Budget Connect 2017 Pre-Budget Survey
The industry anticipates a delay in GST implementation: the Budget would not see any big ticket announcement in indirect taxes 2
Q1 Do you expect the postponement of GST implementation to July 2017? Yes 87.61% No 12.39% Close to 90% of the respondents had predicted the postponement of GST implementation to July 2017. Demonetization and delay in the passage of the final law also give reasons to expect a delay. Q2 Do you expect the Budget 2017 to be independent of GST legislation? Q2 72.94% 27.06% Yes No 27.06% 73% expect the Budget 2017 to be independent of GST legislation. If the Government sticks to the originally planned GST roll-out, i.e., 1 April 2017, it would resist introducing too many changes in the Budget. However, if the GST introduction gets delayed, the Government may decide to announce some changes in the existing indirect tax provision in the Budget to align it with GST. 3
Q3 Do you expect the Government will bring the service tax at par with the proposed GST rate? Yes 55.05% No 44.95% The industry seems to be divided in its opinion on whether the Government will increase the service tax rate to bring it at par with the proposed GST rate on services. The confusion might be stemming from the anticipated delay in the introduction of GST, because of which the Government may consider revising the service tax rate upward to align with the GST rate. Q4 Do you expect any rate change of excise given that GST is likely to be introduced soon? Yes 42.86% No 57.14% 4
Over 57% of the industry anticipates that the Government may not tinker with the excise rate in the light of the impending GST. This could be a reality if the 1 April 2017 deadline for GST implementation is met. However, if July 2017 is set as the deadline, the Government would not have a window to introduce and implement changes in excise rates. EY comment With the latest political developments around demonetization and lack of consensus on some issues in the GST Council, GST introduction from 1 April 2017 seems unlikely. Given the likely delay in the introduction of GST, the Government may be tempted to introduce more-than-expected Budget changes in the current indirect tax regime. If that is the approach, some of the current exemptions may be pruned to make the law simpler. However, given that India Inc. and the Finance Ministry are also focused on GST preparedness, it might be best for them to keep this momentum going and not shift their focus from GST preparedness by introducing too many changes. A rise of a percentage point or two in the service tax rates can be expected. However, an excise rate change would not be recommended as, unlike service tax, this would mean allocation of greater resource and time for the Government given that multiple product rates would have to be assessed. Also, with lower current demand on account of demonetization, any hike in excise and service tax at this juncture may negatively impact demand. 5
Reduction in corporate tax rate cannot be ruled out 6
Q1 What would be the revised Corporate tax rate given the reduction of incentives? 15 to 18 2.19% 18 to 22 16.39% 22 to 25 81.42% The industry is not expecting any unanticipated sweeping reduction in the tax rate. A significant majority feels that the reduced tax rate (if any) would be around 25%. Q2 Will the surcharge on income tax on domestic taxpayers be reduced? Yes, it will not exceed 37.91% 62.09% No change is expected A clear majority expects no change in the surcharge rate 7
Q3 Would the Minimum Alternate Tax (MAT) be abolished or reduced? MAT would be abolished MAT rate would be reduced No change would be there 12.02% 29.51% 58.47% It appears that the industry does not expect immediate reduction of MAT, either because there is no such indication from the Government or because the difference between book profit tax and normal tax may come down as a result of a reduction of incentives and tax rates. Q4 Would the implementation of GAAR be deferred? No Yes, by 32.79% a year 33.33% Yes, deferral by more than a year 7.10% Can t say 26.78% The industry seems to be divided in their expectation regarding deferral of GAAR, with a larger share of the participants expecting GAAR to be deferred by a year. It is noteworthy that a significant number of participants are uncertain about the future direction. 8
In view of the Make in India campaign, do you think the Government will Q5 continue with certain income tax incentives/deduction? Yes, sector specific incentives/ deductions would be allowed to continue No, all tax 72.13% incentives would be phased out as 19.67% Can t say 8.20% planned A significant majority is hopeful that sector-specific exemptions/incentives would be continued. This may continue to support the Make in India campaign. Q6 Do you think the Government may reconsider phasing out tax exemptions? Yes, the exemptions would be reconsidered No, 43.72% exemptions would be 47.54% Can t say 8.74% phased out Corporates are equally divided on their expectation of reconsideration on phasing out exemptions. To reduce the corporate tax rate, it is imperative to phase out the tax exemptions, so that the Government can meet its fiscal target. 9
EY comment The objectives of the Government s tax policy seems to be to achieve lower tax rates, widen the tax base and simplify the tax law with fewer incentives. The survey does not suggest an expectation of a radical change in the tax policy and rates. However, the industry does expect some reduction in the tax rate, while phasing out of tax incentives is inevitable. Reduction in the corporate tax rate is expected only by way of a reduction in the base rate, while the rate of surcharge is expected to remain the same. Similarly, in case of MAT, while abolishment seems a distant dream, a reduction in the rate would be a welcome decision. The Government seems determined and prepared for the implementation of GAAR provisions. However, it may be desirable to defer it by a year till the time clear guidelines are laid down by the Government for the implementation. 10
The industry applauds the efforts made to improve tax certainty but needs faster action
Q1 Post demonetization, do you think the Government would reduce personal tax rates or revise the threshold limit to put more disposable income in the hands of the common man to increase consumption and demand? Yes, peak personal tax rate would be reduced to 25% Yes, the threshold limit would be enhanced to INR 5 lakh No measures needed on personal tax front Current system, with DDT reduced will be retained 35.78% 59.17% 5.05% 25.69% Almost 60% of the respondents feel that the threshold limit for personal income tax rates would be enhanced to INR 5 lakh. This may increase disposable income and thus increase demand and consumption after demonetization but, at the same time, reduce the taxpayer base. 12
