Budget 2019: Will the govt live up to the expectations?

By Sunil Badala

Given the current economic outlook and the first Budget of our new Finance Minister, it will be interesting to see what constitutes top priority areas in the government’s agenda to formulate the tax policies and alter/amend the existing ones. The government’s focus has been on increased compliance, reduced litigation and increased transparency in the tax regime.

As the much discussed Direct Tax Code is expected shortly, there may not be too many big bang announcements in the Budget. However, having said that, the government is exploring ways to garner more tax revenue by tapping new sources or digging into existing ones. Therefore, we should not be surprised if there are some big ticket announcements.

In keeping with the demand of the capital markets, there is an expectation that the long term capital gains tax rate, which was brought in last year may be kept constant in the least. There was a huge push back when at a point the thought was to increase it. In order to make the market lucrative, it may be worth considering either reducing it or altogether scrapping it.

In the overall financial services sector reforms, the emphasis largely could be on the stressed assets space. The way the anti-abuse provisions are worded they could perhaps have unintended consequences for buyers of shares of listed companies/companies under Insolvency and Bankruptcy Code (IBC) by attributing deemed income in their hands. It would be good if these provisions are suitably amended to provide that the shares of the defaulting company acquired under the insolvency proceedings of IBC, shall be exempt from the ’avoidance’ provisions and therefore no income is attributed in such buyers’ hands. The mechanism of Minimum Alternate Tax should also be modified to grant relief until the time the company’s expected turnaround considering the resolution plan submitted to the National Company Law Tribunal. This is likely to result in carrying forward of entire brought forward book loss and depreciation for set-off in future years, thereby making an acquisition of distressed companies more lucrative.

As it has been seen, the financial services sector is integral to the success of the reforms agenda. What is expected is some impetus to the sector to unclog the liquidity conundrum. Public sector banks, still reeling under the burden of bad assets and mounting losses, would require a significant amount of capital infusion. As banks are likely to access capital markets for the money, one impetus would be to allow them to issue special bonds either tax free or where the interest is taxable at a lower rate.

One change the NBFC sector has been fighting for is to be at par with banks qua thin capitalisation norms. There is a need to extend the exemption from thin capitalisation norms to systemically important NBFCs at least.

There are a lot of expectations and hope from this government which was elected with a unanimous majority.
Hope Union Budget 2019-20 lives up to the expectations from the financial markets perspective.

The author is National Leader Financial Services, Tax, KPMG in India.