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Radical reforms promised, but will it come true?
February, 12th 2010

Corporate world has seen an assortment of ups and down globally in recent times. Various industries across the globe had been affected badly due to the recent global recession. While India has been relatively insulated, the Ministry of Finance recognised the importance of fiscal measures to keep the economy on track. Various stimulus packages were announced.  A key development has been introduction of Direct Tax Code (DTC), which is proposed to be implemented from 1 April 2011. 

The DTC has proposed radical reforms in Indian tax system (although some creases to be ironed out), which is why perhaps not much significant reforms are expected. This Budget is largely being perceived as a continuation of the various changes proposed last year and a roadmap to achieve objective of smooth transition from existing income tax law to direct tax code.

Reduction in corporate tax rates
One proposal which has been long pending is the reduction in the corporate tax rate from existing 30 to 25% for Indian companies and 40 to 35% for foreign companies to bring these in line with global averages. Tax rate under Minimum Alternate Tax (MAT), increased from 10 to 15% in Budget 2009 may be reconsidered and brought back to 10%.

Review of depreciation provisions
Looking at global reach and diversification in the corporate world, companies have to invest huge amount on capital expenditure. In the existing tax law, depreciation rates on fixed assets are very low, which would not be enough to recover such a huge capital expenditure to renew the technologies. In order to encourage more capital expenditure, investment based deduction needs to be provided to capital intensive industries.

The provisions related to depreciation on fixed assets have not been updated in line with recent changes in the corporate world. First and foremost change is required in terms of up-word revisions of depreciation rates on fixed assets.  Further, cost of asset on which depreciation is available has always been an issue and creating ambiguity, which needs to be clarified. Given the current scenario of huge cost involved on purchase of fixed assets, it is general practice in the corporate world that companies prefer to acquire assets on lease rather than outright purchase. In the absence of specific provision under the existing income tax law in relation with depreciation on leased asset, various judicial bodies had interpreted the law differently and had spread the ambiguity in relation to eligibility of the lessor or lessee to claim depreciation.  This issue is required to be addressed in the Budget 2010 and needs to provide some clarifications in this regard.

Due to diversification in business of Indian companies there are lots of restructuring and regrouping happening, which results into acquisitions of new business or demerger of existing business. Among these transactions on acquiring new business, probability of payment for goodwill is very high.  In the absence of specific provisions under the current law there is always an uncertainty and scope of different opinion among judicial bodies and corporate world on availability of depreciation of goodwill specially, after the insertion of specific provisions in Finance (No 2) Act, 1998 in relation with depreciation of 25 percent on intangible assets. It is required to bring some clarification in this regard in this union budget considering huge amount is involved on payment for goodwill. In addition to this a clarification is also required in relation to cost of self generated goodwill. 

Effect of retrospective amendments
Of late it has become the regular practice of Ministry of Finance to amend current tax law with retrospective effect.  It not only strengthens the ambiguity, but also nullifies time and efforts were put in by various judicial bodies and corporate world in litigation. Amendments under existing provisions of the income tax law should be in prospective in nature, which is in line with the principle that in case two views were possible under existing law prior to amendment, the benefit of favourable view should be provided to the assessee.

Rigorous withholding tax implications
Recently the tax authorities are highly emphasising on withholding tax implications on all domestic and international transactions. Specially, in relation to international transactions tax authorities interpret the provisions of withholding tax in very narrow sense. For instant, in the recent ruling of Samsung Electronics, the Karnataka High Court [ITA No. 2808 of 2005] has held that before making any payment to a non-resident a prior approval is required to be taken from tax authorities irrespective of the fact that whether payment is taxable in India or not. This particular judgment has increased the ambiguity and hassle among the corporate world, which would affect the international business of Indian companies and provides negative impression of Indian market in international platform. Given the above instance, it is required to clarify such issues to bring a sense of certainty for the companies who are dealing in international transactions.

Further newly introduced provision of increasing the withholding tax rate to 20% (or higher) in case the payee does not have any permanent account number has created lot of confusion for foreign companies/non -resident particularly when the rate exceeds the maximum rate of taxation prescribed under the Double Taxation Avoidance Agreement.

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