Last year, the FM had promised a gradual lowering of corporate tax rates from the current 30 per cent to 25 per cent over the next four years. At the same time, the various incentives given to corporates are proposed to be taken away.
The direct tax collections for current year have fallen well short of the budgeted estimates. Tax collections for the 10 months ended January have fallen short by 35 per cent. Given the shortfall, there may not be sufficient headroom for the government to reduce the tax rate this year. If any, there may be a token reduction of 0.50-1 per cent in corporate tax rates.
At the same time, the Budget could lead to clarity as to the manner in which corporate exemptions will be removed. The government is likely to come out with a sunset date for the tax incentives, which will enable taxpayers to plan their tax positions in advance. However, given the tepid growth in corporate earnings and the continuing global weakness in the global economy, the government may not be overly aggressive in paring the incentives at this point in time.
Exports have been flagging all through 2015 and the weak global economic environment are further headwinds for this sector. The government could provide support to the industry by rationalising the levy of MAT on SEZs and continuation of the incentives to SEZs and EOUs for some foreseeable future till the sector fully revives.
The Prime Minister's pet project 'Make in India' may yet be given a much-needed boost. The government is set to remove all profit-based incentives going forward but it could retain some of the incentives on a case-by-case basis. The suggestion of Arvind Panagariya, Vice Chairman of the NITI Aayog, of a tax holiday for a pre-specified period for enterprises creating jobs in a specified period could see the light of the day. Such an incentive policy for the manufacturing sector would serve the twin purposes of boosting the sector while at the same time generating much needed employment.
Addressing the menace of domestic black money, the government has been proactive over the past year making changes in the rules by way of discouraging cash transactions, compulsory reporting of PAN, etc. Expectations are high that Budget 2016 will make additional legislative changes to address domestic black money and tax evasion.
The government has repeatedly shown its willingness to make the tax administration transparent in its functioning. It should take this process further forward by accepting and expediting the implementation of the recommendations made by the Tax Administration Reforms Commission headed by Parthasarathy Shome. The TARC report address several key problems faced by Indian taxpayers and implementation of the recommendations will go a long way in making India an easy place to do business in.
Additionally, the recent draft report by Justice R.V. Easwar (Retd) provides detailed recommendations on the amendments required in law to cut down on litigation. The government is expected to accept a number of these recommendations by way of suitably amending the legislation in the Finance Bill.
The author is Managing Partner, Nangia & Co