Budgets are always awaited with expectations with different people having their own views as to what it will unfold. Budget 2017, apart from being the first budget to be presented in the beginning of February and combining the budget of Railways, had more possibilities in store due mainly to the claimed continuing fight against black money particularly in the context of demonetization which was hailed as indicator of further stern actions against the menace of shadow economy, corruption and fight against terrorism. The solace by way of hope for a bright future offered to the suffering public due to cash crunch was to be seen as reality for which budget was seen as an instrument. Prospect of unexpected gains by black money not deposited in banks and likely windfall surge in tax revenue under the Pradhan Mantri Garib Kalyan Yojna was seen as factor facilitating allotment for welfare and upliftment of poor and down trodden. At macro level, the gloomy fallout of demonetization predicted by critics and forecast of declining economic growth had to be proved misplaced atleast in the middle and long run. The IMF had reduced the projected rate of growth for the current fiscal year from earlier 7.6% to 6.6%.  The country is to make further advances in getting its place of preferred investment destination and substantially improve its ranking from existing 130 out of 189 countries on which depends the success of ‘Make in India’ initiative with impact on creation of additional job opportunities. One cannot, however, ignore the fact this was to be a budget of the year when election in five States are to follow the presentation of the budget and the general election of 2019 is not too far away.

2.      In matters of fiscal reforms, although with little deferment, the Goods and Services Tax integrating the multiple indirect taxes is now a certainty. It being the most radical reform with great prospects of rationalisation in taxes, the FM has to take steps to align the tax structure to the needs of the GST introduction. In the area of direct taxation, after several postponements, GAAR is to come into effect from April, 2017 which has lot of apprehensions in the mind of the taxpayers particularly the foreign investors. The provision enables the tax authorities to treat transaction designed for tax evasion as impermissible arrangement enabling them to disregard, combine or recharacterise the transactions or make other changes as per law. Although CBDT has attempted to allay the fears by issue of circular a few days before the budget presentation, it needs to be seen whether any legislative measures are taken to make the provision work with justice and fair-play. The panic in the stock market created by a statement of the Hon’ble Prime Minister as to bearing of tax burden by persons dealing in stocks, which was understood as withdrawal of exemption on long-term capital gains on shares, had also created anxiety to see that the later assurance made by the Finance Minister is honoured.

3.        The Economic Survey for the Financial year 2016-17 did show a declined rate of growth in the last quarter of the year but as stated by the Finance Minister in his budget speech the effect of demonetization, whatever it may be,  is not expected to spill over to next year and will have only a transient impact on economy. The growth rate projections of IMF and the World Bank are quite optimistic. Demonetisation of currency has been referred to in the budget speech as the bold and decisive measure which will create a new ‘normal’ in the bigger, cleaner and real economy. Although there is no direct nexus with demonetization, the other economic indicators projected in the budget show encouraging picture. Fiscal deficit has been pegged at 3.2% for the current year and at 3% for the next three years and current account deficit has come down to 0.3% from 1% earlier, inflation brought down to 3.6% in July and foreign exchange reserve stands at $ 361 billion. FDI over the first half of the current year was of the order of Rs. 1,45,000 crore which is adequate to sustain for more than 12 months.

4.       As expected the budget takes care of rural development, infrastructure and poverty alleviation as the main planks. The allocations made are guided by three broad objectives viz. transform, energise and clean India which is referred to as TEC. To achieve these objectives, ten distinct themes have been envisaged, the foremost of them being farmers. Massive allocation of funds to be spent in rural areas of Rs. 1,87,223 crore is higher by 24%. Allocation for MGNREGA has also been raised to Rs.48000 Crores.  Rs.396135 Crore for infrastructure, Rs.1,84,632 crore for women and child development and other allocations towards poverty alleviation are made mainly to uplift rural sector based on the vision to double the farmer’s income in five years. With good monsoon and steps proposed in the budget, the agricultural economy is likely to grow by 4.1%. Attention has also been paid to small and medium sized industries and a level playing field has been attempted to be created by bridging the gap between the effective rate of taxation in comparison to large corporate.

5.       Taking account of the Constitution Amendment Bill passed by the legislature to make way for the introduction of GST and the subsequent progress made by the GST Council, the FM very justifiably maintained stability by desisting from making changes in the area of indirect taxation including Service Tax which will all be subsumed by GST. The extensive awareness programme of the new taxation system will start from 1st. April, 2017.

6.     In the area of personal taxation, the expectations of increased tax exemption limit or reduction in rates has not been met. Relief has, however, been provided in the name of small tax payers by reducing the tax rate applicable in the initial slab of Rs. 2,50,000 to Rs. 5,00,000 from existing 10% to 5%. Simultaneously, rebate is reduced to Rs. 2500 which will be available to persons with income upto Rs. three lakh only, with the result that persons with income upto Rs.3 lakh will have no tax liability. Although the relief appears to be intended to small taxpayers, its benefit will go across the board and all will get tax benefit of upto Rs.12875/-, the justification of which may be questionable in the context of abysmally low Tax- GDP ratio and low direct-indirect tax ratio mentioned by the FM. As a compensation to loss of revenue, income from Rs. 50 Lakhs to Rs. One crore will be subjected to surcharge at 10%. The existing surcharge of 15% on income above Rs. one crore continues.  Other proposals like increase in the threshold limit for audit and maintenance of account in the case of presumptive taxation, payment of advance tax in one instalment by the professionals opting for presumptive taxation, assurance of one page return and no scrutiny are welcome steps which will facilitate compliance.

