The income-tax cuts may result in businesses re-looking at employee compensations.
The slight expansionary stance, invoking the trigger deviation under the FRBM Act for structural reforms, to accommodate flagging growth and global headwinds, was along expected lines. The significant detailing of the targeted allocations under the pillars of ‘Aspirational India’, ‘economic development’ and ‘caring society’ are laudatory. A good part of the net market borrowings to fund the fiscal deficit earmarked for capital expenditure is an indicator of the quality of expenditure.
The relief on the personal income-tax front, to match the tax reduction for corporates, is welcome. However, this requires the individuals to forego various exemptions or deductions for allowances or perquisites. The requirement to not avail HRA exemption, benefit of loss from rented house property among other exemptions or deductions, increases the tax arbitrage from perquisites vis-a-vis allowances. This may result in businesses re-looking at employee compensations. The proposal to restrict deduction on contributions to provident fund, National Pension Scheme and superannuation fund to an overall amount of ₹7.5 lakh is a directional shift away from the Exempt-Exempt-Exempt (EEE) policy. Tax will apply on higher contributions and accretions on taxed contributions. This move is clearly targeted to ensure that the blanket exemption available without any thresholds is curtailed, thus limiting benefits.
The proposed changes to residency rules for individuals are targeted towards Indian citizens or persons of Indian origin who stay in India for less than 182 days presently to ensure they do not become residents. The reduced period of 120 days raises the chances of triggering residence and ensuring disclosure and compliance. Indian citizens who are not liable to tax in any other country will be deemed to be resident in India. Their liability to tax will become a point of contention and would need clarification. However, the finance bill seeks to extend a relaxation to such residents, by diluting the test for being regarded as a “Resident and Not Ordinary Resident". Residents are now only required to be a non-resident in India in seven out of the 10 previous years to be treated as “Resident and Not Ordinary Resident" and not be subjected to tax in India on worldwide taxes.
The bill also proposes the collection of taxes at source on foreign remittances through the Liberalised Remittance Scheme (LRS) and on selling of overseas tour packages. An authorized dealer receiving amounts of ₹7 lakh or more in a fiscal for remittance out of India under the LRS of the Reserve Bank of India, shall be liable to collect TCS (tax collected at source) at the rate of 5%/10% (non-PAN/Aadhaar cases). Likewise, a seller of a foreign tour package, shall be liable to collect TCS at the rate of 5%/10% (non-PAN/Aadhaar cases). It is evident that these proposals are targeted towards mobile citizens and mobile capital.
The removal of dividend distribution tax (DDT) and moving to classical system of taxing dividend in the hands of shareholders/unit holders, was a key ask of international investor community. This, enables foreign investors to both apply the tax treaty rates and also take foreign tax credit in home country for such tax on dividends. The cascading impact on companies receiving dividend is also met by introducing provisions to that effect. Domestic investors are also likely to feel the impact as now they would be looking at a net higher incidence of tax on dividends distributed ranging between 31.2% and 42.74%, depending on slabs, as against the DDT rate of 20.56%. The collateral impact of the above change on yield generating instruments that provide a significant funding avenue for real estate and infrastructure sector has however been unsettled. There is complete exemption from DDT at the asset/ special purpose vehicle (SPV) level and the unitholders of real estate investment trusts (REITs)/infrastructure investment trusts (InVITs). The proposed change brings the dividend to tax in the hands of the unit holders. This may make the yields and the fledgling funding avenue unviable. More importantly, not having policy continuity becomes a big impediment for investments in India.
Continuing stimulus to startups, the bill has further rationalized provisions by extending the tax holiday available to an eligible startup for a period of three consecutive assessment years out of 10; increase the turnover threshold requirement for such tax holiday to an eligible startup to ₹100 crore, aligning the law with circulars previously issued. To further incentivize startups to recruit and retain employees, bill provides to defer taxability on Esops by startups to its employees from the year of exercise.
The proposals in the budget towards incentivizing investments by sovereign wealth funds, easing the norms for fund managers to operate from India, introduction of faceless appeals and scheme for settling old disputes will go a long way in attracting new capital and easing doing business in India.
Written by EY India Chairman and Regional Managing Partner Rajiv Memani, this article first appeared in Mint on 2 February 2020. EY India Tax Partner Jayesh Sanghvi also contributed to the article.