It is no secret that sluggish private sector investment could come in the way of India’s growth forecasts. There is an urgent need that alongside the large commitments made on public spending, private capital creation is once again spurred. No doubt there have been several overarching policy measures towards this, not just in the Budget, but on a sustained basis over the last 12-18 months, and finally, we are seeing some hard action on the ease of doing business paradigm.
From a tax side too, Budget 2017 contains some interesting proposals aimed at incentivising the small entrepreneur and making sure the necessary growth can be driven bottom up. Based on the roadmap laid down last year for the headline rates of corporate tax to come down to 25%, it was widely expected that the rate would be brought down from 30% to atleast 29%. While that did not materialise, a very interesting reduction was done instead. Based on a study that it were the smaller companies, with turnovers of less than Rs 50 crores, which were actually paying taxes close to the headline rate, a sharp 5% reduction in the corporate tax rate has been made for such companies in Financial Year 2015-16. It appears that once a company qualifies, it should remain eligible for the lower rate even if the turnover exceed Rs 50 crores in later years. Particularly noteworthy is that there is no condition of manufacturing or other activity restriction, and hence, the coverage, scope and ambit of this is wide, and will benefit entrepreneurs greatly.
The big disappointment was that the Minimum Alternate Tax rate remain unchanged, and as a token, there was an increase in the period of carry over of the credit from 10 to 15 years. With the gap between the MAT the headline rate being lowered, and with most incentives being withdrawn including caps on the rate of depreciation, there is actually no case for MAT to continue at all, and my prediction is that as the rates come down to 25% overall, MAT will be phased out.
For start-ups there were two specific changes – both good, but perhaps a case of missing the woods for the trees. Before I get to the changes themselves, continuing to apply a narrow definition for start-ups, not just for tax matters but also for all other policy relaxation itself belies the intention. In fact, considering the very nature of start-ups and their businesses, it is almost impossible for companies to fit the narrow size restrictions to qualify as an eligible start-up. It is time that this definition was eased up.
Pending that larger change, Budget 2017 brought relief in the conditions related to carry forward of losses. Under normal law, if the shareholding changes by more than 49%, the losses cannot be set off. Since there is constant capital raise happening in start-ups, many of them were breaching this limit. What the Budget proposes is that instead of a 51% test, as long as promoters remain invested, losses can be set off. However, in the fine print, instead of promoters, it states all shareholders must remain invested, which conceptually is more stringent than the 51% test itself. One hopes this anomaly will be corrected in the final version. Additionally, the period of choosing the 3 year for the tax holiday has been extended from the first 5 to the first 7 years.
Most times Budgets follow a Robin Hood theme of taxing the rich and leaving more for the poor. It is now time to adopt a similar approach with the entrepreneurs as it this class that can truly create the much needed jobs and bring growth down to the grassroots and be the catalyst for the double digit growth dream. This Budget takes some baby steps, but we need more decisive and powerful ones to follow.