Sour economy expecting a sweet Budget

Sour economy expecting a sweet Budget

Finance Minister Nirmala Sitharaman(R) and Minister of State for Finance Anurag Singh Thakur(L) during 'Halwa' ceremony marking the commencement of Budget printing process for the General Budget 2019-20, in New Delhi, Monday, Jan. 20, 2020. (PTI Photo)

Pictures of the halwa ceremony this time around are bringing in a ray of hope to an anxious economy, that has lately gone sour.  The real sweetness of this “halwa” would be savoured on 01 February when the budget proposals will be announced. Amid the slowing economy and sluggish demand, a lot is expected so as to reach the elusive $5 trillion club.

The impact of slashing the tax rates for corporations has not been able to lift the economy, perhaps since non-corporate entities are still taxed at a higher rate. Budget 2020 should establish an even playing field, by bringing parity for non-corporate entities by lowering tax rates. In addition, a simplified administration by extending the scope and limits for presumptive taxation will permit SME enterprises to reduce their compliance costs and promote ease of doing business.

Each year, individual taxpayers crave for lower tax slabs; the proposals in Budget 2020 may fulfill this to a reasonable extent with an aim to leave more disposable income and thus boost demand. The Budget may also offer a higher deduction for investments in long term government savings schemes, which will not only reduce the tax burden on individuals but also provide the much needs funds to fuel economic growth. The FM should also re-evaluate the taxation on capital market instruments to ensure that savings are directed towards financial investments, especially in the listed space.

The revival of the real estate sector will spill over to other sectors and for this, the cap on interest deduction on home loans should be done away with and more incentives are granted for affordable housing.

The proposals are expected to also include measures to boost investment in start-ups, clarify the taxation of AIFs and business trusts, and extend the benefit of lower withholding tax on external borrowings. Additionally, to foster consolidation and M&A, the benefit of tax deferral or neutrality should be extended to share swap, treat capital gains on earn-outs as taxable upon actual realisation, exclude the transfer of shares intra-group from deemed taxation provisions and layout rules for taxation of outbound mergers.

As the nation anxiously awaits the upcoming budget, we hope it brings a sweeter taste that is relished by all and supports the revival of economic growth. In reality, this might just turn out to be a fine balance of sweet and sour!

(The writer is the Partner, Transaction Tax, Tax & Regulatory Services at BDO India)