Where is this tax increase going to come from?
National Tax Leader
Ernst & Young
This year’s Budget has the usual expenditure side allocations amounting to an increase of 29% in planned expenditure over the current year.
Inherent in this are some well hidden reductions in subsidies (eg. petroleum reduced by 30%). Going to the revenue side, there is a projected increase in gross tax revenues of about 19%. So where is this tax increase going to come from? We have the following pointers in the Budget:
Increase in corporate tax surcharge from 5% to 10% (effective tax rate increase from 32.5% to 34%): The FM seems to have equated higher tax on the super-rich individuals and companies on the same plane. This is in contrast to the policy followed world over where risk capital invested in business through companies is incentivised through a lower tax rate and only individuals are subjected to higher rate.
Increase in tax rate of royalties and fees for technical services from 10% to 25%: This again is a rather curious measure as the stated objective is to bring the domestic tax rates on par with rates under tax treaties. However, most tax treaties with India actually provide a range of 10-15% withholding tax rate and a high rate of 25% under domestic laws seems equally unwarranted.
Amendment to tax residency certificate requirement: It has been clarified that the TRC will be necessary but not sufficient condition to apply the tax treaty. This again raises significant uncertainties as it gives tax officers subjective powers to enquire into tax treaty eligibility even if the TRC has been obtained.
Exemption of dividend distribution tax (DDT): In cases where the Indian companies receive dividends from overseas subsidiaries, the concessional rate of 15% tax will continue to apply for one more year and to the extent such dividends are distributed by the Indian company to its own shareholders in India, there will be no DDT applicable. This is in line with global trend of encouraging companies to repatriate profits made by their overseas subsidiaries.
The FM has mentioned that his tax proposals will yield R18,000 crore in total. This is far lower than the overall expected net increase in tax revenues, which obviously assumes a combination of increase in tax base and greater tax extraction from existing tax payers. Both these assumptions may be prone to slippages, specially the assumption of tax revenue increase without significant increase in tax base would translate into more aggressive tax audits especially Indian and subsidiaries of foreign companies operating in India.