By Anil J. Sathe, Editor
When the Finance Minister
presented the Finance Bill 2017, expectations ran high. The country had just
started recovering from the after-shocks of a momentous demonetisation decision
taken by the government. There is an on-going heated debate as to the benefits
of demonetisation and the problems caused by it. However, there was a virtual
unanimity among professionals that there would be provisions in the Finance
Bill which would, apply some smoothing balm to tax payers and attempt to
relieve the pain caused by demonetisation. Some felt that the budget would take
the battle against black money forward.
In this backdrop the budget
presented by Finance Minister could at the best be described as an `incremental
budget’. There were no big bang announcements. The tax rate has been marginally
lowered both for individuals and small corporates. Some of the controversies
and problems arising on account of interpretations of provisions in regard to
the real estate sector have been sought to be addressed. Two amendments, one
exempting notional income in respect of unsold flats for one year and the other
legislating a scheme for taxing capital gains arising out of joint development
or similar agreements are welcome provisions. However, the provision for
limiting the set-off of interest in regard to funds borrowed for acquisition of
premises is rather surprising. On the one hand the government continuously
states that it wants to give a fillip to the beleaguered real estate industry,
it is sought to legislate a provision which would act as a disincentive. There
are two reasons why I consider the provision to be retrograde. Firstly, if
interest paid by the borrower is permitted to be set off against other income
and is therefore a cost for the government, this interest constitutes income in
the hands of a lender who would normally be a bank or a financial institution.
This interest would suffer tax in the hands of the recipient. Therefore the denial
does not seem to be justified particularly in cases where the premises are let.
Secondly, this is incongruous with the reduction in the holding period in
respect of land and building from 36 months to 24 months for terming the asset
as a long-term asset. Therefore on the one hand, the government wants to
promote the sale of real estate and on the other, it seeks to deny set-off
during the period that the taxpayer holds this asset as an investment.
The government’s intent of
disciplining and regulating charitable trusts continues. Henceforth those
trusts which do not file their returns of income in time will be denied the
benefit of exemption. Further, if one charitable trust makes a corpus donation
to another, then such donation will not be treated as application of income in
the hands of the donor trust. This restriction already applies to
expenditure/donations out of accumulated income, it will now apply to all
donations by a charitable trust. While the disciplining of charitable trusts is
welcome, the attempt to regulate political parties and their funding is rather
half-hearted. While the threshold of cash donations has been reduced to
Rs.2000, one wonders whether it will be really effective given the way
political parties fund their expenditure. As far as the electoral bond concept
is concerned, the system remains opaque. It is true that donors do not want to
be identified with political parties. The fact is if they are so identified
they may receive benefits or be harassed depending on their affiliation is the
real cause of concern. The only plus point of the electoral bond scheme is that
the acquisition will be from accounted money. Let us hope that this is only a
beginning and these provisions are tweaked in future to make political funding
more transparent. The only solace is that like all other taxpayers, even
political parties would be required to file their returns by the due date
failing which they will also stand to lose their exemption.
There are two provisions for
which one would give negative marks to the Finance Minister. The first is the
deletion of the provision which requires the reasons recorded by an officer
before initiating a search to be disclosed to a judicial forum. The reason for
such deletion (which is with retrospective effect from 1st April,
1962) is that when disclosed, such reasons give
public the name of whistle-blowers whose security is then under some
threat. Firstly, there could have been some mechanism built-in to avoid
disclosing the name of the informant to the public, while making the reason
available. Secondly, the fact that such disclosure results in a threat to the
person concerned, is a reflection of the position of rule of law in this
country. If reasons are not disclosed, it may result in wrongful use of power to
search and survey which are an invasion of the privacy of a taxpayer and if
unjustified are an unnecessary harassment for him. One hopes that the Finance
Minister takes a serious re-look at these provisions. Secondly, the provision
for seeking to penalise an authorised representative for “incorrect
information” is also uncalled for. There are enough provisions in the Act to
punish a person who deliberately attempts to mislead the Department. One feels
that given the way the bureaucracy functions on the ground, this provision may
be misused to harass professionals. In any case these representatives normally
belong to professions who already have an established disciplinary mechanism.
The Finance Bill contains steps
to ensure that the intent of the government to make the economy cashless is
taken forward. There are disincentives by way of disallowance for cash
expenditure with the limits being lowered in most cases. The most significant
amendment is however the restriction of any transaction beyond the threshold
limit of Rupees three lakh in cash. An infringement of this provision attracts
a penalty equivalent to the amount of the transaction. This is a very important
provision and one really needs to wait and watch as to what effect it has.
In all, the budget presented did
not have very many surprises. Possibly, once the effects of demonetisation are
fully known, and the quantum of tax at the government is able to garner on
account of the drive against black money is established, the Finance Minister
would have more leeway in the next budget which would be the penultimate for
this government. Till then let us keep our fingers crossed!
