Overall, the budget is promising and instils hope for a holistic economic order in the coming years…The budget exercise for 2019-20 has achieved completion with FM Nirmala Sitharaman laying out proposals echoing PM Modi's vision of 'Minimum Government, Maximum Governance'. It builds an ambition following a definite mandate by citizens endorsing faith in Modi 2.0. Emphasizing infrastructure...
Overall, the budget is promising and instils hope for a holistic economic order in the coming years…
The budget exercise for 2019-20 has achieved completion with FM Nirmala Sitharaman laying out proposals echoing PM Modi's vision of 'Minimum Government, Maximum Governance'. It builds an ambition following a definite mandate by citizens endorsing faith in Modi 2.0. Emphasizing infrastructure and rural development, the proposals painting a USD 5 trillion economy path have come at a critical point where the economy needed a transformation by providing stimulus to several sectors, particularly agriculture, rural infrastructure, start-ups, MSMEs, employment etc. Equally crucial was the need to grow foreign investment, identify alternatives to tap capital and manage current account deficit by raising exports.
Prevailing Pain Points
Dipping tax collection, soft-turned manufacturing & slow core-sector growth has continued to be a challenge at least for the past three quarters. Macroeconomic challenges include the sharp cyclical slowdown bringing economic growth to its lowest level in five years and the need to rebalance the Indian economy by spurring investment.
Back in 2014, the Indian economy was a shade lower than USD 2 trillion. Indian GDP has increased by 50 per cent and is poised to cross USD 3 trillion by this fiscal yearend, a total net increase of USD 1 trillion in GDP in just five years. The FM has made an arduous attempt to balance allocations across development, fiscal prudence and socioeconomic priorities considering that past several quarters were unsuccessful in igniting the growth engines. India's economic growth fell to a five-year low in 2018-19 at 6.8 per cent, much below the government's projections of 7.2 per cent. Growth in the fourth quarter decelerated to the lowest in 20 quarters at 5.8 per cent, owing to a decline in investment activity.
Tax Collection Trends
Recent tax collection trends have been a cause for concern for policymakers. Tax collections were weak in the Fiscal year 2018-19, despite a downward revision in the interim budget presented in February early as a result of several factors, more particularly on GST and to some extent Corporate tax. As per the Economic Survey, the gross tax to GDP ratio declined to 10.9 per cent in 2018-19 as indirect tax revenues fell short of budget estimates by 16 per cent. Similarly, direct tax collections didn't deliver on the double-digit growth projected in the budget of 2018. Perhaps, the current hikes in direct and indirect levies could be partly explained in this background. Interestingly, the income tax department, in its pre-budget consultations had pitched for a realistic target for the fiscal year, as the collection for 2018-19 fell about '60,000 crores lower than the Revised Budget target of '12 trillion.
Given the trend so far and muted GDP growth rate for the current fiscal, questions have been raised on the ability to accomplish the current fiscal year's target. The gross monthly GST collections (before refunds) fell just below the '1 trillion in June. The April-June average for GST mop-up has been '1.05 trillion, below the '1.12 trillion estimates. If the recovery isn't steep, meeting the tax targets will be a tough ask. This may entail undue pressure from the taxman on businesses to meet stretched revenue targets. The silver lining could perhaps be non-tax revenues of the Government coupled with a one-time bonanza due to Indirect tax dispute settlement collections.
Key Thrust Areas
The budget does not provide any significant policy shifts but ensures incremental measures resulting in revenue mobilization, digitalization of cash transactions for establishing trail, surge in exports, harsher measures on tax evasion, and obliterating unethical practices. FM has bet on three main drivers to set the economy on the path of achieving the USD 5 trillion target: massive infrastructure development, easing the credit squeeze and major structural changes in agriculture. She intelligently trotted the budget proposal keeping in mind multiple objectives and need to increase tax and non-tax revenues with a close eye on fiscal deficit. In particular, on divestment targets, given the accomplishments in Fiscal 2019, it has kept an aggressive target for the current fiscal. The recent Economic Survey for 2018-19 reflects a 5-year blueprint (2024-25) by pushing investment, particularly in the private domain, promoting exports, nourishing MSMEs and ensuring policy consistency. Most Budget 2019 proposals were in that direction.
Some Direct Tax Changes
Surcharge and FPI Taxation: On the revenue mobilization side, surcharge hikes have raised the effective tax rate for 'individuals' with a taxable income of 2 crores to 5 crores to 39 per cent and for those earning more to 42.74 per cent. There is a resultant increment in tax on long-term capital gains and short-term capital gains. Though the target segment would have been the 'super-rich', the axe seems to have fallen on overseas funds which are structured as associations or trusts! Such hedge funds would also be covered under the hike considering that earnings of all non-companies, including Hindu Undivided Families, Associations of Persons, and Trusts are taxed as individuals.
