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The finance ministry is likely to keep the corporate tax rate unchanged at 30%, as it faces stiff resistance from companies to the draft direct tax code’s proposal to cut the rate to 25% and remove all exemptions.  “Corporates are resisting the phasing out of exemptions even with a lower tax rate,” said a senior government official.
The industry prefers the current system where the effective corporate tax rate is only about 20% due to various exemptions, he said requesting anonymity. The Central Board of Direct Taxes, the key government body that formulates and administers tax policy, is not willing to cut rates, as any reduction in statutory rate will further reduce the effective rate and dent the government’s revenues.

The government is already struggling with a 16-year high fiscal deficit, equivalent to 6.8% of the gross domestic product for the 2009-10 fiscal year. The finance ministry is also likely to retain the tax exemption given to retirement savings at the time of withdrawal in the draft direct taxes legislation.

The tax code has also suggested and exempt-exempt-tax (EET) taxation regime for existing schemes such as provident fund. Under an EET arrangement, investments in savings schemes and the returns earned on them are exempt from tax, but the entire corpus is subject to tax at the time of withdrawal. The proposal has received flak from financial experts.

The government seems to be in favour of continuing the existing regime that is a mix of EEE (exempt-exempt-exempt ), EET and ETE (exempt-tax- exempt).  The draft direct taxes code, unveiled in August 2009, seeks to replace the decades old Income Tax Act, 1961. The code is proposed to come into effect from April 1, next year.These changes along with a proposal to levy a minimum alternate tax (MAT) on gross assets figured in the discussions at a meeting between Prime Minister Manmohan Singh and finance minister Pranab Mukherjee, said the official quoted earlier.

The review exercise is now aimed at bringing a new law that will further the objective of reform , yet be acceptable to ‘aam aadmi’. The official said the key policymakers are keen to continue with the proposed MAT on gross assets. But the definition of gross assets could be changed to give some relief to asset heavy infrastructure companies.  The draft code has proposed a levy of 2.0% MAT on the value of gross assets of all non-banking companies and 0.25% on banking companies.

The value of gross assets is the aggregate value of fixed assets of a company, capital works in progress and the book value of other assets, after taking out the accumulated depreciation on fixed assets and the debit balance of the profit and loss account, if included in the book value.

The finance ministry is looking to keep capital works in progress out of this definition to give relief to infrastructure companies.

The industry’s reservations on asset-based MAT is on the very principle of it and hence does not get adequately addressed by exempting elements like work-in-progress. While the infrastructure sector, with its long gestation periods, will get relief for the initial period, what constitutes work-in-progress will become a bone of contention with the revenue authorities. We still believe that the MAT provisions existing in the current Act should be continued with minor tweaks, if necessary.

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