Top 10 Expectations of Indians from Budget 2014

The change in the political landscape and resurgent optimism in the Indian economy has created widespread expectations from the Budget 2014 with focus on:

• Improving investment climate by reducing legislative uncertainty caused by retrospective amendments and aggressive approach of tax authorities
• Greater thrust on manufacturing and export-oriented businesses
• Rationalization of provisions regarding Minimum Alternate Tax, Dividend Distribution Tax and Transfer Pricing

In context of the above, the following are the Top 10 Expectations from Budget 2014 in the field of Direct Taxes:

A. Corporate Sector

1. Restoration of Tax incentive for Promoting Exports earlier available under section 10A /10B

Section 10A of the Income Tax Act provided 100% tax deduction of profits and gains derived by an undertaking established in free trade zone (FTZ), export processing zone (EPZ) etc. from the export of articles or things for a period of 10 years. Further, section 10B of the Income Tax Act provided a 100% tax deduction of profits and gains derived by an export-oriented unit (‘EOU’) and Software Technology Park of India (STPI) Units from the export of articles or things or computer software for a period of 10 years.

The tax benefits under section 10A / 10B are not available from Financial Year 2011-12 and onwards. In order to re-vitalize and provide impetus to the export sector, it is recommended that these benefits should be restored to promote exports by EOU/FTZ/EHTP/EPZ as well as STPI Units.

2. Reduction of MAT rates

The rate of Minimum Alternative Tax (MAT) levy has seen considerably increased over the years from 7.5% to 18.5% (increased by applicable surcharge and cess). The levy of MAT at such higher rate (i.e. about 2/3rd of the corporate rate of taxation) should be reduced to 10% to provide relief to the beleaguered industrial sector. Further, levy of MAT at the reduced rate of 10% in case of 10A/10B/10AA/80IA/80IB units will ensure that the benefits of tax holidays are not negated by higher MAT.

3. Wider Coverage of Safe Harbour Rules for International Transfer Pricing 

To reduce the widespread litigations in respect of international transactions between Associated Enterprises, the introduction of the Safe Harbour rules (notified on 18 September 2013) provided benchmark and certainty for Information Technology and IT Enabled Services sector and for Research & Development Centers. The scope of the Safe Harbour Rules (SHR) be extended to reduce litigation by covering other major sectors such as:

(i) Automobile sector (currently auto ancillary is covered in the Safe Harbour Rules)

(ii) Engineering sector

(iii) Pharmaceutical Sector (currently contract research and development in pharmaceutical sector covered in SHR)

(iv) Diamond and Jewellery Sector

(v) Metallurgical and other industries

4. No Adjustment in case of Tax Neutral Domestic Transfer Pricing

The international transfer pricing transactions have resulted in high-pitched assessments by tax authorities with additions estimated at Rs. 70,000 crores. To avoid similar potential litigation from the domestic transfer pricing perspective which has been introduced from financial year 2012-13, the tax adjustment in the income of the taxpayer should be restricted only to the cases where there is tax loss to the revenue. In other words, in case of transactions between associated enterprises which are subject to same incidence of tax resulting in tax neutrality, no adjustment should be made.

5. Reducing Legislative uncertainty caused by Retrospective Amendments

The retrospective clarificatory amendments introduced under Section 9(1)(i), Section 2(14) and section 2(47) to tax capital gain on direct / indirect transfer of capital asset w.e.f. 1.4.1962 is regressive. It has eroded the confidence of the international investor community Such retrospective amendments need to be repealed to restore India’s image as an investor friendly investment destination with a stable tax regime.

6. Deduction for Corporate Social Responsibility costs

The new Companies Act 2013 obliges companies to mandatorily spend 2% of average net profits under Corporate Social Responsibility (CSR). However at present, there is no specific provision under the Income Tax Act, 1961 which allows deduction for CSR Expenditure. Allowance of deduction through a specific provision will provide certainty regarding tax treatment.

7. Substitution of Dividend Distribution Tax (DDT) with Withholding Tax for foreign investors

The concept of DDT is uncommon globally and acts as a disincentive to the foreign investors. The DDT is not in the nature of withholding tax and is not eligible for tax credit in the home countries of the foreign investors. It is imperative that the dividend distribution tax paid is converted into withholding tax. This shall enable the foreign investors to claim the tax credit in their home country for the taxes paid on dividends in India without any loss of revenue to the Indian tax authorities.

8. Deletion of Section 40a(i)/(ia)

Under Section 40(a)(i)/(ia), expenditure on which tax is not deducted or / and is not paid to the credit of Central Government is liable for disallowance. There are several types of payments requiring deduction of tax at source such as interest, contractors’ payments, rent, brokerage, professional fees to non-residents/residents. The Income-Tax Act contains stringent provisions relating to non-deduction of tax at source by way of levy of interest and penalty. It is punitive to provide for disallowance of entire expenses in computing taxable income as this results in penalizing the taxpayers twice for the same contravention. Section 40(a)(i)/(ia) should be deleted accordingly.  

9. Continuation of lower rate of 15% tax on dividends received from foreign companies –under section 115BBD

In order to encourage repatriation of funds from specified foreign companies, a concessional rate of tax of 15% on dividend received by an Indian company from such foreign companies (where it holds 26% or more in the equity share capital) was introduced under section 115BBD. The provision of concessional rate of tax under section 115BBD ended on 31.03.2014. Since Section 115BBD acts an incentive for repatriation of income earned by resident companies from investments made abroad and to set off the same while computing the DDT, the provisions should be continued for Financial Year 2014-15 also.

B. Individual Taxpayers

1. Increase in limits for deduction under Section 80C

To encourage savings for the growth of economy, the present limit for deduction under section 80C of the Income Tax Act (the Act) of Rs. 1,00,000 in respect of certain investments such as Provident fund, ELSS, life insurance premium, housing loan repayment and 5 year bank deposits needs to be increased to Rs.2,00,000.

(Above are the views of Dr. Suresh Surana, Founder, Rsm Astute Consulting Group)