The Budget 2011 is expected to be transitional in nature which would pave the way forward for implementation of the Direct Tax Code (DTC) proposed to be effective from 1 April 2012. It is expected that the Budget 2011 would lower the corporate tax rates, incentivize export sector and facilitate smoother transition towards DTC.1.0 Abolition of surcharge and cess on Corporate Tax Rate
Under the proposed DTC, the corporate tax rate is proposed to be 30%. As such, there is no change expected in the corporate tax rate in the expected Budget 2011. However, the abolition of Surcharge and Education Cess would bring certain relief to the corporate sector and would be in line with the proposed Direct Tax Code. This will result in effective lowering of the corporate tax rate from 33.22% to 30%.
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ReplyDelete2.0 MAT implications in respect of Convergence of Accounts into IFRS
The Ministry of Corporate Affairs has announced its intention to implement convergence to IFRS from 1 April 2011 for certain large corporates. This could lead to significant and unintended impact on the book profits of the entities. MAT liability should be based on the book profits calculated as per Indian accounting standards.
3.0 Need to Change DDT to Withholding Tax
The concept of DDT is uncommon globally and acts as a disincentive to the foreign investors. The DDT is not in the nature of withholding tax and as such not eligible for tax credit in the home countries of the foreign investors. With the decreasing capital inflows, it is imperative that the dividend distribution tax paid is converted into withholding tax. This shall enable the foreign investors to claim the tax credit in their home country for the taxes paid on dividends in India without any loss of revenue to the Indian tax authorities.
Further, the DDT @ 15% may be treated as final tax for resident as well as for foreign investors.
4.0 Dividend Distribution Tax (DDT)
The current effective DDT of 16.61% coupled with the corporate tax rate of 33.2175% pushes the effective tax on corporate income and its distribution to an unreasonable level of around 45% which is much higher than the global corporate tax rates. However, Budget 2011 may not address this issue as any reduction in the DDT rate would be inconsistent with the DDT rate of 15% as proposed in the Direct Tax Code.
5.0 Minimum Alternate Tax (‘MAT’) may be retained at 18%
The MAT rate may be retained at 18% or may be increased to 20% in line with the proposed tax rate in the proposed Direct Tax Code. As such there may not be any relief to the corporate sector on this front.
Under the Income Tax Act, there is no MAT applicable for SEZ units. However under the proposed Direct Tax Code, it is proposed to apply MAT even on the profits of SEZ units @ 20%. Due to uncertain global economic outlook and high trade deficit, Budget 2011 should clarify that the current tax regime for SEZ units would continue and exempt the applicability of MAT for SEZ units.
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6.0 Extension of Tax Holiday for STPs/EOUs under Section 10A / Section 10B
ReplyDeletePresently, the export industry is eligible for tax deduction in respect of profits from Software Technology Parks (STPs) and Export Oriented Units (EOUs) for specified period but up to the sunset financial year 2010-11 under section 10A & 10B respectively. It is necessary to extend the tax benefits available to Software Technology Parks (STPs) and Export Oriented Units (EOUs) for additional 3 years.
Further, the Minimum Alternate Tax (MAT) rate of 18% negates the benefit of tax holiday for STPs and EOUs as such units are liable to MAT. As such, MAT should be abolished for STPs and EOUs units so as to be eligible for 100% tax benefits as similarly available to new units in Special Economic Zones under Section 10AA.
Information Technology (‘IT’) and Information Technology Enabled Services (‘ITeS’) sector being a major forex earner and high employment potential, it would be imperative to consider the extension of the tax benefits to such units as there is no provision for such tax exemption in the proposed DTC. It would enable India to maintain its global leadership in this sector.
7.0 Investment in Infrastructure Projects
Investment in infrastructure in critical to achieve the target GDP growth rate of 9% on a sustainable basis. Special incentives for promoting infrastructure projects, like zero rate of taxes on inputs goods and services used during investment phase should be provided or allow such taxes to be accumulated and set off against output tax liability. Also, the FM may consider providing MAT exemption to entities involved in eligible infrastructure projects.
8.0 Disallowances of expenditure under Section 40a(ia)
Under Section 40(a) (ia) of the Income Tax Act 1961, expenditure on which TDS is not deducted or / and is not paid to the credit of the Central Government within the prescribed due date is liable for disallowance. There are several types of payments requiring deduction of tax at source such as salaries, interest, contractors’ payments, rent, brokerage, professional fees and payments to non-residents. The income-tax law contains stringent provisions relating to non deduction of tax at source by way of levy of interest and penalty. It is illogical and punitive to provide for disallowance of entire expenses in computing taxable income and results in penalizing the taxpayers twice for the same contravention. Section 40(a)(ia) should be deleted accordingly.
9.0 Safe Harbour Rules
The transfer pricing regulations have resulting in proliferation of litigation. The Safe Harbour Rules are yet to be introduced despite the promise of Finance Minister in the last year’s Budget. Safe harbour rules shall result in simplicity and certainty and minimize the litigation in Transfer Pricing assessments. As such, the safe harbour rules should be introduced in this Budget.
10.0 Hardships caused to Non-resident assessee by introduction of section 206AA of IT Act
Generally, foreign companies which are not having a permanent establishment or business connection in India, do not posses Permanent account Number (PAN). This is for basically on account of their income being not chargeable to tax in India, but being taxable in the country of which they are tax resident. Now as per section 206AA, they would be required to obtain PAN in India or otherwise they would be subjected to tax at the rate of 20% or tax rate in force, which ever is higher on payments made to them.
Though the intention of such legislation is to increase the tax compliance, it is creating undue hardship on the non-residents and foreign companies as the payments due to them are taxed at a higher rate. The FM should therefore address this issue and provide certain relaxation to the tax deduction provisions on payments to non-residents and foreign companies.