Mar 05, 2012, 11.23 AM | Source: CNBC-TV18

Union Budget 2012: Spare corp tax hike, tax undeclared gold: Experts to FM

Mukesh Butani, chairman and managing partner of BMR Advisors, Dinesh Kanabar, deputy CEO and chairman of the tax practices at KPMG and HP Ranina, the brightest minds, feel that the FM needs to make a Budget that has prospective amendments and not retrospective amendments as that is the key to ensure growth in India.

Pranab Mukherjee, in his tax proposals on March 16, is under pressure to get growth back on track and to get his fiscal house in order. That requires a huge balancing act.

Mukesh Butani, chairman and managing partner of BMR Advisors, Dinesh Kanabar, deputy CEO and chairman of the tax practices at KPMG and HP Ranina, the brightest minds, feel that the FM needs to make a Budget that has prospective amendments and not retrospective amendments as that is the key to ensure growth in India.

Also, they suppose he will roll back indirect taxes to the pre crisis stage, but hope that he will not increase the corporate tax, which is anyways the highest in the world.

They propose a wealth tax on undeclared gold as gold accumulation is the highest in India. They also feel that the government should set up an efficient machinery and collect revenue through the taxes logged in disputed liabilities.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying videos.

Q: Let us talk about the Vodafone case. Very often during Budgets when the government has lost something, not as big as the Vodafone case but when the government wants to sidestep what the courts have done, they come up with amendments which enable them to go back and win the case. Do you expect anything on that in this Budget? Alternatively, do you think since review petition is still on, he may not do anything now?

Kanabar: In some sense the Supreme Court judgement actually gives a direction to the government to welcome to tax these transactions, but you are welcome to make the law in a manner that can tax the transaction and put it prospectively. It does not say that change the law prospectively but in a manner that everybody is aware of its liabilities. For example, in the concluding part of the main majority judgement when Justice Kapadia says that FDI is a very important aspect for the development of a country and FDI flows into those sectors or those countries where there is a certainty of law. Therefore what he meant really was to say, you have a right to tax whatever transaction you want but taxing in a manner that people are aware of their liability before the transaction happens and not do something retrospectively. That is sending a very, very strong message to the government to say that there should not be a retrospective amendment. However, here was one of those rare times when the government did not change the law. So for example, the Vodafone thing began about 4.5 years back. In those 4.5 years, four Budgets were presented.

Q: So they had an opportunity to do that.

Kanabar: They had an opportunity to change the law prospectively. Had they done that maybe they were worried that it might reflect on Vodafone to say that a change in law is the only way to tax such a transaction. In the absence of such a change, Vodafone could not have been taxed, but there were certain other transactions that happened which could have potentially been taxed and the government maybe lost out an opportunity to tax those transactions. I do hope that India will not stand out to say that somebody can take years and years to fight within the judicial system, reach a conclusion only to be told that the law has been changed retrospectively. I do not think that sends out a right signal for the country as a whole.

Q: But it has been done in the past, hasnt it?

Butani: It has been done on many occasions in the past, but I echo Dineshs views that specifically in this case the Supreme Court has said that we have to interpret the law as it stands today. As a matter of fact they have gone ahead and also commented that in the DTC provisions there is a situation where such transactions could be taxed which means that I see an unlikely situation if the government will amend the law to tax it retrospectively or to tax similar transactions retrospectively. However, theoretically speaking legislature is more important than the judiciary. There have been several instances. One of the other important principles I want to talk about even in the past is that retrospective amendments are merely to clarify intent of the law and not create a charging provision because such retrospective provision can also be challenged in the court being unconstitutional. The government recognizes that and unlikely that they will do it and bear in mind this important principle that legislature can over write judiciary but those powers are limited.

Q: Ranina - do you think we could see some kind of clarificatory amendment that will affect the Vodafone case?

Ranina: I agree with both Dinesh and Mukesh that no retrospective amendment should be made. However, it does not prevent the government from making a prospective amendment so that the cases, which are in the pipeline, may still be covered. Whether it will cover transactions, which are already completed that remain to be seen. I think any amendment that will be made will be clarificatory from a particular date. Now they have amended the law retrospectively in several cases. The government is also inclined to do so. They should resist the temptation in this particular case and of course clarify the law with prospective effect so that the new law covers future transactions whenever they take place and they are not covered by the Vodafone judgement.

Q: The fiscal deficit is going to be in focus this time. So are you expecting an increase in tax rates, will he roll back the concessions that he gave in direct taxes in 2008?

Kanabar: That question can be broken up into 2-3 aspects. We do not have buoyancy in collection, which was expected by the government. At this point of time the Budgeted short fall for example on direct taxes is close to about Rs 40,000 crore and one does not know how the years will pan out. Moreover, in some sense Vodafone has an impact out there because the total amount of taxes, which are probably involved in similar cases, was probably to the tune of about USD 5-6 billion. Many of those taxes are coming at this point of time given the Supreme Court judgment.

So there is a situation where there is no buoyancy in collection, government needs to collect more. We are also looking at moving towards a GST regime. The question really which one needs to ponder is what will the government do in a situation like that? We should expect in the field of indirect taxes, the service tax to move up by a couple of points that is what the government is looking towards appropriate rate for GST. Also there is the negative list. There was already a policy paper, which was rolled out, and I am looking forward to government coming out with a negative list on service taxes. Therefore, every service will be taxed barring those, which are excluded. I see both the things happening. A, an increase in service tax and B, sort of streamlining to say that more services will now be brought under the net and almost everything will be covered.

As to whether the stimulus package will be rolled back? One must also remember at this point of time that this is also one of those Budgets, which is going to be slightly populist in nature. So on one hand the government wants to collect more, at the other hand it might want to appease the smaller taxpayers and therefore probably increase the threshold limits and would the government at this point of time want to take away the stimulus package? I would hope that they do not do that.

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