Corporate India has great expectations from the forthcoming Budget. The economy has registered a significant growth in 2007. As per the first survey of the Organization for Economic Cooperation and Development (OECD) released in October 2007, the government's target of reaching GDP growth of 10 per cent in 2011 is achievable if reforms continue.
This report added that India is now the world's third largest economy behind the United States and China in terms of real prices and purchasing power. Direct tax collections are at an all-time high and clearly, the Indian economy has moved to a high growth trajectory. To sustain this buoyancy, the government should look at enforcing tax reforms.
Reduction in tax rate and widening of tax base: Our tax rates should be competitive to enable corporates to be on level playing field globally and for India to attract international capital. The government should thus look at a reduction of the effective corporate tax rates.
Though the rate was brought down from 35 per cent to 30 per cent for domestic companies, however this is only the ostensible rate. Add to this the surcharge and cess and it goes up to 33.99 per cent. Taking into account the additional distribution tax on dividends at 16.995 per cent, the rate exceeds 40 per cent. Levy of fringe benefit tax (FBT) takes the effective rate even higher.
Thus there is a strong case for pegging the corporate tax rates at near about 30 per cent, in whatever way the Government may choose to structure the same incorporating FBT, cess and surcharge. The government should look at removing the surcharge which was always intended to be a temporary measure, abolish or at least reduce Dividend Distribution Tax (DDT) and abolish or dilute Minimum Alternate tax (MAT) provisions.
China levies a corporate tax of 25 per cent (effective from January 1, 2008) on its domestic companies. Russia and Brazil, the two countries that are clubbed with India and China in the BRIC classification also levy a lower corporate tax at 24 per cent and 34 per cent respectively.
A moderate tax level is inevitable not only for industrial and economic growth but also for encouraging voluntary compliance and widening the tax base. The government should streamline tax administration, cut down compliances and take effective measures to curtail litigation, as these are essential to ensure better compliance and bring more tax payers into the tax net.
Protracted litigation at various levels and cumbersome compliances only encourage tax evasion and force tax payers to adopt means and ways to escape taxes. The government could also consider taxing corporates engaged in highly lucrative agricultural activities, without affecting individual farmers.
Fringe Benefit tax: One hardly needs to elaborate on the resistance to the provisions regarding levy of FBT. It appears that the provisions do not bear out the legislative intent as was announced by the Finance Minister in his budget speech at the time of introduction of this levy. The first base suggestion is obviously to scrap the levy. However, if the same is not possible, the levy should not cover genuine business expenditure or expenses which have no connection with employees.
The government may ascribe a threshold limit up to which no FBT is leviable. Also, procedural aspects like assessments, appeals, etc need to be combined with existing procedures instead of unnecessarily adding to the already cumbersome compliances.
The levy of FBT on Employee Stock Option Plans (ESOPs) has created substantial confusion especially in respect of ESOPs which have been in existence at the time of introduction of the amendment vide Finance Act, 2007. It is suggested that all such ESOPs which were formulated before April 1, 2007 should be specifically exempted from the levy of FBT by a suitable clarification.
Tax Incentives: To foster investments and growth the government should provide tax incentives to sectors which promote infrastructural development. India is fast becoming a healthcare hub. However, there are still serious gaps in the healthcare system which need to be covered. The government should consider bringing healthcare services under section 80IA benefit and provide for deductions to business entities engaged in healthcare to encourage private participation.
Further, research and development should be encouraged in all sectors. The weighted deduction under section 35(2AB) for research and development should be expanded to cover high end research and development in all sectors. Private participation should be encouraged in break-through technologies in agriculture and allied sectors by providing suitable incentives.
Venture Capital funding: Venture capital funds are a useful source of risk capital. The pass-through status of these funds was restricted to select sectors in the budget of 2007. The government should revisit its decision and restore the pass through status which is also in line with the practice in certain countries. Especially in light of the high growth rate and emerging opportunities, it is imperative that the government should take steps to encourage fresh investment and entrepreneurship in all sectors.
Other issues: (a) The government should consider bringing a faster and alternate dispute resolution mechanism to reduce pending litigation. (b) Levy of DDT at various stages in case of a multi-tier company structure should be addressed to prevent double taxation. (c) Given the number of companies accessing the capital market, there is a need to clarify the position as regards availability of carry forward of losses post change in shareholding (greater than 49 per cent) pursuant to listing of a company, as the current provisions are open to interpretation either ways. (d) Legislative clarification should be issued where varied interpretations are possible to a said provision, in order to bring clarity.
Thus, the budget to be presented should address tax reforms to ensure robust and sustainable growth and set a direction for orderly development.
Prashant Khatore The author is tax partner, Ernst & Young