Income Tax 31 Jan,2020
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Takeaways from Economic Survey 2019-20
Editorial Team

The Finance Minister, Smt. Nirmala Sitharaman, tabled the 'Economic Survey 2019-20' in the Parliament on January 31, 2020. It is an annual document which reviews the developments in the Indian Economy in the running financial year.

As per the survey, in the World Bank's Index of Ease of Doing Business India has jumped from 142nd rank in 2014 to 63rd rank in 2019. It has progressed on seven out of the 10 parameters. The Goods and Service Tax (GST) and the Insolvency and Bankruptcy Code (IBC) top the list of reforms that have propelled India's rise in rankings. The previous Economic Survey had argued that the single biggest constraint to ease of doing business in India is its inability to enforce contracts and to resolve disputes.

The Economic Survey has been presented in the Parliament in two volumes. Volume-I provides evidence-based analyses of recent economic developments. Volume-II reviews recent developments in the major sectors of the Economy and is supported by relevant statistical tables and data. This would serve as the ready reckoner for the existing status and policies in a sector.

The key takeaways from the Economic Survey related are enumerated below:

1. DIRECT TAXATION

Direct-tax collections

Budget 2019-20 had estimated the gross tax revenue of Rs. 24.61 lakh crores (11.7% of the GDP). The direct taxes, comprising mainly of corporate and personal income tax, constitute around 54% of Gross-tax revenue. The direct taxes were estimated at 6.3% of the GDP in the financial year 2019-20. Receipts from corporate and personal income tax have improved over the last few years. Better tax administration, widening of TDS net over the years, anti-tax evasion measures and increase in effective taxpayers base have contributed to direct tax buoyancy. The actual realisation of net tax revenue during the year 2019-20 (up to November 2019) to the Centre has been 7.51 lakh crore which was only 45.5% of the Budgeted estimates.

Measures taken in the field of direct taxation

(a) To remove the existing human interface and personal interaction prevailing in the assessment procedure, a scheme of faceless electronic assessment was launched by the Govt.

(b) The turnover limit for the reduced corporate tax rate of 25% was increased to Rs. 400 crore (in the financial year 2017-18) benefiting around 99.1% companies incorporated in India.

(c) MAT rate has been reduced from 18.5% to 15%

(d) Special tax rates at the rate of 15% and 22% have been introduced with respect to specified domestic companies.

(e) Insertion of Section 194M for deducting tax at the rate of 5% from payment made to contractors or professionals exceeding Rs. 50 lakhs and Section 194N for deduction of tax at the rate of 2% from cash withdrawn in excess of one crore.

(f) Gifts made to non-residents were also brought under the ambit of Income Tax, wherein certain gifts made to non-residents on or after 05-07-2019 were deemed as income of such non-residents subject to the provisions of DTAA between India and other countries.

(g) PAN and Aadhaar had been made interchangeable implying that a person who has not yet been allotted PAN or who does not own PAN can furnish Aadhaar in its place.

(h) Department has tried to reduce the litigations by raising the threshold limit for filing of appeals before ITAT, High Court and Supreme Court.

(i)  Incentives were taken to promote Start-ups by the formation of dedicated grievance cell, clarifications on the assessment of start-ups relating to additions made with respect to Angel Tax.

(j)  The enhanced surcharge was introduced at the rate of 25% and 37% on the super rich class of assessees.

2. GOODS AND SERVICES TAX

GST Revenue Collection

GST collection grew by 4.1 per cent for the Centre during April 2019 to November 2019. The GST collection for Centre as well as States for the month of November 2019 was the third-highest monthly collection since the introduction of GST. From April to December 2019, gross GST revenue collection has crossed the mark of Rs. 1 lakh crore by five times.

The increase in GST collections was a result of numerous efforts taken by the Government including extensive automation of business processes, application of e-way bill mechanism, targeted action on compliance verification, enforcement based on risk assessment and proposed introduction of electronic invoice system.

Steps taken by the Govt. to improve GST compliance by taxpayers

(a) E-Way Bill: Facility to compare data from the e-way bill portal with GST portal enables verification of the supply of goods involving physical movement. PIN code (origin) to PIN code (destination) distance mapping in the e-way bill system prevents over-reporting of distance for multiple trips.

(b) Returns filing status: The availability of information on the return filing status in public domain of GST portal enables the buyers to choose the compliant taxpayers for doing business, thereby minimizing the business risk of timely availment of ITC.

(c) Reporting Mismatches: In case the liability declared in GSTR-3B is lesser than GSTR-1, or the ITC claimed in GSTR-3B is more than GSTR-2A, a comparison of this anomaly is visible on suppliers GST dashboard to induce the taxpayer to correct it and avoid future litigation. This comparison of mismatch is available on a monthly basis. Taxpayers are also intimated of such mismatch in data through SMS.

