By: Sunil D. Shah, Deloitte Haskins and Sells
By: Sunil D. Shah, Partner, Deloitte Haskins and Sells
Speculations have been building up on what is in store in the Budget 2013 proposals. This is particularly in the background of a slowdown in the rate of growth of the Indian economy and recent tax controversies surrounding foreign investment.
Rates of tax
The current rate of corporate tax of 30 percent while not excessive is higher compared to rates in several other countries. There is also a trend for the corporate tax rates to be reduced by several countries to attract investment. In this backdrop, it may be appropriate to consider a rate reduction or, otherwise, at least an elimination of the surcharge and cess. The Minimum Alternate Tax (“MAT”) at 18.5 percent plus surcharge imposes a burden on fast growing companies which are otherwise entitled to tax deductions and holidays. Hence it is advisable that the rate of MAT be reduced if not eliminated altogether.
Exemptions and tax holidays
Currently there are very few profit-based tax exemptions available, such as for the Special Economic Zones, backward states, etc. Investment-linked incentives are restricted to a select group of industries such as petroleum pipelines, specified hotels, hospitals, housing projects, etc. To promote industrial and investment growth, it is suggested to expand the scope of profit based tax holidays or alternatively the investment linked incentives to a larger category of industries.
Artificial disallowances and allowance of Capital Expenditure
There are several artificial disallowances by which legitimate business expenses do not qualify as deduction for tax purposes or even as amortization. It is best to minimize or eliminate artificial disallowances of genuine business expenditure simply on the ground of late payment or non-compliance with any other laws. It is also advisable to bring clarity to expenses which are treated as capital expenditure and to allow depreciation or amortization on all such expenditure without limiting to the existing categories of depreciable assets. It may be noted that the Supreme Court has held recently that depreciation should be allowed on goodwill. Likewise several rulings have allowed depreciation on non-compete fees.
There has recently been a spate of controversies in relation to foreign investments. Apart from the issue on indirect transfer, there have been controversies around the price at which shares have been issued to foreign investors and on treaty-shopping. It is advisable that clarity is brought around these issues as soon as possible as an investor may be reluctant to consider a long term commitment to India in an environment of uncertainty.
Currently, the salaried class has to bear a substantial burden of taxation with few and minor exemptions and reliefs as compared to several reliefs available in respect of business income and capital gains. Under the circumstances, restoration of the standard deduction would be desirable either separately or in lieu of itemized deductions.
Tax authorities sometimes decline to grant treaty benefits even though the investor may be holding a Tax Residence Certificate. In several cases, interpretation of treaty terms by the Indian tax authorities is in divergence from international conventions. It is suggested that Indian practices around interpretation of tax treaties are in line with general accepted principles of international law. This will create a more conducive environment for foreign investment and business with India.
Recovery of taxes
It is frequently noticed that coercive recovery measures are taken by tax authorities even though the matter may be pending in appeal. There needs to be a sound institutional mechanism to ensure that when a matter is under appeal the business operations of the assessee are not disrupted by coercive recovery measures.
There are several procedural requirements under the Income-tax Act such as obtaining a Tax Residency Certificate, obtaining of a Permanent Account Number, etc. These requirements often create hardships and increase the cost of cross border transactions for the non-residents or even for residents by way of denial of treaty benefits. It is suggested to ease documentation requirements to minimize any impediments to doing business in India.
Tax Accounting Standards
There has been a proposal to notify accounting standards for tax purposes. This could create duplication of work and require maintenance of a separate set of records. Instead, it may be preferable to include any adjustments in the regular provisions of the Income-Tax Act itself.
As the Indian economy matures and India takes its rightful place in the comity of nations, it is time to reinvent the tax laws to make them as an instrument of growth and equity.