The Hindu Business Line : Inklings for India Inc

THE corporate sector does not seem to be expecting much on the tax policy front in the coming Budget. Last year, the relief when tax rates were brought down to synchronise with the personal tax rate gave way to anguish through the introduction of the fringe benefit tax.

Together with the cess and the surcharge, the corporate tax rate is no longer the 30 per cent that it is made out to be on paper — it has gone up to 33.3 per cent.

Chambers of commerce, citing 25-30 per cent tax rates in developed countries such as the UK, Germany, Finland, Canada and Singapore, want the ceiling on corporate taxes fixed at 30 per cent. Based on the Kelkar Task Force report, the depreciation rate on general machinery and plant was brought down last year from 25 per cent to 15 per cent and the initial depreciation rate was raised.

Chambers point out that this realignment of depreciation rates has resulted in increased tax liability in the case of capital-intensive industries. This will not help Indian industry in its quest for global competitiveness.

There have been suggestions that an option be given to companies to either pay a higher corporate tax rate of 31 per cent and avoid the Fringe Benefit Tax, or pay the FBT with the corporate tax rate at 30 per cent.

The idea is that the enormous accounting work involved in working out the FBT can be saved for profit-making companies and firms not paying taxes at all may have the option of paying the FBT.

Already, the tax code is riddled with requirements relating to the accounting for MAT (Minimum Alternate Tax). The Supreme Court had ruled that the balance-sheet prepared in accordance with the company law is binding on the Income-Tax Department in working out MAT.

This ruling has taken the sting out of MAT. Court judgments holding that MAT is applicable even in respect of capital gains can easily be circumvented by taking the capital gains directly to the balance-sheet capital account instead of the current practice of taking it to the profit and loss (P&L) account.

The case for continuation of MAT is losing relevance by the day. And the FBT has been attacked on several legal and constitutional grounds. It has complicated accountancy norms and enormous amount of man-hours are required for preparing the FBT return.

The Prime Minister has assured industry that the Government will take a fresh look at direct tax reform. The complete withdrawal of the FBT, rather than exempting political parties and charitable trusts alone, will bring a sigh of relief to India Inc. Revenue loss, if any, can easily be made up by removing the administrative bottlenecks and withdrawing some of the incentive provisions. India, for example, has been a pioneer of sorts in promoting exports.

The latest amendment to the tax law circumvents a Supreme Court ruling denying relief in respect of loss-making export units. Despite all these efforts, India's exports stand at a mere 15 per cent of its GDP compared to Brazil's 22 per cent, Russia's 22 per cent and China's 40 per cent. While China's exports are surging, from 29 per cent in 2002 to 34 per cent in 2003 and 40 per cent in 2004, India's are stagnant at 15 per cent. Does this not bring out the fact that the tax code does not have much of a role in a country's export effort? This is also true of exemptions granted under various other heads by way of tax holidays.

India Inc. has acquired a global image. Indian companies have set up shop in the UK, the US and Europe. Our tax code will have to take care of their interests. The latest ruling of the European Court of Justice allows set off of losses incurred in one country against the profits in another country for tax purposes in the case of transnational corporations in certain defined contexts (see The Economist, December 24, 2005).

The parent company based in one country will not be eligible for set off in that country if the subsidiaries in other European countries have exhausted the set-off option in those countries. This was in the Marks and Spencer case. Tax experts have pointed out that the ruling in this case will have major implications for Indian companies that have operational base in the UK. Indian companies operating from the UK will be hit by this ruling.

The Finance Ministry should take a closer look at the double taxation avoidance treaties with the EU and the UK to see if hardship for Indian companies can be eliminated.

Much remains to be done by way of reform of the corporate tax structure, which was needlessly complicated last year.

(The author is former Chief Commissioner of Income-Tax.)