As the countdown to Budget 2008 begins, the expectations of the corporate sector are high. The optimism has been spurred by, among other factors, robust GDP growth, increased tax collections, capital market buoyancy, and rising FDI inflows and foreign exchange reserves. While much is called for on the infrastructure, industrial productivity, inflation and agricultural output fronts, and amidst concerns of increasing crude prices and rupee appreciation, the road to Budget 2008 is rife with optimism.
On its parts, India Inc. is looking for more tax reforms. With direct tax collections at an all-time high, corporate tax rates, in keeping with the global trend, need to be lowered. Reduction of the base corporate tax and fringe benefit tax (FBT) rates or complete abolition of MAT (minimum alternate tax) and surcharge could be considered.
Abolition of dividend distribution tax (DDT) has been a long-standing demand on the grounds of double taxation. While this may not seem a welcome suggestion, considering that it is a healthy and efficient contributor to overall tax collections, the demand for introducing a credit mechanism to alleviate double/multiple DDT impact for holding companies is justified. This could be akin to the erstwhile Section 80-M deduction.
In an era of corporate restructuring and consolidation, restricting the benefit of carry forward and set off of business losses under Section 72A to only selected industrial undertakings does not create a level-playing field. Extending the benefit to all industries would be welcome.
To boost industrial output by encouraging exports and address rupee appreciation concerns, deductions such as the erstwhile Section 80HHC to provide relief and encouragement to exporters should be looked at. The information technology sector has contributed significantly to GDP growth. This sector has also fostered entrepreneurship at the SME level and continues to encourage growth in tier-II cities. Export benefits under Section 10A/10B and through the STPI Scheme must be continued with.
Infrastructure, or its inadequacy, is posing a major challenge, that of maintaining the countrys growth momentum. To attract the required investments the need to extend fiscal benefits to the investors cannot be overemphasised. Reintroduction of exemption to investors under Section 10(23G) and extending the benefits of exemption under Section 10(23FB) to investments by venture capital funds into all sectors should be considered.
Certain genuine business expenses (on business promotion, samples, office telephone expenses, and so on) that are incurred exclusively for business purposes are taxed under the deeming provision of FBT. Thus there is a legitimate need to review and restrict the scope of FBT only to expenses that have some plausible nexus to a direct/indirect benefit to employees.
Introduction of new policies to provide much needed tax certainty such as extension of advance ruling mechanism for domestic entities and advance pricing agreements for transfer pricing is necessary. To provide greater tax efficiency to the conduct of business operations of a group, enabling filing of consolidated group tax returns will be a major step forward.
It has been evident in the recent past that moderation in tax rates and extension of tax benefits to the key industries has borne fruits with better compliance and higher tax collections.