Not a taxing budget
I have been a firm believer that every budget does not need to be a time for tax reforms. The US implemented tax reforms after about 30 years, and for some reason, we tend to expect magic from our finance ministers every year. More specifically, the magic show is said to be successful only if it has a long list of incentives, concessions and other sops. It is heartening that Budget 2018 has stayed away from the temptation of a performing act and instead, as far as income-tax is concerned, remained what I would describe as an honest attempt to address only those issues which are critical. When investors and the common man clamour for consistency, clarity and certainty, the first step for that should be fewer changes from year to year!
That said, major change is required at some fundamental level. The Economic Survey threw up statistics on the high degree of tax litigation where the government is a litigator and the low success rates. The statistic did not create alarm for most, but by coming as part of a formal survey, it was expected that the pot would be stirred. Yet, this is an area where the budget perhaps fails, since there are almost no attempts to create seismic shifts in the way the tax administration and collection systems work. The cost of tax collection is increasing, and the statistics presented during the speech on the low levels of income and tax declared by several taxpayers only reiterate the need for a more balanced and cost-effective approach. It is also perhaps the large number of effectively nil filers that create a propensity to unfairly go after the high tax filers. Let us not wait for another budget to address these issues, and the new law being drafted should certainly grab this window of opportunity.
The balancing act of the government continues with the extension of the reduced corporate tax rate of 25% for companies having a turnover of less than Rs250 crore. This will no doubt leave some free cash for additional investment, but by creating tax arbitrages between different companies and other forms of business, and without any corresponding reduction in Minimum Alternate Tax, this is at best another deferral of the larger bullet to be bitten of an across-the-board reduction in rate.
The introduction of a 10% capital gains tax on listed equity transactions and distribution tax on equity-oriented mutual funds is perhaps that revenue raising measure that will provide the courage needed for an across-the-board reduction in the coming year. This new tax was widely anticipated, and a somewhat overheated stock market was the best time to levy the tax. Since FPIs (foreign portfolio investors) pay a 15% tax on their short-term trades already, this new tax will impact mostly large corporates and HNIs (high net-worth individuals). Even there, a cost reset to the fair value as of 31 January is sweet (since as I said the markets are comfortably set). However, here again, there seem to be some slips between the cup and the lip. MAT on Indian companies remains and it is time that there is parity between domestic and foreign investors as well by way of reduced rates. Additionally, if indeed the creation of jobs and capital investment is a goal, then the lower rate of 10% should have also been extended to the private investments made by Alternate Investment Funds.
On digital taxation also the government has taken a leap by coming up with a concept of significant economic presence. Put simply, this says that if you make money from Indian consumers, please pay tax here. There is no disconnect in the theory, but there ought to be a wider debate on whether GST is the tool to collect consumption-based taxes, or whether we really need to create permanent establishments for foreign companies, and get into the quicksand that gets created as a result. If there is one provision that I would ask for wider consultations on, I would pick this one.
Onward and ahead from here.
Abhishek Goenka is partner (tax and regulatory services) at PwC.