CA (Dr.) Suresh Surana

Dr Suresh Surana, Mumbai based Chartered AccountantThe second budget to be presented by the new government is keenly awaited by business entities as it is generally seen to bring ”Achhe Din” from the tax perspective. It is notable that the Prime Minister, himself, as part of his ‘ease of doing business’ framework’ emphasized on bringing in more clarity in taxlaws and administration. Recently, the Prime Minister in one of his addresses has specifically mentioned that ‘Retrospective tax is thing of the past’.

The Union Budget 2016 which shall be announced on 29th February 2016 is expected to be a reformist budget rather than a populist budget and could focus on the following aspects:

  • Reduction in the tax litigation by bringing in clarity on taxation laws
  • Incentivefor the ‘start-ups’ by providing tax breaks
  • Rationalization of the corporate tax rates including Minimum Alternate Tax, Dividend Distribution Tax
  • Deferment ofGAAR and ICDS regulations

Budget Excercise

In this context, certain expectations for the corporate tax payers in this budget are enumerated as under:

1. Composite Tax Rates for Corporates

Under the present structure of taxation for corporates, the levy of tax is based on multiple rates (basic rate, surcharge, education cess&secondary and higher education cess). Further, the surcharge to be applied also depends on the income slab of the corporate, which has led to complexities in tax rates being applicable in case of a corporate with varying tax rates as illustrated hereunder:

Sr. No.Type of CompanyEffective Corporate Tax Rates
IncomeuptoRs. 1 croreAbove Rs. 1 crore but not exceeding Rs. 1 croreAbove       Rs. 10 crore
1Indian company30.90% (tax rate 30% plus education cess 3% thereon)33.063% [(tax rate 30% plus surcharge 7% thereon) plus education cess 3% thereon]34.608% [(tax rate 30% plus surcharge 12% thereon) plus educationcess 3% thereon]
2Foreign Company41.20% (tax rate 40% plus education cess 3% thereon)42.024% [(tax rate 40% plus surcharge 2% thereon) plus education cess 3% thereon]43.26% [(tax rate 40% plus surcharge 5% thereon) plus education cess 3% thereon]

The multiplicity of tax rates makes the present tax structure extremely complicated for both the Indian companies and the foreign companies.As such, on a lighter note it won’t be wrong to say that,it has become difficult to decipher the tax rates without the assistance of a mathematician.

As such, to make the tax paradigm more transparent in terms of decision making and bringing about ease of doing business, it is advisable that a composite income tax rate be introduced for corporates, say @ 30% to 34% based on their income, without any separate levy of surcharge / cess. Any cess or surcharge out of the corporate tax rate can be a matter of internal allocation out of the total tax collection.

Rationalization of the Minimum Alternate tax (MAT) rates and Dividend Distribution Tax (DDT)

The rate of MAT levy has been considerably increased over the years from 7.5% to 18.5%. With surcharge and education cess, the effective rate of MAT comes to 21.3416%. The levy of MAT at such higher rate (i.e. about 2/3rd of the corporate rate of taxation) negates the tax incentives and exemption. As the Finance Minister had in the previous budget announced the reduction of corporate tax rate to 25% over a period of 4 years, it is expected that corresponding MAT rate be reduced and brought down to 50% of the corporate tax rate to provide some relief to the corporate tax payers.

On similar lines, the current rate of DDT which is also just shy of2/3rd of the corporate tax rate should be rationalized and reduced to 50% of the corporate tax rate.

2. Restructure “Dividend Distribution Tax” as “Dividend Withholding tax (DWT)”

The present system of DDT is complex, archaic, not in line with global practices and in its current form has resulted in inefficacy to the foreign shareholders. Thus, it is expected that a deeming fiction shall be inserted into the income tax laws to the effect that Dividend Distribution Tax (DDT) shall be treated as Dividend Withholding Tax (DWT) particularly for foreign shareholders. This will enable them to claim the tax credit (of taxes withheld on dividend income) against their tax liability in the home country. Such restructuring of DDT by replacing it with DWT will align India with International tax norms and will make India a more attractive investment destination.

3. Rationalization of provisions of Section 14A (Disallowance of expenditure incurred in relation to income not includible in total income)

The disallowance under section 14A has been one of the major litigious issues for taxpayers across all sectors. The basic intent of section 14A is to curb the possible abuse of claiming deduction of expenditure which is relatable to exempt income.It is worthwhile to note that, in true sense, dividend income is not tax exempt as the DDT is collected from the companies just for administrative convenience but the real income belongs to the shareholders. Similar analogy applies in case of share of profit from a partnership firm.

This contentious issue has already been considered by the Justice R.V. Easwar committee in its report on simplification of the income tax laws. As such, it is expected that the following 3 recommendations of the committee to address litigation u/s 14A are brought about in this budget:

(i) dividend received after suffering dividend-distribution tax and share of income from firm suffering tax in the firm’s hands will not be treated as exempt income and no expenditure will be disallowed as relatable to them;

(ii) Expenditure disallowed u/s 14A shall not exceed the amount claimed.

(iii) Issue of executive instructions to provide that no interest to be disallowed if source of investment is directly relatable to taxable income.