Q2 Would the dividends taxation policy change to the classical system, i.e., taxing the dividends in the hands of the shareholders? Yes, this is progressive tax No, the current system would continue 21.10% 53.21% More than 50% of the respondents feel that the current system of taxing dividends will continue. The classical system of dividend taxation would mean the burden of tax will shift in the hands of the shareholders. Q3 Do you expect the fiscal deficit to take a dip after the collection of INR 65,000 crore from the Income Declaration Scheme and higher revenue collection from improved tax compliance after demonetization? Yes, the fiscal deficit will take a dip The situation may remain the same 69.27% 30.73% 13
Close to 70% of the respondents feel that the fiscal deficit will take a dip. The support from additional revenue collections should give some fiscal room for the Government to lower the tax burden. Q4 Has India done enough to improve tax certainty by focusing on mechanisms to minimize and resolve tax disputes? Yes, positive results can be seen Efforts are being made, but progress is slow 10.09% 64.68% Nothing has improved at the ground level 25.23% About 75% of the respondents feel that there are visible efforts to improve tax certainty by focusing on mechanisms to minimize and resolve tax disputes, but a majority believe the progress is slow. Tax Tax Tax 14
Q5 Which of the following dispute minimization mechanisms has been the most effective? Advance Pricing Agreements (APA) Dispute Resolution Panels (DRP) 47.25% 16.51% Safe Harbour 5.50% Authority for Advance Rulings (AAR) 22.94% Mutual Agreement Procedure (MAP) 7.80% 47% of the respondents stated that APAs have been the most effective dispute resolution mechanisms, followed by AAR. 111 APAs have been signed as on date since 2014 15. The mechanisms of the Authority for Advance Ruling and Dispute Resolution Panels might need to be made more effective by increasing the number of benches and providing strict timelines for disposal of cases. 15
Q6 Keeping in view the revisions in the India-Mauritius treaty, do you anticipate a review of capital gains taxation policy during Budget 2017-18? Yes 47.47% No 21.66% Can t say 30.88% More than 47% of the respondents anticipate a review of the capital gains taxation policy in this Budget. The Mauritius Treaty amendments have created a level playing field between resident and nonresident investors to a large extent. This significant step, coupled with other positive factors such as improving FDI, current account deficit and inflation, may create an opportunity to also relook at the entire domestic capital gains regime for rationalization and simplification. The Indian tax law has evolved over the years with several complexities. For instance, the threshold for qualifying as long term varies from 12 months to 24 months to 36 months for different instruments. Similarly, there are differential regimes for different instruments, e.g., preferential tax treatment for listed shares and certain mutual funds, and differential indexation regime for debentures and bonds. 16
Q7 GAAR is scheduled to be implemented in India from April 2017 and an equalization levy was introduced by the Government in the last Budget. Is the government likely to implement more such anti-avoidance measures during the Budget session? Yes, there may be more anti-avoidance measures, particularly in line with BEPS agenda 84.33% No 15.67% A significantly high number (84%) of the respondents feel that more anti-avoidance measures, particularly in line with the BEPS agenda, will be introduced during the Budget session. Given the need to improve the tax GDP ratio while keeping the corporate tax rate low, checking tax avoidance and base erosion is high on the Government s agenda. 17
EY comment The Finance Minister is likely to maintain focus on lowering the tax burden to boost investments and on bringing certainty and simplicity in taxation. To improve the tax GDP ratio, the Government is expected to continue its efforts toward preventing base erosion. To meet the expectations following demonetization, some relief in personal income taxes seems to be a major change expected during the Budget. On the corporate taxation side, though the respondents want no change in the dividend taxation system, on grounds of equity and avoiding double taxation of the same income at the corporate level, the classical system of taxing dividends (taxing in the hands of shareholders) may be considered. A reduction in the fiscal deficit as a result of the collections from the Income Declaration Scheme and demonetization should give the Government some fiscal room to reduce the tax burden on corporations as well as individuals. The Budget may see a review of capital gains taxation in India. The key objectives to guide the new capital gains tax regime should be neutrality (i.e., uniform treatment of all incomes and sectors), progressivity, 18
simplicity, minimal adverse impact of the lock-in effect due to realization basis of taxation, and stability/ certainty. India has been an active participant in the BEPS discussion, and the topic has been high on the Government s agenda. With GAAR expected to be implemented from this year, more such anti-avoidance measures are expected to be introduced during the Budget session. Over the past months, the Government has undertaken many positive tax reforms to bring consistency and coherence in tax policy. Significant clarifications were issued to bring clarity and certainty in taxation, and steps are being taken to improve ease of compliance and improve dispute resolution. But the translation of the announced reforms into effective implementation has been slow, and there exists a lag between the policy and on-ground action. Hence, it is important for the Government relook at the on-ground implementation of mechanisms to minimize and resolve tax disputes. On disputes resolution mechanisms, the mechanisms of the AAR and DRP need to be made more effective by increasing the number of benches and providing strict timelines for the disposal of cases. These findings are based on an EY survey of 218 CFOs and senior finance/tax professionals conducted from Dec 2016 to early Jan 2017. 19
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