Corporate tax rate
Currently, companies whose gross receipts or turnover does not exceed a certain threshold are eligible for a reduced tax rate of 25 per cent. This benefit is not available to other companies, limited liability partnerships (LLP) and firms, who are resident in India and are taxable at 30 per cent.
The rate of tax in most developed countries is much lower, e.g. 21 per cent in the US, 19 per cent in the UK. To promote economic growth, boost investment in India and to increase tax collections, it may be a welcome move to reduce the tax rate to 25 per cent for all domestic companies, LLPs and firms.
Dividend Distribution Tax (DDT)
Dividend was initially taxable in the hands of shareholders. The Finance Act, 1997 first introduced DDT, wherein the rate of DDT was 10 percent. Currently, the effective rate of DDT is 20.56 percent after grossing up.
Foreign shareholders may not get credit for DDT paid in India with exceptions for certain countries. Accordingly, it may be beneficial if dividend is taxed directly in the hands of the shareholders, like the erstwhile system. This will enable foreign shareholders to claim foreign tax credit for taxes paid in India.
Deductibility of expenditure incurred in respect of activities relating to Corporate Social Responsibility (CSR)
Explanation 2 to section 37(1) of the Income-tax Act, 1961 provides that CSR expenditure, not being an expenditure incurred for business, shall not be eligible for deduction while computing the taxable business profits. CSR expenditure is mandatory under the Companies Act, 2013. Accordingly, the same should be allowed as a deduction.
Obligation of filing return of income in India
At present, non-residents and foreign companies earning only interest income or dividend income do not have the obligation to file income-tax return in India wherein tax has been withheld. It may be preferable if similar benefit is extended to income earned in the nature of royalty and fees for technical services wherein taxes have been withheld.
Consolidated tax return
Under consolidated tax filing system, the main entity of the group is responsible for all or most of the group’s tax obligations / compliances. This will enable to minimise administrative cost. It may be considered to introduce this concept in a phased manner with implementation first on listed companies.
Standard deduction from salary income
The Finance Act, 2018 has introduced a standard deduction from salary income up to Rs 40,000 in lieu of reimbursement of medical expenses and transport allowance. It will be a welcome proposal if the government enhances the limit of the standard deduction to reduce the tax burden on salaried individuals.
National Pension Scheme (NPS)
The withdrawals made from the NPS on closure of account or on opting out of NPS, are taxable in the hands of the employee to the extent of 60 percent. This is not in parity with other schemes. It may be considered to fully exempt the said withdrawals from NPS to promote more individuals to be a part of the NPS.
It will be interesting to see what Budget 2019-20 has in store for taxpayers at large.