The thrust of tax proposals are anchored on nine principles. Symbolically, the number 9 represents wisdom and good leadership; this intent of the finance minister is visible in his rather well-balanced Budget with pragmatic proposals.
For the first time, a futuristic corporate tax rate of 25% appears in the tax code, albeit only for new manufacturing enterprises. This aligns with the desire to provide a competitive framework for Make-in-India. The eligible taxpayers can elect for this lower rate, or for the existing regime of higher tax rate with investment allowance, accelerated depreciation and the like. SMEs also benefit from a 1% corporate tax rate cut, whilst the reduction of tax rates for other corporates eludes, possibly until tax holidays start phasing out in 2017.
India now seeks to tax the B2B segment of the digital economy; the finance minister proposed an ‘equalisation levy’ (6%) for non-residents providing ‘specified services’ to residents, and non-residents with permanent establishment in India. Taxation of digital economy has been in the works in several developed nations. The government wishes to encourage patent development and registration in India—there is a proposal to introduce concessional rate of 10% in respect of royalty income, along with a shelter from minimum alternate tax (MAT). As expected, in line with the government’s clarification on non-applicability of MAT to foreign companies, appropriate amendments have been proposed. Thankfully, the applicability of Place of Effective Management rules has been deferred by a year. Country-by-Country Reporting for large MNCs has been incorporated. Most proposals indicate that the tax world is converging now, with India rapidly adopting international practices.
To augment taxes and address ‘vertical inequity’ among non-corporate resident taxpayers regarding taxation of dividends, the minister proposed 10% tax for recipients in respect of dividend greater than R1 million, over and above DDT paid by the company. He also introduced a limited amnesty programme and a set of proposals to reduce litigation. Internationally referred to as the ‘Vodafone Tax’, this is one measure of 2012 which has been a persistent concern for investors. The minister has wisely proposed a solution involving payment of tax with waiver of interest and penalty. If accepted by the aggrieved investors, this could bring closure to one of the most controversial tax developments in recent times.
Balancing the attempt to improve India’s position with the global investor community, the tax cuts have been mostly for small taxpayers, who will be pleased with lower tax costs, presumptive tax regimes for small enterprises and self-employed and tax holidays for start-ups.
(With inputs from Vishwendra Singh, manager, BMR & Associates LLP)