Tax is increasingly used as a vehicle for fiscal stimulus to provide the much-needed boost to the economy during a slowdown. A stable government at the centre together with the realisation that India needs to continue on its growth path has fueled the expectations of India Inc for a pragmatic Budget.
Some of the measures that are high on India Incs wish list are detailed below.
Reduction in corporate tax rates:
A moderate rate of tax is necessary for boosting economic growth. At the moment, Indian companies are taxed at 30 per cent. Further, there is a surcharge/cess, increasing the effective tax rate to almost 34 per cent. Also, companies are required to pay fringe benefit tax (FBT) on prescribed expenses, most of which could be genuine business expenses. And lastly, companies are even required to pay dividend distribution tax (DDT) at around 17 per cent. With so many direct taxes, the effective direct tax burden could easily be 40 per cent or more.
Thus, corporate tax rate of 30 per cent needs to be brought down to 25 per cent, so the Indian corporate have a level playing field with their counter parts in the world. The basic corporate tax rate in BRIC countries is: Brazil at 15 per cent, Russia at 20 per cent, China at 25 per cent (China as part of its fiscal stimulus package has recently slashed the corporate tax rate for the IT sector to 15 per cent).
The surcharge of 10 per cent on all companies having taxable income of more than Rs 1 crore should be abolished. Surcharge, which is to be imposed under certain compelling circumstances like external emergency of war, drought, flood etc. has become an indirect measure of increasing tax rate. Such a surcharge needs to be withdrawn gracefully so that taxpayers come wholeheartedly forward in the time of real need.
Minimum alternate tax (MAT) should either be abolished completely or at least should be reduced from the current basic rate of 10 per cent on adjusted book profits to 7.5 per cent as earlier.
Dividend distribution tax:
Domestic companies have to pay a basic 15 per cent dividend distribution tax (DDT) on the dividends distributed by them. DDT results in double taxation and has a cascading effect on profits. While an attempt was made to reduce the cascading impact of DDT up to single tier of the corporate structure, its complete abolition will help boost cash flows. Further under the existing provisions, the benefit even up to a single tier is not available to a holding company in India which is a subsidiary of another foreign company. If complete abolition is not possible, the rate should be brought down to 10 per cent as earlier.
Eliminating or rationalising FBT:
Fringe benefit tax is a tax on expenditure, is not part of the income tax. It is not at all good for a conducive business environment and more so when the economy is struggling.
Certain expenses covered under the FBT are genuine business expenditures such as sales promotion and publicity, conveyance, hotel, boarding and lodging, repairs, running and maintenance of motorcars, aircrafts and depreciation thereon, use of telephone, festival celebrations, maintenance of guest house, tour and travel. Such expenses need to be removed from the FBT list in case it is decided to continue with the tax.
Increase in depreciation rates and provision of investment allowance:
The decision of reducing depreciation rate from earlier 25 per cent rate for plant and machinery to 15 per cent needs to be reviewed in order to give boost to the capital industry. Further, investment allowance provisions are also required to be reintroduced to further incentivize the capital spending. However this allowance should only be allowed to use for reinvestment.
Extension of tax holidays to boost the growth of exports as well as specific industries:
Tax holiday for exporters
The exemption under section 10A/10B for STPI and EOUs which is expiring on 31 March 2010 needs to be extended to give support to the exporters to meet the challenge of global recession.
Tax holiday for specific industries
Certain other industries which look forward to support in the form of tax holiday are mining including coal mining, oil refineries, city pipe lines, housing sector, power projects (after 31 March 2010) to improve the infrastructure of the country.
The controversy created in the last budget around tax holiday for natural gas is clearly undesirable and has made Ministry of Petroleum and Natural Gas cut a sorry figure before international investors. Considering the need of natural gas in the country, there seems to be no need to distinguish between crude oil and natural gas.
Restoration of certain exemptions:
Income from investment in infrastructure projects
Restoration of the erstwhile provision of section 10(23G) where by income arising from investments in infrastructure funds was exempt can improve the sentiment of the infrastructure industry and will help India in competing with China
Interest income on foreign borrowings
The availability of funds has become a challenge for the corporate and thus new projects. Reintroduction of erstwhile provisions of section 10(15)(iv)(f) and 10(15)(iv)(c) for interest tax exemption on foreign borrowings for industrial development as well as imports of raw material, plant and machinery can ease the pressure to a certain extent. This will further complement the recent ECB liberalization by Reserve Bank of India.
Widening the scope of section 80IA to boost infrastructure development
The Finance Act, 2007 has inserted sub-section (12A) to deny the tax holiday to an undertaking which is transferred in a scheme of amalgamation or demerger on or after 1st April, 2007 without giving any justification. Such a section needs to be deleted to provide complete freedom to corporate to restructure their operations with tax neutrality.
Introduction of participation exemption for investments abroad:
To support the Indian business houses making global acquisition, dividend income received from such foreign acquisitions which is fully taxable in India should be made tax exempt as is done in various countries such as Netherlands, Singapore, Austria to name a few. This can encourage the Indian companies to bring back foreign currency to India rather then parking the funds in more tax favourable jurisdiction. Currently foreign dividends which are repatriated back to India are taxed at the corporate tax rate of 30 per cent plus applicable cess and surcharge.
Alternative mechanisms for resolving disputes:
Lastly the traditional methods of dispute resolutions need a renovation in line with the international best practices. India can consider introducing the concept of mediation, expert appraisal, pre filing agreement, industry dispute resolution programme as prevalent in developed tax regimes such as the US, so that a dispute is resolved without litigation which results in wastage of time and money. United States also provide assistance and guidance to tax payers even before the return is filed.
To reverse the trend of retrenchment as seen in last few months, the government should support employment. The deduction under section 80JJAA available to industrial undertaking subject to satisfaction of certain conditions can be increased to 50 per cent from the current level of 30 per cent.
At present 30 per cent of additional wages paid to new regular workmen is allowed as a deduction. If possible, the benefits of this section should be available not just to industrial undertakings but also the service sector.
The stage is set for reforms and well-thought out tax reforms can help India on its path towards becoming an economic super power.