The countdown has begun for the budget, with both Indian corporates and foreign investors having huge expectations from the new government.
Corporates have a fair expectation that the tax environment in India should be clear, certain, has effective tax dispute mechanism and is administratively not burdensome. Some crucial expectations of corporates in direct tax along with the recommendations are:
Reduce corporate tax rate: The effective rate in India for domestic companies is almost 34%, and for foreign companies is almost 43%. India is among the few countries that had passed legislations last year to increase the corporate tax rates. India being an emerging market and with a lot of potential for corporates to expand, it is expected that tax rates are reduced to increase retained earnings, which could, in turn, be used for expanding business. It is therefore recommended that the FM reduces the effective tax rate and provides for a single tax rate instead of levy of additional surcharge and cess.
Incentivise power, infrastructure and energy sector: In a developing country like India, power, infrastructure and energy sector assumes great importance for attracting new investments and attaining high growth.
The growth of these sectors has a direct bearing on the other sectors like construction, agriculture, automobiles, textiles, etc. At present, tax laws provide for tax holiday to power sector only for units commencing power generation by 31 March 2013. FM should therefore extend the tax holiday, by providing for extending the tax holiday by at least five years. Also, applicability of Minimum Alternate Tax (MAT) to units at SEZ, power sector, infrastructure and energy sectors may be revisited to provide for non-applicability of MAT during the tax-holiday period.
Remove retrospective amendment: Investors globally witnessed prolonged litigation in India by virtue of several large and high profile cases such as the Vodafone. Vodafone had won the tax dispute after obtaining favourable decision from the Supreme Court (SC). However, after the SC's decision, the income-tax law was amended retrospectively to negate the favourable decision of SC resulting in an international outcry of investors on the uncertain tax environment and loss of confidence.
It is, therefore, recommended that retrospective amendments such as on indirect transfer, royalty, TDS be deleted to regain investors confidence.
Defer General Anti Avoidance Rule (Gaar) - The Gaar provisions were introduced to check tax avoidance and were to have come into effect from 1 April 2014. However, they resulted in controversy, with corporates getting concerned about unwanted future litigation which could arise and therefore Gaar provisions were deferred to 2016.
Ambiguities continue to remain in Gaar with respect to several concepts such as lack of commercial substance, substantial commercial purpose, bonafide objects, etc. Therefore, considering the current investment scenario they would expect Gaar to be deferred till the ambiguities are clarified and confidence is developed on its implementation.
It is therefore recommended that Gaar be deferred to improve industry sentiments.
Settlement of ongoing tax disputes: Considerable resources of the corporates is spent on either obtaining certainty from tax authorities on tax laws or for quick disposal of tax disputes. At present, on a conservative side, it takes a minimum of 12-15 years for a litigation issue to be resolved till the SC. Therefore, corporates would welcome a mechanism which could provide for quick disposal and settlement of cases. It is recommended that the FM may provide for settlement of cases by payment of tax liability on a tax pending dispute and waiving off the interest and penalty. This would encourage corporates who want to suo moto settle the ongoing pending cases year on year at one go with a waiver on interest and penalty and at the same time would serve the purpose of government of getting tax inflows, which otherwise could have been deferred due to stay on payment of demand obtained by the taxpayers from the courts.
Expand the scope of Authority of Advance Ruling (AAR), a dispute resolution mechanism which can be used only by non-residents to obtain clarity on direct tax laws in respect of a transaction undertaken or to be undertaken. AAR therefore helps in eliminating potential tax disputes.
It is recommended that scope of AAR be expanded to Indian companies also. Considering the fact that expanding the scope of AAR would result in increase in number of AAR applications, the FM could provide for allowing Indian companies to approach AAR provided the transaction exceeds certain monetary limit. Further, the number of judges at AAR should be increased for quick disposal of cases.
The writer is a tax partner with a member firm of Ernst & Young Global. Views are personal. Saral Barlota, senior tax professional, EY, contributed to the article