Written by Abhishek Goenka and Nikhil Rohera
For the last full Budget of this term, the government was under a unique dilemma. On one hand it was under pressure to moderate tax rates to attract and retain investments, whereas on the other hand it was also imperative for it to rein in fiscal deficit to garner adequate resources.
The Budget has brought down the tax rate to 25 per cent for those domestic firms whose turnover was up to Rs 250 crore for FY17. With this move, almost the entire MSME sector will enjoy a lower corporate tax rate. However, the earlier cess of 3 per cent has now been replaced with a new health and education cess of 4 per cent for all taxpayers including corporates resulting in a marginal rise in effective tax rate.
For unlisted firms, the Budget now proposes a Dividend Distribution Tax of 30 per cent of deemed dividend eg. loan or advance to a shareholder of such company. This appears to be an anti-abuse provision introduced to prevent camouflaging of dividends via loans or advances.
Separately, it is also proposed that prosecution proceedings can be launched against a company for not filing its tax return within the prescribed time. Again, the intent here is to bring shell companies into the tax net.
The Budget also proposes to extend the tax benefit by two years to start-ups incorporated up to March 31, 2021 and has further rationalised the definition of eligible business to align with the expanded definition adopted by DIPP. However, the turnover threshold of Rs 25 crore has not been increased meaning whereby the tax deduction would be withdrawn if turnover of the start-up exceeds this limit in any of the 7 years post incorporation.
Lastly, in terms of misses, although it was widely expected that some roadmap or clarity on the proposed Direct Taxes Code will be provided, the Budget remained silent on it. Further, the introduction of long term capital gains tax on listed equities was a dampener given the limited grandfathering and low threshold. Also there were no significant tax changes to incentivise capital investment or manufacturing, and various sectors like infra, pharma, power and telecom did not witness any positive changes.