The Indian Government has, through the Budget 2016 speech, made a conscious effort to improve the ease of doing business in India, reduce litigation and compliance and provide a taxpayer-friendly environment.
The Finance Minister (FM) attempted to reduce the corporate tax rate, which he had promised last year; however, it is restricted to new manufacturing companies (which will face a 25% rate) and micro, small and medium enterprises (MSMEs) – for which the rate will be 29%. Perhaps fiscal compulsions deterred the widely-expected broad tax rate cut. The roadmap to phase out tax incentives was unveiled, providing certainty as well as time for taxpayers to plan and arrange their business.
There were many positive announcements – providing complete pass-through status to real estate investment trusts (REITs), infrastructure investment trusts (InvITs) and asset reconstruction companies (ARCs) by exempting them from dividend distribution tax (DDT). This will enhance the competitiveness of these vehicles and promote investment in the real estate/infrastructure sector.
The FM also made an honest attempt to go one step further on retrospective amendments, providing affected taxpayers an opportunity to pay off taxes and get interest and penalties waived. The introduction of a fresh amnesty programme in direct taxes, with more benign interest and penalties along with assurances against prosecution, may prompt far greater participation. Also, the rationalisation of penalty provisions and the dispute resolution procedure for past disputes up to the appellate level will reduce the litigation backlog and free up judicial time. The Budget also rolls out a host of administrative reforms by way of fixing loopholes and measures to make it a taxpayer-friendly environment.
The new regime of taxing income from worldwide exploitation of patents developed or registered in India will allow India to compete with developed economies that provide similar relief and give a great fillip to research, development and innovation. Also, the Budget has taken the initial steps in implementing BEPS Project outcomes in the form of an equalisation levy cess of 6% in B2B digital transactions and the introduction of country-by-country reporting (CbCR) in transfer pricing documentation. Thankfully, the €750 million limit for group revenue has been retained, which means it will affect a very small number of Indian companies.
From an indirect tax standpoint, the inverted duty structure for the IT industry along with the reduction of customs duty on inputs and raw materials is aimed at encouraging domestic manufacturing and job creation. The silence on GST – the most anticipated tax reform – is disconcerting. While some subtle steps have been taken, taxpayers had hoped for a more positive affirmation in terms of an action plan and timeline.
Maulik Doshi is a partner at SKP Group, a member of Nexia International
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