Budget 2016: NPS, EPF now on same footing, says Dhirendra Kumar, CEO, Value Research

The die is cast. With three Budgets out of his allotted six Budgets gone, Arun Jaitley has underlined his instinct of being a cautious and incremental reformer. Nothing wrong with that, in fact, incremental changes that are tightly focussed on problem areas are probably better than wading in with big changes.

The Budget is very clear on what the problems are, what the solutions are, and in what order will they be implemented.

For example, the FM has said often enough that corporate taxation has to be cleaned up. Exemptions have to be reduced and the tax rate decreased. As things stand, larger companies are better able to exploit exemptions.

The Budget removed exemptions, which will mostly increase tax for larger companies, and made the beginning for reducing taxation for smaller companies and startups.

On savings, personal investments and taxation, the Budget makes one really big move that was due, and was talked about for more than a decade. It has brought the National Pension System at par with EPF as far as taxation goes. However, it has done so not by making NPS tax exempt at the time of withdrawal, but by making both partially taxable. Sixty per cent of the withdrawals from each scheme will be taxable.

Thankfully, the taxation of EPF is not retrospective. That is, tax will be due only on the corpus that grows from the contributions that are made from April 1 onwards.

Previously accumulated amounts will not be taxed. My guess is that there will be some protests against this. This is so specially because even a fairly low-income EPF member will end up reaching the highest tax bracket in case of a bulk withdrawal. If 60% of the corpus is taxed at 30% then the effective tax rate is 18% of the total. However, this level will also be reached only many years in the future. It would be better if none of these are taxed, but parity for NPS is not so bad either.

My main complaint with this Budget is that the exemption and tax slab limits as well as Section 80 tax exemption amounts have not been raised. These limits effectively become devalued with inflation every year. The government's tax inflow increases even if your income increases nominally, but your inflation-adjusted post-tax income decreases and the value of the tax-exempt savings decreases. The effect is disproportionately worse for lower income taxpayers.

However, Mr Jaitley has done well to remove the bias against small investors that was built into the dividend distribution tax. Even here, the general theme has been repeated - if there is a tax anomaly, he will remove it by taxing more in some places rather than less in other places. This will probably be the pattern for years to come.

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Budget 2016: Times guide to corporate tax

Proposal (P): New manufacturing companies incorporated on or after March 1, 2016 have been provided an option either to adopt a reduced corporate tax of 27.55% (where the income exceeds Rs 1 crore but does not exceed Rs 10 crore) or 28.84% (where income exceeds Rs 10 crore) provided such companies do not claim profit-linked / investment-linked deduction or do not avail of investment allowance and accelerated depreciation.

Impact (I): Whereas this move is intended to provide the much needed boost to the manufacturing sector and the 'Make in India' initiative of the government, considering the capital-incentive nature of the manufacturing industries, the benefit of reduced rate may be of little help in the initial years. Thus, the companies may prefer to claim the deductions and incentives which may result in reduced effective tax rate rather than opting for lower rate of tax.

P: New startups, involving innovation development, set up before April 1, 2019 proposed to be provided with 100% deduction of profits for a period of 3 years out of 5 years (subject to satisfaction of certain conditions). However, the MAT would be applicable on such startups.

I: This move will incentivise development of new technology in India. The new startups would also generate employment and bring innovation in India.

P: Effective corporate tax rate for small companies having turnover less than Rs 5 crore reduced to 31.96%.

I: This move will encourage entrepreneurship in India. MSMEs and SMEs are major job creators and the reduced corporate tax rate will boost growth.

P: Introduction of reduced rate of tax of 10% on income by way of royalty in respect of a patent developed and registered in India.

I: This would encourage innovation among Indian residents. For example, a large company would have paid a tax rate of 34.61% but income from royalty on patents developed would attract a lower tax rate of 10%.

P: Provisions of Taxes Deducted at Source (TDS) rationalized. Threshold limits for TDS on various payments increased. Further, withholding tax rates have been lowered in respect of certain payments.

I: The move is aimed at rationalizing TDS provisions and reduce tax outflow in the hands of small tax payers.

P: Taxes to be collected at source at the rate of 1% on purchase of luxury cars exceeding value of Rs 10 lakh and purchase of goods and services in cash exceeding Rs 2 lakh.

I: This proposal would help the tax department to monitor and curb use of black money. At the same time, this would increase the compliance burden of the vendors.

P: The income-tax department cannot file appeal against the directions issued by the Dispute Resolution Panel .

I: This proposal would reduce long drawn litigation. At the same time, it may discourage the DRP from deciding even slightly debatable issues in the taxpayer's favour.

P: Increase in threshold limit for presumptive taxation from Rs 1 crore to Rs 2 crore for persons having income from business.

