The Union budget has interesting implications for corporate and individual taxation. While there are no big bang tax reforms, the budget has made a small attempt to reach out with benefits to Indian corporates and individuals.
It needs to be understood that with a higher allocation for defense and infrastructure the leeway for cutting taxes was limited. However, the government has made an attempt to give some benefits to tax payers.
The rate of corporate taxes have been cut from 30% to 25%. However, the rate stays the same for this fiscal and will be cut to 25% over 4 years. The disappointment may be that there is no mention on reduction of MAT. The Minimum Alternate Tax has been kept static at 18.5%, which will be very close to the corporate tax rate level once it is revised to 25%. This anomaly largely negates the impact of cut in rates.
Additionally, the government retains the right to impose an additional 2% surcharge for the Swach Bharat Abhiyan, which could take the effective taxes higher. However, the more interesting feature is the move towards doing away with all exemptions for companies. These exemptions have been distorting taxation and also are a major source of litigation with companies. Again this move towards zero exemptions will happen in phases over 4 years.
Foreign portfolio investors have, probably, a lot to cheer about in this budget. Quite a few things have gone in their favour. To begin with the government has postponed the implementation of GAAR by 2 years. That will be a relief to foreign investors. Secondly, it has been confirmed by the FM that when implemented, the GAAR will be only apply with prospective effect and not with retrospective effect. That will set many potential disputes to rest.
MAT on foreign portfolio investors was another bone of contention. Many FPIs had received notices from the Income Tax Department asking them to explain why MAT should not be charged on their book profits. The FM has now confirmed that there will be no MAT on FPIs as long as the transactions are through the recognized exchange and STT has been paid on the same.
There have been marginally higher benefits for individuals. To begin with the FM has confirmed that there will be no withdrawal of exemptions for individuals. There are additional benefits. The wealth tax has been abolished in entirety which will permit middle class to easily monetize their holdings in real estate and gold. Additionally, the limits of medical insurance under Section 80D have been raised from Rs.15,000 to Rs.25,000. For senior citizens the limit has been raised from Rs.20,000 to Rs.30,000 taking the overall benefit under Section 80D to Rs.55,000/-. It is a good step. One of the concerns was the overall limit of Rs.1.5 lakhs for Section 80C, Section 80CCC and Section 80CCd combined. The New Pension Scheme (NPS) scheme contribution will not have an additional tax break of Rs.50,000 above the existing limit. Considering the rising medical costs, the government has proposed the annual exemption for diseases of a serious nature from Rs.60,000 to Rs.80,000 per annum.
There are some areas of concern for the HNI investors. Those who have taxable annual income in excess of Rs.1 crore will have to pay an additional surcharge of 2%. This rich man tax has already been imposed in countries like Singapore and the US has been talking about it. The Union Budget also clamps down heavily on people who hold assets abroad and those who have foreign income. The penalties on non-disclosure of foreign income or foreign assets are almost prohibitive. Many HNI investors will have to be additionally cautious on this front.
In conclusion, the budget is a major positive for the FPIs and marginally for the retail investors. HNI investors have a lot to worry about on the front of a high income tax as well as greater disclosures of assets held abroad. Budget has been neutral for corporates. Cut in tax rates is largely neutralized by no change in the MAT. Also, the increase in the service tax rates as well as excise duty will add to the cost of doing business in India.