that the real changes in the budget, from the taxation point of view, will be evident in the new tax code the finance minister is developing. Excerpts: What tops your list of budget expectations?
There is a view this is an election budget, so there could be some tinkering with, say, the tax rate for individuals in the lowest slab "" I don't see the FM raising the income exemption limit as this will remove people from the list of taxpayers; he could lower rates. But the real changes will be made elsewhere.
Where?
The FM has been talking of writing a new tax code. This is the place to watch. He'll probably mention it in the budget, and then go through a consultative process by putting it on the web and then invite comments, through open houses, and so on.
And what do you expect here?
One of the major gaps in the tax law is relating to cross-border investments by Indian companies. The issue of underlying tax credits has got a lot more serious with Indian firms investing a lot more overseas. Basically, if an Indian firm makes a profit of $100 on its unit in the US and pays a tax of $30, it repatriates $70 to India. This $70 as dividend gets taxed once again in India at 34 per cent. In OECD countries, this gets tackled by allowing firms to get credit for the tax already paid elsewhere. Without this, Indian firms are forced to keep their money abroad, in places like the Channel Islands and Mauritius, and that hurts the economy.
Doesn't this get fixed if we have a double tax avoidance treaty?
No, that only applies to things like withholding taxes which are taxes withheld before distributing dividend to overseas firms.
How does Control of Foreign Companies (CFC) affect this?
What CFC does is that, the income that an Indian firm parks overseas, in Mauritius or the Channel Islands, is deemed to have come into the country and a tax has to be paid on it. This affects their IRR adversely and makes them uncompetitive vis-à-vis global players. So, if CFC is to be introduced, the issue of underlying tax credits needs to be addressed first.
Does CFC mean that FIIs saving taxes through Mauritius will have to pay taxes here?
No, this applies generally to Indian firms saving on taxes by keeping income abroad, and not foreign firms.
What about the issue of taxing profits of firms with business here "" the Morgan Stanley case and the tax case involving sale of shares of foreign companies by non-residents. Will the code address that?
There is some thinking on how to tax the profits of global firms that may be attributable to their Indian operations. I don't want to get into names, but there is a view that if a firm abroad derives a part of its profits/value from India, the tax must be paid here. There could be some mention of this in the code. There could be amendments made to nullify the effect of certain recent judicial decisions.
Is this permissible? After all, what this means is that if 25 per cent of Suzuki's profits come from India, then 25 per cent of the profits of sales of Suzuki's shares in Japan must be taxed here!
It does sound anomalous. If we want to be a global economic player, any change in law would need to be in line with international tax practices. If any amendment is made, I hope it is made with prospective application.
How do you think the Transfer Pricing (TP) dispute could be resolved/minimised?
TP requires deep understanding of the economics of a business. Unless we are able to appreciate the same, TP disputes would continue. Advance Pricing Agreements (APAs) could be the solution to reduce disputes. APAs allow pre-agreement with the tax authorities on your transfer price. There is a possibility of its introduction in this year's budget.
Is there a case for cutting tax rates? After all, the buoyancy we're seeing may be due to overall economic growth and not compliance per se.
That's possible. With the tax buoyancy being there, it would allow FM more play for tax rate cuts. Indeed, we cannot see a big hike in compliance until tax authorities start making use of the Annual Information Returns from various sources "" so every time you make an investment in mutual fund, the taxman gets to know ... tracking of all types of financial information is a must for improvement of tax compliance. Also there is a case for streamlining the tax-on-tax effect on dividends and moderating the surcharge rate of 10 per cent.
What tax-on-tax? The average corporate tax in India is around 19-20 per cent.
I don't know how this number is arrived at. I think when people do this, they take into account the profits of tax-exempt firms as well. The corporate tax rate is around 34 per cent, and once you add the dividend distribution tax (DDT), FBT and so on, the burden works out to around 38-40 per cent. Further, DDT has a tax-on-tax effect on inter-corporate dividend distribution. At each level of dividend distribution, DDT is payable. The subsidiary pays DDT and on the same dividend, the parent company again pays DDT without any mechanism of getting credit for DDT already paid.
Can a MAT be introduced on firms within SEZs?
Not likely, it would require deep consultation with the commerce ministry!
Is there a case for extending the software holiday? After all, large firms will shift to SEZs which have a tax holiday, while the smaller firms that can't afford it will have to pay taxes.
There is certainly an argument to continue the benefit for smaller software companies and those in Tier II and Tier III cities. However, the general feeling is that the STPI tax holiday would not be extended. Let's see!
