This year’s Budget for all practical purposes has been a one-size-fits-all budget. In the present scheme of things, the government had to perform the balancing act of providing for economic revival, giving prominence to people-centric policies and charting out a clearer growth avenue. In this background, expecting a horizontal corporate tax rate cut was thought by many as an over-exaggerated corporate whim. The current status quo of Indian corporate tax rate at 30 per cent clearly accentuates India as an outlier in the current world order where cutting corporate tax rates is embraced seamlessly by one of the largest economies of world, the land where the sun never sets. India, on the contrary, has introduced an array of substantive insertions and amendments to tax provisions that may place it as a not so attractive destination from a tax viewpoint, but is expected to support the country’s native industry, channel investments from the bourses to manufacturing and agriculture sector and would reinforce the ‘ease of doing business in India’ theme holistically.
India is already enjoying the reputation of being the first country to impose Equalisation levy. In its fresh attempt to take a stab at taxability of the digital economy, two explanations have been inserted to section 9. With superimposing “broader dependent agency permanent establishment (DAPE) rules” into domestic law through amending the definition of dependent agents without providing for any carve outs is surely an act reinforcing India’s acceptance to para 1 and para 2 of Article 12 of OECD’s Multilateral Instruments. Further, a new phrase “significant economic presence” has been coined, which is clarified to be part of business connection definition. This would set many a currently favourable tax positions as litigious propositions and strengthen a plethora of unfavourable jurisprudence on digital payments ruled out in the past. Mundane functions such as systematic and continuous soliciting of business activities through digital means could be exposed to permanent establishment taxability. Though further clarification on these aspects can be expected in form of circulars / notifications defining the qualifying thresholds and given that the above explanations are in compliance with India’s stringent Multilateral Instrument (MLI) position adopted with opting for Option A of Article 13 of OECD’s Multilateral Instruments, this amendment shall surely open up a Pandora’s box of fresh litigative issues.
While an attempt has been made in the past for the successful run of Income Computation and Disclosure standards (ICDS), through testing the “delegated legislation” principle assigned to Central government, it failed miserably in the wake of the recent Delhi High Court judgement in case of CTC vs Union of India, wherein the constitutional validity of ICDS was challenged. Several ICDS were struck down, being declared ultra vires the Income Tax Act itself. The Honourable High Court held that power to enact law lay in hands of Parliament and not the Executive, thereby restricting the powers of Central Government to notify ICDS, which override binding judicial precedents. Historically, Indian tax proposals many a times have overwritten taxpayer favourable jurisprudence while drafting tax proposals. However, inclusion of ICDS as part of Income Tax Act in the present Budget has been done to provide parliamentary accent and constitutionality to the tax standards. Introduction of more tax standards as part of relevant income tax sections, is on the anvil in successive budgets, wherein, in name of resting litigation and providing consistency of application, being the torch-bearing principles of ICDS initially introduced, the substantive tax positions of ICDS shall find legal sanction in the tax statute. No wonder that the revenue never challenged the not-so-favourable Delhi High Court ruling, before the Supreme Court.
Amidst rife speculations on introduction of long term capital gains tax, a 10 per cent rate on gains exceeding 100,000 is imposed on Indian and foreign investors alike. My personal view is that this is a much required move in today’s time and might not ward off India’s image an investment avenue for FPIs and NRIs. The prime reason cited by FM to spin off capital gains tax is directing capital from stock markets to other sectors. Though there’s more math to it, with Indian bourses registering historic records, a 10 per cent rate would provide a revenue target of close to Rs 200 billion, which is more than double of the present budget of Rs 77.67 billion of target STT collection.
Further, the major world economies fall within a range of 7.5 per cent to 30 per cent capital gains tax rate with China imposing 25 per cent, despite being one of the most sought after BRICs nations, as per the recent CEOs global survey.
One of the prime reasons for improving India’s ratings in the World Bank’s recent research report is introduction of Insolvency and Bankruptcy Code of 2016. India has moved by 30 places from last year’s survey results and had for the first time featured in the top 100 countries from ease of investment perspective. While this is a very positive outcome of recent corporate policy reforms, the strengthening of IBC has been on government’s agenda since inception. Keeping up with the promise, many a changes have been proposed in the Budget today ranging from providing MAT benefit on unabsorbed depreciation and brought forward losses for companies under insolvency resolution process, benefit of carry forward of losses while change of shareholding occasioned under the Code to providing an opportunity of being heard before denying section 79 benefit.
With certain very aggressive and audacious promises being made by the finance minister, Budget 2018 surely seems to have injected the seed of initiative in major sectors where criticism was widespread on lack of policy reforms for ages. With many flagship national level schemes being launched providing impetus to job creation, agricultural reforms, fishery and horticulture, health and sanitation, education, digital India and even air pollution, nothing has been left out from the devil’s office’ work desk that had set government and administration in the tight spot in recent past. Presently, it’s here for everyone to watch the shaping out of slated policies along with viewing how wisely and practically the implementation challenges are met.
The author is the founder partner, BMR Legal. Views expressed are personal