Of vision, growth pangs and solutions

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India has a historical opportunity to claim its rightful place in the world economy. We have the natural resources, the human asset base, the financial capital, the managerial acumen and all other attributes to grow from strength to strength. In essence, we are fully committed to economic reforms even though, at times the pace does not match expectations – perhaps the price we pay for democracy! But it is important that our economic growth is inclusive and the benefits percolate to as many people as possible so that we do not end up increasing the gap between the haves and the have-nots.

In my opinion, given the maturity and the opportunities the Indian economy offers, the Budget exercise should not be the ‘great annual event’ it is made out to be with wish lists and expectations of major policy initiatives. These should happen throughout the year as and when required.

Corporate India is in fairly good shape. Confidence levels are high and the economy is intrinsically sound, so there is no real need for sops and handouts. The government of course has a role to play: by acting as an enabler and ensuring that it creates a conducive economic environment, removing ‘speed-breakers’ and ensuring that the industry retains its value proposition and competitive advantage.

While the corporate sector gets on with business, the government should address issues like removing bureaucratic hurdles and red-tape, simplifying procedures and creating a level playing field. It needs to address strategic issues like promoting technology and innovation, and the increasing challenge of skilled and trained human resources.

What we need the Finance minister to address is the speedy implementation of administrative and fiscal reforms and doing away with non-value added and antiquated practices. For instance, in the new VAT regime, C-form submissions should be done away with as we reduce the central sales tax, as a step towards its eventual displacement. The LTU concept (large taxpayer unit) is a sound one and all VAT states should be connected for sales tax purposes.

Excise duty on deemed exports is now being collected and subsequently refunded. This is a non-value added administrative exercise and should be discontinued. Moreover, benefits applicable to physical exports should also be extended to deemed exports and sales tax and service tax on such exports be exempted. Similarly, the fringe benefit tax and other levies which are more of an administrative nightmare and don’t really add any significant value to the exchequer, should be abolished. On the whole, the government should simplify the structure and take corporate tax through a single window, even if it means revising the rate marginally to compensate.

Among other required reforms, education cess and surcharge should be consolidated to harmonise excise duty, and STP benefits should be extended beyond 2009 to bring them on a par with SEZ benefits.

One of our greatest needs today is to build world-class infrastructure with a vision and do it fast. The infrastructure investment should be doubled from the current 5% to at least 10%. For the power sector, it is now critical to address the challenges and populism must give way to pragmatism in order to ensure basic viability. We have covered early ground on encouraging private participation but need to do a lot more to bring in adequate funding. Special treatment could be considered for instance on Cenvat for the sector across generation, transmission and distribution projects, regardless of size.

—The author is MD, ABB India

SEZ

Nitin Baijal & Abhay Sharma
The SEZ legislation, introduced with much fanfare, has often been touted as one of the primary vehicles of economic growth in India. The idea behind the legislation is to catalyse growth of quality infrastructure, industry and job opportunities by offering tax incentives to those who develop SEZs as well as to those who set up units in these SEZs. But impediments and a variety of issues have resulted in only a portion of the potential of SEZs being tapped.

One such issue being faced by most corporate tax payers that have SEZ units is the calculation of the exemptions on the profits of SEZs under the Income Tax Act, 1961. Under Section 10AA of the IT Act, the exemptions are equal to profits of an SEZ unit x the export turnover of that unit. As regards the interpretation of the term, ‘total turnover of the business of the assessee’, there exists confusion.

The revenue authorities say that the total turnover of the businesses of assessees includes the turnover of not only SEZs unit but also of the entire businesses of the assessees. On the other hand, assessees feel that only the total turnover of SEZ units be included for calculation purposes. So, the revenue approach seems prejudicial to those whose businesses are not solely conducted via SEZs.

To have a better understanding of the debate, lets consider this scenario: company A has a total turnover of Rs 150, of which Rs 100 come from one SEZ unit and Rs 50 from another non-SEZ unit, and also an export turnover of Rs 100 and profits of Rs 100, both from the SEZ operations. Now consider the case of company B which has a total turnover of Rs 100 and a profit of Rs 100, both coming SEZ operations. Here, the tax-exempted profits of company B’s SEZ unit shall still be higher at Rs 100 since, while computing, only the turnover of its SEZ unit will be considered. Whereas, while computing the turnover of the SEZ unit of company A, the turnover of both SEZ and non-SEZ units will be considered. Hence, company A ends up being a loser with a total tax-exempted profit of Rs 66.67. In our view, the stand adopted by the assessees seems to have merit. Further, judicial authorities have also been saying, that the benefit under such Sections is to be calculated keeping in mind the unit alone .

Even the Central Board of Direct Taxes has previously clarified in relation to similarly worded provisions of Section 10A of the IT Act—that the calculation of profits to be exempted is to be computed keeping in mind only the undertaking and not the business as a whole.Given the importance of SEZs to the our economy, the government could consider clarifying the legislative intent by using this year’s Finance Act and laying to rest an issue that has caused much consternation among a section of the taxpayers.