India Inc’s budget wish list

Every budget rides high on the expectations of taxpayers and the Finance Minister has a challenging task of balancing tax cuts and breaks with measures to raise revenue for meeting the country’s funding needs.

Though the estimated GDP growth rate for FY 2017-18 (i.e. 6.5 per cent) is lower than the GDP growth rate of FY 2016-17 (i.e. 7.1 per cent), the government is of the view that the reform measures undertaken by it are yielding results. Against this backdrop, it needs to be understood that the shrinking kitty of the Finance Minister may not permit any bumper tax cuts, and rather, restrict his focus on measures that will place the economy firmly on an upward growth trajectory, without compromising on fiscal consolidation.

Nonetheless, the Finance Minister should undertake to overhaul certain provisions related to corporate income-tax – the biggest contributor of direct taxes in India.

Some of these are discussed here.

Firstly, while ‘profit linked’ incentives are being phased out, to incentivise investment in certain businesses especially the ones which are capital intensive, the scope of ‘investment linked’ deductions, i.e. providing tax breaks based on investment made  in capital assets like plant and machinery, should be enlarged by expanding the list of eligible businesses to include businesses like electricity generation and distribution. In addition to capital formation and employment generation, this would also give an impetus to the government’s Make-in-India initiative. The tax foregone from such tax sops can be offset by discontinuing the profit-linked deductions which is already underway.

Secondly, given the country’s need for quality infrastructure, infrastructure development companies which require considerable funding, should be excluded from the purview of the thin-capitalisation rules (introduced last year). These rules cap the deduction of interest expense on borrowed capital in certain circumstances and thus, may dis-incentivise infrastructure companies from undertaking high capital-intensive projects.

Thirdly, it is high time that specific exemption is provided for a company to LLP (Limited Liability Partnership) conversion, regardless of the turnover and assets of the company. Currently, if the converting company’s turnover is more than Rs 60 lakh or asset size is more than INR 5 crore, its conversion into LLP is a taxable event. These limits act as the biggest roadblock for existing businesses to adopt LLP structure, which is more business-friendly. In fact, even government data shows that while the number of new LLPs registered has doubled to approximately 30 thousand in the last 3 years, the number of companies that have opted for conversion into LLP is only a dismal low of around 300 (i.e. 100 times lower than new LLP incorporations).

The fourth expectation is in relation to the most talked about commercial law these days– the Insolvency and Bankruptcy Code (IBC). This law has been enacted to ensure a time-bound completion of the corporate insolvency resolution process of corporate debtors. From a tax perspective, any waiver or write back of loans by lenders results in notional taxable income for the debtor. One hopes that Budget 2018 provides relief from such taxation as levying tax on such notional income on an already dying company amounts to neutralising the relief it gets as part of the resolution process to the extent of tax outgo. Not only this, in the IBC regime wherein distress share transfers would increase, there are two more provisions which need to be re-examined – one, that restricts the carry forward and set-off of business losses by a company in case of change in shareholding beyond 49 per cent; and two, that levies tax on the buyer as well as the seller of shares and securities on the basis of ‘fair market value’ thereof.

Fifthly, on a conceptual note, India Inc hopes for some relief in relation to the dividend distribution tax (DDT) – which is payable by a company at the rate of 20.36 per cent of the amount of dividend distributed to the shareholders. DDT is an additional tax that is payable over and above the corporate tax liability of a company. Neither the payer company nor the recipient shareholder (more relevant in a cross-border scenario where such dividend is taxable in the home jurisdiction of the shareholder) can take credit of DDT. Resultantly, DDT becomes a sunk cost and increases the cost of capital to that extent. To address this, either the rate of DDT should be reduced or it should be replaced with a withholding tax so that the shareholder is able to claim credit for such tax.

Conclusion:
The current government has consistently adopted a stakeholder consultation approach and taken some effective policy measures in the recent past. A jump of 30 places in World Bank’s Ease of Doing Business rankings and a rating upgrade by Moody’s is a clear indicator of the results of these efforts. While all this needs to be applauded, one hopes that Budget 2018 brings more cheer to the taxpayer and furthers the overall objective of widening the tax base by rationalising the tax regime which would eventually encourage compliance.  

Ritu Shaktawat is the Associate Partner and Raghav Kumar Bajaj is the Senior Associate in the Direct Tax team at Khaitan & Co. The views expressed here are personal views of the authors and do not represent the views of the firm