There is an enormous investment requirement and need to create jobs. Hence, the government has to instil confidence in Indian and foreign investors alike. A recent report released by the Department for Promotion of Industry and Internal Trade (DPIIT) on foreign direct investments (FDI) into India in 2018-19 shows that FDI has declined by 1% to $44,366 million.
The Union Budget 2019 to be presented by the finance minister on 5 July 2019, is a good opportunity to take some concrete steps in this direction.
Reducing income tax rates
Presently, the corporate tax rates in India are among the highest in competing economies. To address this, in 2015, the government proposed reduction of corporate tax rates with corresponding withdrawal of exemptions in next four years. While corporate tax rates have been reduced to 25%, it is currently only applicable to companies having turnover of up to ₹250 crore during 2016-17.
In order to meet its commitment of making the corporate tax rate in India comparable with other Asian economies by 2019, the government should make 25% as the single rate of tax for all companies in India. Further, the benefit of 25% rate should be extended to partnership firms and limited liability partnerships, which also constitute a major portion of the micro and small and medium enterprises (MSME) sector.
In order to give impetus to the economy and keep investors engaged in the ‘consumer story’ of India, further relief should be extended to individual taxpayers. More cash in the hands of masses will increase consumption and also augur savings, infusing more cash into the economy.
Reduction of DDT
The effective tax on dividend distributed is in excess of 40% of profits earned by the company (25-30% corporate tax rate on profits earned by the company and 20.3576% on the dividend distributed by the company). Further, shareholder having dividend income in excess of `10 lakh in a year is also taxable at 10% of the excess dividend. There is a need to reduce this rate gradually to encourage participation of different stakeholders in the country’s financial markets.
Further, DDT should be replaced with taxation of the dividend income in the hands of the shareholder. This would enable foreign investors to claim credit of dividend taxation in their home jurisdiction.
Abolition of angel taxation
Startups have been plagued with tax issues, especially angel tax where share premium received in excess of fair value have been taxed as income in the hands of startups.
The government has made concerted efforts to ease applicability of angel tax to the startups. However, there is a need to abolish applicability of angel tax on startups altogether considering that there are sufficient checks under the income tax laws to curb the flow of unaccounted money. These measures would bring some respite to young entities and help them focus on their business, along with boosting investor confidence.
Ease in regulatory framework
In order to make India an attractive investment hub and spur economic growth, the government should remain committed to better its ranking in the index of Ease of Doing Business. To this end, the government should make changes in the regulatory framework by simplifying corporate law so that minor, technical and procedural defaults are only subjected to civil liability, thereby reducing impending litigation.
Transition to Ind-AS
Another development is the migration of accounting by companies from I-GAAP to Ind-AS. In this regard, tax law needs to be amended to provide for tax treatment of the change in accounting policies, which entails a major shift from the principles of I-GAAP. For example, a debt instrument may get classified as ‘equity’ for accounting purposes under the Ind-AS and it is unclear what bearing such reclassification would have in the corporate’s tax computation.
Clarification on GAAR
The provisions of GAAR were made applicable from 2017-18. However, there still remains ambiguity in interpreting the scope of GAAR provision, leading to uncertainty in the minds of investors.
In the upcoming budget, the government should come out with guidance on each and every aspect of the Indian GAAR regime to ensure that there is clarity and genuine transactions do not attract GAAR. International best practices on GAAR should be considered while issuing this guidance.
The government has constituted a task force to review existing Income Tax laws. The task force is due to submit its report by 31 July, 2019. In order to streamline and simplify the existing tax law, the government is expected to introduce the Direct Tax Code (DTC) in line with internationally accepted best practices. While one waits for the DTC, the upcoming Union budget should provide the government a good opportunity to instil confidence in investors and kick-start investment activity.
Priyanka Sahi contributed to this article.
Vikas Vasal is national leader tax, Grant Thornton India LLP.