The Hindu Business Line : The Big Three on the Budget

Evaluating the 2006 Budget proposals , it appears that the intention of the UPA Government is to press for reforms in the areas of tax administration and taxpayer service, rather than focus on substantial tax reforms. And this seems to signal the emergence of India as a mature and developing economy.

India's GDP is expected togrow 8.1 per cent by the end of fiscal 2006 on the back of strong agricultural growth. The Finance Minister expects the fiscal and revenue deficits to be controlled at 3.8 per cent and 2.1 per cent, respectively, by fiscal ending 2007, which appear to be in line with the FRBMA target of eliminating revenue deficit and restricting the fiscal deficit to 3 per cent by 2009.

Fifteen more services are proposed to be taxed, taking the entries in the taxable service list to 96. A marked increase considering that only 26 services were taxable between 1994 and 2000. By increasing the service tax rate from 10 per cent to 12 per cent, the Finance Minister has yet again turned to the golden goose.

While the Indian economy is chugging along, the tax-GDP ratio, at 10.50 per cent, is way below China's, which is around 25 per cent.

Ernst & Young

While the increase in the rate of MAT from 7.5 per cent to 10 per cent and the specific inclusion of long-term capital gains from sale of listed securities (otherwise exempt from tax) for MAT purposes is not such a good news; relief comes in the form of MAT credit which is now available for set-off over a seven-year period (previously five years). Besides, it has also been clarified that MAT credit can be factored for computing advance tax.

While on the topic of advance tax, a positive development is the provision which permits corporates to adjust foreign taxes paid on foreign sourced income, while computing their advance tax liability. A complete roll-back of the FBT, a levy that has been widely viewed as retrograde, was always unlikely; the "rationalisation" came in the form of an across the board reduction in the FBT valuation of travel and tour (including foreign travel) expenses to 5 per cent, a reduced valuation that was hitherto enjoyed only by companies engaged in construction, manufacture of pharmaceuticals and computer software.

The Revenue has introduced a retrospective amendment validating the issuance of scrutiny notices in relation to returns filed between October 1, 1991 and September 30, 2005, pursuant to re-assessment proceedings, even where such notices have been issued beyond the time limit prescribed (but within the time limit for completion of re-assessments). This amendment can potentially open a Pandora's Box and subject taxpayers to scrutiny proceedings with respect to matters since forgotten.

The amendment to Section 14A now makes it mandatory for the Revenue to determine the amount of expenditure attributable to exempt income, irrespective of whether any expenditure is actually incurred, but in accordance with a method to be prescribed. Nonetheless, it remains to be seen how fairly this provision will be administered.

On the whole, it is difficult to predict the effectiveness and efficiency of the Finance Minister's direct tax proposals. The Revenue authorities are more likely to rely on industrial buoyancy and the continued focus on a more efficient tax administration to achieve the objective of improving direct tax collections and, thereby, the country's tax-GDP ratio.

Bharat Varadachari

PricewaterhouseCoopers

The major changes to tax laws are the increase in the rate and scope of MAT, the rationalisation of FBT and the withdrawal of exemption under Section 10(23G). In a major policy change, tax treaties between institutions of different countries will be recognised for cross-border taxation. The increase in MAT to 10 per cent is a step backwards. Given the buoyancy in the tax-GDP ratio and insignificant collections, MAT could have been abolished. The extension of the period for MAT credit no doubt tries to reduce the impact. The reduction in FBT is mostly cosmetic. The benefit of the reduction will be offset by an increase in service tax.

Indraneel Roy Chaudhury

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