I: Currently, 8% of the turnover (of up to Rs 1 crore) is presumed to be income against which a tax levy is imposed at the applicable rate. With increase in threshold limit it will reduce the compliance burden for small businessmen.

P: Long-term capital gains arising from transfer of unlisted shares of a company in which the public are not substantially interested (eg, private companies) taxable at a reduced rate of 10% in the hands of non-residents.

I: This would bring certainty in respect of taxability of gains arising from transfer of shares of unlisted companies and is likely to incentivise corporate reorganization in India.

P: Provisions relating to place of effective management (POEM) come into effect from April 1 2016.

I: POEM provisions were introduced last budget and applied to the current financial year (2015-16). However, draft guidelines were issued only in December. Thus the delay in introduction of POEM to April 2016 will help Indian companies having overseas subsidiaries.

P: A person resident in India or a non-resident having a permanent establishment in India, making payment exceeding in aggregate Rs 1 lakh in a year towards online advertisement to a non-resident, who does not have a permanent establishment in India would have to withhold tax at 6% of gross amount paid, as an equalization levy which is to be discharged by way of withholding.

I: This provision is aimed at alignment of domestic tax law with the OECD recommendations on BEPS action plan on the digital economy. This provision would impact the income of non-resident e-commerce giants providing online advertising services (such as, Google, Yahoo, etc) or other services to the companies in India.

P: The Income Declaration Scheme, 2016 is proposed to be introduced with effect from June 1, 2016 for disclosure of undisclosed income subject to certain conditions. Tax is proposed to be charged on the undisclosed income at the rate of 30% on the declared income plus surcharge at the rate of 7.5% and a penalty at the rate of 7.5%, thus, making effective tax rate to 45% of the undisclosed income.

Immunity from prosecution and prosecution under the Benami Transaction (Prohibition) Act, 1988 is also proposed subject to fulfilment of certain conditions. Further, no scrutiny assessment/ enquiry is to be initiated in such cases.

I: Considering the immunity from prosecution and scrutiny assessment /enquiry, the proposed scheme could be a good opportunity for some errant taxpayers for disclosure of their undisclosed income.

P: Introduction of 'The Direct Tax Dispute Resolution Scheme, 2016'. Under the scheme, the cases pending before the Commissioner (Appeals) for certain category of persons, would be deemed to be withdrawn upon payment of tax plus interest (up to date of assessment) and penalty of 25%.

I: This is a welcome move to enable government to expeditiously collect tax arrears and to reduce the huge backlog of pending cases before the Commissioner (Appeals). This would also benefit tax payers as it would help reducing litigation.

P: Securities Transaction Tax on sale of options has increased from 0.017% to 0.05% of the option premium.

I: The increased rate will increase the costs of option transactions which may adversely impact transaction volumes.

P: Existing penalty provisions levying penalty on account of concealment or furnishing inaccurate particulars of income from 100% to 300% at the discretion of the tax official, to be scrapped from April 1, 2017. As per the new provisions, penalty shall be levied @ 50% on the tax payable on under reported income and @ 200% in case of misreported income.

I: These rationalized provisions are aimed at bringing objectivity, certainty and clarity in the penalty provisions and reduce arbitrary action by the tax authorities.

P: The revision of belated return has been allowed within one year from the end of the relevant assessment year.

I: The proposal should ensure timely compliance. At the same time, the genuine tax payers who would miss the return filing deadline due to unforeseen circumstances, should be able to revise their belated return of income.

P: Processing of return is made mandatory before completing assessment proceedings.

I: This is a welcome move which would require tax authorities to mandatorily process the return and release timely refunds to tax payers, if any.

P: The time limit for passing rectification order by the Appellate Tribunal is reduced from 4 years to 6 months.

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Arun Jaitley Budget 3 Focuses On Farmers, Poor And Small Tax Payers; Cars Costlier

New Delhi: Finance Minister Arun Jaitley unveiled a budget for farmers and the poor on Monday, announcing a string of farm measures, rural aid and health programmes. He also announced measures that he said would help more than two crore taxpayers.

Cars will be costlier, with the Finance Minister proposing a new cess on cars. And cigarettes too will cost more as he proposed a hike in excise duty on tobacco.

Stock markets traded choppily through his speech, the Sensex sinking at one point by 660 points when the minister announced a 10 per cent tax on dividends of over Rs. 10 lakh a year. They pared much of the losses after he ended his speech.

Investors are relieved that the government is sticking to the roadmap for fiscal consolidation; Mr Jaitley has fixed next year's fiscal deficit target at 3.5 per cent of the GDP.

Presenting his third budget, Mr Jaitley pledged to "spend prudently and wisely for the people, especially for the poor and downtrodden."

