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Budget 2010: Sudhir Kapadia's expectations
January, 16th 2010

In about 40 days from now Finance Minister Pranab Murkerjee will put an end to the suspense by telling us if the fiscal stimulus will stay or go, if taxes will go up or hopefully down, if exemptions will be maintained or not. But if you cant wait till February 26, then listen into Sudhir Kapadia, Partner, E&Y he talks about the one budget expectation that he is willing to bet his money on.

Q: You have three expectations right?

A: Absolutely. The first one I think is corporate tax rate will be lowered to 30%. This is in preparation of the Direct Tax Code (DTC) prescribing a 25% rate. This is consistent with the individual rate reduced to 30% last year as well. It is also because if you see some of the macro trends it would support such a move, if you look at the fiscal stimulus you referred to last year there were three legs to it - Social sector spending, rolling back on indirect taxes which impacted positively certain industries that was the second main and the monetary policy. I think there is a consensus that the subsidy required on monetary policy let us say for housing loans may not be required so that is going to be a revenue plus. If you see the roll back on indirect taxes that maybe not be required any longer. Those industries are doing pretty well also you want to prepare for GST which consensus say between 16-18% would be the rate. But social sector spending will be required it may increase as well. But there is enough levy way, enough headroom for a reduction in corporate rate to 30%.

Q: Two revenues plus one revenue minus which is why you believe corporate taxes will come down. So that is one down two more to go. What is the second one?

A: Second one is really procedural. In many ways it is the big issue on payments to non-residence because of the Samson decision. You have a situation where every payment which India Inc makes today to a non-resident be it on capital account, be it on revenue account, suffers are with holding tax, unless you get a certificate from the tax officer that is ridiculous. It can not sustain. So I think there will be a clarification for sure which will at least restore the status quo to say that you can rely on a professional accountant to tell you what the withholding tax rate should be. I think that is required and that will come.

The third one I think is the indirect transfer of shares. It has created a lot of uncertainty, lot of confusion. I expect some kind of amendment hopefully on the positive side, but that is a hope. But it will at least tell us the situations under which the revenue will chose to tax indirect transfers. Today people are just going haywire and saying that which kind of conditions, which layers of transactions will suffer taxation in India, I expect this to be clarified in a much more compact manner. China was done it very recently as well not very happily but I think we will do a better job that we have to the Chinese experience at hand.

Q: Why do you believe that this third point that you raised pertained to or commonly refer to as the Vodafone situation will be taken up in this budget and not dealt with in the direct tax code which actually deals with it pretty substantially doesnt it?

A: Right. Direct tax code deals with it but I think there are certain procedural issues or certain issues which are not arguably a part of tax reform. Which can be taken out from the direct tax code and brought into the budget and this could be one of them because as I said most tax payers would rather have certainty as to the situation under which you want to tax such indirect transfers. Indirect transfers can happen in situations. So that is the reason, there are others as well. For example the treaty override, there is a general anti avoidance rules. Which situations will you say that they would be subject to inspection, further investigation? Not just a general rule which says all the situations you are not sure what will be the tax impact.

Q: You expect this in all this in budget 2010?

A: Yes.

Q: Since you expect so many aspects of the DTC to be introduced in the budget thgis year itself. Why dont you expect any changes to the capital gains tax regime will be taken up in this budget itself?

A: The only aspect I mentioned are not substantial reforms. So I do not expect the gross assets taxes to come in for instance. I do not expect rate to 25% and I do not expect the capital tax reforms. These are all reforms points or the incentive linked tax exemption.

I do not think we will see those in the budget. These are all part of the DTC.

Q: You wont see them going away in the budget?

A: We wont see the current profit linked incentives going away and we will not see investment linked incentives coming in. Those will be part of the DTC. The procedural parts can easily come in now.

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