Union Budget 2015: Time to open doors for investments with tax reforms: EY

Prashant KhatoreEY India‘Achhe din anne wale hain’ was the slogan of the Bharatiya Janata Party (BJP) for the 2014 Indian general election. The slogan was coined by BJP's Prime Ministerial candidate Narendra Modi, indicating that a prosperous future was in store for India if the BJP came into power.In this context one has to really analyse whether the slogan holds good for India Inc also. The Modi government will present its second union budget (first full-fledged budget after UPA government), and there are numerous expectations from Mr. Jaitley by India Inc for a balanced growth and development.India is one of the fleeting growing economies and one of the most attractive investment destinations in the world. Over the years, India has employed various fiscal measures in order to achieve higher economic growth and stability, efficient resource allocation and equitable distribution of income. While, Finance Ministry is on its wheels to prepare for the budget to be presented in house on 28 February which will lay down the broad agenda of “ache din” for remaining tenure. There are lot of expectations to bring certainty in Indian tax regime and to accelerate the momentum of Indian economy’s growth. Some of the expectations from the upcoming budget are discussed below.Minimum Alternate Tax (‘MAT’)/ Alternate Minimum Tax (‘AMT’) as the name suggests is levied alternatively (in absence of levy of normal tax) on the book profits of the company/ LLP. As the name itself connotes, the tax rate should be kept at minimum compared to current rate of 18.5%, which is approximately 2/3 of normal tax rate. In an ideal tax scenario, MAT/AMT should be as low as possible and therefore should be around 50% of normal tax rate. Also the time limit for availing MAT credit (difference between Normal Tax & MAT) should be relaxed to unlimited time period against current limit of ten years, which will ensure that corporates are not unduly affected for their inability to utilize MAT credit because of unavailability of normal profits for taxation.There has been an ongoing debate around applicability of MAT on foreign companies, which has resulted into discomfort amongst foreign companies, the same should be clarified in upcoming budget.Another limb of direct tax regime, which has resulted into inconsistency and discomfort amongst foreign investors, is retrospective amendments in relation to royalty & fee for technical services taxation and clarifications issued post Vodafone judgement (Supreme Court) in relation to indirect transfer of shares.Lot of suggestions have been made to Finance ministry suggesting that no tax should be imposed on capital gains arising out of transfer of shares of foreign company listed and traded on stock exchange outside India, such recommendation should be taken care of and reflected in upcoming budget of 2015. Current direct-tax regime in relation to indirect transfer of shares provides that capital gain arising on transfer of shares of a foreign company is subjected to tax in India, if shares of such company derive their value ‘substantially’ from Indian assets. There has been a lot of debate on what constitutes as substantial. Thus, Government should clarify what is meaning that can be ascribed to word “substantially”. Finance Act, 2013 has provided investment based tax incentive to encourage the companies engaged in the business of manufacture or production which provides for additional deduction of 15% of cost of new assets purchased within specified period. However, the cumulative condition of ‘acquired and installed’ to be complied in the same year may result in harsh consequences where acquisition is within the prescribed period but installation is completed beyond the prescribed period – say, in  a case where assets are acquired towards fag end of the year. This defeats the object of encouraging investment in manufacturing sector. It is recommended that there should be longer time limit for installation of assets to make the incentive more meaningful.Government should also look at tax holidays in select industries to promote investment and employment.  Also there is an urgent need to find a way to achieve speedy resolution of tax disputes.To spur the growth in Real Estate industry, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts were introduced. However, the taxation provisions brought in by last Finance Act for these investment vehicles were not seen favorably due to which the expected kick-start for these new vehicles was not achieved. This Finance Act should target to bring in required amendments to make these investment vehicles tax efficient for investors, sponsors and other concerned parties. A few of the major expected amendments are providing full pass through status instead of partial pass through status for taxation purposes, amendment in relation to applicability of MAT & DDT on special purpose vehicles etc. Investors often look for transparent and steady tax and regulatory regime for investment decisions. However, developments in Indian economy are now weakening investor confidence in the country. With ever increasing tax litigation and transfer pricing being used for astounding adjustments including alleged taxation of foreign direct investment, many investors are now unsure of their long-term investments plans in India.While it is appreciable effort of government’s reforms that has led to rise in revenue collection as a mean to reduce fiscal deficit, however a lot more reforms are expected from “Modi Sarkaar” in order to boost Indian economy through much awaited tax reforms resulting into stable tax environment, which is business friendly and contributing to India Inc. (Views expressed are personal)