Direct taxation is normally one of the key areas to be watched in any budget. Broadly this budget is likely to focus on 2 key themes. Firstly, the focus of the Union Budget will be on mitigating the pain of the small and medium sized tax payers to compensate them for the difficulties they had to undergo during the demonetization exercise. This could come in the form of more liberal tax limits, more exemptions and rationalization of rebates. On the other hand, the government will also look to tweak corporate tax rates to make it more aligned with its broad focus of making the Indian corporate sector more robust and boost rural demand.
Based on these 2 themes, we have 8 specific expectations from the Union Budget 2017 on the Direct Taxes front…
- The current income tax exemption limit of Rs.250,000 is largely out of tune with the changing income levels. This limit could be raised. Additionally, the threshold limit for the peak rate of 30% taxation could also be increased substantially. The idea is to make the entire tax structure more progressive and therefore additional levies on the higher income groups cannot be ruled out in this Union Budget.
- One of the thrust in this Union Budget will be the housing sector, with special focus on “Housing for All”. That means the benefits u/s 24 of the Income Tax Act may be enhanced from the current levels of Rs.200,000 to represent the current real estate values in metros more realistically. The overall limit for Section 80C which includes the principal repayment of your home loan may also be enhanced. The special benefit of additional exemption u/s 80EE for the last fiscal year may be extended or even made permanent.
- There has been a long standing demand for the re-introduction of Standard Deduction for people in the lower income bracket. The Standard Deduction is intended to provide compensation to salary earners to put them at par with businessmen. There has been a constant clamour to reintroduce this section and it may make a comeback in this Union Budget.
- The Union Budget may make a start in shifting from the EEE (Exempt, Exempt, Exempt) system to EET (Exempt, Exempt, Taxed) system. Section 80C products like PPF, ELSS and insurance are exempt at 3 levels. They provide tax incentives when you invest, the returns are tax free and even the redemption is tax free. This tends to distort the demand for debt in India and the government may make a start to rationalize this.
- If the statement by Mr. Modi calling upon capital markets to contribute more to tax revenues is any indication, then one can expect some tweaking of capital gains treatment of equities. The definition of long term capital gains in case of equities may be shifted from 1 year to 3 years, although mutual funds may be left outside that ambit. Additionally, the rate of tax on STCG may increase from 15% to a minimum of 20% to prevent distortion of returns.
- Corporate tax rates may see a sharp cut in this budget. Arun Jaitley had already promised to cut tax rates on corporates from 30% to 25% over 4 years. Considering that most sectors have faced the brunt of the demonetization, the government may look to soothe the impact by cutting corporate tax rates by 2% in the Union Budget. This will be a big boost for the corporate sector overall.
- Another major expectation is that the Minimum Alternate Tax (MAT) rates are also reduced in this budget. Currently, MAT is levied on Indian companies at 18.5%, which actually makes a mockery of any cut in tax rates. Logically, a cut in MAT rates will be on the cards. But, this cut in MAT will most likely be accompanied by withdrawal of a plethora of exemptions that Indian companies enjoy. The net effect could be a mixed bag for Indian companies.
- Lastly, we come to the aspect of taxation of FPIs. There are a few key changes expected. The government has already renegotiated treaties with Singapore, Mauritius and Cyprus and FPIs will now be forced to look at India more as an attractive investment destination rather than merely as a route to round-trip money. The Union Budget could also announce the implementation of GAAR (General Anti Avoidance Rules) effective April 01st 2017. While the fears of retrospective taxation will be clearly addressed, FPIs will have to play by the rule book in the future. This is likely to make Indian markets healthier and more robust in the long run.
Broadly, the tax related announcements are likely to be positive for individuals and corporates. Of course, we do not rule out another amnesty scheme as well as a variety of compromise formulae. In the process, if Indian direct laws become simpler, it would be for the better.