Help citizens save, corporates succeed, and startups innovate with tax reforms
India’s first full-time woman finance minister Nirmala Sitharaman will present Modi 2.0’s first full budget on July 5. Predictably, Sitharaman has been engaged in pre-budget discussions with representatives from different industries and segments. Some ailing sectors which require urgent attention include job creation, liquidity crisis in NBFCs (non-banking financial company) and rising NPAs (non-performing assets). With the Government enjoying a considerable majority, a few economic reforms that were put in cold storage may be actively taken up now. The government’s aim will be to revive the economy, which experienced a slowdown in FY 19.
No significant changes are expected in allocations earmarked for different ministries and departments in the Interim Budget as the Government remains firm on its goal of maintaining fiscal balance.
After a long journey of 24 months, India’s largest and most debated tax reform Goods and Services Tax (GST) has now attained stability. With the growing GST revenues, one can soon expect simplified compliance and a single revenue neutral rate against the five-tier tax structure, and achieve the “One Nation, One Tax” concept in reality. On the policy front, the GST Council is likely to move forward on the prolonged debate on ending the moratorium on natural gas and other petroleum products, into the GST regime.
The budget is a season when the common man anxiously awaits tax relief which directly impacts his disposable income.
Some hopeful expectations citizens feel would benefit them:
• Rationalising the tax slabs as currently, the tax rate jumps from 5 percent directly to 20 percent.
• Increase in the deduction of home loan interest from Rs 2 lakh to Rs 2.5 lakh for incentivising home buyers.
• Increase in the limit of tax exemption under section 80C from Rs 1.5 lakh to Rs 2 lakh.
The Government should also consider the reduction or abolishment of cess on income tax, which was introduced as a short-term measure to meet the shortfall in revenue from regular taxes.
The corporate sector is robust and growing, yet it too has expectations in the ease of doing business to help industries grow:
• Increasing the turnover threshold for a lower corporate tax rate of 25 percent, which currently stands at Rs 250 Cr.
• Reduction in corporate tax rate from 30 per cent to 25 per cent should be inclusive of all surcharge.
• Reduction in the Minimum Alternate Tax (MAT) rate from 18.5 per cent to 15 per cent. (Minimum Alternate Tax is a tax provision designed to include companies in the income tax loop. to ensure that no taxpayer (company) with substantial income can avoid paying income tax.)
• Amendment of section 35D, to allow expenditure incurred for increasing the authorised share capital as revenue expenditure in 5 equal instalments. (35D deduction of income tax pertains to expenditure which may usually be disallowable on the ground that it is a capital nature or is incurred prior to the setting up of a business.)
There are massive expectations from the startup ecosystem after Modi’s manifesto for the Lok Sabha elections promised “simplifying and lowering tax rates” for entrepreneurship and innovation. With the prime minister coming back for another term, investors are optimistic that angel tax regulations will be relaxed. Startups are expecting Modi to change the landscape and make India one of the premier markets for innovation. As the last term carried with it many allowances and funding for startups, the expectations for this term is to build an ecosystem to streamline business frameworks. These measures would bring some respite to young entities and help them focus on their business, along with boosting investor confidence.
The Indian automobile sector is witnessing its worst-ever slowdown mainly due to weaker domestic demand, cautious lending by NBFC’s and changing government policies, especially related to diesel vehicles.
Reduction in tax rates on automobiles can provide a booster dose to the revival of the sector.
To restore the health of PSU banks and strengthen balance sheets, the Government may consider allocating some funds to PSU banks to meet the minimum capital regulatory requirement as per the Basel III norms. The merger of major PSU banks also might be considered. The idea behind the consolidation of the PSU banks is to make them globally competitive and better players in the banking space. The merger will also reduce the need for recapitalisation.
Finally, the Government can take this opportunity to thank its citizens who bestowed their overwhelming support during the Lok Sabha elections 2019 by giving them a reason to smile - some tax sops.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)