RSM India

India Budget 2019 – Insights & Updates

India Budget 2019  - First Reactions

The Budget 2019 has been presented in the backdrop of a decisive electoral mandate, stable macro-economic parameters and slowdown in economic growth and employment. The Budget has thrust on investment by government, re-capitalization of banks by Rs.70,000 crores and aggressive public sector disinvestment target of Rs.1,05,000 crores. There are measures to attract foreign investment by raising sectoral caps for aviation, media, insurance and other sectors, raising limit for FII investment in listed companies from 24% to 49% and integrating NRI Portfolio and FII Investment schemes. The consolidation of multiple labour laws in to 4 codes as and when implemented can transform the archaic labour law regime to more integrated consolidated regime (similar to GST reform for indirect taxes). There is a thrust on affordable housing and start-ups with several benefits and relaxations.

There is no structural change in corporate tax regime except that now companies up to an annual turnover of Rs.400 crores would qualify for the lower rate of tax of 25% (plus surcharge and cess). The steep increase in surcharge on personal tax front for income exceeding Rs.2 crores and Rs. 5 crores will impact a small segment in number but having a significant influence on the economy. The additional interest deduction for affordable housing loan and electric car purchase will benefit the middle income group.

Overall, it is a good budget with several statements of intent and thrust on investment but no major structural change on the direct and indirect tax regime.

Dr. Suresh Surana, Founder, RSM India

 

Super Rich Taxed Royally- Highest Individual Tax Rate Increased from 35.88% to 42.744%

The Super Rich have been taxed royally in the Budget 2019. There has been an exponential increase in the surcharge rate proposed by the finance bill no. 2 of 2019, wherein the highest surcharge rate has been proposed of 37% for those having total income exceeding Rs. 5 crores and at 25% for those having total income between Rs. 2 crores to Rs. 5 crores. This will result in overall increase in the tax rate of 3% to 7%. While this measure shall have a limited impact as the number of taxpayers having income above Rs. 1 crore is appx. 140,000 as per the recent CBDT data but their economic influence is much greater.

Tax Rate Break-up

Income Range

upto 1 cr

Above 1 crs upto 2 crs

Above Rs. 2 crs upto Rs. 5 crs

Above Rs. 5 crs

Base Tax Rate –(a)

30

30

30

30

Surcharge (%)

10

15

25

37

 Surcharge (b)

3

4.5

7.5

11.1

 c = (a + b)

33

34.5

37.5

41.1

Cess ---(d )

1.32

1.38

1.5

1.644

New Tax Rate (c + d)

34.32

35.88

39

42.744

Earlier tax rate

 

35.88

35.88

35.88

Effective increase (percentage points)

 

0

-3.12

-6.864

 

Dr. Suresh Surana, Founder, RSM India

 

Budget (No.2) 2019 – Personal Taxes

The Budget 2019 has aimed to be incentivize affordable housing, electronic vehicles and start ups and there is no major relief on account of personal taxation. The increase in NPS withdrawal exemption limit from 40% to 60% on closure of his account or on his opting out of the pension scheme of the total amount payable to him at the time of such closure or on his opting out of the scheme, is a welcome relief.

Ø    Super Rich Taxed Royally

The Super Rich (individuals and HUFs) have been taxed royally in the Budget 2019 and the new rate structure is as follows:

Tax Rate Break-up

Income Range

upto 1 cr

Above 1 crs upto 2 crs

Above Rs. 2 crs upto Rs. 5 crs

Above Rs. 5 crs

New Tax Rate

34.32

35.88

39

42.744

Earlier tax rate

 

35.88

35.88

35.88

Effective increase (percentage points)

 

0

-3.12

-6.864

 

Ø    NPS Withdrawal Exemption limit hiked to 60%

Any payment from the NPS Trust to an assessee on closure of his account or on his opting out of the pension scheme, to the extent of 60% (earlier 40%) of the total amount payable to him at the time of such closure or on his opting out of the scheme, is exempt from tax

Ø    Re-incarnation of 1/6 Scheme - Mandatory furnishing of return of income by certain persons

Persons who enter into certain high value transactions have to furnish their return of income mandatorily for that relevant year. The transactions are:

  1. deposited Rs. 1 one crore or more in bank accounts
  2. incurred expenditure more than Rs. 200,000 for foreign travel
  3. electricity bill above Rs.100,000 or
  4. claiming any benefits of capital gains exemption on investment in a house or a bond or other eligible assets; or
  5. other prescribed conditions

This is similar to the earlier scheme of mandatory filing of returns on fulfilment of certain criteria but which was subsequently withdrawn.

