Promising outlook for the corporate tax world?

Amidst the debate around the face-lift given to indirect tax structure by the introduction of GST and the impact of demonetisation on the economy, Union Budget 2018-19 has a lot of public and investor expectations riding on it.

Budget 2018 will be the first post-GST Budget and also the last full Budget of the Modi government before the 2019 general elections.

Across various forums, the government has indicated that demonetisation had caused "some pain" and there would be "more gain" in the months to come. To make this a reality, the government should use the Budget window, especially to bring a sigh of relief in the direct tax segment.

To embark on this journey, in November 2017, the government constituted a task force to draft a new direct tax law in consonance with economic needs of the country. Until such new law is formulated and implemented, Budget 2018-19 would need to address key corporate tax issues which remain an urgent need of the hour.

Some of the key expectations from corporate tax perspective are as under:

To begin with, corporate tax reduction is very much a talking point this year and is at the top of India Inc’s wishlist. It is the need of the hour that the corporate tax rate is reduced to 25%, in line with the promise made earlier and to make Indian businesses competitive on a global level. Further, income tax rates for unincorporated bodies such as limited liability partnerships should also be reduced. In addition, the government should consider inclusion of small corporates/SMEs under presumptive taxation regime and also increase the limit under the said regime to widen the tax base and reduce the compliance burden on small taxpayers.

There is a strong need and plea for abolishing MAT, especially with the phasing out of deductions and exemptions. Further, till the time the provisions of MAT are fully phased out, an indefinite period (as against current period of 15 years) for carry forward and set-off of MAT credit would be welcome. Even otherwise, certain important clarifications on MAT are required. To mention a few, capital receipts (not chargeable to tax) credited to profit and loss account and dividends received from foreign company (similar to domestic dividend) should be exempt from MAT.

Moving further, recently and as a welcome step for companies subject to Insolvency and Bankruptcy Code (IBC) proceedings, the government relaxed certain rigours of MAT provisions for such companies. This Budget may expect further relaxations to address other key issues of such companies from a tax perspective.

Digressing a little, on the dividend front, the effective rate of Dividend Distribution Tax (DDT) is about 20%. It should be reduced considerably to bring it at parity with a reduction in corporate tax rate and to boost the equity inflows in India. Further, dividends which have already suffered DDT once, are again being subject to DDT at each company level in the multi-tier corporate structure. To address this, the government may take corrective steps. For instance, dividends which have suffered DDT should be treated as a pass through so as to avoid cascading impact of DDT. This will boost investor confidence and improve ease of doing business in India.

Further, under the current law, loans/advances granted to shareholders (holding more than 10% voting rights) are taxable as dividend in the hands of shareholders in spite of genuine need of funds at the shareholder-level for a short duration. It is anticipated that such tax be relaxed in case of such transactions. Alternatively, the threshold limit of 10% may also be increased to 51%, which would also assist in reducing the rigours of this provision considerably.

Budget 2017-18 restricted weighted deduction for capital expenditure to the taxpayers engaged in specified businesses from 150% to 100%. However, to boost growth and promote Indian infrastructure sector, which is a major contributor to India GDP, the government should consider restoring the weighted deduction (i.e. 125% to 150%) for specified businesses and extend the same to new infrastructure facility also.

Similarly, the past Budgets provided for a gradual reduction in the amount of deduction available (from 200% to 150%-100% in gradual years) for expenditure on scientific research. Withdrawal of weighted deduction for scientific research expenditure will be a retrograde step, and therefore, weighted deductions for various modes of scientific research expenditure should be continued. Alternatively, the government may also consider introducing benefits in the form of tax research credits which can be offset against future tax liability.

Lastly, and on the administrative and litigation front, it is time certain bold steps are resorted to ensure faster processing of tax refunds and also institute a mechanism for quick disposal of appeals. A shortened litigation cycle and a pragmatic approach benefits both the government and the taxpayer.

To conclude, it is time for the government to bring out some positive and optimistic outlook for this Budget at least. Right from the common man to the super rich, all eyes are on this Budget. The government will, therefore, need to strike a fine balance. It will be interesting to see how the Budget unfolds.

Sunil Kapadia, Tax partner, EY India