Budget 2014: 10 big changes that can transform the realm of corporate taxation
Tax Partner, EY
1. Remove retrospective amendment brought in Finance Act, 2012
Retrospective amendment has created an uncertainty in the tax environment. It is critical that the industry is provided with a tax environment which is clear and certain and therefore Government could send a message that it does not intend to go ahead with retrospective amendments and the judgements of the Courts will be respected which would boost the industry sentiments positively.
2. Lowering effective tax rate
The effective tax rate for domestic companies whose taxable income exceeds Rs 10 crores is almost 34%. Imposition of increased surcharge, cess, higher dividend distribution tax, makes cost of doing business in India significantly high leading to lower retained earnings for expansion, modernization, technology up-gradation, etc.
Therefore, the levy of a single moderate tax rate be adopted thereby reducing the effective tax rate and increasing the earnings of the industry.
3. Incentivise manufacturing and service sector
Considering the thrust on kick-starting growth in manufacturing sector, FM may consider to provide tax holiday, for 5 consecutive years in a 10 year period, to commence as per the choice of the assessee, to newly set up unit engaged in manufacturing activities and also extend the investment allowance on new plant and machinery (which is presently available if the new plant and machinery is acquired and installed by 1 April 2015) during an initial period of, say, three years. This would not only encourage the MNCs but also the domestic players to invest in new latest technology and thereby boost the industry output and competitiveness. Further, presently there are no specific tax holidays given to the service sector which contributes almost 60% of India's GDP. FM may consider to provide tax benefits to boost the service sector or provide weighted deduction for cost of salaries of new employees or in skill enhancement of existing employees to also boost employment opportunities in India.
4. Removal of Minimum Alternative Tax (MAT) on units in Special Economic Zones (SEZ)
The amendment in MAT provisions to make them applicable for units in SEZ resulted in breaking of 'promissory estoppel' by Government as units were established on the assumptions of exemption from MAT provisions. This measure created tremendous negative sentiment in domestic industry and needs to be restored to the original position of MAT exemption. Similarly, to give a boost to the infrastructure industry in India, MAT on infrastructure companies needs to be abolished.
5. Strengthen Alternative Dispute resolution mechanisms
Industry across all the sectors are facing a common issue of considerable time spent and costs involved in resolving tax disputes with the tax authorities.
Following changes be brought to strengthen the alternate dispute resolutions:
Expand capacity in AAR & APA for quick disposal of increasing number of applications/ cases Expedite MAPs and progress with treaty partners even where 'wordings' are unclear Expand DRPs with full time and independent members Empower DRPs to enter into negotiated settlement with taxpayers on the basis of 'no further appeals to higher courts'
6. Encouraging outsourcing of R&D expenditure
Outsourced R&D work is becoming a key area for India and there is a need for encouraging investment in R&D in India in all industries i.e. chemicals, pharmaceuticals, automobiles, textiles, etc.
However there are no specific tax benefits available to units in the business of R&D. Therefore, tax benefits should be extended to R&D facilities, which are outsourced to third-Party service providers or other institutions or benefit be given to the units in the business of providing R&D.
7. Encouraging industries to go green/ CSR initiatives
At present there are no specific direct tax benefits or policies for mitigating the costs incurred by industries in taking initiatives which helps in lowering the carbon emissions, use of energy efficient products, or CSR initiatives, etc. Considering the fact that the contribution of the industry is vital for the environment and beneficial for the industry, the government could extend tax benefits for eco-friendly projects/ CSR initiates.
8. GAAR implementation
Ambiguities continue to remain in GAAR with respect to concepts such as lack of commercial substance, substantial commercial purpose, bonafide objects, abuse and misuse of law. GAAR could be deferred and should be implemented once these ambiguities are solved so as to improve industry sentiments.
9. Corporate 'risk-based' tax assessments
There is an urgent need for tax administration to evolve from a '100% vouchers/bills' audit mindset to a 'systems' based audit which focuses on few recalcitrant corporate taxpayers and collects more revenues rather than spreading itself too thin over audits of almost all corporate tax payers. This system also encourages taxpayers to take reasonable tax positions with proper disclosures to ensure being regarded as 'low or moderate' risk tax payer by the tax authorities.
10. Need to make tax administration effective
Tax Administration Reform Commission (TARC) has recently issued a detailed report suggesting improvements in tax administration and policy. It states that in 2014, India was ranked 152 out of 185 countries on the ease of paying taxes in the World Bank's "Doing Business" indicators which is a stark indication of the gap between where we are and where we ought to be.
Tremendous time is spent by industry with the tax authorities because of ineffective tax administration i.e. delay in processing refunds, rectification orders, etc.
Therefore, the TARC recommendations such as tax officers training in customer relationship, satisfaction, taxpayer education, scrutiny assessment data sought on e-system, strict time frame for issue of refunds, etc should be implemented.