Ø    Deduction for interest on electric vehicles loan (Proposed section 80EEB)

With a view to improve environment and to reduce vehicular pollution, it is proposed to allow deduction in respect of interest on loan taken for purchase of one electric vehicle from any financial  institution up to Rs. 150,000. This is subject to the condition that the loan is being taken during the period from 1 April 2019 to 31 March 2023 and the assessee does not any other electric vehicle on the date of sanction of loan.

Ø    Deduction for interest on Housing loan (Proposed section 80EEA)

With a view to provide impetus on affordable housing, it is proposed to allow deduction in respect of interest on loan taken for purchase of an affordable house (worth not above Rs. 45 Lakhs) up to Rs. 150,000. This is subject to the condition that the loan is being taken during the period from 1 April 2019 to 31 March 2020 and the assessee does not any other residential house on the date of sanction of loan. This is in addition to interest deduction of Rs.  200,000 which can be claimed as interest on self-occupied property.

Ø    Inter-changeability of PAN & Aadhaar and mandatory quoting in prescribed transactions

The Inter-changeability of PAN & Aadhaar and mandatory quoting in prescribed transactions or for filing or return is a very welcome move and would help to increase the tax base.

Ø    TDS on property scope widened to include all additional charges including the consideration.

For purpose of TDS on purchase of property @ 1%, it has been clarified that the consideration for immovable property” shall include all charges of the nature of club membership fee, car parking fee, electricity and water facility fees, maintenance fee, advance fee or any other charges of similar nature, which are incidental to transfer of the immovable property. This would put additional compliance burden on  home buyers for other residuary payments.

Ø    Tax Deduction at Source (TDS) on payment by Individual/HUF to contractors and professionals

It is proposed to insert a new section 194M in the Act to provide for levy of TDS at the rate of 5% on account of contractual work or professional fees by an individual or a Hindu undivided family, who are not required to deduct tax at source under section 194C and 194J of the Act, if such sum, or aggregate of such sums, exceeds Rs. 50,00,000 in a year. However, in order to reduce the compliance burden, it is proposed that such individuals or HUFs shall be able to deposit the tax deducted using their Permanent Account Number (PAN) and shall not be required to obtain Tax deduction Account Number (TAN).

Ø    TDS on cash withdrawal to discourage cash transactions

In order to discourage cash transactions and move towards less cash economy, it is proposed to levy TDS @ 2% on cash payments in excess of Rs. 1 crore in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient.

Ø    Buy-back tax extended to listed companies

Any buy back of  shares from a shareholder by a company listed on recognised stock exchange, on or after 5th July 2019, shall also be covered by the provision of section 115QA of the Act and have to pay tax @ 23.296%. This would be a barrier for the companies who have already made announcement for buy-back or are in process. The gains on buy-back would be exempt in the hands of the shareholders.

Views of CA (Dr. Suresh Surana), Founder, RSM India

 

2% TDS on cash payments exceeding Rs. 1 crore - Increased Compliance and Tracking Burden on the Banking System

The introduction of the 2% TDS is intended to curb flow of cash in the economy and could have more impact on the unorganized sector which generally is cash dominated. This measure has cast more responsibility on the banks (including co-operative banks) & Post offices to track all cash payments made to any person from  an account held with it. The tax rate proposed is 2% under a new section 194N, where the cash payments from the account held with it exceeds Rs. 1 crore in a financial year. This compliance burden does have present some challenges, such as

  1. It may increase the transaction time for cash withdrawals, as the bankers may need to customize their financial softwares to include the tracking system
  2. The account holder may transact with multiple banks for such cash withdrawal, as this proposed limit seems to be restricted to the individual bank making the cash payment
  3. As the date of effect of this amendment is 1st September 2019 (mid-year), more clarity would be required as the cash withdrawal limits are proposed for the financial year.

