By Mukesh Bhutani
The First budget of Modi 2.0 was announced with a huge focus on redistribution of wealth and tax administrative reforms keeping transparency in mind to support its slogan 'Minimum Government and Maximum Governance'. It focuses on measures to simplify tax administration with the use of technology tools for tracing cash economy and reigning discretion of tax officials on tax assessments.
Incentives to start-ups: FM's announcement for start-up sector on waiving the need for any form of scrutiny by the tax administration concerning 'valuations' of share premiums will come as a big sigh of relief for a sector which underwent an unwarranted examination of the taxman. Start-ups have now been dealing with challenges involving high credit costs and deprivation of timely adequate funding, adding up to complex regulatory gridlocks. Preventing government from achieving policy objectives under its flagship programs 'Digital India' and 'Startup India'. Currently, India has over 16,500 start-ups as recognised by the Department of promotion of Industrial and Internal Trade from around 30,000 start-ups. Also, special administrative arrangements have been put in place for assessments of start-ups with prior approval of a senior official to undertake scrutiny assessment. Further, the issue of establishing the identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. Finally, the benefit of non-justification of the fair market value of shares will extend to Category-II Alternative Investment Funds (AIF) to proper funding in this sector.
These changes have primarily cleared the angel tax controversy over valuations during various rounds of start-up funding. The Bill proposes to extend the period of exemption of capital gains arising from the sale of residential house for investment in start-ups up to mAR 31, 2021 and transfer of majority shareholding of eligible start-up shall no longer be deprived from setting off its losses, which otherwise applies to all taxpayers.
Other amendments: FM announced to introduce Central Cell to issue scrutiny notices to taxpayers. Notices will not disclose the name, designation or location of the Assessing Officer. Cases selected for scrutiny shall be randomly allocated to assessment units. The Central Cell will be a single point of contact between the taxpayer and the department. This new scheme of assessment represents a paradigm shift in the functioning of the revenue department and will discourage unfair practices.
In place of a levy for withholding tax, a 2% charge on withdrawal of cash in excess of Rs 100 million from a single bank has been introduced to discourage the use of cash as well as establish a trail.
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An introduction of two additional slabs of surcharge of 3% and 7% applicable to individuals on income between `20 million to `50 million and above `50 million, respectively, is motivated by the principle of redistribution of wealth via tax levies. Perhaps, the expectation on the streets for new levies, such as wealth tax and inheritance tax, is avoided with such super-rich tax. Of course, one needs to see if the maximum marginal rate, which stands at 42.74% is corrected with a moderate tax rate under the Direct Tax Code. As an anti-avoidance measure, buyback of listed shares will be taxed at 20%, which was earlier applied only to unlisted companies.
At the outset, it is fair to say that this year's Budget is primarily focused on tax administrative reforms with a vision to encourage a cashless economy to come close to the distant dream of $5 trillion GDP by 2024-25.
The writer is Partner, BMR Legal Advocates