4. Provision of Tax Incentive for Start-ups

The government of India has recently come up with the framework for the Start-up enterprises. The scheme provided for certain tax breaks to be provided to the start-ups such as exemption from capital gains tax, tax exemption for 3 years, exemption from the provisions of section 56(2)(viib), etc.

As such, it is expected that a separate chapter be introduced in the Income Tax Act to provide a separate taxation regime for the eligible startups. This step would play an important role in encouraging the entrepreneurial spirit amongst the youths and the start-up movement.

5. Deferment of Income Computation and Disclosure Standard (‘ICDS’)

ICDS has been made applicable for computation of ‘Business Income’ and ‘Income from Other Sources’ effective for FY 2015-16 and onwards for all assessees who follow mercantile system of accounting. It is expected that the provisions of the ICDS shall be deferred so as to provide sufficient time to the taxpayers to understand the impact of such provision on their tax liability.

This is also in line with the recommendation of the Easwar Committee report which has suggested deferment of ICDS.

6. Deduction under Section 80JJAA should be extended to assessees engaged in providing services

Section 80JJAA is a provision under the Income tax Act which incentivizes employment generation in the manufacturing sector by providing them tax incentive of 30% on the additional wages paid to the new regular workmen, subject to certain conditions.

With the advancement of technology and automation, the overall employment generation has been impacted in the recent past. As such, the service sector in India, which has a share of more than 52% in the Indian GDP and also is one of the major employment generators, should also be incentivized by extension of the tax breaks provided in this section.

As such to ensure overall employment generation, it is expected that the provisions of section 80JJAA is also extended to cover enterprises operating in the service sector.

7. Conversion of Private Limited Company into Limited Liability Partnership (LLPs)

The new Companies Act has introduced far reaching changes in terms of financial reporting, corporate governance, disclosure requirements, consolidation of financial statements, independent directors, internal financial control etc.The governance matrix has been made more stringent for corporates as the penalties for non-compliance has been increased manifold. This has increased the cost of compliance for all entities particularly for the companies which do not have public funding or do not have accessed the capital markets.

As such, to encourage companies, both private companies and closely held public companies, to convert it into Limited Liability Partnerships (LLPs), the regulations governing the conversion are simplified and made more practical.

For instance, to avail the capital gains tax on conversion by a private limited company and closely held public company into an LLP, there are many restrictive conditions prescribed. One of which is that the turnover of the company under conversion is not more than Rs. 60 lacs in any of the previous 3 years. These conditions hinder the conversion of the company into an LLP structure and also leads to unwarranted tax litigation. As such, it is necessary to remove this condition of the maximum turnover (in the last 3 years) which lacks any substance and permit transition to the LLP form of organization which is more conducive for doing business in India.

8. Need for Continuation of Tax exemption/incentives for Infrastructure / Telecom / Power

The Finance Minister in his Budget Speech, 2015 indicated that the rate of corporate tax will be reduced from 30% to 25% over the next four years along with corresponding phasing out of exemptions and deductions.

Undoubtedly, removal of tax incentives (such as deduction under section 80IA, etc) will result in reduction in tax disputes; however, their phasing out altogether across the Industries would not be desirable considering the need for infrastructure development and employment generation.

9. Allowability of filing Consolidated Tax Return for Infrastructure Companies

In the infrastructure sector where the companies are engaged in the building of special projects such as highway projects, the corporates for the purpose of bidding for contracts or as a part of the tender process are required to create separate SPVs for each such projects. These projects are generally in the nature of Build Operate Transfer (BOT). As such, the overall performance of the entity is not in consonance with the performance of the underlying SPVs due to the requirement of separate tax compliances for each such SPVs. For instance, there may be overall loss at the entity level but due to the separate filing of tax return for each underlying SPVs, the entity is unable to avail set off of inter unit SPV losses.

As such, to address this tax issue and also to encourage further investment in the infrastructure sector, it is expected that provision can be inserted for allowing filing a Consolidated Tax Return at the entity level rather than at the SPV level.

10. Defer the General Anti Avoidance Rule (GAAR) by at least 2 years

As provided in the Income Tax Act, GAAR provisions are to become applicable to the income of the financial year 2017-18 (Assessment Year 2018-19).

GAAR is more of a deterrent measure than revenue gathering measure. The present government is committed to reduce litigation and has recently taken certain measures (such as setting up of tax simplification committee, acceptance of the judicial rulings in the case of Vodafone / Shell, etc) with an emphasis on the 3Cs’ i.e. Certainty, Consistency and Clarity in the tax laws, the GAAR may result in bringing about more litigation, rather than reducing it. As such, it is expected that the provisions of GAAR be deferred for a period of at least 2 more years.

11. Controlled Foreign Company (CFC) Rules

Controlled Foreign Companies (CFC) is a regulation which is globally applied to limit artificial deferral of tax by using low taxed entities in foreign jurisdiction. Globally CFC is considered to be a very complex regulation due to its difficulty in practical implementation.

To encourage outbound investments by Indian corporates, it is expected that the CFC regulations would not be introduced in this budget considering its complexity and its potential to act as a deterred for Indian companies investing outside India.

(Author is founder of Founder of RSM Astute Consulting Group)

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