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Budget fails to signal stable, friendly tax regime

Tax experts say Chidambaram has failed to take any major steps to improve India's tax regime in keeping with global best practices.

Suman Layak        Last Updated: February 28, 2013  | 19:53 IST

Insipid and uninspiring - that's the first impression of Finance Minister P. Chidambaram's tax proposals in the Budget .

Tax experts say Chidambaram has failed to take any major steps to improve India's tax regime in keeping with global best practices. He also hasn't sent any signal that India's tax regime will stable and friendly and, instead, has introduced measures that would last just one year.

Experts feel it will be impossible for Chidambaram to push forward the Direct Taxes Code and the Goods and Services Tax (GST) before the general elections due by May 2014. "The Direct Taxes Code is a work in progress. This [budget] gives the impression that it is a stop-gap arrangement," says Diksha Baxi, Executive Director at law firm Khaitan & Co.

Anish Mehta, partner at audit and consultancy firm BDO India, says Chidambaram should have announced that cases like the manner in which Vodafone was targeted by tax authorities will be avoided in the future. Mehta also feels that the proposal to increase the rate of tax on royalty payments, from 10 per cent to 25 per cent, will surprise companies. What likely prompted Chidambaram to increase the tax rate was the fact that Indian units of a lot of multinationals had increased their royalty payments in recent years. Had these companies been repatriating the money as dividend, the tax impact would have been 16 per cent. Still, the proposal will not help the government much as companies can take advantage of double taxation avoidance treaties that India has signed with several countries, says Mehta.

Mehta says it is unclear how the finance minister will get his math right. "He is increasing plan expenditure by 30 per cent - that is by Rs 1.20 trillion (one trillion equals 100,000 crore) and his tax increases will bring him only about Rs 20,000 crore. Of this, Rs 9,000 crore will go away for GST-related compensation for states. If he is betting on growth and higher foreign direct investment, he needed to send stronger signals."

The minister has offered few incentives to the common man, says Mehta. "On the other hand, he has targeted the rich in at least four ways - imposing a surcharge on people with taxable income of more than Rs 1 crore, increasing the tax on sport-utility vehicles, luxury flats and residences, as well as on high-end mobile phones."

Baxi says Chidambaram has tried to please a lot of people in the government's last budget before general elections. "For really significant changes we will have to wait," she adds.

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