Finance Minister Arun Jaitley’s first full year budget made the right noises to corporates and foreign investors, by assuring a stable tax regime and ease of doing business in India.
The Minister said he would lower the corporate tax rate over the next four years to 25 per cent from 30 per cent. “This will lead to higher level of investment, higher growth and more jobs. This process of reduction has to be necessarily accompanied by rationalisation and removal of various kinds of tax exemptions and incentives for corporate taxpayers, which incidentally account for a large number of tax disputes,” Mr. Jaitley said in the budget speech.
“I wanted to start the phased reduction of corporate tax rate and phased elimination of exemptions right away; but I thought it would be appropriate to give advance notice that these changes will start from the next financial year. Our stated policy is to avoid sudden surprises and instability in tax policy,” he added.
The budget also said the key tax reform in the form of goods and services tax (GST) would be rolled out from April 1, 2016. In line with this rollout, Mr. Jaitley also rejigged certain indirect taxes.
“Budget is on expected lines from indirect tax perspective – clear affirmation of GST in April 2016, addressing inverted duty structure by reducing basic customs duty on inputs, intermediates and reduction in Special Additional Duty to incentivise manufacturers. Increase in service tax rate to 14 per cent and pruning of negative list as a precursor for GST, Cenvat credit time limit increased from 6 months to 1 year,” Harishanker Subramaniam, Partner & Indirect Tax Leader, Ernst and Young said.
In one of the key moves for offering clarity mainly to foreign investors, the budget deferred the implementation of the controversial General Anti-Avoidance Rules or (GAAR) until 2017. The norm first proposed in 2012 and sought to prevent companies from routing through other countries to avoid tax, had created high uncertainty in the mind of foreign investors.
Mr. Jaitley gave an assurance of quick resolutions for pending tax disputes.
He removed the distinction between direct and portfolio investors, a move which would encourage foreign investors to take stakes in Indian firms. “There has also been an attempt to address the key issues of the investors like clarity on REITs and non-applicability of minimum alternative tax on foreign portfolio investors. Overall, it’s a progressive budget with emphasis on putting India back on the agenda as an investment destination for both foreign and domestic investors,” Vikas Vasal, Partner-Tax, KPMG in India said. “Reduction in tax rate on royalty payments to 10 per cent etc. will help boost business confidence.”
The budget also raised the threshold for applicability of transfer pricing norms to Rs. 20 crore from Rs. 5 crore. “This will significantly reduce the compliance burden for a large number of taxpayers. This is a welcome move and shows the intent of the government to reduce the pains of the honest taxpayer,” Vijay Iyer, partner and transfer pricing leader at Ernst and Young said.
