP has emerged as a popular hybrid entity in India that offers the flexibility of partnership with the limited liability of a company. To further leverage its potential, it would be apt to classify reorganisation/ merger of LLP as non-taxable transfer under section 47.

♦ Notify cases to which section 50CA and section 56(2)(x) shall not apply– There are many uncertainties around the applicability of these provisions to transactions such as buy-back of shares, capital reduction, fresh issue of shares under Initial Public Offer (‘IPO’) and private placement, transfer of shares under CIRP, etc. The Finance (No. 2) Act of 2019 empowered CBDT to notify cases to which provisions of these sections shall not apply. The CBDT, however, is yet to come out with any notification under these sections. Some clarity on this from the Ministry is much awaited.

♦ Determining fair market value (FMV) under section 55(2)(ac) for shares received on merger– For determining the cost of acquisition of capital asset being shares listed on recognised stock exchange, FMV shall be the highest price of the share on any stock exchange on 31 January, 2018. Where Mr. A holds shares of Company P (listed) prior to 31 January 2018, and subsequently, Company P merges with Company Q (listed), there is no clarity on whether to refer to the price of shares of Company P or Company Q, as on 31 January 2018.

♦ Tax implications on outbound merger– Unlike domestic or inbound mergers, there are no specific tax exemptions for outbound mergers. Addressing this inconsistency in the treatment of outbound mergers vis-à-vis inbound mergers would be welcomed by India Inc.

Would the budget be populist or elitist? Will there be a roadmap to achieve the target of a 5 trillion-dollar economy? Will the government bite the bullet and step up public expenditure ignoring the fiscal deficit cues? Will there be measures to curtail the rising rate of unemployment? Is there a headroom for further tax cuts? With expectations galore, curiosity manifold, means to spend limited and an overbearing thrust to deliver, all eyes are now set on how the Hon’ble Finance Minister attempts to strike a sound balance and play the role of a trailblazer. We are now eagerly looking forward to the budget, 2020.

Author: Alok Saraf –Partner and Saurabh Mehta – Director, M&A Tax, PwC India

The views expressed in this article are personal. The article includes inputs from Bhumika Shah – Manager, M&A Tax, PwC India.

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January 2021