Published Editorial

Budget 2017 - Demonetization, GST ensured the Budget came at the right time

February 2017

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Sunil Kapadia
Tax Partner, EY India

Budget 2017 has been announced amidst considerable uncertainty in the Global economy including the Feds mandate to increase rates to growing signs of a retreat in globalisation. These trends coupled with an increase in prices of commodities globally was set to have an impact on developing countries.

Further, domestically, an acknowledged need for follow-up actions on demonetisation, the onset of the GST, ensuring that inflation stays low as well as keeping with the need for fiscal consolidation has ensured that the Budget came at an opportune time.

The Finance Minister (‘FM’) kicked off his speech by appreciating the challenges and highlighting the positives. Some of the key proposals from a corporate tax perspective are as under:

1. Rates of corporate tax

Budget 2015 had announced a phasing out of incentives/ benefits and a corresponding reduction in tax rates. Budget 2016 saw very little relief in the form of a 1% reduction in case of companies having a turnover of less than INR 5 crores and a tax rate of 25% on new manufacturing companies. Budget 2017 has proposed a reduction of tax rates on corporates having a turnover of upto INR 50 crores to 25%. While this comes as a welcome cheer for SMEs, other companies/ LLPs have been ignored entirely.

The FM acknowledged the demand for abolition of MAT, however, given that the benefits to the revenue resulting from the phasing out of incentives would be realised only after 7-10 years, the FM ruled out the possibility of abolishing or reducing MAT, however, he has allowed a carry forward of MAT credit for a period of 15 years vis-à-vis the current period of 10 years.

Lastly, with the intention to promote start-ups, Budget 2016 had provided an eligible start-up a deduction of 100% of the profits for any 3 out of the 5 years after incorporation. The provisions have been further liberalised in a much welcome move in Budget 2017, wherein start-ups can get tax incentives in 3 out of 7 years after incorporation.

2. Fillip to foreign investment

The FM in his speech highlighted that while FDI inflows have reduced by 5% globally, FDI inflow into India has increased by 36%. With a view to continue to incentivise FDI inflows the FM announced a further liberalisation of the FDI Policy and the phasing out of the FIPB and its eventual abolishment in FY 2017-18. The beneficial withholding tax rate of 5% on interest earned by foreign entities on External Commercial Borrowings has been extended to 30 June 2020. Also, the concessional rate of withholding tax has been extended to interest payments on Rupee Denominated Bonds (ie Masala Bonds).

The indirect transfer provisions are sought to be clarified to provide that transfer of investments made by non-residents in FIIs of Category I & II, would not be treated as indirect transfer with retrospective effect.  This is a welcome move.

3. Thin capitalisation

Budget 2017 has introduced provisions on thin capitalisation in line with Action Plan 4 of BEPS wherein any interest paid by companies/ permanent establishments to their associated enterprises in excess of 30% of EBIDTA would be disallowed with effect from 1 April 2017. While this is welcome move keeping in BEPS plan, however, it may adversely impact various capital incentive projects in where foreign investors use a mix of equity and debt.

4. Discouraging of cash transaction

Proposals to tax presumptive income of SMEs at 6% (instead of 8%) in respect of turnover upto INR 2 crores received by non-cash means, restricting the cash expenditure allowable as a deduction to INR 10,000 (instead of INR 20,000), prohibiting cash transaction above INR 3 lakhs are welcome steps and would help clean up the system and discourage black money transactions.

While in the case of a revenue expenditure exceeding a certain threshold incurred in cash, the expenditure would not be allowable as a deduction, however, there was no such corresponding provision for the purpose of capital expenditure incurred in cash. Budget 2017 has introduced a disallowance on depreciation and investment-linked deductions (deduction under section 35AD) in relation to capital expenditure incurred in cash exceeding INR 10,000.

5. Taxability of carbon credits

There were divergent decisions on the issue as to whether the income received or receivable on transfer of carbon credit is a revenue receipt or capital receipt. In order to bring clarity it is proposed to provide a concessional tax rate of ten per cent in case of income arising from sale of carbon credit.  While there is now clarity on the taxability under the normal provisions, if the said receipt is not reduced at the time of computing book profits for MAT purpose, the said receipt would be taxable at higher rate under MAT provisions.

From a corporate tax perspective, it is a fairly balanced budget. The Government continues to introduce provisions which are set to reduce cash transactions and impact black money in the system. However, there are several expectations which have not been met like appropriate reduction in tax rates for large corporates, phasing out of MAT, reduction in the rate of equalisation levy, liberalising the Patent Box Regime, abolishing of ICDS to name a few.

Rahul Kakkad, senior tax professional, EY also contributed to this article.