Remove surcharges and cess, tax corporates moderately

Team Government of India has been extensively reaching out to global investors, governments and various stakeholders to attract further investment in India …all this coupled with positive economic indicators has raised the expectation bar. What is awaited is a dose of reforms and a road map to next 5-10 years. On the other side the revenue/tax collection is quite low, and the divestment programme is yet to achieve the targets (with a month to go). Obviously, there will be a balancing act to meet the fiscal discipline.
On a high note, some of the key expectations from a corporate tax perspective which could help to revive investment, increase growth and generate employment are given below:

Lowering effective tax rate:

The finance minister during the meeting at the World Economic Forum at Davos had hinted at not raising the existing tax rates.

The current effective tax rate for domestic companies whose taxable income exceeds Rs 10 crore is almost 34%. A plethora of surcharges have become a permanent feature of the tax system insidiously increasing the effective tax rates. Now that there is corporate social responsibility discipline in place coupled with better economic factors and stabilised exchange rate, it's time to remove all the surcharges and cess. This will result in a moderate rate of 30% tax on corporations, which would still be higher than most countries in BRIC and other emerging markets. Also, thee needs to be a roadmap or guidance on reduction in tax rates for next five years.

Lower rate of MAT

The Finance Act, 2011, had increased the rate of MAT from 18% to 18.5%. The rate of 18.5% (effective tax rate @ 20.96% inclusive of surcharge & cess) is high as it adversely affects the MAT paying companies. Hence, it is suggested that the effective MAT rate may be brought down to 10% or have a graded MAT scheme ie 15% MAT for taxable income and 10% for exempt income; obviously, there should not be any surcharges or cess.

Attribution of profits to a Permanent Establishment ('PE')

At present, there is no guidance for the tax authorities for the basis of attribution of profits to be taxed in India in case a Permanent Establishment (PE) is established. Hence, the tax authorities arbitrarily attribute huge amounts as income of the PE and tax the same in India. Accordingly, a clarification is much needed to provide that the tax authorities cannot attribute further profits to PE, if the PE is remunerated on an arms-length basis. This will encourage foreign investors to not only invest in India but provide appropriate guidance on taxability in India.

Clarification on taxability of indirect transfer

There is a need for clarification when and how the capital gains from indirect transfer become taxable in India. As the term 'value substantially' is not defined under the Act, it has led to significant subjectivity, uncertainty and litigation.
The government may bring clarity that "more than 50%" of value being derived from Indian assets to be considered as the meaning of "substantial" for taxing indirect transfers which would also be in line with the Shome Committee recommendations and the recent Delhi High Court ruling in the case of Copal Research. The industry is also suggesting that minority interests in listed securities and intra-group transactions should be outside the purview of indirect transfers.

Special economic zones (SEZ)

'Make in India', an initiative led by the Modi government designed for enhancing investments in India with objective of "sell anywhere but make (manufacture) in India" has re-emphasised the importance of boosting the manufacturing sector. For the same, development of more SEZs within the country would become important. In terms of the above, it is expected that the finance minister could take steps to simplify the rules for developers of SEZs so as to encourage development of more units. Also, there is should be single tax window for units established in SEZs (under Make in India scheme). The same would help to encourage augmented exports of Indian manufactured goods which would ultimately help to earn foreign exchange. Also, abolishment of minimum alternate tax (MAT) and dividend distribution tax (DDT) for SEZ developers would be welcomed by the industry players.

Promotion of infrastructure sector

Infrastructure development is a pre-requisite for the growth and development of any country. The government has identified infrastructure development and growth in manufacturing sector as its key focus areas. The government has offered various tax incentives under the Act to infrastructure companies such as power, roads etc to boost infrastructure development. However, the same has not yet taken off completely. Accordingly, the finance ministry needs to introduce more incentives for infra players so as to encourage greater capital expenditure and attract more foreign infra players to India.
It is worthwhile to note that the benefit available to the infra companies under the normal provision of the Act get neutralised since the companies are required to pay MAT on their book profit. Hence, to attract more investments in the infrastructure sector, MAT on infrastructure companies should be abolished. It is also necessary to extend the investment allowance benefit to increased categories of plant & machinery and to other industries including hotels, information technology, etc. This will help in giving a boost to the economy.

Promote R&D

We see Indians (i.e. scientists, technocrats) at the multinational firms, who facilitate creation of innovative / creative technology, products, etc. All this is possible through investment into R&D; and it results into value creation, global brands, etc.
In order to create new technological innovation whether into agriculture, medicine, information technology, consumer products among others, there is a need to attract talent and investment. One of the steps to invite talent/capital into R&D could be to provide better tax incentives for R&D and graded tax regime for taxing income from such products or solutions. While India does provide an attractive jurisdiction to outsource R&D work, to put India in a leading position there is a need to provide impetus to such activities in the form of tax and fiscal benefits.

The writer is partner – tax & regulatory services, EY. Mitesh Jain, senior tax professional, EY contributed to the article. Views expressed are personal