The Tax Changes In Budget 2017 Are An Open Secret

Is Finance Minister Arun Jaitley a man of his word? Because if he is then it's already clear what he will do with taxes, indirect and direct, in Budget 2017. Well, mostly.

The GST Factor

With the imminent arrival of GST, any changes in indirect taxes that are not in keeping with the four rates approved by the GST Council, will be short term and counterproductive.

While the broad GST rate structure is known, the GST Council has not yet finalised which rates will apply to various goods and services, though it is widely expected that services will be taxed at 12 and 18 percent versus the current applicable rate of 15 percent.

BMR Advisors' Rajeev Dimri leads the indirect tax practice and says many changes in taxation of services and widening of input credit side could begin right away.

Direct Tax Roadmap Ready

Jaitley has left himself little room to maneuver in the direct tax space as well, having laid down a roadmap in 2015 and re-affirmed it in 2016.

Budget 2015
“The basic rate of Corporate Tax in India at 30 percent is higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive. Moreover, the effective collection of Corporate Tax is about 23 percent. We lose out on both counts, i.e. we are considered as having a high Corporate Tax regime but we do not get that tax due to excessive exemptions. A regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion. I, therefore, propose to reduce the rate of Corporate Tax from 30 percent to 25 percent over the next 4 years.”

In that same speech, Jaitley said he wanted to start the phased reduction of corporate tax rate and phased elimination of exemptions right away, but thought it appropriate to give advance notice that these changes will start from the next financial year.

In Budget 2016 he fulfilled just one part of that promise, by setting out kill dates for certain exemptions.

• Accelerated depreciation will be limited to maximum 40 percent starting April 1, 2017.
• The benefit of deductions for ‘research' will be limited to 150 percent staring April 1, 2017 and 100 percent starting April 1, 2020.
• Tax incentives for new SEZ units will be available to those units which commence activity before March 31, 2020.
• Tax incentives for skill development will continue up to April 1, 2020.

The finance minister also offered some relief to new manufacturers and small companies...

• 25 percent corporate tax rate for new manufacturing companies as long as they don't claim any tax incentive.
• Lower tax rate of 29 percent for enterprises with a turnover not exceeding Rs 5 crore per year.

But there was no reduction in the headline corporate tax rate of 30 percent nor did Jaitley provide a roadmap for bringing it down to 25 percent.

And despite his Budget 2015 promise to do away with exemptions and deductions, in Budget 2016 he also announced new incentives for startups and innovation.

Startups
100 percent profit deduction for three of five years.
Minimum alternate tax to apply.
No tax on capital gains is invested in notified Fund of Funds/startups

Patent Box
10 percent rate of tax on income from worldwide exploitation of patents developed and registered in India.

While that was a departure from the broad theme of eliminating deductions and exemptions, even critics will admit that a government ought to have latitude to use tax policy to promote specific economic ideals.

What Will He Do In 2017?

1. Cut The Corporate Tax Rate?

Will Budget 2017 live up to the promise Jaitley made two years ago – of lower rates and the elimination of exemptions?

“Absolutely,” says Punit Shah, partner at Dhruva Advisors.

Ameet Patel, partner at Manohar Chowdhry & Associates says he expects a bigger cut in the corporate tax rate, to 27.5 percent.

Shah adds that the one thing to watch out for is whether Minimum Alternate Tax would also be reduced or eliminated, once exemptions and incentives are abolished. He says this is a logical corollary to the elimination of exemptions, pointing out that there was no mention regarding this in the roadmap and that clarity would be welcome.

2. Usher In GAAR?

Last year Jaitley had reiterated his commitment to usher in GAAR (General Anti Avoidance Rules) in 2017 and had deferred POEM (Place of Effective Management) by a year, to 2017. So expect both those to apply starting April 1, 2017, even though some experts are hopeful GAAR will be deferred by a year.

3. Boost ‘Make In India'?

Besides these promised changes tax experts expect a few more, mostly to boost the government's pet projects such as Make In India. Especially as customs duty falls outside the purview of GST.

4. Capital Gains Tax Changes?

Recent comments by the prime minister on “low or zero tax rate” for certain types of financial income sparked fears of a change in the long-term capital gains tax exemption, despite the finance minister's assurance that there will be none.

5. The Rest...

Like every year, this year too tax experts are expecting a change in dividend distribution tax such that the burden of payment shifts from the company to the recipient, but there's no indication the minister's list includes that.

Patel says he expects ICDS, the tax accounting standards applicable starting accounting year 2017-18, to be scrapped, and he also believes Budget 2017 will announce a change in the financial year, from April - March to January - December.

On February 1

If Jaitley is a man of his word then the tax portion of the Budget 2017 speech is already scripted. Most of it.

The only factor that may prompt the minister to change his mind is the demonetisation factor. If he expects a longer than ‘a-couple-of-quarters' impact on economic growth and hence lower tax buoyancy, then this ambitious and progressive plan to cut tax rates and eliminate exemptions may be pushed further down the road. Or replaced by other fiscal stimulus.

Leaving the government only two years to deliver on the 2015 promise. Or not.