In a way, it can be said that this is an “indirect de-monetization” measure to suck the economy of the cash transactions and push towards a more transparent, organized and compliant business structure.

Dr. Suresh Surana, Founder, RSM India

 

Buyback Tax Scope extended to Listed Companies

At present, only unlisted companies are liable to pay buy-back tax @ 23.296% on the net consideration (i.e. buyback price less the issue price received by the Company). This section was introduced as an anti-abuse provision to check the practice of unlisted companies resorting to buy-back of shares instead of payment of dividends.

Buy-back is means to reward the shareholders and increase the remaining shareholders’ value in the shares by increase in earnings per share. To block the listed companies from practice of resorting to buy-back of shares, instead of payment of dividends, the buy-back tax have also been extended to listed companies. Earlier, the surplus arising to the shareholders was taxed as capital gains and when shares were tendered through the stock exchange on which STT was paid, the long term capital gains would have been subject to tax @10% (including no tax on capital gain in respect of price as on 31 January 2018 due to the benefit of grandfathering). This move would be a major deterrent in buy back of shares by listed companies. The tax of 23.296% would be payable by the Company on the difference between the buy-back price and the issue price of the shares and the said gains would be tax exempt in the hands of the shareholders.

This may result in cascading tax as the difference between the issue price and the buyback price may already have been taxed in the hands of the previous shareholders as capital gains. This would rather the impact shareholders’ returns on their investment in shares of listed companies and also impact the Companies at large. This would be additional burden for all the companies who have already made announcement for buy-back or are in process of the same as the said provision is being applied with immediate effect.

Dr. Suresh Surana, Founder, RSM India

 

Big Boost for Foreign Investment

In order to arrest economic slowdown and stimulate growth, it is necessary to stimulate investment. While India’s FDI inflows in 2018-19 remained strong at US$ 64 billion marking a 6% growth but need further thrust to achieve the vision to make India a US$ 5 trillion in the next 5 years. This is an opportune time as several foreign investors who have over-invested in China are keenly looking for an alternative large economy with long term economic growth potential. The Hon’ble  Finance Minister has announced several measures in the Finance Bill (No. 2) of 2019 to attract foreign investment:

  • The Government will examine suggestions of further opening up of FDI in aviation, media (animation, AVGC) and insurance sectors in consultation with all stakeholders.
  • 100% Foreign Direct Investment (FDI) will be permitted for insurance intermediaries.
  • Local sourcing norms will be eased for FDI in Single Brand Retail sector (at present 30% local sourcing should be from India).

 

  • Increase in the FPI limit to Sectoral Cap

Currently, the total holding by each Foreign Portfolio Investor (FPI) or an investor group as referred in SEBI (FPI) Regulations, 2014, should be less than 10% of the total paid-up equity capital on a fully diluted basis or less than 10% of the paid-up value of each series of debentures or preference shares or warrants issued by an Indian company and the total holdings of all FPIs put together should not exceed 24% of paid-up equity capital on a fully diluted basis or paid up value of each series of debentures or preference shares or warrants. The limit of 10% and 24% will be called individual and aggregate limit, respectively. It is proposed to increase the statutory limit for FPI investment in a company from 24% to sectoral foreign investment limit with option given to the concerned corporates to limit it to a lower threshold. For example, in Insurance sector, FDI limit is upto 49% under automatic route. Hence, as proposed, all FPIs collectively can invest upto 49% in an Insurance Company which the earlier limit was 24% in aggregate.