Recent reports estimate that approximately 40% of the FPI funds that invest in India are set up in trust form. In this context, the Government's suggestion to opt for 'corporate' structure to avoid additional surcharge seems impractical. Trust funds cannot just simply convert into a corporate structure to avoid the hike on surcharge. More importantly it is quite possible that it's seen as a tax-avoidance measure to attract General Anti Avoidance Rules (GAAR). With over $430 billion invested in India, FPIs have been growing steadily, inspired mainly with bold decisions on the economic front. Given this background, these tax flip-flops would certainly incinerate foreign investments. Post budget announcement, FPIs withdrew around '7,712 crores from equities in the first 19 days of July; the highest so far in 2019, reveals the latest data available with depositories. We need to wait and watch whether at all the Government would come up with a pragmatic solution to ease out the burden of increased taxation on non-corporate FPIs.
Digitalization wits: Faceless income tax e-assessment with no human interface could perhaps turn out to be a gamechanger in the medium term and reformative administrative reform. However, the degree of transparency is a question that would still riddle taxpayer minds! The efficacy of its phased implementation will be tested. Given the budgetary allocations, it seems an aggressive attempt to reform the tax administration by way of investments to upgrade its IT system to serve taxpayers, intelligently choose cases for audit, track errant taxpayers and control unethical practices. A 2 per cent TDS on Bank cash withdrawals exceeding 10 million in aggregate and the mandate prescribed on digital payment options (to businesses with turnover exceeding 500 million) could well be an impetus to the Modi Government's long-standing objective of creating a "less-cash" digital economy, besides disincentivizing the cash economy. This is suggestive of a well-thought-out initiative for a technology-driven 360-degree facelift to facilitate the vision of a digital India.
MSMEs and Angel Tax Reliefs: The importance of MSMEs has been reiterated with much-needed attention given to this sector. Over the years, MSMEs have been struggling to get loans given their helplessness to demonstrate collateral support. The introduction of the 10 million MSME loan brings great relief to small business owners, making easier accessibility and processing of loans through a single portal. It would undoubtedly translate into stability and promote business. The interest subvention for all GST registered MSMEs seeking new or incremental loans is a considerate step.
To address Angel Tax controversy that revolved around valuation of share premiums, the 'No Scrutiny'/Audit policy will come as a much-needed breather, though the turnover threshold for start-up eligibility was not enlarged. Proposal for special administrative arrangements by CBDT and grievance redressal would undoubtedly lift the entrepreneurship spirit of start-ups. Perhaps, we will have to wait for the Ministry of Commerce and Industry (DPIIT) to fill the gap.
Indirect Tax Changes – The focus is on Make in India!
With overall tax collections not reflecting the desired trend, FM displayed a twin objective of facilitating trade and boosting tax revenues. The tariff hikes, probably part of a broader push towards protectionism besides promoting 'Make in India', would impact industries such as electronics, chemicals, plastics and rubber, paper, automobile and steel (besides petroleum, gold & silver). It is likely to provide a level playing field to domestic manufacturers, besides addressing invertedduty structure and boosting exports. Import duty waiver on defense equipment would have a far-reaching effect in strengthening Indian border forces. Overall, the importsubstitution measures suggest the Government's efforts to promote domestic manufacturing.
Sabka Vishwas! The attraction is the Legacy Dispute Resolution Scheme that provides a one-time window to taxpayers to settle all excise and service tax (including additional levies & cesses). This is timely when taxpayers and the administration were muddled with past vexatious litigation, given the fact that GST has subsumed most indirect tax laws from July 2017. On the face of it, it is an attractive opportunity to settle pending disputes with the luxury of waiver on interest and penalty. Interest waiver is unprecedented! However, the devil lies in the details. There are a few grey areas that require immediate clarifications. One such issue is where notice has been issued, and final hearing has concluded long back, yet an order hasn't been passed (delayed beyond prescribed limitation period). The question is if such cases will be eligible, as the scheme does not apply where an adjudication order is awaited. Another element that remains unfathomed is the leeway (intended or unintended) given to delinquent taxpayers involved in cases where tax/duty has been collected and not paid to the exchequer. Those taxpayers get away by paying only a part of such tax collected. Probably, the administration will issue administrative clarifications in the coming weeks. Of course, the scheme is well-intended; nonetheless, the administration should address them to avoid a top-up of litigation.
Before parting…
Overall, the budget is promising and instils hope for a holistic economic order in the coming years. The next big item keenly awaited will, of course, be the new Direct Tax Code…
The author is Founder, BMR Legal Advocates. He was assisted by advocates Joseph K Antony, Bhagyashree, Riya Gupta & Karan Dhanuka.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.