Individuals seek tax rate cuts: KPMG survey

By Hitesh D. Gujaria

India’s Union Budget for 2020 is scheduled to be presented on 1 February 2020. It is expected that the Finance Minister will consider several far-reaching economic and fiscal measures to boost India’s economic growth.

KPMG in India has through its pre-budget survey conducted in January 2020 tried to capture the expectations of key stakeholders on various tax aspects of the budget. The findings of this survey are briefly set out below:

Direct tax rates

• The year 2019 saw the government implement significant tax cuts for domestic companies (to 22 per cent) and for newly set up manufacturing companies (to 15 per cent) subject to their giving up available incentives and deductions. More than half the respondents plan to opt for the lower tax regime of 22 per cent by giving up available incentives from FY 2019-20. A majority of respondents also believe that the rate of tax for foreign companies should also be reduced in light of the tax cuts for domestic companies.

• A further stimulus by way of personal tax cuts is now anticipated. A large majority of respondents anticipate that the basic exemption limit of INR2.5 lakh for individuals will be increased. Respondents also expect the Finance Minister to increase the income limit at which the maximum marginal rate of 30 per cent kicks in. If implemented, these moves can help spur consumer demand by complementing the interest rate cuts delivered since last year.

• Enhancements in the deduction under section 80C, the standard deduction and other exemption limits for House Rent Allowance (HRA), children education allowance, etc. are also anticipated by the survey respondents.

• As regards corporate taxes, a little over 50 per cent of respondents believe that the existing dividend distribution tax levied on dividends declared by domestic companies should be replaced by an investor level tax on dividends.

Inheritance tax

• A majority of respondents also believe that the Finance Minister will not introduce inheritance tax. This is in line with the overall expectation that there is a need for providing a fiscal stimulus by reducing taxes on individuals.

Extending tax incentives/holidays

• Keeping in line with the government’s focus on ‘Make in India’, 70 per cent of respondents expect that the weighted deductions currently available for expenditure incurred on in-house research and development to be extended beyond the current sunset period of 31 March 2020.

• Around 50 per cent of the respondents expect the tax holiday for exports available to Special Economic Zone (SEZ) units be extended beyond 31 March 2020.

Transfer pricing

• A large majority of respondents believe that the safe-harbour regulations need a revamp from an administrative standpoint. It is expected that this will make them more acceptable from the point of view of both taxpayers as well as the tax authorities. Respondents are also divided on the readiness of India to undertake risk-based transfer pricing assessments for cases selected on the basis of master file and the country-by-country reports filed and exchanged.

Capital markets

• On the capital markets front, the survey has thrown up some interesting results. While the reintroduction of tax on long term capital gains on listed securities was controversial when it was introduced in 2018, only about 52 per cent of the respondents felt that it should be rolled back. Similarly, there was a muted response to the scrapping of Securities Transaction Tax (STT) on securities, with only 41 per cent in favour of its abolition.

Use of technology

• The use of technology in tax administration has gotten a thumbs-up from survey respondents. A significant majority believes that the faceless e-assessment scheme announced in the last budget will lead to greater transparency and efficiency in the assessment process. As a result, a majority of respondents believe that the e-assessment proposals will prove beneficial to taxpayers.

• About 71 per cent of respondents believe that the time, effort and cost involved in tax compliances has increased in the last few years, while 23 per cent think otherwise. Most respondents have however adopted technology in their tax systems with usage across GST compliance, e-invoicing, tax litigation, digitisation of records and tax computation.

Dispute resolution

• Dispute resolution continues to be an area of concern among survey respondents. Almost half the respondents believe that the approach of revenue authorities in dealing with international taxation issues are not in line with international norms. While Dispute Resolution Panel (DRP) is indeed a fast-track mechanism intended to address international tax and transfer pricing disputes, it clearly emerges from the responses that almost half of the respondents believe that DRP mechanism is not meeting its objective of resolving disputes amicably.

• Interestingly, a majority of respondents believe that the law should provide for a mechanism for negotiated settlement of disputes in litigation.

Indirect tax

• Just under 50 per cent of respondents believe that the provisions dealing with the place of supply of R&D, testing services and other performance-based services under GST are detrimental to the export of services. Since persons in India who render such services to customers outside India also contribute foreign exchange for the country, the exclusion of such services from the ambit of export of services is seen by respondents as affecting exports.

(The author is Partner and Co-Head, Tax, KPMG in India)