It is a challenge on hand for Mr Chidambaram. The possibility of Budget 2008-2009 being the last Budget of the present Government gives rise to greater compulsions and expectations for a dream budget fulfilling the wishlist of all and sundry.
With all the industries and ministries clamoring for tax sops and relief, the Minister will have his hands full balancing the demands of the industries/ministries and the exchequer. The recent reports of slow down of the industrial growth and the volatility of the stock markets too would be playing on his mind. He would for sure want to send out a clear message to the Foreign Investors, of India being a stable, growth oriented and transparent investment destination.
Industry too will need to be re-assured with a tax-payer friendly regime to give an added impetus to the economic growth.
Rationalization of the rates of the multifold tax levies, by way of Income Tax, Fringe Benefit Tax, Dividend Distribution Tax (‘DDT’) on corporates, would be one of the most vexing issues that the FM would need to address. The levy of Income Tax and DDT, currently pegged at 33.99 per cent and 16.99 per cent respectively, makes the marginal tax rate of domestic companies on distributed profits as high as 43.3 per cent (compared to corporate rate of 25 per cent in China, with additional 10 per cent withholding on profits distributed by foreign owned companies).
With buoyant tax collections in 2007-08, there is significant pressure on the FM to reduce the effective rates; the Minister himself has acknowledged that reduced tax rates invariably lead to widening of tax base and better compliances.
The new tax code aimed at simplifying the current tax regime continues to be a promise that has been delayed. In the interim, the FM should consider easing atleast some of the compliance obligations of the tax payers in the budget (viz the onerous duty imposed on tax payers under the withholding tax provisions coupled with provisions forfeiting the tax deduction of expenses on which withholding is inadequate/has not been effected).
A time bound dispute resolution mechanism would also help in mitigating some of the rigors being faced by the tax payers. Aligning the domestic law provisions relating to taxation of foreign companies in India (viz business connection, existence of permanent establishment) with the international tax principles and provisions, through definitive and unambiguous legislations would go a long way in reducing litigation and allaying the apprehensions of foreign companies with interest in India.
Given the recent trend of domestic companies setting shop abroad, the FM should look at providing mechanisms and incentives by way of grant of underlying tax credit (i.e credit for corporate taxes borne by the subsidiaries/JVs outside India on the income from which dividend is paid) and tax neutral mergers & amalgamations of subsidiaries/JVs abroad with other foreign companies, for avoiding double taxation and ensuring that profits earned outside are ploughed back into India and not other jurisdictions due to tax compulsions.
To ensure sustained and equitable growth by channelising investment into core sectors, viz infrastructure, education, health and rural development, the FM could consider granting tax breaks for investments/contributions by both corporates as well as individuals, as an alternative to levy of surcharges. As regards, the real estate sector, there are reports that the government is considering a scheme for Real Estate Investment Trusts with certain tax breaks, where small investors could invest and reap the profits of the realty boom.
All in all, the FM in the past has been known to have used his magicwand; the expectations are no less this time. However, only time will tell how he fares in the litmus test, especially in terms of guiding the economy in the right direction, given the political compulsions.
(In the first of two articles, Vinesh Kriplani, partner, global tax advisory services, Ernst & Young, discusses direct taxes)