By: Anish Mehta, Haribhakti & Co.
By: Anish Mehta, Haribhakti & Co.
The Union Budget 2013 would be presented in the Parliament at one of the most challenging times. Given the unfavourable fiscal conditions, there is a need for proposals which will continue to inspire confidence.
Direct Tax: Budget wish list
1. Personal taxation
The standard deduction for salaried employees should be reinstated to ease the tax burden.
The exemption limit of INR 800 per month towards transport allowance needs to be considerably raised upwards to bring it in line with the rising costs.
The exemption limit of INR 100 per month per child (up to maximum two children) towards education allowance needs to be raised upwards to bring it in line with the rising cost of education.
The current tax exemption limit of INR 15,000 per annum towards medical reimbursements needs to be increased in order to bring the same in line with the rising medical costs.
2. Corporate Taxation
2.1 Fillip to investment in infrastructure sector
There is a growing demand for augmenting infrastructure facilities to sustain and accelerate the growth momentum. To provide a requisite push to investment in the infrastructure sector, fiscal policy would have to play an important role. The key expectations are as under:
MAT on SEZ income may be withdrawn
The exemption from paying DDT by SEZ developers may be restored
Though infrastructure projects are entitled for tax holiday, the levy of MAT has negated the said benefit. Therefore, infrastructure companies should be exempted from payment of MAT.
The tax holiday benefit for the power sector under section 80-IA should be extended. At present there is a sunset clause, which entitles a company for tax benefits, only if it starts generating power by the end of 31st March 2013.
2.2 Tax exemption for dividend received from foreign group entities
Outbound investments by the Indian corporates are growing significantly in recent years. However, the returns from these investments, when brought to India, suffer tax unlike domestic dividends which are tax free in the hands of the recipients. Vide Finance Act 2011, the rate of tax was reduced to 15% (plus surcharge and education cess). Such dividends received out of tax paid profits overseas and would be subject to taxes in those jurisdictions. As such, the same should not be subject to further tax in India on remittance. It is recommended that tax on dividends from overseas group entities be done away with.
2.3 Clarity on Transfer Pricing regulations
Multinational companies have been subject to huge transfer pricing adjustments. The adjustments are usually done without appreciating the business realities and functional, risk profile of the taxpayer. It is suggested that the Budget 2013 comes out with some proposals, which are fair and in line with the existing international practices.
2.4 Effective Dispute Resolution Mechanism
Prolonged tax litigation is one of the key concerns faced by the taxpayers. The Dispute Resolution Panel (DRP) and the Mutual Agreement Procedure (MAP) have not proved effective mechanisms. There is a need for implementing a mechanism which can help the taxpayer to ‘settle’ tax disputes. This should also ensure that where a tax payer has already received a favourable resolution of a dispute, the dispute is not continued in subsequent years.
2.5 Tax benefits on Amalgamation or demerger
Currently, sections 72A/72AA of the Act allow carry forward of loss and accumulated depreciation of the amalgamating/demerged company in the hands of amalgamated/resulting company only in case of industrial undertakings, ship, hotel, aircraft and banking.
Considering the rapid growth of various new sectors, this benefit should be extended to all businesses.
Further, specific provisions need to be introduced to extend benefits of deduction under section 80-IA, 80-IB, 80-IC to the amalgamating/resulting company in case of amalgamation/demerger.
2.6 Carry forward of unutilized foreign tax credit
The IT Act provides for set off in respect of foreign taxes paid on overseas income. However, no such set off may be possible in case of loss or insufficient profits. Tax laws of certain foreign countries such as US allow carry forward of unutilized foreign tax credit.
It is suggested that taxpayers be permitted to carry forward such unutilized credit.
There appears no firm indication on the implementation of the Direct Taxes Code (DTC). So far as the alignment of the existing tax provisions with DTC is concerned, there is scope for more action in this budget. Some of the concepts outlined in DTC including the Controlled Foreign Corporation (CFC) rule, Place of Effective Management (POEM), Branch Profit Tax (BPT) etc. would need clarifications before their introduction.
In the midst of political, social and economic crises across the nation, the Government needs to take decisive steps to turn the economy around and create an investment friendly climate. The Government has already announced few reforms and hopefully the Hon’ble Finance Minister continues treading the same path.