• Deccan Chronicle
  • Andhra Bhoomi
  • Asian Age
  • ePaper
  •  Auto Refresh
Home

ePaper
Last Updated:05:20 AM IST | Wednesday, Feb 01, 2023
  • Home
  • Politics, Plan And Policy
  • Markets
  • Companies
  • Economy
  • In Other News
  • Autos
  • Just In
Menu
  • Home
  • Politics, Plan And Policy
  • Markets
  • Companies
  • Economy
  • In Other News
  • Autos
  • Just In
Home > Companies > Charting the road to recovery after pain of demonetisation
Companies
Charting the road to recovery after pain of demonetisation
By  
  , Published : Jun 5, 2017, 11:47 am IST | Updated : Jun 5, 2017, 11:47 am IST

The FY2018 Union budget will demonstrate the government’s commitment to a simple and stable taxation system. We expect the government to reduce both corporate and individual income tax rates and align indirect taxes in certain cases to the purported GST rates. We estimate FY2018 fiscal deficit at 3.3 per cent of GDP but this will largely depend on the interplay between the potential positives, that is additional taxes, and negatives, that is additional spending to support consumption of the government’s demonetisation exercise.

Taxation: A new chapter
We see the FY2018 Union budget as the starting point of India’s new taxation system for both direct and indirect taxes. The government has announced its intention to implement a simple, stable and transparent taxation system.
The recent demonetisation measure may also have a bearing on the government’s decision on the taxation structure and tax rates. The government may reduce corporate tax rates and individual income tax rates to encourage greater compliance and complement the demonetisation measure, and provide stimulus to consumption, negatively impacted by the short-term disruption to the economy from demonetisation. The demonetisation exercise will undoubtedly have had a large psychological impact on companies and individuals under-reporting their incomes and underpaying their taxes.
Direct taxes: The government has repeatedly stated its intention to broaden the tax base and reduce tax rates to moderate levels. As part of its stated policy to implement a simplified taxation system for companies, it has already announced its intention to reduce corporate tax (basic) rate to 25 per cent by FY2020 in the FY2015 budget and also implemented changes to the Income Tax Act in the FY2016 union budget, which will remove several tax exemptions for companies over a period of time. We expect the government to reduce the corporate tax rate by around 2 per cent in the forthcoming union budget from the current 30 per cent.
Lastly, we believe a ‘carrot-and-stick’ policy will encourage higher tax compliance among companies and individuals. We see demonetisation as a ‘stick’ that may force companies and individuals to rethink their cavalier attitude towards taxation and report their true incomes and pay taxes. We believe lower tax rates will serve as a ‘carrot’ to induce companies and individuals to declare their true incomes and pay taxes on the same.
Indirect taxes: The government is on course to implement GST by July 1, 2017. We do not expect any major changes in indirect tax rates in the forthcoming budget as the government will implement GST over the next few months. We do not rule out the government aligning the rates on certain goods and services closer to the purported rates under GST. In particular, we would watch for any increase in the standard rate for service tax from the current 15 per cent (including surcharges) to 18 per cent, the standard GST rate. We expect the government to remove surcharges on services and club them under the standard GST rate.
Capital gains tax: The government’s policy seems to be still evolving in this area. The market has had some concerns about the government raising the holding period for equities for long-term capital gains or even raising the tax rate on short-term capital gains in the forthcoming union budget.
One concern around the imposition of capital gains tax on investors in FPIs may have been partly addressed. The Central Board of Direct Taxes has put in abeyance its December 21, 2016 clarification on the application of indirect tax provisions on investors in FPIs under certain conditions under Section 9 (1) (i) of the Income Tax Act, 1961. We presume this is a precursor to a rethink on the issue and the government may amend the section concerned in the forthcoming budget to exclude FPIs from application of the provision.
Fiscal: A difficult chapter: We model FY2018 fiscal deficit at 3.3 per cent of GDP (central government only) but acknowledge that we find it difficult to estimate FY2018 revenue and expenditure numbers with a great deal of certainty given the uncertain impact of demonetisation on the government’s taxation revenues; the government’s response in the form of fiscal stimulus to support consumption, affected by demonetisation; implementation of GST during the course of the year; and the amount of fiscal flexibility available to the government from any relaxation to the government’s GFD/GDP target for FY2018 from the ongoing review of the government’s Fiscal Responsibility and Budget Management target.
The government will likely reduce corporate and individual tax rates in the forthcoming budget as discussed above. However, the extent of reductions, if at all, is quite uncertain and will depend on its desire to provide relief to companies and individuals post demonetisation and boost consumption.
Demonetisation may boost tax revenues if a large number of individuals participate in the ongoing income declaration scheme that gets over on March 31, 2017 and/or the IT authorities are able to unearth bank accounts with inexplicable increase in deposits and impose the appropriate tax and penalty. Also, it is possible that certain sections of the unreported economy that were not reporting their true incomes start reporting their true incomes based on their experience with demonetisation and implementation of GST.
Demonetisation may affect the government’s revenues if economic conditions were to remain subdued well into FY2018 due to the negative impact of demonetisation on consumption and potential negative impact on the informal economy.
The implementation of GST during FY2018 will also raise uncertainty about the government’s revenues. The government will likely try and minimise the impact of GST on its revenues but the government is yet to decide on rates of various products and services. It has decided on the broad rates for a few categories of products and services as of now.
Regarding the government’s response to the slowdown in the economy due to the demonetisation exercise, we expect the government to boost capital and revenue expenditure, especially on rural spending, to support consumption.

—Economy/Strategy India, Kotak Institutional Equities end-of
Tags: 
news
Latest From Companies
HUL CMD Sanjiv Mehta said the results show that the long-term structural opportunity of FMCG in India remains intact.

HUL Q1 net profit rises 5.7 pc to Rs 1,897 crore

The management of Radar has built and exited 3 different businesses themselves which helps the sensitise first time and even veteran entrepreneurs.

Radar India advisors scales a new high

The top seven cities of Delhi, Mumbai, Kolkata, Chennai, Hyderabad, Pune and Bengaluru accounted for 4.45 billion km.

Delhi sees more night trips than Bengaluru, Mumbai, says Ola

Most Popular

Mukesh Ambani 9th richest on Forbes' real-time billionaires list
Top credit card myths harmful for your financial well-being
Microsoft CEO Satya Nadella tops Fortune's Businessperson of the Year 2019
Employment growth slowed down in last two years: report
GST structure: key challenges and its solutions

Editor's Picks

Income tax e-filers drop by over 6.6 lakh in FY19: Official data
Swiping on your smartphone reveals a lot about you to your social media company
  • Read Financial Chronicle as it appears in print.
  • Subscribe, and get it delivered in the inbox everyday.
  • Politics, Plan And Policy
  • Markets
  • Companies
  • Economy
  • In Other News
  • Autos
  • Just In
  • Home
  • About Us
  • Contact Us
  • Terms of Service
  • Privacy Guidelines
  • Copyright © 2019 Financial Chronicle, All rights reserved
Developed & Maintained By Daksham