The much-awaited DTC contains significant proposals such as reduction in corporate tax rate to 25%, reduction in individual tax rates and at the same time an increase in the tax base through levy of minimum alternate tax-based on gross assets, stringent anti avoidance rules, expansion of rules relating to corporate residence and redefining the relationship between tax treaty and domestic tax laws. Although, the DTC has been broadly welcomed by the industry at large, there are certain areas which need to be ironed out. The industry was also pleasantly surprised by the governments decision to remove fringe benefit tax (FBT) and commodities transaction tax. FBT has been replaced by the perquisite taxation, which is largely similar to the regime which existed prior to FBT. Taxability of Limited Liability Partnerships (LLP) was largely clarified though issues relating to tax treatment on conversion of company to LLP and foreign investment in LLP remain.
Introduction of the Dispute Resolution Panel, advance pricing arrangements in the DTC and proposal to introduce safe harbour rules were some key moves welcomed by the India Inc.
On the tax administrative side, some circulars relating to taxation of non-residents have been withdrawn and at the same time the Indian revenue authorities have trained their guns on some of the large cross-border transactions involving Indian assets. Recent judicial pronouncements relating to tax withholding have also given the revenue authorities a fillip to increase their scrutiny on cross border payments.
Introduction of GST in the indirect tax was one of the significant initiatives. The proposed GST regime would subsume various central and state taxes including excise duty, additional customs duty, service tax, VAT, luxury tax, etc. It is proposed to have a dual GST system i.e. a Central GST and state GST and interstate transactions would be liable to an IGST. The GST regime looks to provide all the benefits of set-offs and input tax credits from the original manufacturer/service provider up to the final retailer/service provider and the industry should benefit from the removal of cascading effect of Central and state taxes and multiplicity of tax treatment across state boundaries. Although consensus has been reached on most issues around the GST regime, issues relating to rate of tax, tax slabs, place of supply rule and status existing special schemes, exemptions and remissions are yet to be ironed out.
With a view to stimulating the economy the government in February lowered service tax to 10.3% from 12.36%, excise duty to 8.24% from 10.3% and customs duty to 24.42% from 26.85% and these measures have been extended to the current fiscal as well.
2010 should see the introduction of the GST regime, though not necessarily in line with original deadline of April 1, 2010. The government is also expected to finalise the DTC during the course of 2010 and these two changes will definitely require industry to change the way India Inc does business and at the same time result in finance professionals and C-suite undergoing retooling of their existing skills. Given the burgeoning fiscal deficit currently expected to be 6.8% of Indias GDP, it would be interesting to see if the government rolls back the stimulus measures, keeping in mind the potential negative impact it may have on the GDP growth. Outcome of tax litigation vis--vis cross border transactions would need to be carefully monitored keeping in view the impact it could have on foreign investment into India. In summary, 2010 could be the year in which tax would be key driver to Indias growth story!
The writer is tax partner, Ernst & Young, India