7.    The rationale of compression of time for completion of scrutiny assessment from 21 months to 18 months for AY 2018-19 and further to 12 months from AY 2019-2020 is not understandable. In the past also we have been making changes in such limits with to and fro movements causing avoidable confusions and making the law complicated.

8.       The proposal that deserves widest acclaim is one for incentivizing the real estate sector for construction of affordable housing. The government is committed to complete one crore houses by 2019 for the homeless and those living in kutcha houses. The allocation for Pradhan Mantri Awaas Yojna has been stepped up from Rs.15000 crore to Rs. 23000 crore. To mention the fiscal incentive, the tax exemption in respect of profit from business of developing and building housing project that was given last year has been considerably liberalized to encourage development of such affordable housing. Total exemption was available if the project was completed within 3 years from the date of first approval. The condition of completion within 3 years from the date of approval has been relaxed by prescribing the period of 5 year. Further, the residential units were not to exceed the built up area of 30 sq.mt. in the cities of Chennai, Delhi, Kolkata or Mumbai or within the peripheral area of 25 km and, 60 sq.mt in the rest of the country. This being too short a limit for built up area, the proposal seeks to prescribe this limit for carpet area rather than the built up area. The peripheral areas of metropolitan cities in which the unit could not have exceeded 30 sq.mt. will now be treated as rest of the country and it will be permissible to construct units of 60 sqmt. carpet area there also. The proposal will go a long way in making such projects more attractive.

8.1     Another problem being faced by the builders is taxation of unsold units which are their stock in trade. Such unit, under the present law are taxable under the property head at their notional value. The proposed amendment seeks to provide relief by providing that the annual letting value of such units for a period of one year from completion will be nil which will provide the builders breathing time to sell those units.

8.2     The year of taxability under the development projects in which the owner of land/building transfers development rights to another person in consideration of a share in the constructed area has been a contentious issue. Such joint development projects are proposed to be made taxable in the year of completion of the project.

8.3     A further step to encourage investment in immovable property is reduction in the holding period for the property to qualify as long term asset. The existing period of holding to make the asset a long term is proposed to be reduced from 10.    existing three to two years. However, indexation of cost for which the base date presently is 1.4.1981 is proposed to be changed to 1.4.2001.  For the property acquired before 1.4.2001, its market value as on 1.4.2001 will be treated as the cost of acquisition for purposes of computation of capital gains.

8.4     The provisions relating to real estate when viewed in totality should boost up the construction of affordable housing and may also improve sentiments in the real estate sector.

9.       In his budget for 2015, the FM gave an assurance to bring down the corporate tax rate to 25% within a period of 4 years and simultaneously to withdraw exemptions which reduce the effective tax rate. In keeping with his promise, he reduced the rate to 25% in 2016 budget in respect of new manufacturing companies who do not avail of any exemption. Further, the tax rate was reduced by one percent in respect of companies whose turnover was less than Rs. 5 crore. The budget proposes to reduce the income tax on such small companies by raising the turnover limit to Rs. 50 crore. Such companies will be taxed at 25%. The proposal will also help the medium and small enterprises and firms to migrate to company format.


10.     Vide Finance Act, 2016 a provision was made for taxing those individuals, Hindu Undivided Families or Firms whose income includes income by way of dividend aggregating more than Rs.10 Lakhs. Such persons are to be taxed at the rate of 10% of the amount of dividend exceeding Rs.10 Lakhs. The scope of this section is proposed to be extended by making it applicable to all residents except domestic companies, funds or trusts, universities, educational institutions or medical institutions whose income is exempt from tax. The amendment will bring within the scope of taxation all private trusts which have made investment in shares and deriving dividend therefrom exceeding Rs.10 Lakhs.

11.      As a further step in continuation of demonetization towards crack down on cash economy, the government has accepted the recommendations of Special Investigation Team working for unearthing black money stashed abroad and declared illegal the cash transactions of the value of Rs. 3 lakh and above. Violation is subjected to penalty equal to the amount. The income tax provision which makes cash payment exceeding Rs. 20,000 inadmissible has also been amended to reduce the limit to Rs. 10,000. Similarly, amendment has been proposed in Section 80G to tax cash donations exceeding Rs.2000 in place of Rs. 10,000 at present.

12.     Electoral funding has been one of the root causes of circulation and creation of black money. As a further step in the series of measures to curb black money and in order to bring transparency in the source of funding to political parties, the budget proposes to ban donations of Rs. 2,000 or more unless it is made by cheque or draft or by electronic clearing system. It is obligatory for political parties to furnish a return of income as per the provisions of section 139(4B) of the Act. The issue of Electoral Bonds by the RBI is also proposed which can be purchased by the donor, the proceeds of which will go to the account of the political party. 

We have prepared clause wise analysis of the Finance Bill, 2017. We hope you will find it useful.