Income Tax 30 Jan,2020
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Budget 2020 - What may be in store for the taxpayers?
Shailesh KumarPartner, Nangia & Co LLP

Amidst high expectations of the taxpayers and slowing economy, Budget 2020 will surely be a tightrope to walk for the Modi 2.0 government. While India waits to see what the Finance Minister has in store for the taxpayers, it also expects her to address some basic issues like providing necessary push to domestic consumption & demand and at the same time managing fiscal deficit.

As a major step to boost the sentiments of the corporate sector, the government slashed the corporate tax by way of an ordinance. This has escalated the hopes of individual taxpayers also, particularly the middle and higher income groups, who have been denied benefits in the form of reduced rates or slab restructuring since the Budget of 2012. Further, the tax structure in India is complex and needs simplification, while some provisions are huddled together under a single section; others have various internal caps and limits that are difficult to conform to. For instance, Capital gains on securities are taxed at 4 different rates - 10% (LTCG on equity), 15% (STCG on equity), 20%(LTCG other than equity) and applicable slab rates (STCG other than equity), in fact, the period of holding for determining nature of capital gain (short term/ long term) is also different for different types of securities, making compliance harder. Budget 2020 must focus on bringing about simplicity, which will not only increase tax revenues but also facilitate greater compliance.

Another provision teething troubles is the section governing Dividend Distribution Tax (DDT). DDT is charged at the rate of 20.56% (after 'grossing-up'), when a company distributes dividend, on income that has already borne the incidence of tax. Additionally, investors in receipt of dividend above INR 10 Lakh are required to pay 10% income tax. In order to bring down the effective tax rate for corporates, it is desired that the provision of DDT be scrapped and the old regime of taxation of dividends in the hands of the shareholders be reinstated. Alternatively, dividends may be made 'tax free' again in hands of individual shareholder.

In pursuance of the government's stated objective of "Ease of doing business", it is sought that the Income Computation and Declaration Standards (ICDS) be scrapped altogether. Introduction of ICDS has led to an increased compliance burden, with little visible benefits in tax collection.

Further, in order to stimulate exports and increase foreign inward remittance, corporates also expect the extension of tax holiday for SEZ units set up after 31st March 2020.

The Budget 2018 re-introduced tax on sale of long-term equity shares or equity oriented funds, which is already subject to Securities Transaction Tax (STT). LTCG exceeding INR 1 lakh is now taxed at 10 per cent without any indexation benefit. To incentivise investment in equities for a long-term and to boost the Indian capital market, exemption on LTCG may be reinstated if shares are held for a minimum period of say 2 years. Additionally, for promoting investment in the debt securities, the Government may introduce additional tax deduction for investment in Debt Linked Savings Schemes with lock-in period.

Extra fiscal stimulus in the form of rationalisation of tax rates and removal of ambiguities in the annual budget will have a far-reaching impact in uplifting the taxpayers' sentiments creating a conducive tax regime for the taxpayers.