The finance minister has an unenviable task while presenting the budget this year, given the state of the economy, tax collections and budgetary deficit. Adding to his woes is the recent Vodafone ruling, generating debate on likely budget proposals for taxing indirect transfer of shares and anti-avoidance rules. Though avenues for policy changes appear limited in view of the proposed DTC rollout, there are a few areas which require a fresh look.
The current MAT rate of 18.5% is high and needs to be reduced. DDT paid on dividends received by a company from its subsidiary should be allowed as a deduction while calculating its DDT liability, without any restriction on the number of subsidiary tiers. Surcharge and cess could also be abolished to align rates with DTC proposals.
Business deductions need to be rationalised. The weighted deduction for in-house scientific research and tax holiday for power generation expire on March 31, 2012 and need to be extended. Additionally, profits from power generation could be excluded from MAT. Tax depreciation at 15% for plant and machinery is lower than that prescribed under the Companies Act for assets used in shifts and needs to be restored to 25%, to encourage capital intensive industries. A weighted deduction may be introduced for expenditure on community and social development in critical areas of education, health, rural development, water management and alternative energy to grant impetus for corporate social obligation and reduce the Centre's burden for expenditure in this area.
Clarity is also required on deductibility of ESOP cost in the hands of employers. The tax benefits for carry forward and set off of business loss and unabsorbed depreciation in respect of amalgamation need to be extended to all businesses.
As regards capital gains, the base date for determining the FMV of an asset should be shifted from April 1, 1981 to April 1, 2000 on the same lines as proposed in the DTC. With increasing property prices, the present limit of Rs 50 lakh for claiming exemption for investments in specified bonds under section 54EC, needs to be removed or revised upwards. This would also encourage more investments in infrastructure.
Suitable amendments need to be introduced in section 14A and Rule 8D, dealing with disallowance of expenditure for exempt income, so as to restrict the disallowance up to income received. Income from investments made in subsidiary companies may be excluded, having regard to business considerations. Interest disallowance should not be made where an assessee has adequate own funds vis-à-vis borrowed funds. Though judicial rulings have established that TDS is not applicable on reimbursement of expenses, a suitable clarification needs to be inserted. Clarity is also required on characterisation of payments for use of software as royalty. Guidelines could also be laid down for distinguishing between an operational and finance lease for allowing depreciation claims.
Milin Thakore is director, Deloitte Haskins & Sells. Views expressed are personal.