Budget to nudge I-T regime closer to DTC

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SummaryThe Union Budget for 2013-14 is likely to include steps to modernise the country’s tax administration, reduce the compliance burden and improve transparency.

The Union Budget for 2013-14 is likely to include steps to modernise the country’s tax administration, reduce the compliance burden and improve transparency. It may also include some of the tax measures outlined in the proposed Direct Taxes Code (DTC) Bill in a modified form. Officials involved in the budget-making process said the focus would be on introducing changes that would be “acceptable and welcomed by the productive sectors of the economy”, a clear indication that there would not be any tax proposals that would upset the investor community.

While personal income tax rates have already been aligned with the slabs and rates proposed in DTC, corporate tax rates continue to be slightly higher than the DTC rates including cess and surcharge. Since the average effective tax rate on corporates is below 25% (despite a 4 percentage-point increase since 2006-07 due to the phasing out of exemptions), it is unlikely that the extant rates would be disturbed.

KR Sekar, partner, Deloitte, said: “We expect stability and certainty in the tax regime, measures to revive the economy and steps towards a more effective dispute resolution that unlocks the amounts involved.”

The phasing out of profit-linked incentives and replacing them with investment-linked ones had started some years ago, with more substantive moves being in the last couple of years. Yet, as far as the alignment of the existing tax provisions with the DTC is concerned, there is scope for more action in this year’s budget. Some of the concepts outlined in DTC including the General Anti-Avoidance Rules and the provision for multinationals to strike a pact with tax authorities on the way they price their cross-border trade within the group to avoid transfer pricing disputes have already been legislated. Other concepts outlined in the code such as Controlled Foreign Corporation (CFC) rules meant to tax the non-repatriated profits of Indian companies’ overseas subsidiaries and branch profit tax (BPT) targeting the permanent establishments of foreign companies here would need clarifications and some relaxation before their introduction. Some analysts believe finance minister P Chidambaram might address these concerns in the coming Budget, while there is also a view that the government might wait till a formal position is taken on the DTC before CFC and BPT concepts are introduced.

The industry wants the scope of CFC provisions to be narrower, limited to one level of overseas subsidiaries and credits to be allowed on the taxes paid by the foreign subsidiary abroad. DTC had proposed a 15% BPT in lieu of a reduction in income tax rate for foreign companies from 42% to 30%.

Chidambaram’s advisor Parthasarthy Shome had said last week that the ministry would increasingly follow the approach of looking at contentious tax matters from a global perspective, even as New Delhi strives to revive investor sentiment. Chidambaram on Tuesday urged his officers to follow a friendly approach, which would enhance tax compliance. “As we go forward, we should rely more on technology, non-intrusive intelligence gathering and a non-adversarial tax administration,” Chidambaram said while addressing officials of Central Board of Excise and Customs (CBEC) here.

The finance minister also has to make dispute resolution mechanisms more effective. Experts said some of the existing provisions such as the Mutual Agreement Procedure, under which tax authorities from different countries come together to agree for an understanding to avoid double taxation of companies present in all the countries, have not yet been effective due to the alleged unwillingness of India to make compromises.

“We are trying to see what would be the best in terms of transparency, facilitation in terms of returns so that some of the issues that are bothering the industry will be covered,” Shome had said last week.

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