Budget 2015: Reforms we wish to see in the Direct Tax mechanisms

Various progressive policy measures have been taken by the new NaMo government. The tax amendments of the last budget were encouraging and conveyed government's attempt to simplify the taxation system. With the Union budget only a month away, a lot of expectation has built on tax front as this will be the first full year Budget presented by the new government. Will the Budget -2015 prove the commitment of the government towards tax reforms and create a more conducive investor environment?

Reversal of the retrospective tax amendment in the Income-Tax Act certainly tops the wish list, as it would send out a bold message that India is open to doing business with the rest of the world. Here is a list:

Reduce corporate tax

The business community is seeking a reduction in corporate tax rate to 25% which would be a major boost to corporate companies. It effectively would reduce the corporate tax rate from 33.99% to 28.3%.

Move DDT to REIT

The taxpayers are seeking Dividend Distribution Tax (‘DDT’) exemption, which is levied at the SPV level on distribution of dividend by SPV to Real Estate Investment Trusts (‘REIT’).

Slash MAT

Minimum Alternate Tax (‘MAT’) has steadily increased in the past few years. To boost the corporate sentiment, many corporates are hoping for a reduction in MAT to 10% from the present 18.5%. Further, to attract more industrial and infrastructural investments, MAT/AMT on eligible businesses/industrial undertakings should be relaxed.

Promote SEZ by slashing taxes

Over the years Special Economic Zones (SEZs) have become an unattractive option for many businesses due to the withdrawal of tax incentives in the past. SEZs are likely to play an important role in realising Prime Minister Narendra Modi’s ambitious ‘Make in India’ agenda. Removing MAT and DDT for SEZs would only spur business activity for SEZs.

Revalue disallowance

At times quantum of disallowance u/s 14A as per Rule 8D may far exceed the exempt income. This could be absurd at times and runs contrary to the intention of Section 14A of the Act. It should be clarified that the disallowance as per the deeming provisions of Rule 8D of the Rules should not exceed the amount of exempt income earned.

Exclude genuine loans

Genuine Loan given as part of business transaction and Inter-corporate deposits should specifically be excluded from the application of Section 2(22)(e) of the Act to avoid unnecessary litigation.

Include CSR deduction

CSR is not charity or mere donation, and is way of conducting business, by which corporate entities visibly contribute to the social good. Hence, it is recommended that the Explanation 2 to Section 37 should be omitted and a deduction of CSR expenses incurred by the taxpayers pursuant to provisions of the Companies Act should be allowed under Section 37 in computing business income.

Increase cap for incentive under Section 80 C

Exemption limit under 80C was increased last year from Rs 1lac to 1.5 lacs. Taxpayers are hoping for a further increase in 80C incentives to Rs 2.5 lacs. Further, the basic tax exemption limit for individual taxpayers may be increased to 3 lakh and the peak tax rate of 30% be made applicable over an income of Rs 20 lakhs for individual taxpayers. Government can also re-introduce deduction for infra-bonds to boost the retail investment.

Revalue royalty charged

With the insertion of Explanation 4 to Explanation 6 to Section 9(1)(vi) of the Act, purview of “Royalty” has become ambiguous and wide. It is recommended to suitably exclude the payment for the use of a 'facility' as a service charge and where (a) the payer is only interested in the service and not in the use of process/ technology used for transmission (b) does not have any control on the process/ technology used for transmission.

Clarify quantum under indirect transfer

In the case of indirect transfer, where shares of a foreign entity are transferred whose value is substantially situated in India, only such portion of the gains is taxable which are relatable to Indian assets. It should be expressly clarified as to what would the word ‘substantial’ mean. The same can be set at 50% in view of the judicial pronouncement in Copal’s case.

Provide more clarity in mergers

The Companies Act, 2013 provides for merger of an Indian company with a foreign company subject to compliance with certain conditions, although such provisions of outbound merger has not been notified yet. The tax authorities have not yet released any clarification on taxability of such outbound merger, and the same may be expected to be released in this year’s Union Budget.

Allow carry-forward of losses

The growing contribution of tertiary sector in the country’s GDP necessitates allowing carry- forward of losses under section 72A of the Act in cases of amalgamation for all services sector (including infrastructure), which at present, allows such benefit of carry forward of losses’ only to certain industrial undertaking.

Relax provisions for demerger and amalgamations

Section 79 of the Act provides that a change of more than 49% voting rights of a closely held Indian company would result in denial of carry forward and set-off of business losses. However, when change in the shareholding of the Indian company occurs by virtue of amalgamation / demerger of a foreign holding company with another foreign company, the provision of Section 79 may not trigger. Such a relaxation from provision of Section 79 of the Act is not there for amalgamation/ demerger of one Indian holding company with another.
About the authors: This article has been written by Rakesh Nangia, Managing Partner, Nangia & Co