He outlined what he said were the nine pillars on which the government would base its "transformative agenda" for the economy in the coming year, first among them agriculture and farmers' welfare. Mr Jaitley said the key areas of policy focus would be farming, social reforms, infrastructure and recapitalising the banking system.

"We need to give back to our farmers. We need to think beyond food security to income security...will double income of farmers by 2022." He has allocated Rs. 35,984 crore for farmers' welfare.

The minister has also announced a 228% jump in funds for rural transformation, allocating Rs. 38,500 crores for MGNREGA, a rural employment scheme that was a flagship of the previous Congress-led UPA government.

Among major announcements was one for LPG connections for poor women, which he said would benefit 1.5 crore households this year.

The Finance Minister has raised the deduction limit for those with total income of less than Rs. 5 lakh from 2000 to 5000. He has also announced relief for tax payers who do not own a house and don't get house rent allowance from employers.

The Finance Minister began by saying he is presenting the Union Budget at a time when the global economy is in serious crisis, emphasising that "India has held its ground firmly" in tough times. 

"We inherited an economy of slow growth, high inflation and low faith in government...amidst global headwinds, the Indian economy has held its own," said Mr Jaitley, much of speech seated.

Beside him sat Prime Minister Narendra Modi, who had described the Union Budget as an examination in which "125 crore Indians are going to test me."

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India signals possible deficit revisions in Budget 2016

 India should review its mid-term fiscal strategy, the Economic Survey urged on Friday, in a possible indication that Finance Minister Arun Jaitley may have to borrow more to raise pay for government employees and bail out banks.

The report called India "a haven of stability" in a gloomy international landscape but, as Group of 20 finance ministers gathered for talks in Shanghai, warned too of possible currency turmoil in Asia after China's recent devaluation.

The Economic Survey, which sets the scene for Jaitley's third budget on Monday, forecast the Indian economy would grow by between 7.0% and 7.75% in the 2016/17 fiscal year that starts on April 1.

That would be in line with this year's expected out turn of 7.6% but below earlier expectations that growth would accelerate to over 8%.

Although Asia's third-largest economy has overtaken China's as the world's fastest-growing, weak business investment and a growing bad loan problem will compel Prime Minister Narendra Modi to keep the spending taps open to deliver on his promise of jobs for India's 1.3 billion people.

Modi needs to cover the estimated $16 billion annual expense of a once-in-a-decade pay and pension hike for federal employees.

The report also put the total cost of recapitalising banks at $26 billion in the coming years.

The government will stick to its budget deficit target of 3.9% of gross domestic product in the year now drawing to a close, but the coming year will be "challenging" from a fiscal point of view.

The report, written by economic adviser Arvind Subramanian, said that "credibility and optimality" argued in favour of sticking to next year's deficit target of 3.5% of GDP - phrasing that left room for an upward revision.

"The time is right for a review of the medium-term fiscal framework," the text, handed out in Parliament, said.

Analysts said Subramanian was flagging some backsliding on the deficit - if not next year then the year after - to account for an economy that is doing less well than the headline figures suggest.

"My sense is that there is a 20-30 basis points slippage coming in the fiscal deficit number, so basically I'm expecting a 3.7 or 3.8% fiscal deficit number for 2017," said Ritika Mankar Mukherjee, senior economist at Ambit Capital.

Subramanian's cautious advice to raise the deficit has been rejected by central bank governor Raghuram Rajan, who argues that India should keep its powder dry in case the weakening world economy tips into recession.

Indian bonds, shares and the rupee gained on a view that the government was at least not throwing fiscal caution to the winds.

PAY HIKES

Raising pay for 10 million federal employees would not destabilise prices, the report said, while low inflation has taken hold, leaving room for the Reserve Bank of India to cut interest rates further if needed.

Inflation is expected to decline to a range of 4.5% to 5.0% in the 2016/17 fiscal year, within the RBI's target, while the current account deficit would stay low at 1.0% to 1.5% of gross domestic product.

With the government tapped out on the spending side, there will be scant cash for capital projects through which it can achieve the growth rates of 8-10% needed to create jobs for the 1 million Indians joining the workforce every month.

This "does not augur well for the government capex - the major support to investment today, as private investment sentiment continues to stay weak," said Rupa Rege-Nitsure, group chief economist at L&T Finance Holdings in Mumbai.

The report flagged steps to broaden India's narrow tax base, arguing that 20 percent of individuals should pay tax on their earnings compared to just 5.5% now. The easiest way to do so would be not to raise thresholds on tax breaks and to review and phase out such exemptions.

India needs to gird itself for the possibility of turmoil on international currency markets and contend with "an unusually weak external environment".

"India must plan for a major currency re-adjustment in Asia in the wake of a similar adjustment in China," it cautioned.

Jaitley, making last-minute preparations for his budget address, is skipping this weekend's G20 gathering.

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