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Union Budget 2018- Evaluating the tax benefits extended vis-à-vis the buoyancy in direct taxes

Published: Feb 28, 2018

By Tehmina Sharma, Riddhi R. Shah and Devansh Waghela

THE government led by Prime Minister, Shri Narendra Modi has been aggressive - implementing a series of fundamental structural reforms to propel India among the fastest growth economies of the world and the Indian society as well as economy has demonstrated remarkable resilience adopting the same. Each of such reforms have focused on making available necessities "Roti-Kapda-Makkan" to the citizens of India. The Finance Bill 2018 being the last full tenure budget led by the government before the 2019 elections had much uncertainty around as to what it would unveil bearing the aforementioned outlook in mind.

The direct tax proposals put forth by the Finance Minister in his Union Budget 2018 ('Budget 2018') has strongly conveyed the intent to continue extending momentum to the buoyancy in direct taxes and expanding the taxpayer base. Looking holistically, the budget has been perceived as a populist one benefitting the economically less privileged masses and disheartening the rest.

In our article, we have tried decoding the most debated proposals of the Budget 2018 alongside deliberating alternatives to these propositions.

A. New regime for taxation for long-term capital gains on sale of equity shares etc.

Formerly, the Finance Act 2004 had brought about a transformation with regard to taxation of long-term capital gains on transfer of listed shares and units of equity-oriented funds by levy of Securities Transaction Tax on such transfers with effect from October 1, 2004 and exempt the gains arose from tax.

The Finance Minister took note of the fact that tax exemption on long term capital gains (subject to certain conditions) arising from transfer of long term capital asset being an equity share of a company or a unit of equity oriented fund led to potentially substantial revenue loss for the government and encouraged investment of excess business surplus into financial assets - prejudiced against the business operations.

Accordingly, he has proposed to tax such long-term capital gains exceeding Rs. 1,00,000/- at a modest concessional rate of 10 %, without allowance of any indexation benefit. However, all such gains up to 31 st January 2018 were to be grand fathered i.e. sheltered against the new levy; thereby imparting a sense of relief and assurance by the Finance Minister.

Bearing in mind higher individuals participating in the equity market and recognizing the fact that vibrant equity markets are essential for economic growth, a marginal increase on the existing holding period of 1 year to qualify as long-term capital asset would have been acknowledged well among the taxpayers than taxing it.

The premise for exempting long-term capital gains was by virtue of the fact that Securities Transaction Tax was being levied on total value of transaction on stock exchange. However, under the new regime the Securities Transaction Tax still subsists. Retracting tax exemption benefits on long-term capital gains has certainly questioned the appealing status of equities, which has been bullish for long now.

Certainly, the objective was to increase tax buoyancy, which could have been seamlessly achieved by increasing the rate of Securities Transaction Tax and would have been equivalent to or more than the anticipated tax revenue to government in form of long-term capital gain tax. Such increase in rates would have been perceived in a much convincing manner by the investors in equity markets contrary to the displeasing move of taxing long-term capital gains and increasing the compliance burden for the taxpayers.

In addition, majority of such long-term capital gains accrued to non-individual taxpayers, accordingly the provisions of new regime could have been subjectively made applicable to taxpayers apart from individuals.

Since the risk capital is a necessity for economic development, withdrawing this benefit can also impact economic growth, and in turn, overall tax collection. In fact, tax loss from this move may be higher than that of the tax forgo happening due to tax-free long term capital gains.

Furthermore, there has been no mention about setting off long-term capital loss against such long-term capital gains. Much clarity is still awaited and qualms of the taxpayers will be answered only once the proposition is passed and the law is adopted.

B. Promoting Small and Medium Enterprises ('SMEs')

The corporate income tax rate is one of many aspects of what makes a country's tax legislation and economy attractive for the purpose of investment. With an objective to provide boost to the SMEs, the Finance Minister fulfilled his assurance of reducing the corporate income tax rates in a phased manner by proposing 25 % tax rate for domestic companies whose turnover or gross receipts do not exceed INR 2,500 million for the fiscal year 2016 - 17.

The reduction in said tax rates is expected to benefit 99 % of the domestic companies filing their tax returns in India. The underlying intent therein was to leave such companies with higher investible surplus funds help create better job opportunities and economic welfare among the masses of Indian society.

Over the past few years, several countries across the globe including United States of America have reduced their corporate income tax rates considerably. This move by Indian government is in line with the global tax legislations and had this not been done by the Finance Minister it would pose a risk to India losing its competitive edge in the global economy due to its exceptionally high corporate tax rates.

