The Union Budget 2019 – myriad changes for corporates and investors
The second female finance minister of independent India, Nirmala Sitharaman, presented her proving budget highlighting the vision of the second tenure of the Modi Government, which bagged a landslide win in the 2019 general elections. The preceding term of the Modi Government marked pioneering reforms such as introduction of the goods and services tax, Insolvency and Bankruptcy Code, demonetization and the like. These ambitious reforms led to an economic slowdown owing to challenges in their smooth implementation.
The 2019 budget was expected to be a populist one, being Sitharaman's first budget in a stable majority government. The Government had set expectations in the Interim Budget in February this year. It had done well to exceed those expectations by not only replicating some relaxations (e.g., rebate for individuals with taxable income up to INR 500,000) but also announcing greater benefits in some areas. For instance, the interim budget had announced revision in the threshold for companies eligible for a reduced corporate tax rate of 25% to turnover not exceeding INR 2.5bn from the earlier INR 500m. This has been revised in the final budget now to a cover a much larger expanse of companies with turnover not exceeding INR 4bn. This reduced corporate tax rate would not only benefit budding start-up entities and small companies but will also be appreciated by medium-sized entities, as it entails additional resources to these entities.
Start-ups, with their ever-increasing relevance to India's economy and investment environment, saw a few more announcements gift-wrapped for them. The benefit of exemption from angel tax for start-ups will be extended for investments raised from Category II alternate investment funds (AIFs) as well. Currently, this is available only for investments raised from Category I AIFs. The compliance norms shall also be eased out. For instance, the finance minister mentioned in her speech that, by filing prescribed declarations, start-ups will be exempt from scrutiny on the valuation of their shares. This shall certainly bring solace to start-ups raising investments. Finance Act 2017 liberalises the carry forward of losses for start-ups for the initial seven years of incorporation subject to conditions. However, the clause relating to any change in shareholding of companies beyond 49% leading to the lapse of carried forward losses is available only to companies other than start-ups. In the current budget, said clause is proposed to be extended to eligible start-ups.
Besides facilitating the economy to benefit from foreign inflows, the government is committed to encouraging a cashless economy and driving digital modes of payment. This drive was evident in the past when the Government introduced various provisions to encourage digital payments. Examples of this include a 2% reduced presumptive profit in respect of turnover for the received banking channel and restriction on accepting payment in cash exceeding INR 0.2mn. Budget 2019 now proposes that tax deducted at source of 2% will be levied on cash withdrawals exceeding INR 10mn in aggregate in a bank account in one year. Further, businesses with annual turnover exceeding INR 500mn shall now offer digital modes of payment to their customers; the related charges shall be absorbed by the Reserve Bank of India and the banks from their savings on account of handling less cash.
The finance minister recommended that the Securities and Exchange Board of India (SEBI) should increase the public float for listed companies from 25% to 35%. It will be interesting to see how the proposition to increase the non-promoter shareholding threshold in public companies is taken by both the exchange board and promoter groups. Further, it has been proposed to introduce buy-back tax on listed companies proposing to undertake the buy-back of their shares. This may result in a higher tax outflow, since the buy-back tax rate is higher than the long-term capital gain tax rate, which was levied in the past on buy-back by listed companies. This is an anti-abuse provision to prevent listed companies from taking advantage of tax arbitrage between the buy-back tax and dividend distribution tax.
India is a large economy, and various multinationals globally have considered it for expansion. To tap such opportunities, the Government liberalised the foreign investment regulations in the past in various sectors. Budget 2019 also spotlighted the Government's focus on making India an open economy. The finance minister proposed 100% foreign direct investment (FDI) for insurance intermediaries, which was favoured by the insurance regulator. It is expected to help attract foreign funds into the intermediaries segment, which includes insurance brokers, agents, financial advisers, etc. Further, it is proposed to ease the local sourcing norms for FDIs in the single-brand retail sector. This will aid in accelerating the plans of various international brands setting up and expanding retails stores in India. Opening 100% foreign investment for aviation, media and insurance intermediaries will help these industries benefit from foreign expertise, collaboration and know-how.
The Government's intent to aid the securities market in India and harness foreign portfolio investment (FPI) is perceptible from the myriad changes proposed in various regulations. SEBI has constituted a working group for rationalizing the existing know-your-customer norms for FPIs. The working group also proposes to review investment restrictions such as the following: liberalized investment cap, reclassification of investment from FPI to FDI and permission to FPIs for conducting off-market transactions. The budget has announced the proposal to increase the FPI investment cap, which is currently 24%, to the applicable sectoral caps. The proposal to merge the non-resident Indian portfolio route with the FPI route is expected to prove to be a single regulatory regime for foreign investors, thus easing compliance requirements.
Not only did the finance minister bring out rejuvenating propositions, she also tried to address some practical challenges that corporates face. One such significant move was the amendment in tax laws, exempting the resulting company from the requirement to record assets and liabilities taken over on demerger at book value to comply with the Indian Accounting Standards.
Overall, the proposed reforms in Budget 2019 are expected to nurture capital-intensive sectors such as infrastructure as well as the labour-intensive agrarian society that is India. Easing of the foreign investment norms is a welcome change, and the Government's continued focus on promoting the digital economy is expected to help it achieve the US$5tn economy target. The impact of these reforms would highly depend on their implementation. The Government may also look to address other challenges such as related to fiscal deficit and employment generation.
* This article includes inputs from Ritika Tulsyan - Manager, M&A Tax, PwC India and Roshini Krishnaiyer - Associate, M&A Tax, PwC India
Disclaimer:The views expressed in this article are personal. The publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.
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