MAT-exemption for FIIs, deferral of GAAR and clarity on taxation of indirect transfers will help in this
We cannot agree more with the finance minister when he describes the direct tax proposals as ‘transformative measures’ that match the GST—another transformative legislation in the indirect tax field. Indeed, this Budget marks a key transformation where the ease of doing business is the guiding principle and most of the direct tax proposals are directed at that.
The proposal to reduce corporate tax rate from 30% to 25% over four years is a bold reform measure. The litigation-generating ‘high-tax, high-incentive’ regime will thus gradually make way for a simpler law with lower rates, starting next financial year.
Several aspects of the direct tax law had been seen as obstacles by the business even though they failed to garner revenue for the government. REITs and InvITs, for example, were set up with noble intentions but the lack of a full pass-through status eluded them; this has been rectified in the Budget. However, the minimum alternate tax (MAT) on transfer of the projects to SPVs has not been excluded. This washes away much of the good work that has been done in making them full pass-through.
GAAR was a concern for all; it wasn’t that all businesses adopted devious tax avoidance measures but business was apprehensive, in general, of the high-handed way it would have been enforced. The proposal to postpone GAAR by two more years makes business sense both for the government and industry. For the business, the prospect of being issued with GAAR notices at the sight of a complicated transaction on the apprehension that it must be a tax avoidance device has now been kept at bay. This is not the time when the government can afford to be seen as an overbearing cop breathing down the neck of any enterprise as if the latter were an offender. The amendment in the GAAR regime is spectacular, because, while the existing law would have counted all investments made after August 30, 2010, for GAAR examination, the proposed one would count investments made on or after April 1, 2017—almost a 7-year deferral.
The reduction of the rate of tax on royalty and fee for technical services from 25% to 10% would make adoption and absorption of technology competitive, both for setting up new industries as well as enhancing the efficiency of existing industry.
Recently, the tax officers have issued show cause notices to the foreign institutional investors (FIIs) as to why the minimum alternate tax (MAT) provisions should not be applied on the capital gains earned by them in India. The proposed amendment to grant the MAT-exemption to FII is prospective and, hopefully, Indian revenue would give up ongoing litigation and proceedings for earlier years as well. But, the amendment falls short of expectations since a similar exemption is not granted to foreign companies not having any presence in India. Further, a similar exemption to the SEZ developers and SEZ units would have helped to promote the Make-in-India initiative.
Some of the earlier Budgets have had the tendency to overrule the favourable rulings of the courts. This Budget has accepted some of the favourable rulings—for instance, allowing the balance additional depreciation in succeeding year, clearing the meaning of the term ‘substantial’ for the purpose of indirect transfer.
The efforts at reducing red tape and needless litigation are a hallmark of this Budget. Wealth tax, for example, was an irritant to companies. It required return to be filed and valuation to be done. Some cases would be picked up for scrutiny and, at the end of it all, the tax yielded paltry revenue to the government. It is heartening that the government has taken note of this and abolished the wealth tax. The proposal to add more information requirement in the return of income so that the government continues to get information that would otherwise have come from the wealth tax return is a calibrated measure and cannot be faulted with.
At the same time, some of amendments may raise new litigative issues. For instance, the introduction of the criterion needing determination of the residency of the company (based on its place of effective management) is an instance where the spirit of the Direct Tax Code (DTC) is introduced in the current law itself. However, the concept itself and the wording of proposed provisions may result in a new stream of litigation.
The Budget misses when it comes to measures to settle the litigation pending at various levels. Hopefully, the government will look into the measures suggested by the Tax Administrative Reform Commission, especially in relation to dispute management. The current Budget is futuristic in the sense that it has laid the road map for the likely amendments in next budgets and, at the same time, has provided clarity on some litigative issues. It is equally incumbent on the administrative bodies to focus on the reforms and provide clarity on the ambiguities left in the drafting of the laws. Such a measure can only achieve the tax regime which is predictable and non-adversarial.
The author is partner and leader (Direct Tax), PwC India