Rationalisation of taxes will help companies

This budget could act as a catalyst in giving an impetus to India’s growth story. While direct tax collections are likely to exceed Rs7.82 lakh crore, as against an estimated collection of Rs7.45 lakh crore during the current fiscal, there are concerns about rising inflation, increasing interest rate, foreign institutional investors (FIIs) liquidating their investments in India, funds being parked outside India, etc. 

Corporate tax rate
A liberalised taxation regime has been a long-pending demand of the corporate sector. Considering that the tax collections during the current fiscal are likely to exceed the budgetary target by about Rs37,000 crore and coupled with the industry recommendations, the corporate tax rate could be reduced from the current 30% to 25%.

This will improve tax compliance and governance and thereby have a larger tax base. The reduction of the corporate tax rate to 25% would also bring the tax regime in the country at par with that of developed Western nations and make the country’s corporate sector more competitive globally.

Alternatively, to align with Direct Taxes Code (DTC), surcharge could be abolished, this will reduce effective tax rate of 33.22% to 30.9% (including education cess).

Minimum alternate tax
There have also been demands from various quarters for rationalisation of MAT as a specified percentage of the basic corporate tax. MAT is primarily directed towards profit-making companies that do not fall under the tax net because of exemptions by causing them to pay a fixed percentage of book profits.

Over the years, MAT rates have gone up from 7.5 to 18%, causing difficulties for the industry, especially the infrastructure sector, which is reeling under the pressure of MAT. The MAT rates could be reduced and brought down to the earlier level i.e. 7.5% (atleast for critical sectors such as infrastructure). Also, availability of MAT credit could be increased from 10 to 15 years to streamline it with the provisions of DTC.

Dividend distribution tax
Many corporate houses, today, are forced to maintain a dual-tier/ multi-tier structure for their businesses on account of commercial, regulatory and legal constraints/ regulations/ considerations. This often results into multiple levy of DDT and the cost of doing business in India. This cascading impact of DDT in multilayered corporate entities can be done away with by rationalising the DDT provisions by making it a single level levy.

Revenues from overseas investments
In the context of liberalisation and globalisation of Indian economy, many Indian entrepreneurs are making overseas acquisition or setting up companies outside India to increase their businesses/ expand their base.

While dividend income (profit repatriation) from such overseas investments is taxed at 33.22% in India, many offshore jurisdictions offer participation exemption to companies and accordingly, exempt such dividend income from tax.  Therefore, to increase the global competitiveness of Indian companies, vis-a-vis companies from other countries, the government could introduce similar participation exemption/ incentives.

External commercial borrowing
In order to provide easy access to low-cost offshore funds in the form ECB, exempting interest income (on such ECB) from taxes could be explored.  The said exemption would not only make funds available at an economical rate to the Indian corporate sector, but could also attract foreign investment in the form of ECB in India.
Increase in inflation and interest rates will cause a huge burden on the operations and cost structures in India, impacting sales turnover.

Thus, rationalising taxes would help corporates sustain growth.
The government is under pressure to bring back the ill-gotten money stashed outside India.  In fact, the Supreme Court has now started questioning the government on the measures/ steps taken to this effect. While it may be too early to announce any measures at this stage, but it would be important to initiate steps such as entering/ renegotiating bilateral tax treaties, agree a mechanism for exchange of information, etc.

The government has already embarked on bringing about substantial changes to the legal framework concerning direct taxes, with the proposed DTC set to replace the current Income Tax Act, 1961 from April 1, 2012. Thus, while the finance ministry is unlikely to make major changes to the current tax regime, it could use Budget 2011 as an opportunity to rationalise and streamline the same with DTC.

The writer is a tax partner with Ernst & Young. Views are personal.