Interim union budget: hits and misses

By Amit Singhania and Gouri Puri, Shardul Amarchand Mangaldas
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TAXATION

Few would disagree that the first term of the Modi government brought in bold tax reforms, including the introduction of a nationwide goods and services tax, demonetization and a crusade against “black” money, abolition of the capital gains tax exemption on on-market transactions, and closure of the Mauritius tax treaty route.

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Amit Singhania

It is small surprise that despite the convention of governments presenting a modest budget before general elections (scheduled for May), the business community harboured some hope that the Modi government’s interim budget would address a few, if not all, tax issues affecting them.

However, sticking to convention, the government did not make any significant policy or tax-related announcements. The policy announcements were largely agrarian/rural focused or targeted small and medium-level enterprises.

Instead, the government espoused its 10-year vision for the economy and set out a 10-point agenda that focuses on building India’s social and physical infrastructure, expanding rural industrialization, developing a digital economy, promoting a healthy and pollution-free nation, developing India’s space programmes and achieving food security, giving perhaps a glimpse of the future for proposals in the annual budget later this year.

The government once again called on its mantra of minimum government and maximum governance as the way forward to becoming a US$5 trillion-dollar economy in the next five years, and aspirations of becoming a US$10 trillion-dollar economy in the subsequent eight years thereafter.

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Gouri Puri

On the income tax front the changes were centred on the lower to middle income group of individual taxpayers. The introduction of a complete tax rebate for individuals with an annual income of up to ₹500,000 (US$7,000) was a key highlight. Even tax savvy individuals in higher income brackets of ₹650,000 or so can have this rebate by investing in approved retirement plans, medical insurance, etc.

Additionally, the standard deduction for salaried individuals has increased from ₹40,000 to ₹50,000. The proposal for raising the threshold for deduction of tax at source on interest earned on bank and post office deposits, from ₹10,000 to ₹40,000, is also slated to provide much relief to small taxpayers who would otherwise have to claim a refund of excess taxes deducted at source in their tax returns. Similarly, the government’s proposal to increase the threshold for deducting tax at source on annual rent, from ₹1,80,000 to ₹2,40,000, will fare well with middle income earners, reducing their compliance burden.

The interim budget also provides tax breaks for investments by individuals in a second home. Indian tax law levies tax on notional rental income arising from house properties (even where such a house property is not rented). However, one self-occupied house property is exempt from such notional rent taxation.

The budget has extended such exemption to two self-occupied homes per individual. Similarly, Indian tax laws allowed individuals a rollover benefit for reinvestment of long-term capital gains, realized on the sale of an existing home, to purchase or construct a house. Such rollover benefit has now been extended to reinvestment in two residential properties for long-term capital gains of up to ₹20 million. Although aimed at benefiting the salaried class, these tax proposals would certainly also give impetus to India’s housing market.

Additionally, the interim budget has extended the 100% tax holiday provided to businesses developing affordable housing by one more year, i.e. from 31 March 2019 to 31 March 2020. Moreover, the benefit of exemption from notional rent accorded to builders and developers holding house properties as inventory is proposed to be extended from one to two years from the end of the financial year in which the building is completed.

On a separate note, the finance minister, Piyush Goyal, has shared the government’s ongoing work on a path-breaking technology

that would improve taxpayer services such as processing of tax returns within 24 hours, and simultaneous refunds to taxpayers. His promise of an electronic anonymous assessment process with no personal interface should go a long way in bringing transparency to tax administration and compliance.

As individual taxpayers celebrate, the business community will need to be patient until the final budget is announced in July. Until then, the government has maintained the status quo, promising a more transparent tax administration in the future.

Shardul-Amarchand-Mangaldas-&-CoAMIT SINGHANIA is partner and GOURI PURI is a principal associate at Shardul Amarchand Mangaldas. They can be contacted at amit.singhania@AMSShardul.com and gouri.puri@AMSShardul.com