Budget 2014: What Corporate India Wants The FM To Do
Tax Partner, EY
Not in several years has there been such an up swell of positive sentiment in the run up to a Budget. Unwittingly though, it has also imposed the burden of extraordinary expectations on the Government. While the wish lists run into reams of pages, certain common denominators emerge on what Corporate India wants the Finance Minister to do.
Changing the rules of the game to force a favourable outcome, after the game has been played (and lost) is the surest way to destroy the credibility and ensure fans lose interest in the sport. A single stroke of the legislative brush turned business and investor sentiment hostile, when Vodafone was taxed despite an Indian Supreme Court ruling to the contrary. Several other taxpayers also suffered on account of the collateral damage of the related retrospective amendments. The predominant view today is that indirect transfers of shares of Indian companies (through sale of shares of foreign holding companies) should only be taxed prospectively. Equally important is for the Government to provide clarity on the circumstances in which these provisions would be triggered. A failure to proactively clarify the law and its application would imply leaving the taxpayers and Revenue to the devices of prolonged litigation to find an answer to their questions.
The retroactive and multiple changes to the amendments made in the definition of royalties, seeking to stem the trend of taxpayer-friendly judicial pronouncements also needs to be addressed. If certainty in the tax policy should be a metric on which the Government would like to be measured, it should undo the recent trend of attributing intent to legislation on a post facto basis.
Similarly suitable amendments clarifying that capital infusions cannot be subjected to tax under the pretext of transfer pricing adjustments, will go a long way in restoring sanity and confidence in the fairness of the tax regime.
Even as we seek to address business sentiment and promote an investor friendly environment, a project as ambitious in its scope as GAAR should be handled with caution. Taxpayers and the taxman alike must be prepared, the law should be clear in its applicability and potential ambiguities and controversies must have been thought through and addressed upfront. A draft circular, a Shome Committee report and some amendments later, we are yet to arrive at a consensus on what GAAR entails. It would be prudent to have clear guidelines in place and generally build an atmosphere of trust, credibility and stability before GAAR is brought into force.
Manufacturing and capex
Given the stated intent of providing a fillip to manufacturing, the period for investment allowance maybe extended to three years, the threshold of minimum investment reduced to Rs 50 crores and the quantum of deduction enhanced to 25 percent. These asks, along with a corresponding deduction of the investment allowance in computation of MAT, will help fuel investment in manufacturing capacity.
Increasing capex will also in part be funded by cross-border debt. Extending the applicability of the lower tax rate of 5 percent on cross-border debt to loans granted beyond June 2015, would therefore be par for the course.
MAT has been a cost for infrastructure projects, which were originally intended to enjoy a tax holiday. In several cases, the infrastructure SPVs are ready to step out of their concession period by the time the tax holiday expires, rendering them powerless to utilise the accumulated MAT credit. Eliminating the levy of MAT in such cases is an immediate need, should infrastructure be a focus area. Such a move should be coupled with the re-introduction of section 10(23G), providing an exemption for income earned from funding infrastructure projects.
Tax rate moderation
The effective tax rate in competing (emerging) economies such as Brazil, Russia, China and South Africa, ranges between 15 and 28 percent, with most countries not levying tax on distribution of dividends. However the need to keep fiscal deficit in check may leave limited room for tax rate moderation.
As corporates ready their CSR spends for the first time, clarity on the tax position would be welcome in the interests of avoiding litigation in future. Upfront clarity on the tax position would assuage taxpayers who otherwise must pick from a menu of: eligibility to claim it as business expenditure, deduction under Chapter VI-A, and treating CSR expenditure as a non-tax deductible expenditure.
The capabilities of the new Government, which hopes to carry forward the momentum of the mandate it has received, shall be tested severely on 10 July against the diverse threats of inflation, deficits, currency depreciation and crawling growth. We shall hope for the best.
Views expressed are personal.