Union Budget 2020: Expectations For Improving Disposable Income, Improving Consumption, And Streamlining The Tax Scenario

Key Highlights:

  • Consumption has taken a hit, which has started to take a significant toll on the Indian economy. The upcoming Union Budget is expected to tackle the same by streamlining the applicable tax rates on individuals.
  • Creating more disposable income can help various sectors and stimulate positive growth cycle.
  • The infrequency and unpredictability of changes in tax laws is something which affects consumers as well as investors. This is another aspect which needs to be kept under check.
  • Expectations are high from the Union Budget 2020. We’ve discussed why it needs to be more aggressive and accountable to various stakeholders in the Indian economy.

Let’s be honest, merely a reduction in the corporate tax rates won’t help the Indian economy. It will help the economy to some extent, say in terms of the available surplus to invest, but the need of the hour is to increase consumption amidst the global as well as Indian economic slowdown. The consumption is on a downward spiral due to less disposable income and that is one aspect which needs to be seriously looked into. Even if the corporates have surplus funds to invest, post the corporate tax rate cut, the additional investment is contingent upon demand of that particular product/service in the market, which is in turn contingent upon the disposable income. You see, it’s a cycle which has a spiral effect.

Could Certain Sectors Get A Much-Needed Silver Lining Via Union Budget 2020?

A $5 trillion economy is an ambitious target which requires a steady investment in the country’s infrastructure sector. As of now, even though we’re a growing economy, we still lag behind Asian countries such as Singapore, China, etc., let alone countries outside the Asian continent. A single-party government should be able to take bolder steps in the absence of a strong opposition.

It’s a ripple effect-like mechanism. Infrastructure, manufacturing, steel, etc., these industries and sectors are inter-linked with each other and they need to be looked at holistically.

As for the manufacturing sector specifically, new Indian companies (keyword: Indian) setting up manufacturing capacities have been given a tax relief that they’ll be taxed at 15% (plus applicable surcharge and cess). However, foreign manufacturing companies setting up in India will continue to be taxed at 40% (plus applicable surcharge and cess). Although, we don’t expect the tax rates to be at par for native and foreign companies for obvious reasons, but there should be an attempt to reduce the disparity in the tax rates between the two brackets.

The Direct Tax Code: Now? Never? Or Maybe Later?

The Direct Tax Code (DTC) is being touted as a tool which would simplify and streamline the direct tax scenario in India but even that is in a flux of its own. The DTC came out in 2010, but it has been put on the back-burner time and again, for some or the other reason. Personally, I feel maybe the government itself is unsure as to how can they go about the DTC. May be for the fact that, a lot of the changes proposed in the DTC, have been already gradually incorporated in the existing Income Tax Act (‘Act’).

Personally, even though it may sound a little vague, I believe that with multitude of reforms being introduced in the recent years viz. GST, overhaul of the company law, demonetization, etc., the introduction of DTC at this point will do more harm than good. At this stage, it will only create more uncertainty amongst the stakeholders.

It would be better to let the dust settle first regarding the previously implemented changes (regardless of their nature and their perception by the general public) and maybe a few years down the line, the DTC can be put to implementation.

General Expectations For Increasing Disposable Income

The Prime Minister invited not just economic stalwarts but also the general public for budget-related suggestions. I am not sure how many of those suggestions will be incorporated, but what I do expect this Budget to be aggressive and not a laid-back one.

It’s the first budget after the 2019 general elections and it should be relatively aggressive to counter the economic slowdown.

Talking about disposable income; it’s all very numeric, to be honest. And that’s because giving more disposable income stems from the idea of rationalizing the applicable tax rate on the individual taxpayers. Going by various industry reports, I believe there should be a relaxation provided to the individual taxpayers via this budget. Again, as I mentioned earlier, it’s all very numeric and I choose not to go into the numbers.

Improving the Sentiment Among Investors As Well As Civilians: But How?

Well, the problem here is deeper than we think. I believe the tax law changes in India are highly uncertain, and that uncertainty is what makes it difficult for both investors as well as civilians. There is something which gets introduced, and then it is either withdrawn or altered.

An example of this could be the recent changes in the ITR (Income Tax Return) forms (ITR-1 and ITR-4), where changes were introduced and within few days, the introduced changes were rolled back. There are numerous examples where this has happened. So, it’d be appreciated if the government either doesn’t release these changes in a haste or if it does decide to release them, it should thoroughly analyze before releasing them and should then stick to its decisions.

Unanswered Questions Which Need To Be Considered

Audit proceedings for the assessment year 2017-18 are underway (cases where transfer pricing provisions are applicable) and it will be interesting to see how the tax authorities deal with the cases with regards to Place of Effective Management (‘PoEM’). While there is a lot of uncertainty on how these provisions would be applied by the field officers, there are certain aspects that need clarification.

There is an apparent dichotomy in the existing final guiding principles (PoEM guidelines) released by the Central Board of Direct Taxes (‘ÇBDT’) for determining the PoEM of a company u/s 6(3) of the Act. Para 5(a) (referring to page #2 of the  PoEM guidelines) lists down conditions and uses the term ‘and’ leading one to conclude that the prescribed conditions are required to be satisfied cumulatively, but based on Example #2 (referring to page #9 of the PoEM guidelines), it appears that satisfaction of any one condition would  suffice to conclude that a company is not involved in Active Business outside India (‘ABoI’).

Furthermore, clarity is also required on whether the company, whose PoEM is said to be in India, will be treated as an Indian Company or a Foreign Company for all practical purposes. This is very important to clarify as there can be no concept of quasi-Indian company.

Aspects like equalization levy, significant economic presence, etc., are some other aspects which require detailed notifications too, but they’re more or less based on a wait-and-watch game being adopted by the CBDT in order to be in sync with the global consensus.

My closing remarks would be reiterating that consumption and certainty in tax laws need to be improved significantly. The Government is taking decent initiatives on the reforms front, but the implementation needs to be thoroughly improved going forward.

All eyes on the Finance Minister, and we hope it’s a great budget.

Written By

Karnik Gulati

Karnik serves as a Manager in the Tax And Regulatory Services at Coinmen.

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