Discussing Budget 2016-17 | Tax Reforms


In this section, we will deal with the issue which can guide the future investments for an economy – Tax Reforms.

budget_tax reforms

Focus Areas

Small Enterprises

  • The corporate income tax rate is lowered for relatively small enterprises i.e companies with turnover not exceeding Rs 5 crore to 29% plus surcharge and cess, from the next financial year.
  • Govt. has increased the turnover limit under Presumptive taxation scheme to Rs 2 crores to bring big relief to a large number of assesses in the MSME category.

Start Ups

  • 100% deduction of profits for 3 out of 5 years for startups set up during April 2016 to March 2019. MAT will apply in such cases
  • Startups will look at India as a favourable destination instead of relocating to more tax friendly regimes such as Singapore
  • New manufacturing companies to be given an option to be taxed at 25% + surcharge and cess, provided they do not claim deductions and other incentives
  • Read about the whole start up stand up policy in our two part explainer, click here and here

Cess and Surcharge

  • Surcharge is increased on persons having income above Rs 1 crore from 12% to 15% <progessive taxation, taxing superrich>
  • The Krishi Kalyan Cess @ 0.5% will be imposed on all taxable services. The proceeds would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers
  • An Infrastructure cess @ 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles and SUVs
  • The ‘Clean Energy Cess’ levied on coal, lignite and peat is renamed as ‘Clean Environment Cess’ and simultaneously increased its rate from Rs 200 per tonne to Rs 400 per tonne <click here to know difference b/w tax, cess and surcharge with an awesome infographic>

Miscellaneous Provisions

  • To implement General Anti Avoidance Rules (GAAR) from 1.4.2017
  • Exemption of service tax on services provided for skill development &
  • Changes in customs and excise duty rates on certain inputs to reduce
    costs and improve competitiveness of domestic industry
  • 13 cesses which are levied by various ministries in which revenue collection is
    less than Rs 50 crore in a year will be abolished

Opportunities Missed

  • The finance minister could have reduced corporate tax rate by half a percent overall, rather than distorting the structure. Most countries have reduced corporate tax rates to attract inward investments <Lowering the corporate tax rate leads to money being reinvested back into businesses, increasing hiring and creating more output, and therefore spending in the economy>
  • There is no clarity about when the govt will lower the corporate tax rate to the proposed 25% from 30%. The reduction in corporate tax rate and phase out of exemptions must be in tandem to ensure a smooth transition from a high tax regime to a more competitive tax regime
  • The reduction in corporate tax rate should eventually lead to a phasing out of the MAT, as the difference between the basic tax rate and the effective MAT rate is likely to narrow
  • There is no clarity about the future of SEZs, in case tax incentives are phased out. <Already, SEZs have lost popularity since FY12, when a MAT and a Dividend Distribution Tax were implemented to prevent erosion of the tax base. Phasing out tax holidays could reduce investments in SEZs further amid sharply slowing exports>–


There are several incremental measures, but no intention to undertake deep, structural reforms in tax policy or administration

  • It takes some steps forward on administrative simplification, but then doesn’t go far enough by amending the provision on retrospective taxation
  • There seems some discord between govt. and Income tax department, as Income tax department continues to send notices
  • It does provide some tax relief to SMEs under direct taxes, but doesn’t extend it to cover indirect taxes
  • The tax amnesty scheme clearly gives a signal to tax evaders that there will be ample opportunities to convert their unaccounted, untaxed incomes and assets into “white” incomes and assets, with zero risk of prosecution

PS: Please click on the green hyperlinked text to read more about the concepts. Revise and revise & feel free to ask pertinent questions.

Read more about GST Bill: All you need to know about and follow our story on       GST: Most Important Tax Reform since 1947 and Minimum Alternate Tax.

Published with inputs from Pushpendra | Image: Finmin

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