By Invitation. What’s changed with the Finance Bill

Passage of the Finance Bill, albeit customary, stands out as one chief legislative agenda for a ruling government despite it being a money Bill, which requires majority only in the Lower House. The 2016 Bill received presidential assent after Parliament approved the changes and insertions to calibrate tax proposals presented by the Finance Minister on the floor of the House.

Tax proposals in this year’s Budget were crafted around the policy objective of evolving a more predictable tax regime, phasing out tax incentives while rationalising tax rates, encouraging private investments in infrastructure sector, promoting indigenous value creation and entrepreneurship, extending relief to marginal taxpayers whilst taxing the super rich and finally, aligning domestic tax legislation and administration with global best practices in the wake of adoption of Base Erosion and Profit Shifting (BEPS) rules.

Rationalisation of corporate tax rates for manufacturing and small and medium scale businesses is a precursor to the government’s commitment to phased reduction of headline corporate tax rate to 25 per cent, particularly in the wake of the impending sunset on profit-linked tax incentives with effect from April 2017 (April 2020 in case of SEZ units). Clarification on the capital gains tax rate for shares held in closely-held companies will reduce the exit cost for strategic investors, and also help resolve avoidable tax disputes. A reduced holding period for unlisted shares (two years from three, earlier) to qualify as long term would facilitate secondary market exits of investors at reduced tax cost.

On the flip side, additional dividend tax on individuals and firms receiving the money was an unpleasant surprise for investors. Even though the new levy can be argued to be in sync with ‘taxing the rich’ principle underlying the Budget, I wonder if a threshold of ₹10 lakh is adequate to label the recipient ‘super rich’!

A three-year income tax holiday for start-ups, and rationalised capital gains taxation for resident individual investors investing in start-ups will provide much-needed fillip to this flagship programme.

A couple of nuances remain unaddressed; whilst the Startup Action Plan held out the promise of capital gains exemption for investors holding shares of start-up enterprises, the fine print didn’t contain such an exemption. MAT continues to be a worry for start-ups; there is a strong case for a reduced MAT rate for start-ups. Clearly, these are unintended mishaps and hopefully would be dealt with in due course.

To encourage indigenous R&D capabilities, the government has ushered in a patent box regime, permitting eligible business to opt for presumptive taxation of royalty income.

This is a progressive tax policy move and aligns with best international practices for promoting the country as a preferred R&D centre. The regime has been made ‘optional’ by an amendment to the Finance Bill, to retain flexibility for investors with high cost structure.

The Budget handed out near-complete tax pass-through status to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs), by exempting Special Purpose Vehicles (SPVs) held by REITs and InVITs from dividend distribution tax (DDT). This move would be a catalyst for business trusts to emerge as a preferred long-term fund pooling vehicle. However, the taxability of investors on the rental income arising from property held directly by REITs and InVITs continues to remain unclear.

Implementation of General Anti-Avoidance Rules (GAAR) from April 2017, in tandem with introduction of anti-abuse provisions in tax treaties are significant tax policy measures to deal with BEPS practices.

To facilitate effective information sharing, particularly in Transfer Pricing matters, the Finance Act 2016 has introduced the Country-by-Country Reporting (CbCR) rules to overhaul the manner and extent of documentation requirements for multinationals in India.

Taxpayers, however, expect the government to issue appropriate clarification as to confidentiality of information gathered by way of CbCR, and potential impact thereof, if any, with respect to ongoing Transfer Pricing assessments, or bilateral resolution underway under Advance Pricing Agreements or Mutual Agreement Procedure. India has been a source of leading transfer pricing disputes and this move should help bring litigation down.

To sum up, Finance Act 2016 was crafted with a view to usher in structural reforms in tax policy and administration.

It is imperative that now India keeps an eye on the emerging global tax policy landscape which could have far-reaching implications on shaping future tax policy.

The writer is Managing Partner, BMR Legal, assisted by Sumit Singhania. The views are personal