While delivering the first budget of the current government’s second term, Finance Minister Nirmala Sitharaman focussed on the importance of ease of doing business and claimed that enterprises remain the backbone of the country’s economic growth. Several times during her budget presentation, she emphasized the importance of technology for removing bottlenecks in compliances.
Even as the budget proposals seemed lacking on major reforms, several key initiatives were announced that could impact corporations of all sizes and finance leaders would do well to keep them in mind while making strategy and business decisions.
Easier compliances: Many companies have been struggling with mismatches between GSTR 1 and GSTR 3B. To solve this, the FM announced a new e-invoicing system where invoices will have to be uploaded on a government portal before it becomes a legitimate commercial document. With the rollout expected from January 2020, e-way bills are set to become redundant.
Taxation proposals: While the individual income tax rates remained unchanged, there are a lot of new proposals for corporations and leaders. For instance, the corporation tax rate has been reduced to 25% from 30% for all companies with a turnover of up to Rs 400 crore. This covers 99.3% of the corporations in the country, the FM said. On the other hand, there’s bad news for companies which have been trying to reduce their dividend distribution tax burden through buyback of shares. The government has proposed that listed companies shall also be liable to pay additional tax at 20% in case of buyback of share, as is the case currently for unlisted companies.
For companies under the resolution framework as part of the Insolvency and Bankruptcy Code, the budget has proposed that for the purposes of computation of Minimum Alternate Tax (MAT) liability of such companies, the aggregate of brought forward losses and unabsorbed depreciation shall also be allowed as deduction.
Additionally, it is now mandatory to file income returns for individuals entering into high-value transactions such as deposits of more than Rs 1 crore in a current account in a year, or spending more than Rs 2 lakh on foreign travel or more than Rs 1 lakh on electricity consumption in a year.
Aadhaar and PAN to be interchangeable: The Finance Minister also proposed to introduce interchangeability between PAN and Aadhaar in the Income Tax Act to allow for individual taxpayers to use any one of these two documents to file returns. This interchangeability is being seen as a move to convert Aadhaar into a universal identifier. If the interchangeability is effected above the scope of just paying taxes, as the FM indicated, companies in the financial sector space will benefit from rethinking customer acquisition and the non-availability of PAN is no longer going to be a barrier to expansion.
- Parity between banks and NBFCs: The budget also proposed a key change in the NBFCs regulations which will now allow NBFCs to not pay tax on the interest accrued in bad and doubtful debts. “We welcome the honorable finance minister's proposal to bring parity between scheduled banks and NBFCs. Under section 43D banks were not required to pay tax on the interest accrued in bad or doubtful debt until the interest is actually realized. Now that the same treatment is extended to NBFCs, we have a more level playing field, a step forward towards harmonization,” said Mr. VP Nandakumar, MD & CEO of Manappuram Finance Limited.
Relief for startups: Those operating startups have much to cheer. The budget provisions have relaxed the condition for carrying forward and set off of losses enabling them to carry forward their losses on the satisfaction on either of the following conditions, i.e. continuity of 51% shareholding/voting power or continuity of 100% of original shareholders.
Moreover, the provision which allows exemption of capital gains from the sale of residential property on investment of net consideration in equity shares of eligible start-up shall be extended by 2 years. Thus the benefit shall be available for sale of residential property on or before 31st March 2021.
Additionally, the condition of minimum holding of 50% of share capital or voting rights in the start-up is proposed to be relaxed to 25%. The condition restricting the transfer of new asset being computer or computer software is also proposed to be relaxed from the current 5 years to 3 years.
Increase in public shareholding: As one of the least liquid stock markets in the world, India has finally moved a step ahead. The budget has proposed to increase the minimum public shareholding to 35% from 25% in listed companies.
Cess on petrol and diesel: Companies reliant on large scale transportation could see their bottom lines dip a bit. The budget provisions have sought to increase Special Additional Excise duty and Road and Infrastructure Cess by Rs 1 each on petrol and diesel, thereby bumping up the cost of fuel by Rs 2 per litre.
Easier fund-raising: Companies looking for funds could see some tailwinds if some of the budget proposals are implemented quickly. The finance minister has proposed to ease the conditions on offshore funds situated in India. Two of these conditions, relating to the remuneration of the fund manager and the time limit for building up of corpus, are proposed to be rationalized so as to facilitate setting up of fund management activity in India with respect to such offshore funds.
Rationalisation measures: The finance minister has also introduced a couple of rationalisation measures which are likely to help finance leaders. FM has sought to relax the definition of ‘demerger’ to allow the resulting company to record the value of the property and liabilities at a value different from the book value in compliance with the Indian Accounting Standards. Moreover, the value of taxable securities transaction in respect of the sale of an option and exercising of such an option will now only be the difference between the settlement price and the strike price.
- Customs duty increase: While some duties have been eased to incentivize domestic value addition, customs duties on a range of other inputs have been increased. The increased duties will now have to be paid on commodities from industries such as steel, ceramics, textiles, paper, chemicals, plastics, electronic goods, food processing, and automobile parts.