Will the note ban windfall bolster the tax kitty?

Finance Minister Arun Jaitley is clearly betting big on the likely fiscal windfall from the recent demonetisation exercise to bolster direct tax revenues for 2017-18.

This is going by the tax revenue projections for the next fiscal in the Budget tabled on Wednesday.

The latest Budget package clearly seeks to tighten the noose on tax evaders and clamp down on black money, while handing out a good deal to compliant middle-class taxpayers, as well as foreign portfolio investors (FPIs) for keeping their faith in Indian markets.

Banning cash transactions above ₹3 lakh — in line with the recommendation of the SIT on black money — may go a long way to reduce black-money generation in the system.

The Centre is also riding on a higher-than-anticipated nominal GDP growth of 11.75 per cent (11 per cent in 2016-17) to deliver the goods on the tax revenue projections front. Higher GDP growth implies increased incomes, which could translate into higher tax receipts.

On the direct taxes side, the emphasis is clearly on the personal income tax front, where a massive 25 per cent increase has been budgeted, taking its share to as much as 45 per cent of the overall direct tax receipts.

The fiscal windfall is expected from both the banned high-denomination notes that have not been returned to the RBI and the higher tax collections arising from increased disclosure under Pradhan Mantri Garib Kalyan Yojana. Both of these are likely to be one-off in nature, and the government has remained non-committal on the magnitudes of the windfall.

It is this expected demonetisation windfall that has seemingly encouraged Jaitley to hand out a bonanza to FPIs.

Jaitley announced in his Budget speech that FPIs (category I and II) will be exempted from the purview of the indirect transfer provisions (popularly referred to as Vodafone tax provisions). The icing on the cake for such FPIs is that the exemption will be in effect on a retrospective basis from April 1, 2012.

Amit Maheshwari, Partner, Ashok Maheshwary and Associates, a CA firm, said: “FPIs can heave a sigh of relief. Now they have reasonable certainty on all key aspects such as Minimum Alternate Tax (MAT), issues on categorisation of income (capital gains vs business income) and indirect transfer provisions.”

Jaitley’s direct tax proposals have some good deals for middle-class taxpayers, although he rued that India is still largely a non-tax compliant country. In his speech, he highlighted that the number of people showing income more than ₹50 lakh in a year in the entire country was only 1.72 lakh.

“We can contrast this with the fact that in the last five years 1.5 crore cars have been sold, and the number of Indian citizens who travelled abroad either for business or tourism stood at two crore in 2015,” Jaitley said.

While handing out relief for the middle class through a cut in tax rate (from 10 per cent to 5 per cent) for individual assesses with income of ₹2.5-5 lakh, he hiked the tax burden for those with income between ₹50 lakh and ₹1 crore through a 10 per cent surcharge. Those earning less than ₹3 lakh annual income will have zero tax liability.

Jaitley’s tax proposals were also reform oriented — a case in point being, shifting the base year for capital gains taxation to 2001 from 1981 earlier.

The Budget has several goodies for the housing sector, including providing infrastructure tag for ‘affordable housing’. The Centre has also taken care of the thorny taxation issue of ‘deemed rental’ on property held as stock-in-trade and not let out during the year.

“The push to affordable housing was a long-standing demand of the developers’ community. The Budget has delivered on it. They can now raise low-cost funds both within India and abroad,” Sriram Kalyanaraman, Managing Director and CEO, National Housing Bank, told BusinessLine .

Taken together with Prime Minister Narendra Modi’s December 31 announcement, this has been the best ever push for affordable housing, he added.

To promote the real estate sector and make it more attractive for investment, the Budget has reduced the holding period from the existing 36 months to 24 months in case of immovable property (both land and building), to qualify as long-term capital asset.

The Budget was disappointing for large corporates with the expected acceleration in corporate tax reduction not becoming a reality. However, relief came the way of small and medium companies. The tax rate is proposed to be reduced to 25 per cent for companies with an annual turnover of less than ₹50 crore/year.

MAT continues to stay, although the Budget seeks to increase the carry forward years to 15 from 10 now.

NPS subscribers have got some tax relief, especially those who want to go in for partial withdrawal. Also, the tax deal has been sweetened for self-employed individuals contributing to the NPS. Additionally, tax deduction of investment up to ₹50,000 under Section 80CCD(1B) will continue to remain the same for all NPS subscribers, salaried or self-employed.

The Budget has also sweetened the tax deal for start-ups by allowing them to avail themselves of 100 per cent tax deduction on any three consecutive years in a span of seven years after incorporation. Earlier, this was permitted only out of the first five years after incorporation.

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