  • FPIs will also be permitted to subscribe to listed debt securities issued by ReITs and InvITs.
  • It is proposed to permit investments made by FIIs/FPIs in debt securities issued by Infrastructure Debt Fund – Non-Bank Finance Companies (IDF-NBFCs) to be transferred/sold to any domestic investor within the specified lock-in period.
  • It is proposed to rationalize and streamline the existing KYC norms for FPIs to make it more investor friendly without compromising the integrity of cross-border capital flows.
  • It has been proposed to merge the NRI-Portfolio Investment Scheme Route (Schedule 2) with the Foreign Portfolio Investment Route (Schedule 3). This coupled with extended limit upto secotral cap for FPI would accelerate foreign funds inflow into India.

Dr. Suresh Surana – Founder – RSM India

 

Budget 2019 - Boon for MSMEs in this Budget

This Budget has been announced with particular emphasis on MSMEs and startups.  For ease of access to credit for MSMEs, Government has introduced providing of loans upto Rs. 1 crore for within 59 minutes through a dedicated online portal. Under the Interest Subvention Scheme for MSMEs, 2% interest subvention for all GST registered MSMEs, on fresh or incremental loans, has been continued. Further, it has been announced to create a payment platform for MSMEs to enable filing of bills and payment thereof on the platform itself which are payable by Government. This would eliminate delays in payments and would boost their cash flows.

Further, it has been decided to extend the pension benefit to about 3 crore retail traders & small shopkeepers whose annual turnover is less than Rs. 1.5 crore under a new Scheme namely Pradhan Mantri Karam Yogi Maandhan Scheme. Enrolment into the Scheme will be kept simple requiring only Aadhaar and a bank account and rest will be on self-declaration. This is a very welcome move for small retailers who are facing stiff completion from e-commerce platforms.

Dr. Suresh Surana – Founder -RSM India

 

Budget 2019 – Reviving and Stimulating Economic Growth

In order to achieve the vision to make India a US$ 5 trillion in the next 5 years, reviving and stimulating economic growth and employment is the most important objective. This is an opportune time as several foreign investors who have over-invested in China are keenly looking for an alternative large economy with long term economic growth potential. Has the Budget 2019 taken enough steps in this direction?

Foreign Investment

  • The Government will examine suggestions of further opening up of FDI in aviation, media (animation, AVGC) and insurance sectors in consultation with all stakeholders.
  • Local sourcing norms will be eased for FDI in Single Brand Retail sector (at present 30% local sourcing should be from India).
  • Increase in the FPI limit to Sectoral Cap: Currently, the total holding by each Foreign Portfolio Investor (FPI) or an investor group as referred in SEBI (FPI) Regulations, 2014, should be less than 10% of the total paid-up equity capital on a fully diluted basis or less than 10% of the paid-up value of each series of debentures or preference shares or warrants issued by an Indian company and the total holdings of all FPIs put together should not exceed 24% of paid-up equity capital on a fully diluted basis or paid up value of each series of debentures or preference shares or warrants. It is proposed to increase the statutory limit for FPI investment in a company from 24% to sectoral foreign investment limit with option given to the concerned corporates to limit it to a lower threshold. FPIs will also be permitted to subscribe to listed debt securities issued by ReITs and InvITs.
  • It has been proposed to merge the NRI-Portfolio Investment Scheme Route (Schedule 2) with the Foreign Portfolio Investment Route (Schedule 3). This coupled with extended limit up to sectoral cap for FPI would accelerate foreign funds inflow into India.

Government Investment

The Budget has thrust on investment by government, re-capitalization of banks by Rs.70,000 crores and aggressive public sector disinvestment target of Rs.1,05,000 crores.

MSMEs and Start-ups

There are several measures for MSME sector and start-ups.  For ease of access to credit for MSMEs, Government has introduced providing of loans up to Rs. 1 crore for within 59 minutes through a dedicated online portal. Under the Interest Subvention Scheme for MSMEs, 2% interest subvention for all GST registered MSMEs, on fresh or incremental loans, has been continued. Further, it has been announced to create a payment platform for MSMEs to enable filing of bills and payment thereof on the platform itself which are payable by Government. This would eliminate delays in payments and would boost their cash flows.