C. Standard deduction on salary income

Acknowledging the significant role played by one of the most honest taxpayers in nation building, the Finance Minister has proposed a standard deduction of Rs. 40,000/- from the gross salary of salaried taxpayers. This was one of the most sought change in the Budget wish list of this year. The standard deduction was a part of the Income-tax Act until former finance minister, Shri P. Chidambaram, withdrew it in the Union budget of 2005-06. Standard deduction allowed the salaried class to take care of expenses that didn't come under the purview of the income tax rules. 

The salaried taxpayers who did not have compensatory allowance; being in nature of transport and medical allowance will largely be benefited from the said proposition. However, most of the salaried taxpayer enjoyed such allowances, which cumulatively amounted to Rs. 34,200/-; thereby resulting into meagre benefit of Rs. 5,800/- for salaried taxpayers. Furthermore, introduction of 4 % health and education cess replacing the existing 3 % cess, the aforementioned benefit will not only get moderated but also result into additional tax liability for certain employees.

If one were to talk about fulfilling the long impending hopes of salaried taxpayersa higher value of standard deduction or changes in the existing tax slab rates coupled with increased threshold limit for the tax saving investment linked deductions would have been a welcome move and highly praised by the salaried taxpayers.

D. Increased deductions for health insurance schemes and treatment relating to senior citizens

One of the underlying intent of Budget 2018 propositions was to advance horizontal equity of the tax system by providing relief to certain sections of the society, in particular, senior citizens keeping in view their precincts.

Under the existing tax legislation, a deduction upto Rs. 30,000/- was allowed to individuals and in respect of payment towards annual health insurance premium of senior citizens and medical expenditure for very senior citizens. The said limit is proposed to be increased to Rs. 50,000/- now for senior as well as very senior citizens uniformly.

Also, a deduction upto Rs 60,000/- and Rs 80,000/- was allowed to individuals in respect of payment towards medical treatment of specified diseases for senior citizens and very senior citizens, respectively. The said limit is now proposed to be increased to Rs. 1,00,000/- for senior as well as very senior citizens.

While the said propositions are pragmatic and well appraised among the masses, with increase in medical and health maintenance cost; extending, said benefit to all individual taxpayers instead of senior citizens alone would have been commending.

E. Deduction in respect of interest income to senior citizens and rise in pertinent threshold for TDS

Presently, a deduction upto Rs. 10,000/- is allowed to an assessee in respect of interest income from savings accounts. In view of advancing measures for promoting equity, the Finance Minister has made another proposition to allow a deduction upto Rs 50,000/- of interest income received on deposits held by senior citizens. However, the senior citizens shall not be able to reap benefits from the former provisions with the introduction of this deduction.

Further, it is also proposed to raise the threshold for deduction of tax at source on such interest income earned by senior citizen from Rs. 10,000/- to Rs 50,000/-.

This certainly is a sigh of relief for the senior citizens promoting their welfare and increased hassle free funds at their disposal in their hands.

F. Extending the benefit of tax free withdrawal from National Pension Scheme

Until now, an employee contributing to National Pension Scheme was allowed an exemption in respect of 40 % of the total amount payable to him on the closure of subscriber's account or on opting out. However, this exemption was not available to non-employee subscribers. With an intent to provide a level playing field, it proposed to extend benefit of tax-free withdrawal from the National Pension Scheme to the non-employee subscribers as well.

However, despite taxpayer's expectations for complete tax exemption to National Pension Scheme by making it an Exempt-Exempt-Exempt ('EEE') scheme, the Finance Minister's propositions have been futile in doing so. Thus, 20% of the withdrawal still remains taxable, while 40% of the accumulated corpus at the time of withdrawal in non-taxable and the balance 40% has to be mandatorily be invested into annuities.

Regardless of all as aforementioned, extending the tax-free withdrawal benefits to non-employees subscribed is an optimistic move by the Finance Minister.

Conclusion

Given all that it brings on table, the Union Budget 2018 can be said to be a pro-poor nonetheless not as much of a populist budget. India, predominantly being an agricultural economy and contributes to more than 25 % of the India's Gross Domestic Product. Agricultural income arising from such a massive segment has still been kept be exempt from the ambit of levying direct taxes. In our view, if one were to introduce concessional rate of income tax on agricultural income earned it would have led to material increase in the buoyancy of direct taxes, reducing the burden on the 3 % of the population which pays direct taxes. Furthermore, taxing agricultural income is also in line with principles set by globally developed economies like Unites States of America, Canada, United Kingdom and Australia among others.

Nonetheless, while the intent seems genuine, progressive, forward looking, contemporary, ingenious and focused towards increased direct tax buoyancy and upliftment of the economically less privileged; the benefits extended are fringe. Such marginal benefits, if extended on an annual basis, shall certainly diminish the slit and promote parity amongst all taxpayers with equivalent tax saving opportunities.

(Tehmina Sharma is Partner, Riddhi R. Shah is Senior Manager and Devansh Waghela is Deputy Manager, Deloitte Haskins and Sells LLP)

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