The expectations ride high for the Union Budget 2015 as this is the first full-fledged budget of the new government. The government needs to demonstrate concrete action to revive investment, increase growth and generate employment.
In this context, certain budget expectations for corporate sector are as under:
1. Reduction of Minimum Alternative Tax (MAT) rates
The rate of MAT levy has seen considerably increased over the years from 7.5% to 18.5% (plus applicable surcharge and cess). The levy of MAT at such higher rate (i.e. about 2/3rd of the corporate rate of taxation) negates the tax incentives and exemption and is expected to be reduced to 10% to provide relief to the corporate sector.
2. Substitution of Dividend Distribution Tax (DDT) with Withholding Tax for foreign investors & Reduction in DDT Rate
The concept of DDT is uncommon globally and acts as a disincentive to the foreign investors. The current DDT regime in India is not in the nature of withholding tax and therefore foreign investors are not eligible for tax credit in their home countries.
It is imperative that the dividend distribution tax paid is converted into withholding tax. This shall enable the foreign investors to claim the tax credit in their home country for the taxes paid on dividends in India, without any loss of revenue to the Indian tax authorities.
The rate of DDT at 16.995% with the new grossing up requirement is effectively 20% which coupled with corporate tax rate of 33.99% makes India one of the highest effective tax rates in the developing countries. The rate of DDT is expected to be lowered to 10%.
3. Rationalization of provisions of section 14A
Provisions of section 14A (which provides for disallowance of expenses incurred in relation to exempt income) read with Rule 8D would be rationalized and reduce substantial litigation, if the DDT is converted into dividend withholding tax.
4. Voluntary Litigation Settlement Scheme
Currently, large number of appeals with tax demands of Rs. 400,000 crores appx. are pending before appellate authorities at different levels. Voluntary Litigation Settlement Scheme can be introduced whereby the taxpayers can pay the tax amounts based on such guidelines with 50% interest and no penal and prosecution consequences. This shall result in huge tax collection of outstanding demands and reduce future litigation.
5. Tax incentive to Manufacturing Companies
In line with the 'Make in India' initiative taken by the Current Government, the manufacturing sector needs backing in the form of tax concession. In this regard, lowering the corporate tax rate from current 33.99% to 25% would be a welcome step.
6. Defer the General Anti Avoidance Rule (GAAR) by at least 2 years
GAAR is an advanced instrument of tax administration- more of a deterrent measure than revenue gathering measure and its application requires specialized knowledge on the part of tax officers in the area of international taxation and other related areas such as finance, banking and corporate law.
Therefore, before GAAR is implemented it is expected that intensive training shall be given to the officers concerned and accordingly, provisions of the GAAR shall be deferred at least by 2 years.
7. Wider Coverage of Safe Harbour Rules for International Transfer Pricing
To reduce the widespread litigations in respect of international transactions between Associated Enterprises, the introduction of the Safe Harbour rules provided benchmark and certainty for Information Technology, IT Enabled Services sector, for Research & Development Centers and for government electricity companies (for Specified Domestic Transactions). It is expected that the scope of the Safe Harbour Rules be extended to cover other major sectors such as manufacturing, automobile sector (currently auto ancillary is covered in the Safe Harbour Rules), Engineering sector, other service sectors etc. in order to reduce litigation.
8. No Adjustment in case of Tax Neutral Domestic Transfer Pricing
In case of transactions between associated enterprises which are subject to same incidence of tax resulting in tax neutrality, no adjustment should be made on the Transfer Pricing front. In other words, to avoid potential litigation from the domestic transfer pricing perspective which has been introduced from financial year 2012-13, the tax adjustment in the income of the taxpayer should be restricted only to the cases where there is tax loss to the revenue.
9. Deduction for Corporate Social Responsibility costs
The Companies Act 2013 obliges companies to mandatorily spend 2% of average net profits towards specified Corporate Social Responsibility (CSR) projects. However at present, deduction for CSR Expenditure is allowed only if it falls under Section 30 to Section 36 (i.e. is in the nature of business expenses) of the Income Tax Act. Allowance of deduction through a specific provision for CSR expenditure will provide certainty regarding tax treatment.
10. Deletion of Section 40a(i)/(ia), which provides for disallowance of expenses on TDS default
Under Section 40(a)(i), expenditure on which tax is not deducted or / and is not paid to the credit of Central Government is liable for disallowance to the extent of 30% of expenditure in case of resident payments and 100% disallowance in case of payments to non-residents. There are several types of payments requiring deduction of tax at source such as interest, contractors' payments, rent, brokerage, professional fees to non-residents/residents. The Income-Tax Act contains stringent provisions relating to non-deduction of tax at source by way of levy of interest and penalty. It is punitive to provide for disallowance of entire expenses in computing taxable income as this results in penalizing the taxpayers twice for the same contravention. Section 40(a)(i)/(ia) should be deleted accordingly.
(Dr. Suresh Surana is the founder, RSM Astute Consulting Group)