Labour Law Reforms

The present labour law regime is archaic and impediment to investment. It is not focused on employment generation and fostering productivity. The consolidation of multiple labour laws in to 4 codes as and when implemented can transform the archaic labour law regime to more integrated consolidated regime (similar to GST reform for indirect taxes). This is one single action which can change India’s manufacturing and services sector landscape.

Corporate Tax Reforms

In India, corporate earnings are taxed at 3 levels:

  • Corporate Tax: Corporate tax on profit before tax 34.94% (companies with annual turnover exceeding Rs.250 crores)
  • DDT: 17.46 % on after tax profits available for dividends distribution (100 – 34.94) resulting in effective tax rate of 11.36%
  • Tax on shareholders receiving dividend income: 11.96% on dividends distributed to non-corporate resident shareholders

This is one of the steepest tax structures in the world with the overall tax rate on fully distributed corporate earnings being as high as 52.5%. The tax rate for individuals and HUFs has also been hiked from 35.88% to 42.744%  (for income exceeding Rs. 5 crores). While the benefit of the lower corporate tax rate has now been extended to the companies having turnover of Rs.400 crores (earlier Rs.250 crores) in the Budget, a far more structural reform was needed to make India globally attractive as an investment destination. The corporate tax rate in China is 25% and does not have a multi-tier tax structure.

Employment Generation

World Economic Forum in its report titled – ‘Future of Jobs Report 2018’ has anticipated that due to advancement in technology coupled with automation, total task hours performed by humans is expected to reduce by 23% and machines shall perform the 52% of total task hours across 12 industries spanning manufacturing, services and high tech. In this backdrop, there is a strong need for measures directed towards increase in employment generation in India keeping in mind that India has highest proportion of young population as compared to rest of the countries in the world. Notably, more than 20 million people graduate in India every year.

The existing provisions of section 80JJAA which gives deduction of 30% of additional employee cost for 3 assessment years to all assessees who are audited under section 44AB has stringent conditions. (such as the restriction of such benefits to additional employees only and further restricted to employees whose total emoluments is less than Rs. 25,000 per month. It was necessary to increase the limit of emoluments to a much higher level say Rs. 100,000 a month to cover the large workforce particularly in technology and digital space. It would also have more appropriate to extend the benefit to the overall employee cost albeit at a reduced rate of 10% instead of 30% of the additional employee cost.

Concluding Remarks

While the Budget has taken several steps on boosting foreign investment and public sector spending, the measures for private sector investment revival, corporate tax reforms and employment generation seem to have fallen short of the expectations.

Views of CA (Dr. Suresh Surana)

 

Indirect Taxes - Dispute Resolution Scheme

As a move towards curbing litigation, a dispute resolution cum amnesty scheme called “the Sabka Vishwas Legacy Dispute Resolution Scheme, 2019” is being introduced for resolution and settlement of legacy cases of Central Excise and Service Tax. The proposed Scheme shall cover past disputes of taxes which have got subsumed in GST namely Central Excise, Service Tax and Cesses. It may be noted that Customs law and VAT disputes are not covered in this Scheme. All persons are eligible to avail the scheme except a few exclusions including as those convicted under the Act in the case for which he intends to make declaration and those who have filed an application before the Settlement Commission.

The relief under the scheme varies from 40% to 70% of the tax dues for cases other than voluntary disclosure cases, depending on the amount of tax dues involved. The scheme also provides relief from payment of interest and penalty. For voluntary disclosures, the relief is regarding waiver of interest and penalty on payment of full tax dues disclosed. The person discharged under the scheme shall also not be liable for prosecution.

This could be a major initiative which can be taken by tax payers to end earlier long drawn litigation under Service Tax and Central Excise wherein the relief is significant ranging from 40% to 70% of the tax dues depending upon the facts of the case and with no prosecution provisions being invoked. It would have been desirable if Customs disputes were also covered under the Scheme and we do hope that the state governments extend similar schemes for the VAT disputes as these measures will result in significant additional revenue collection and at the same time result is a massive reduction of legal disputes.

Dr. Suresh Surana – Founder -RSM India