Given that Budget 2018 was the last full-term budget of the Finance Minister, he had a stiff task of balancing populism, fiscal prudence and pushing economic growth. The government has walked the fiscal tight rope, projecting a fiscal deficit of 3.3% for 2018-19, despite massive allocations to agriculture, health, education and infrastructure.
It also launched the world’s largest government funded health care programme, the National Health Protection Scheme.
The most looked-forward-to announcement was rationalisation of corporate tax rates, including MAT, to keep up with the global trend of reducing corporate tax rates.
A lower corporate tax rate of 25% is proposed to be extended to corporates with a turnover of up to ₹250 crore in financial year 2016-17; tax rate for only other domestic corporates remains unchanged at 30%, plus surcharge and cess (which is now increased from 3% to 4%).
Long term capital gains (LTCG) tax of 10% has been introduced by the Centre on LTCG on listed shares and equity oriented mutual funds exceeding ₹1 lakh. This will affect investor sentiment in the short-term.
‘Expectations dashed’
Expectations of abolition of Dividend Distribution Tax were dashed and additionally, distribution of income by equity oriented mutual funds will now attract distribution tax of 10%.
In continuance of India’s strategy to adopt measures of organisation for Economic Co-operation and Development (OECD) on Base Erosion and Profit Shifting (BEPS), the budget proposes to expand the scope of business connection in the domestic tax law.
Foreign enterprises
It is now also proposed to tax foreign enterprises not having any physical presence in India, but having ‘significant economic presence’ if the aggregate payment from transactions of goods or services (including provision of download of data or software in India) or the number of digital users exceeds a prescribed limit. These measures seek to align Indian tax law in the direction which countries globally are converging to prevent tax avoidance.
On the personal tax front, expectations of reduction in individual tax rates / threshold limit or increased deduction for investments have not been met.
The standard deduction of ₹40,000 reintroduced for the salaried class gives token benefits as it comes alongwith withdrawal of the existing deductions for conveyance and medical reimbursements.
Thankfully, there has been much-needed relief for senior citizens with the increase in the limit for non-taxable interest income to ₹50,000; increased deductions for expenses on health insurance premium and medical expenses for specified diseases.
Given that the Economic Survey placed in Parliament had highlighted exports and private investments to be the key growth engines, one would have expected measures in this budget to incentivise investment.
‘Discouraging investors’
While there is sufficient boost for Micro Small and Medium Enterprises (MSMEs), the proposals on LTCG, DDT on equity-oriented funds continuing and the existing Securities Transactions Tax (STT) discourage investors in capital markets.
One hopes that the targeted spends on the agrarian economy, in infrastructure and education build a groundswell of sustained economic growth to propel the country forward.
(The writer is Partner, KPMG in India)