(d) Due Date Reminders: SMS are sent to registered persons for reminding about the upcoming due date of filing summary return in Form GSTR-3B.

(e) Free accounting and billing software for small taxpayers: GST Council has decided to offer free services like preparing invoices, GST returns, Income Tax returns, Balance sheet and Profit & Loss statement through accounting & billing software for the small businesses.

(f) Acknowledging Compliant Taxpayers: Government has decided to issue a certificate to compliant GST taxpayers and acknowledge their contribution towards nation-building. This appreciation serves to motivate taxpayers to continue their compliant behaviour in future as well.

Measures taken during 2019-20

(a) Fully Automated Return System: To implement the idea of invoice level reconciliation by following the sequence of returns GSTR-1, GSTR-2 and GSTR-3, the New Return System is proposed to be introduced w.e.f. 01-04-2020. The new system aims to reduce manual efforts and uses technology extensively by having a single main return (GST RET-1/2/3) supported by two annexures (GST ANX-1 & GST ANX-2).

(b) Fully electronic refund process and single disbursement: The necessary capabilities for making the refund procedure fully electronic through Form RFD-01 have been deployed on the GST portal with effect from 26-09-2019. To reduce undue hardship to the refund applicants, both the sanction order and the corresponding payment order for the sanctioned refund amount, under all tax heads, i.e., CGST, IGST, SGST, UTGST and Compensation Cess is issued by one officer only.

(c) Rationalization of cash ledger: Unified cash ledger merging 20 heads into 5 major heads, will be rolled out, w.e.f, 01-02-2020.

(d) Quoting of DIN: CBIC w.e.f. 08-11-2019 has introduced Document Identification Number (DIN), for all communications sent by its offices to taxpayers and other concerned persons. Presently DIN is applicable for search authorization, summons, arrest memos, inspection notices and letters issued in the course of any enquiry.

(e) Sabka Vishwas (Legacy Dispute Settlement) Scheme 2019: The scheme is a one-time measure for liquidation of past disputes of Central Excise, Service Tax and 26 other indirect tax enactments. It provides an opportunity for voluntary disclosure to non-compliant taxpayers. The scheme provides that eligible persons shall declare the unpaid tax dues and pay the same as per the provisions of the scheme. The scheme provides for certain immunities from penalty, interest or any other proceedings including prosecution to those persons who pay the declared tax dues.

(f) Electronic invoicing and Quick Response Code: The Government has proposed to introduce an electronic invoicing system (e-invoice) for all B2B invoices in a phased manner. Phase 1 would be voluntary and is proposed to be rolled out from Jan 2020. E-invoicing shall be mandatory for those having annual turnover of more than 100 crores w.e.f. 01-04-2020. This would help in a seamless flow of credit and invoice matching as envisaged in the GST regime. It is also proposed to implement the system of invoice with dynamic QR code for all B2C invoices for the taxpayers having annual aggregate turnover of more than 500 crores w.e.f. 01-04-2020.

(g) Small Taxpayers exempted from filing Annual Returns: The exemption has been granted to small taxpayers having annual aggregate turnover of Rs. 2 crores and less from filing of annual returns in Form GSTR 9 for the period 2017-18 and 2018-19. Also, if these taxpayers have not filed their annual returns by the due date, it should be considered as deemed to be furnished by the due date.

(h) Changes in Rates of goods: The changes in GST rates during the year 2019 have been made to make the GST rate structure simpler, promote exports, address issues of credit accumulation, resolve the dispute for past periods, etc. The details are:

  Description Old Rate New Rate
  Electric Vehicle 12% 5%
  Charger or charging stations for Electric Vehicles 18% 5%
  Marine Fuel 0.5% (FO) 18% 5%
  Dried tamarind and Plates and cups made up of leaves/ flowers/bark 5% NIL
  Cut and polished semi- precious stones 3% 0.25%
  Goods falling under Chapter 86 of GST tariff like railway wagons, coaches, rolling stock (without refund of accumulated ITC) 5% 12%
  Caffeinated Beverages 18% 28%

(i)  Changes in rates impacting real estate sector: To boost real estate sector, GST at the effective rate of 1% without ITC on affordable residential apartments and 5% without ITC on residential apartments outside affordable segment has been levied with effective from 01-04-2019. Intermediate tax on development right, such as Transfer of Development Rights, long term lease (premium), Floor Space Index has been exempted.

