Chennai: Rationalisation of the corporate tax mechanism, infrastructure development, corporate reorganisations, and administrative improvements: If these expectations are attended to by the Budget, the Indian corporate world will stand on a stronger footing, and propel economic growth, assures N. Madhan, Tax Partner, Ernst & Young.
A stable Government always ushers in higher expectations, be it in terms of tax policies or any other policies, he reasons, in an email interaction with Business Line. “Today, as the ripple impact of the economic recession has hit all countries to varying degrees, India can still hope to continue on the growth path, if a proper road map is set down by the Government.”
Excerpts from the interview.
On the rationalisation of the corporate tax mechanism.
In India, the corporate tax rate is 33.99 per cent (30 per cent base + 10 per cent surcharge + 3 per cent cess). This apart, an Indian company also pays 15 per cent Dividend Distribution Tax (DDT), not to mention the Fringe Benefit Tax, which can all result in a tax rate of 40-50 per cent for companies.
The basic corporate tax rates in the other BRIC countries are: Brazil 15 per cent, Russia 20 per cent, and China 25 per cent (China as part of its fiscal stimulus package recently slashed the corporate tax rate for the IT sector to 15 per cent).
If the tax rate could be brought down to 25 per cent all-inclusive, at least over the next 3-5 years, it would increase the cash flow for the corporate sector and drive investments and growth.
DDT rate should be brought down to 10 per cent, with credit system possible for any company that receives and pays dividend, as with the erstwhile Section 80M.
The genuine difficulties posed by FBT must also be mitigated. Of course, it goes without saying that accelerated depreciation provisions, for plant and machinery acquired during a specific period or by companies in specific sectors, can help boost investments and growth.
On infrastructure development.
This is one of the key priority areas and will play a major role in India’s growth story. Any investment in greenfield infrastructure projects should be incentivised. As the Government needs funds to fuel its infrastructure projects, unless private partnership is encouraged by proper schemes, all the projects would become unduly delayed, if not aborted.
This can be possible only by reintroducing Section 10(23G) which gave complete tax exemption to income from infrastructure projects. The exemption should be full, in the sense that the corporate should be exempted also from MAT on the gains made at the time of exit. Capital gains on exit should be exempt, too.
An alternative could be to incentivise the investors at the time of investments by permitting 20-30 per cent of the investment cost to be written off as business expenditure. This would not only attract strategic investors, but also the financial investors to make investment into infrastructure projects.
On corporate reorganisations.
The Government should appreciate that the corporate sector is busy consolidating its positions in India as well as abroad to emerge as a global power. This requires tax supports such as tax-free buy-back of shares, carry-backward of losses, continuance of exemption on transfer of undertakings on corporate on restructuring and so on.
Further, current Indian tax laws do not encourage profit repatriation to India, as foreign-sourced dividend income is taxed at normal tax rate. On the lines of several developed tax regimes, the Government should consider providing tax exemptions on foreign source of dividends, or providing better mechanism for availing foreign tax credits.
On administrative improvements.
Litigation is a pain point for both Indian companies and foreign investors. The benefit of applying for advance rulings must be available to domestic companies in respect of domestic transactions as well.
An advance pricing mechanism must be introduced to mitigate transfer pricing litigations; if possible, safe harbours must be built in and transactions within the safe-harbour margins must not be subject to audit.
Source : The Hindu