Budget 2020 Expectations – A Tightrope For Fiscal Stimulus Via Tax Sops/Incentives?

Amid expectations of another tax stimulus on similar lines to the slew of recent tax initiatives introduced in 2019 to boost demand and the Indian economy, the Hon’ble Finance Minister will present her second Union Budget on February 1. The government has been holding meetings and consultations with industrialists and economists to bring the economy back into the growth trajectory. It is expected to be a balancing act between fiscal stimulus initiatives with seemingly limited elbow room, especially in light of low government receipts and modest tax collection numbers.

In August 2019, the Task Force, constituted to draft new tax law, submitted its final report to the Finance Ministry. Though the report has not been made public by the government, some of the recommendations of the Task Force has already been implemented, one example is the reduction in corporate tax rates. The Task Force has also recommended five tax slabs for individuals (5 percent, 10 percent, 20 percent, 30 percent and 35 percent) against the prevailing three tax slab structure. The government is expected to realign the direct tax slabs in line with these recommendations and also possibly raise the tax exemption limit to increase the disposable income of the middle classes and boost the consumption power. Any tax loss from such a move can be more than compensated by the growth in consumer spend and the subsequent increase in indirect tax proceeds.

The Government had introduced two new tax concessional regimes for domestic companies, reducing the tax rates from 30% to 15% and 22% for manufacturing and non-manufacturing companies respectively. Similar tax rate cuts are expected for partnerships, LLPs and proprietorships who run MSMEs. The tax rate cuts would make them competitive and provide financial support to the MSME sector.

The finance ministry had hinted in the past that it was looking into the taxation of ESOPs to address the issues around dual taxation (first, as a prerequisite at the point of exercising the stock option, and second, as capital gains at the point of selling it) that possibly curbs its effectiveness as a compensation and talent retention tool, especially for start-ups. Budget 2020 could bring some clarity on this.

There are also expectations in some quarters that the government could reintroduce the classical tax system of dividend taxation in the hands of the shareholders instead of the present Dividend Distribution Tax (DDT) levied on the Companies distributing dividends, though there are mixed signals. The expectations on reduction of DDT rate seems stretched in light of the deficit in government receipts.

Sector-specific incentives have been in demand in the various meetings held by the Finance Ministry. Various trade bodies of the Media sector including broadcasting, cable and satellite sectors have sought reconsideration of the GST rates. Broadcasting sector expects that television and radio sectors are treated on par with newspapers for GST purposes. Since the digitisation of the cable television in India, the Cable & Satellite industry is primarily driven by new technology and considerable investments in set-top boxes. Cable & Satellite industry is anticipating a reduction in the overall taxation of set-top boxes. The sector also expects rationalizations and clarity on withholding tax rates Band Placement Fees, Transponder fees, and other payments, which can help companies with better cashflows, tax certainty and address the ongoing protracted litigations.

Some of the other key areas on which the Budget 2020 can focus includes improvement in insolvency process in relation to NCLTs, faster mergers, acquisitions and demergers processes, reduction in timelines

for FDI approval, structural changes in laws for effective and stable business environment, time-bound decisions for augmenting ease of doing business both at the central and state levels.

All in all, Budget 2020 it is expected to be an action-packed event with the industry expecting economy boosters especially tax related initiatives from the Hon’ble Finance Minister. Authored by Milan Shah, Partner PwC India (Ably assisted by Jubin Joseph, Associate, PwC India), BCS Bureau