UPA’s tax policies added to corporate India’s ‘misery’

Since January 2008, the UPA government has passed up four sessions of Parliament to introduce legislation to simplify direct taxes, to be called the Direct Tax Code. But in its five-year term, it has recorded the dubious distinction of introducing three ?regressive? taxes?the fringe-benefit tax (FBT), the securities transaction tax (STT) and the just-withdrawn banking cash transaction tax (BCTT)?and stopped short of introducing a fourth one, the commodities transaction tax.

Each of these taxes sharply scaled up the cost of doing business for Indian companies and correspondingly reduced their competitiveness. ?FBT is presumptive in nature and taxes expenses, instead of income,? concurs TN Pandey, former chairman of the Central Board of Direct Taxes.

For instance, a survey conducted by Ficci and PricewaterhouseCoopers (PwC) of a sample culled from the S&P CNX Nifty and the Junior Nifty indices found that in some of these prized companies for investors, the total tax rate was as high as 87.5%. This absurd level of taxation comparable to the direct tax rate of the 1970s, when the government often charged 97.5%.

For several of them, the survey shows the tax rate is above 50% (of profit before tax) with an average tax rate of 35.9%. Not surprisingly, India?s score in the Forbes Tax Misery & Reform Index saw the sharpest rise by 24 points for 2008.

Former taxmen, opposition leaders and analysts all staunchly believe that though these new taxes helped increase collections, their advent has muddied further an already complex tax regime. ?The UPA?s tax system is regressive. It is leaving behind a very complicated tax regime and has given a whole lot of discretion to tax officials. It is raid raj and inspector raj,? said Yashwant Sinha, who handled the finance portfolio in the NDA government.

No wonder India Inc has demanded a rollback of these taxes at every opportunity. ?In relation to taxes, which are more in the nature of direct taxes?like FBT?if collection is the key motive, that could perhaps be addressed by a minor tweaking of the corporate tax rate rather than bringing in a whole new tax regime,? said PwC executive director Ketan Dalal.

The UPA?s first Budget introduced STT, whose rate was further hiked in 2005. As market players feared, a large volume of incremental business on Indian stock exchanges immediately fled to tax-friendlier places like Singapore. Commenting on the phenomena, Percy Mistry noted in his report that removal of STT is one of the prerequisites of making Mumbai an international financial centre: ?There will be initial loss of revenue, but this is inevitable with the removal of bad taxes.?

Mistry says the benefit of the removal would be like the gains that accrued from lowering customs duties, which helped the manufacturing sector. The impact of the FBT can be judged from the fact that in a year when corporate income has dipped by 5%, FBT collections have risen by over 15% to Rs 6,267 crore.

Acknowledged Pandey: ?The growth in tax receipts is in no small part because of the new taxes that have been introduced. FBT, for instance, has brought in over Rs 6,000 crore to the exchequer.?

Introducing the FBT in Budget 2005-06, former finance minister P Chidambaram said, ?There are many perquisites that are disguised as fringe benefits, and escape tax.? While the tax is now levied on employers? expenses on activities such as entertainment, travel, employee welfare, accommodation and recreation, initially it was also levied on employers? contributions to superannuation funds.

Companies feel that the tax is levied on genuine business expenses and adds to the already high corporate tax burden of 33.36%. Giving some credence to the grouse, tax collections from FBT continue to be better in 2008-09, while overall direct tax receipts have slowed in tandem with economic activity.

Analysts say this rise in FBT collections is a function of expenditure. Even if profits of companies register a decline, their expenses can?t fall beyond a certain point. Sinha agreed, ?There?s no rationale behind the FBT. The BJP, in its election manifesto, has in fact promised to withdraw the tax,? said Sinha. Chidambaram described the BCTT, which was almost co-terminus with the UPA?s tenure, as a measure to curb evasion, but was considered an irritant despite a rate of just 0.1%. ?It?s a misconceived tax. Rather than how much I withdraw, what is more important is to find out what I do with it,? said Pandey.

?The STT and the BCTT are taxes on financial intermediaries, something which Chidambaram had earlier promised not to do,? said Sinha. ?If the aim is to track cash withdrawals, it can be done by simply quoting the Permanent Account Number,? a tax consultant said on condition of anonymity.

More recently, in Budget 2008-09, Chidambaram proposed a commodities transaction tax, roughly on the lines of the STT. Commodity exchanges and even the Forwards Market Commission were up in arms. Echoing Mistry?s objections, they said the tax would make commodities more expensive at a time when inflation was already on an upward spiral.

For every Rs 1 lakh traded on commodity exchanges, the transaction cost would go up to Rs 21 from the current Rs 3. Finally, the PM?s Economic Advisory Council had to step in and point out that introducing the tax may not be a wise move, given that inflation had already hit 7% by then.

New taxes apart, procedural hassles have also added to taxpayers? ?misery.? While the income-tax department made online filing of returns for corporates mandatory from assessment year 2006-07, there have been more than enough teething troubles, most significantly a software snag, which kept the returns from being processed. Companies feel that filing separate returns for taxes like FBT also add to their overall tax burden.

Added to this is the revenue department?s inclination to change tax laws retrospectively in the Finance Bill. For instance, to ensure that telecom major Vodafone and others pay tax on cross-border deals, Budget 2008-09 amended the Income-Tax Act retrospectively from June 2002. The amendment made buyers responsible for paying tax after purchasing any capital asset ? a share or debenture ? of a company in India.

Meanwhile, persistent grey areas over international tax, particularly transfer pricing, continue to lead to lengthy litigation. ?Complexity in tax laws is more or less a global phenomenon. However, uncertainty of interpretation and long delays in resolving disputes are major causes of concern for corporates and more so for international companies,? summed up Dalal.