Murmurs of 'tax terrorism' and overreach of tax officials had started doing the rounds after demonetisation. There was hope the Union Budget would dispel these fears. But going by the response of tax experts and businesses, it more or less disappointed.
Several proposals that were not clearly spelt out in the Budget speech but were explained in the Finance Bill - especially those giving sweeping powers to tax officials - turned out to be unsavoury. The Budget, it seems, was driven more by the government's desire to curb the generation and use of black money than any need to provide a 'healing touch' to businesses hit by demonetisation.
Though businesses welcomed the fact that the Budget had no big negative surprise, and even tried to improve the ease of doing business, many could not hide their concerns over what they called the government's "over-the-top" stance against tax avoidance. A chartered accountant said in an informal discussion that the "government was converting the Income Tax Act into a Criminal Act."
The Budget proposes to give more sweeping powers to tax officers. This is giving jitters to the business community. One proposal seeks to give joint directors, deputy directors and assistant directors of the Income Tax Department the power to call for information for any enquiry. Another gives assessment officers the power to provisionally attach a property for six months "to protect the interest of revenue". These steps have revived fears of 'tax terrorism' and harassment of taxpayers. Though the chairman of the Central Board of Direct Taxes (CBDT), Sushil Chandra, has said many times that raids would be carried out with "responsibility" and tax authorities would have to submit a note to a high court explaining the reasons for the raid, a large number of taxpayers are not very convinced.
If that was not enough, tax officers will now be able to reopen cases where search operations have unearthed undisclosed income and assets of over `50 lakh for up to 10 years. At present, such cases can be reopened till six years. This, say tax experts, can prove to be another tool in the hands of tax officers to harass taxpayers.
Another proposal that has not gone down well with chartered accountants (CAs), investment bankers and other finance professionals mentions that if CAs, valuers and merchant bankers - who file audit, valuation and other reports - give wrong information, they will be liable to pay a penalty of `10,000. The CBDT Chairman said after the Budget that as CAs and other professionals have always asked for fixing accountability of tax officers (a demand the tax department has accepted), they should not get outraged if the tax department wants to make them accountable too. CAs, however, say that wrong filings are not always deliberate; in most cases, these are mistakes, they say.
"The institute (ICAI) has taken up the issue with the government. It has said that regulations that allow it to take action against unscrupulous CAs are already in place," says Nilesh Vikamsey, President, Institute of Chartered Accountants of India (ICAI).
The Budget has also proposed several steps to restrict the use of cash. It has adopted the suggestion by the Special Investigation Team on black money that cash use be restricted to `3 lakh per transaction. Now, anyone who accepts cash above this limit will have to pay a penalty of 100 per cent of the amount. Also, political parties have been barred from accepting donations above `2,000 in cash. Besides, for cash donations above `2,000, the tax deduction under Section 80G has been withdrawn.
One controversial proposal is aimed at curbing the practice of operators jacking up prices of penny stocks and then exiting, making gains at the cost of other investors. Now, any transfer of listed equities after September 30, 2004, will attract long-term capital gains tax if the securities transaction tax (STT) has not been paid. There are several genuine off-exchange transactions such as purchase of shares through initial public offers, follow-on public offers, employee stock options and qualified institutional placements on which the STT is not paid. This may hit many such transactions unless the government comes out with a list of deals to be kept out of the ambit of this provision.
While start-ups are happy that they can now claim deduction on profits earned in any three consecutive years for seven years instead of the earlier period of five years, there is one announcement that has not gone down well with them. The Budget says if unlisted shares are transferred for less than the fair market value, or FMV, capital gains tax will be computed on the FMV. The tax department will come out with a method for calculating the FMV. This is a dampener for unlisted companies, especially start-ups, where promoters, private equity investors and venture capital funds buy and sell shares frequently. Promoters and investors in these companies are worried that any lack of clarity in the method for calculating the FMV will lead to subjectivity and litigation as assessing officers may reject the FMV arrived at by the company or its promoters.
Amit Maheshwari, Managing Partner of accountancy firm AKM Global, says the aim of this decision is to tax gains from sale of properties at below market prices through the company structure. He says the government will use the net asset value to calculate the FMV instead of the discounted cash flow method. The net asset value method is expected to better reflect the FMV of the property.
Globally, countries are aligning their tax laws to the BEPS (Base Erosion and Profit Shifting) Action Plan - a set of rules put together by over 100 countries to check the practice of companies avoiding tax in their resident countries by shifting profits to low-tax locales. India is also adopting some points in the action plan. In last year's Budget, the government had come up with Equalisation Levy, a kind of withholding tax on money paid by an Indian entity to buy advertisement space on a foreign website. This year, the government has partially adopted BEPS Action Plan 4. The Budget provision in this regard says an Indian company or permanent establishment of a foreign company cannot claim deduction on interest (above `1 crore) paid to non-resident associated enterprises by more than 30 per cent of earnings before interest, depreciation tax and amortisation. Earlier, companies could claim 100 per cent deduction on such interest expenses. This provision, say experts, is aimed at the practice of companies using such interest expense to reduce taxable income.
Amit Singhania, Partner, Taxation, Shardul Amarchand Mangaldas & Co, says this may capital more expensive for companies.
Rahul Mitra, Head of Transfer Pricing and BEPS, KPMG in India, says the move came as a surprise as the government was, till a year ago, saying that India needed foreign money for building infrastructure, and since there were already many restrictions on raising foreign debt, it might not adopt this particular action plan. He says it is surprising that the government is encouraging fund-raising from abroad by lowering the withholding tax and at the same time putting restrictions such as these.
However, one of the biggest dampeners came on the corporate tax front. Before the Budget, everyone was expecting at least a 200 basis points reduction in corporate tax rates. However, the government reduced the tax rate from 30 per cent to 25 per cent for only small and medium enterprises with annual turnover of less than `50 crore. Experts say the government did not have the fiscal space to lower corporate tax rates across the board and this was the best it could have done. The move benefits 96 per cent companies registered in India, though some feel the benefit should have been also extended to sole proprietorships, partnership firms and limited liability partnerships.
More Misses Than Hits
Clarifications such as exemption on indirect transfer of shares to non-residents who, directly or indirectly, hold shares or interest in Category I and Category II foreign portfolio investors, tax neutral conversion of preference shares into equity shares, capital gains exemption on transfer of masala bonds, lower withholding tax on foreign debt, etc, are positive moves, but the government's aggressive approach towards anti-abuse and tax avoidance is making tax laws hawkish.