(j)  Changes in rates impacting hotel industry: GST rate on hotel accommodation service are redistributed under following tax slabs:

  Declared tariff per unit per day GST
  Rs. 1,000 and less Nil
  Rs. 1,001 to Rs. 7,500 12%
  Rs. 7,500 and more 18%

3. CORPORATE LAW

Ease of doing business in India

India has jumped 79 positions in World Bank's index of Ease of Doing Business, improving from 142nd rank in 2014 to 63rd rank in 2019. However, it continues to trail in parameters such as Ease of Starting Business (rank 136), Registering Property (rank 154), Paying Taxes (rank 115), and Enforcing Contracts (rank 163).

Enforcing a contract in India takes on average 1,445 days in India compared to just 216 days in New Zealand, and 496 days in China. Paying taxes takes up more than 250 hours in India compared to 140 hours in New Zealand, 138 in China and 191 in Indonesia. These parameters provide a measure of the scope for improvement.

Setting up and operating a service or manufacturing business in India face a maze of laws, rules and regulations. Many of these are local requirements, such as burdensome documentation for police clearance to open a restaurant. This must be cleaned up and rationalized one segment at a time.

Public Sector Banks (PSBs)

Since 1969, India has grown leaps and bounds to become the 5th largest economy in the world. Yet, India's banking sector is disproportionately under-developed given the size of its economy. For instance, India has only one bank in the global top 100 – same as countries that are a fraction of its size: Finland (about 1/11th), Denmark (1/8th), Norway (1/7th), Austria (about 1/7th), and Belgium (about 1/6th). Countries like Sweden (1/6th) and Singapore (1/8th) India's size have thrice the number of global banks as India does.

As PSBs account for 70 % of the market share in Indian banking, the onus of supporting the Indian Economy and fostering its economic development falls on them. Yet, on every performance parameter, PSBs are inefficient compared to their peer groups.

An average loss of 23 paise per rupee of taxpayer's money in PSBs

In 2019, every rupee of taxpayer money invested in Public Sector Banks (PSBs), on average, lost 23 paise. In contrast, every rupee invested in New Private Banks (NPBs licensed after 1991) on average gained 9.6 paise. Also, credit growth in PSBs has been much lower than NPBs for the last several years.

In 2019, PSBs' collective loss— largely due to bad loans—amounted to over Rs. 66,000 crores, an amount that could nearly double the nation's budgetary allocation for education.

Recommendations by the Economic Survey for PSBs:

(a) Use of technology across all banking: The survey suggests the use of FinTech (Financial Technology) across all banking functions and employee stock ownership across all levels to enhance efficiencies in PSBs. These will make PSBs more efficient so that they are able to support the nation towards being a $5 trillion economy.

(b) Incentivize employees through ESOPs: To incentivize employees and align their interests with that of all shareholders of banks, bank employees should be given stakes through an employee stock ownership plan (ESOP) together with proportionate representation on boards proportionate to the blocks held by employees.

(c) Use of GSTN type entity to enable AI, big data for better decisions: A GSTN type of entity should be set-up to enable the use of big data, artificial intelligence and machine learning in credit decisions, especially those pertaining to large borrowers. As Government is the owner of all the PSBs, Government has the right to use the data that PSBs generate during their business. Therefore, the Government, as the promoter, must set up this entity that will aggregate data from all PSBs to enable decision making using big data techniques. The patterns in default that such powerful techniques can unearth are far beyond the capacity of any unscrupulous promoter to escape. Therefore, such investments are critical to ensuring better screening and monitoring of borrowers, especially the large ones.

With the cleaning up of the banking system and the necessary legal framework such as the Insolvency and Bankruptcy Code (IBC), the banking system must focus on scaling up efficiently to support the Economy.

4. PRIVATIZATION AND WEALTH CREATION

The Economic Survey mull for undertaking aggressive disinvestment to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in management in the selected CPSEs for which the Cabinet has given in-principle approval.

The best example of disinvestment reported in economic survey was for Bharat Petroleum Corporation Limited (BPCL) "Approval for strategic disinvestment of Government's shareholding of 53.29 per cent in Bharat Petroleum Corporation Limited (BPCL) led to an increase of around Rs. 33,000 crore in the value of shareholders' equity of BPCL when compared to Hindustan Petroleum Corporation Limited (HPCL). This translates into an unambiguous increase in the BPCL's overall firm value, and thereby an increase in national wealth by the same amount."

A comparative analysis of the before-after performance of 11 CPSEs that had undergone strategic disinvestment from 1999-2000 to 2003-04 reveals that net worth, net profit, return on assets (ROA), return on equity (ROE), gross revenue, net profit margin, sales growth and gross profit per employee of the privatized CPSEs, on an average, have improved significantly in the post privatization period compared to the peer firms

The ROA and net profit margin turned around from negative to positive surpassing that of the peer firms which indicates that privatized CPSEs have been able to generate more wealth from the same resources.

The analysis affirms that disinvestment (through the strategic sale) of CPSEs unlocks their potential of these enterprises to create wealth evinced by the improved performance after privatization.