The upcoming Budget will, however, need to have the full ethos and stamp of the current government, especially in the areas of some much-needed tax reforms.
As finance minister Arun Jaitley prepares himself to present his third Budget on February 29, 2016, he does bear the burden of great expectations. In many ways, the first two Budgets had to rightly address some legacy issues, especially on retrospective taxation and a plethora of avoidable tax litigation built up in recent times. On balance, the finance minister has done a commendable job of addressing these twin issues. The upcoming Budget will, however, need to have the full ethos and stamp of the current government, especially in the areas of some much-needed tax reforms.
Corporate tax reforms: The first attempt to particularly overhaul existing tax laws was through the proposed Direct Taxes Code (DTC) a few years ago. Despite 2-3 alterations and several deliberations, it was a stillborn project which never saw the light of day. In fact, Jaitley has made it clear that the erstwhile attempt to rewrite the law through the DTC has been shelved. At the same time, he has laid out the roadmap for a phased reduction in the corporate tax rate to 25% in the next four years, along with the phased removal of various incentives and exemptions. This philosophy of improved corporate tax rate, coupled with a simpler law not favouring particular industries or locations which can distort investment decisions, was the main recommendation of the Kelkar Committee on tax reforms more than a decade ago—which, in fact, formed the genesis of the proposed DTC.
There are currently over three dozen tax incentives either in the form of profit-linked or investment-linked deductions and allowances. Some of them have sunset clauses already prescribed, whilst many are open-ended. The ministry of finance has already announced its intention of discontinuing those incentives which have a prescribed sunset clause beyond the prescribed date and has also suggested a cut-off date of April 1, 2017, for the remaining incentives.
The intention appears to be to grandfather all eligible exemptions and incentives availed of prior to April 1, 2017. At the same time, the acknowledged economic policy of this government is to encourage research and development, employment and manufacturing in India. There is also an obvious and continuing need to encourage investments in core infrastructure, given the humongous needs of sectors such as roads, ports, transportation and natural resources. Finance minister Jaitley will thus have to walk a tightrope between removal of exemptions and ensuring that businesses remain incentivised so as to continue and increase their investments in these important sectors of the economy. So, the finance minister may continue with research and development deductions as well as deduction for employment of new workers which are currently available. It is also expected that Minimum Alternate Tax (MAT) will be phased out, along with a phased reduction in the corporate tax rate and many of the incentives. The case for the calibrated removal of MAT is strengthened by the current statistics cited by the government that the effective corporate tax rate is about 23% after taking into account available deductions. With the rationalisation of deductions and incentives, there is a strong case to remove MAT, as the gap between the nominal and effective rate of tax is bound to narrow.
Presumptive tax of small businesses: With the government’s emphasis on Start-up India and the focused approach to liberalising rules and procedures governing small businesses, Jaitley may consider a simpler presumptive taxation scheme for businesses with a smaller turnover (up to R10 crore), which will obviate the need to conduct detailed assessments and considerably simplify the taxation of such businesses.
Risk-based assessments: Drawing inspiration from similar programmes in developed countries, Jaitley may consider a more focused approach of conducting risk-based assessments of large corporate taxpayers after profiling them and the categories of transactions, so that fewer but more deeper assessments are carried out. A majority of corporate tax returns are expected with minimal intervention through notices for assessments.
Global tax developments: The base erosion and profit shifting (BEPS) agenda of the OECD is bound to find a place in the upcoming Budget. For instance, the country-by-country reporting for multinationals to maintain a master file documentation of the corporate supply chain as well as country-by-country analysis of profits will be required to be maintained, going forward. Multinationals will need to better align their business activities with their transfer-pricing policies.
The author is national tax leader, EY India. Views are personal