Budget to make tax laws less taxing

With the two key decisions – one, implementing GST and the other, demonetization - being taken last year, the Union Budget 2017-18 is definitely going to be unique, even historic, in many ways.

The Finance Act, 2016, started the process of phasing out of various deductions and also reduced the rate of tax to 29% in case of certain class of domestic companies. It will be interesting to see as to how the government will take this forward in the Budget 2017-18 and whether it will really reduce the corporate tax rate in line with the expectations of the corporate taxpayers who are losing out on the benefit of various exemptions/deductions.

The present law denies the benefit of set-off of brought forward losses, if 51% of voting power of the company is not 'beneficially' held by the same shareholders. The term 'beneficially' has been a matter of litigation, and hence, clarification in this regard would be much appreciated.

Also, in order to promote a healthy start-up ecosystem, the government should clarify that such provisions related to set-off of losses shall not be applicable to start-ups. Furthermore, the share premium for issue of shares over the fair market value of shares received by a start-up from a resident, which is taxable at present, should be made exempt on satisfaction of certain conditions.

Employee stock options plan (ESOPs) are generally used to incentivise employees through participation in company's ownership. Although, various Courts have held the ESOPs cost to be a tax deductible item in the hands of the employer, an express provision clarifying the position would be a welcome move.

Limited Liability Partnership (LLP) Act was enacted in the year 2008 and we have come a long way since then. It is expected that the government would consider increasing the present threshold limits of turnover and assets base for qualifying the conversion of companies to LLP as a tax neutral transaction.

There is a lot of ambiguity surrounding around the concept of 'Place Of Effective Management' (POEM) and its consequential impact on various other provisions of the income tax law. Also, final guidelines in relation to POEM are yet to be issued by the government. In order to avoid uncertainty due to delay in issuing guidelines, one would expect deferral of POEM.

In order to promote non-adversarial tax regime, the government should re-look at the relevant provisions dealing with the reopening and revision of closed assessments. Also, the Finance Bill, 2016, introduced new provisions dealing with penalty that could be levied if the assessed income is higher than the income reported by the taxpayer. Since the law applicable in this regard, as it stood prior to 2016, has been tested before Various Courts wherein the Courts have laid down guiding principles, the newly inserted provisions will again open up new avenues for litigation. Therefore, it is hoped that the government will scrap the penalty provisions inserted by the Finance Bill, 2016 and will reinstate erstwhile provisions.

The Indian tax system at present is already on the cusp of a paradigm shift to a new, different and more advanced tax system. It will be interesting to see further reporting requirement that may be introduced by the government to make its database and information channel more robust, effective and useful. In this background, the government should consider deferral of GAAR to reinforce trust of business houses as implementation of GAAR may lead further to an ambiguous and adversarial environment.

It will also be interesting to watch out for the incentives that the government would announce to promote digital economy on one hand and bring more online services under the net of equalisation levy on the other hand.

The writer is director, direct taxation, Nangia & Co