3 things FM needs to do to pierce the Demonetisation Chakravyuha

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A nation of 1.3 billion people waits with bated breath to see if Finance Minister Arun Jaitley presents a budget full of tax sops for middle class/corporate India and softens the demonetization impact. While numerous radical proposals including a flat tax, cash transaction tax etc. are making the rounds, we ask some of the top tax experts their opinion on the 3 proposals that the FM should include in his budget speech tomorrow.

Dinesh Kanabar
CEO, Dhruva Advisors LLP

A lowering of the tax burden on both corporate and individual taxpayers in this Budget will be a welcome step. On the corporate side, the Finance Minister had already presented a roadmap for reduction of rates coupled with a phase out of incentives. Implementation of this rate cut (coupled with a reduction in the MAT rate and an increase in the period for carry forward of MAT credit) will help boosting investor confidence and help increase investment. A reduction of individual rates or a rationalization of the slab structure will also prove extremely useful. Incentives for the salaried class through reintroduction of a standard deduction should also be considered, which can help boost domestic demand. 

The demonetization exercise is likely to lead to unprecedented information inflows that will need to be effectively leveraged by the tax administration so as to widen the tax base by bringing more and more people within the tax net. This will help in paving the way for further reductions of the tax rate going forward. To this end, strengthening the tax administration both from a technological and personnel standpoint should be a top priority. Safeguards to improve the overall taxpayer experience will...

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Rajendra Nayak
Partner, International Tax Services, Ernst & Young LLP

In the last couple of months, India’s economic and political landscape has been dominated by the Government’s sudden decision on 8 Nov 2016 to demonetise high-value currency notes. The 2017 Union Budget that would be presented on 1 Feb 2017 in the backdrop of the debate on possible adverse effects and potential benefits of this move can be expected to contain measures to deal with three inter-related but distinct policy challenges: (1) The finance minister needs to address concerns around possible demand slowdown as a result of the cash crunch. This may require providing additional fiscal stimulus to the economy as well as putting more money in the hands of taxpayers by reducing tax rates and/ or changing slabs for personal income tax. (2) Demonetisation was introduced as an attack on the black economy. To achieve this objective additional measures to ensure a lasting blow to the black economy may be announced in the Budget. (3) The efforts to uplift the extent of digitization of transactions – particularly in rural areas and in the informal sector – would need to be sustained by introducing incentives for digitizing of transactions.

K. Vaitheeswaran
Advocate
  • Given the impact of demonetisation the primary objective would be to put some money in the hands of the tax payer. Therefore liberal IT basic exemption limits; increase in investment linked deductions; and increase in tax rebates.
  • To offset the loss of revenue a number of excise exemptions are likely to be withdrawn. This would be done as a prelude to GST.
  • With election round the corner, increase in service tax rate will be a brave decision. There would be some tinkering in abatement rates and taxable value to implement the rate change.
  • Badri Narayanan
    Partner, Lakshmikumaran and Sridharan

    My three proposals that I expect the FM to table:

    1.       Some sops for digital payments and financial companies including customs/excise benefit for payment system equipment

    2.       Increase in the rate of service tax. This maybe marginal to ensure Central Government has revenues to pay for GST compensation and to bring further parity between effective tax on goods and services

    3.       Reduction in the rate of corporate tax

    T. P. Ostwal
    Chartered Accountant, T. P. Ostwal & Associates LLP

    1.    Proposal to abolish Dividend Distribution Tax (DDT) and introduce the classical system of taxing dividend

  • Before the introduction of the concept of DDT vide Section 115-O introduced by Finance Act, 1997, dividend were taxed in the hands of the shareholders; and the companies distributing dividend were not required to withhold any DDT at the time of distribution.
  • Current dividend taxation structure requires the companies to withhold DDT and disburse the dividend net of DDT to the shareholders. Such dividend, received net of taxes, is exempt in the hands of the shareholders. These provisions are applicable irrespective of the fact whether the shareholders are resident or non-resident.
  • However, the current structure causes hardships to the non-resident in a way that no credit is available to the non-residents in their resident country with respect to the DDT paid in India as the DTAA between countries do not cover the taxes paid in the form of DDT.
  • Hence, it is recommended to abolish DDT and continue with classical system of taxing dividend to avoid unnecessary hardship to the non-residents in the form of high taxation. 
  • 2.    Proposal to abolish Security Transaction Tax (STT)

  • It is recommended to abolish STT on so as to make investments in...
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    Uday Ved
    Chartered Accountant

    Key Asks from Finance Minister:

    - Reduce corporate tax rate to at least 28% or below (say up to 25%) and eliminate sur-charge so that effective tax rate comes in the range of 25-28%. Parallely, phase out Minimum alternate tax or reduce the same to 10%. This will be in line with path given by the FM in Budget 2015 and make Indian companies competitive in global markets.

    - Increase exemption limit for individuals from Rs.2.5 lacs to Rs5 lacs and change slabs as below:

    > 0-5 lacs - Nil

    > 5-10 lacs - 10%

    > 10-25 lacs - 15%

    > 25-100 lacs - 20%

    > more than 100 lacs - 30%

    Sur-charge should be removed. Above will provide relief to common man from the pain of demonetisation and put more money in his pockets and also have an effect of more tax collection from rich people.

    - On capital market, the existing system of tax exemption for long term capital gains in listed companies and charging STT has worked well and there is no need to unsettle the same. Also in order to be fair to all shareholders,...

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    Rohan Shah
    Advocate

    This budget being the first key policy statement post demonetization is one that I expect will be pro farmers, pro industries, pro consumption and pro infrastructure. On the direct tax front, investors are observing all GAAR related signals and hoping that the Govt. will greater certainty on the many contentious issues which have come up in the last few months. There is a general expectation of a reduction in corporate and personal tax rates and the FM needs to deliver fully on these expectations. In indirect taxes, all changes are expected to only be marginal with a view to facilitate the migration to GST. Services will become costlier and all goods of conspicuous consumption will be taxed higher. Various exempted goods will suffer a tax varying 3-5% in preparation for GST. The nation expects a Budget which is strongly pro India and pro Indians.

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