Budget 2016: Key tax measures at play

The Budget for 2016–17 on 29 February, is expected to set a roadmap for economic growth of India in the next three years. Some of the measures taken by the Government in the past two years such as relaxing Foreign Direct Investment (FDI) in railways, defense and insurance sector, investment in LLP and deregulation of diesel prices reflects the Government’s untiring efforts to boost economic growth and make the vision of “Make in India” a reality.

However the global growth is not so promising. Chinese imports invading the Indian and global market are likely to impair the vision of “Make in India” and perhaps economic growth. The outgo on account of the implementation of the 7th Central Pay Commission recommendations will require funds to be arranged from government revenues.

The Finance Minister (FM), at the recent pre-budget consultation meet, said the focus of this year’s budget could revolve around the social sector, inclusive growth being the focal point this year for the government.  Furthermore, there is also need to undertake measures to combat issues such as black money, achieving self-sufficiency level in power and energy sector and encourage private investments.

Direct-tax measures:

On the direct tax front, the new Government has taken several steps to make the system taxpayer friendly and to reduce litigation. The Government has attempted to bring increased transparency into the tax system by taking various measures such as issuing draft guidelines on determining the Place of Effective Management, providing clarity on applicability of MAT to Foreign Companies, appointing committees to address tax-related issues, constitution of Income-tax Simplification Committee, etc. All such measures have demonstrated that the Government is determined to take steps to establish a non-adversarial tax regime and reduce litigation.

Considering the global and economic environment currently prevailing in India, setting up of a steady tax regime should be a major goal for the Government in this year’s Budget. Any temporary approach to collect increased revenues does little for the  larger cause of the Indian tax system. Some of the key tax/policy changes awaited could look out for in this budget could be:

Reduction in the corporate tax rate, together with rationalization of incentives. This has the potential to transform the investment climate in India. The Tax payers will expect that the FM should announce year-wise roadmap for reduction of corporate tax rate from 30% to 25%, alongside withdrawal of incentives in a calibrated manner. The phase-out of incentives should be prospective, so that any investments made on the basis of these incentives should not be affected. Moreover, rate of MAT should be rationalized in tandem with the reduction in corporate taxes. Any cut in tax breaks on capital investment, research and development, and projects in under-developed regions should be avoided in the backdrop of current business and economic situation.

The Government is also evaluating recommendations of Parthasarathi Shome committee and of Justice Easwar Committee. Therefore, one can expect changes to support simplification of tax law and a more tax-friendly administration.

Furthermore to encourage clean and renewable energy sector and boost private investments therein, the FM should announce fiscal measures such as capital subsidy, investment allowance linked to investments in plant and machinery, steps to  achieve grid connection, land to put solar panels and manufacturing of solar equipment in India.

Considering that skill development is essential for success of the “Make in India” campaign, tax benefits should also be extended to expenditure incurred by companies for their existing employees.

In order to promote a culture of entrepreneurship, for innovation-driven enterprises, apart from income tax break for three out of five years and capital gains tax exemption, one could expect other business friendly announcements. One can expect fast track approval for startups under one window based on self-declaration, faster registration of patents than before, protection of intellectual property rights etc., in this budget.

The FM is also expected to make key announcements on how India desires to apply provisions regarding country by country reporting for Indian multinational companies, how India will seek to apply Base Erosion and Profit Shifting (BEPS) guidelines. There may also be some announcements with respect to BEPS Action Plan 4 – Financial Payments (where the Government should approach the issue cautiously and not restrict interest deduction), Action Plan 6 – Prevent Treaty Abuse where trade and investment consideration will need to be taken care of. The Government may also seek to amend the extant transfer pricing provisions in light of the recommendations made by Action Plan 8-10. The Government is also expected to announce safeguards to allay any fears about confidentiality of the information that companies share with the Tax Department.

A definite timeline for roll out of the much awaited GST is also expected, since it is likely to give a much-needed boost to the economy.

From an economy perspective, the taxpayers expect that the FM should adopt a balanced approach, since cut in tax breaks should not hamper the “Make in India” drive to attract new investments in the manufacturing sector, both domestic and foreign direct investment. Measures to boost exports are also expected. Clarity on SEZ taxation and doing away with MAT on SEZ profits will be the key ask of the SEZ units. To sum up, a spurt in economic activity will give the much needed boost to the Government’s tax revenues and therefore policy, and tax changes should be directed to achieve that objective in the forthcoming Budget 2016–17.

Follow us on Twitter @EY_India and join our Tax LinkedIn Group for regular updates on Budget 2016.
Visit our Budget Connect website to view our experts talk on Budget 2016 and register for upcoming webcast.

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