The Hindu Business Line : Continue weighted deduction for research & development

With increased tax compliance and tax collection, the Government should consider rationalising the tax rates further. It should consider withdrawing surcharge, which is being levied from the assessment year 2000-01.

Mr Ashesh Safi

What is going to be the direction of the forthcoming Budget? "Moderate taxes, better tax administration, fewer tax exemptions and widened tax base," foresees Mr Ashesh Safi, Director, Deloitte Haskins & Sells, Mumbai. "There are certain tax exemptions which are expiring on March 31, 2007. It needs to be seen whether such exemptions are extended for a further period," he says, in an interaction with Business Line.

Here's more from Mr Safi, on what to expect from the Budget 2007.

Is it likely that the Finance Minister will give a boost for investment in the infrastructure sector?

To maintain a GDP (gross domestic product) growth rate of above 8 per cent, there is a need to enhance investment in the infrastructure sector. As per one study, investment of at least $320 billion is required in this sector, over the next five years. Most of this requirement is proposed to be met from within the country. For this purpose various proposals are being considered, such as:

To notify oil/gas pipelines as infrastructure facility for allowing tax deduction under Section 80IA of the Income-Tax Act.

To increase the tax deduction limit of Rs 1,00,000 under Section 80C by providing specific limit for investment in infrastructure funds/projects.

To reintroduce deduction under Section 80L for interest income arising on bank fixed deposits, which are utilised for financing infrastructure projects.

To reintroduce Section 10(23G) which provided exemption to income earned from long-term financing to infrastructure projects.

To extend the exemption to a debt-oriented mutual fund investing in infrastructure companies from payment of tax on income distribution.

Any change in tax rates anticipated?

With increased tax compliance and tax collection, the Government should consider rationalising the tax rates further. The Government should consider withdrawing surcharge, which is being levied from the assessment year 2000-01. This will provide some marginal relief from the tax burden.

The outlook for software exports.

Tax holiday available to software industry established in STP (Software Technology Park) will expire on March 31, 2009. Over the years, exports from this industry have been increasing; and target is $330 billion export revenue by the year 2020. To maintain a competitive edge in software exports over China, east European countries and the Philippines, the Department of Information Technology has proposed to extend the existing tax holiday for another 10 years. The Government may consider extending such benefit.

How can the Budget help promote R&D?

Section 35 (2AB) provides weighted deduction of 150 per cent for expenditure incurred on scientific research by certain industries viz manufacturer of drugs, pharmaceuticals, electronic equipment, computers, telephone equipment, chemicals etc.

The present provisions are expiring on March 31, 2007. Similarly, tax deduction available under Section 80IB (8A) to a company established for carrying on scientific research will not be available to any company established or approved after March 31, 2007. The industry groups/chambers have represented for extension of such benefit for further 10 years. With the opening up of the economy, to remain competitive in pharma industry, electronic industry etc., it is necessary to increase research and development activity. In order to boost such activities, it is necessary to continue such weighted deduction.

Are airlines looking forward to any sops?

Tax exemption available on lease rental payable for lease of an aircraft or an aircraft engine will not be available in respect of agreements entered into after March 31, 2007. At present, two-thirds fleet of the Indian airline industry are on lease.

Though earlier there was a proposal to remove the exemption, it has been extended twice on the demand of the airline industry. Considering the present status of fleet, the Federation of Indian Airlines and Civil Aviation Ministry is pressing for extension of the exemption.

Do you expect any sops for financial institutions?

Asset reconstruction companies (ARC) are formed by banks/financial institutions as special purpose vehicles for speeding up recovery of non-performing assets.

An ARC is pass through entity. Therefore, like mutual funds there should not be any tax incidence on income generated by ARC. To attract investment in securities offered by ARC, it is necessary to provide the same status and exemption to ARCs as available to mutual funds. The Government may consider providing tax exemption to ARC as available to mutual funds under Section 10(23D).

What can investors look for?

First, some change with regard to capital gains bonds. Section 54EC provides tax exemption for long-term capital gains if such gains are invested in the notified bonds.

In the last Budget, the Government restricted the issuers of such bonds to two, viz REC and NHAI. Further, the size of bond issue was also restricted. This year, bonds worth of Rs 9,500 crorewere notified by the Government for this purpose.

However, to protect the interest of small investors, at a later date the ceiling of Rs 50 lakh per investor was prescribed. Though a host of exemption provisions are under review, there is a view prevailing not to discontinue the said exemption as it will not be fair for small investors. It is, however, likely that a limit will be prescribed for claiming exemption under Section 54EC. It will also ensure availability of such bonds to small investors.

Second, dividend distribution tax. Every Indian company is required to pay dividend distribution tax irrespective of the fact whether it is a holding company or a subsidiary company.

Dividend distribution tax paid by holding company may result into payment of tax on same income that has been distributed twice, first by subsidiary and subsequently by holding company. This is detrimental to two-tier subsidiary structure in India. Sometimes there are commercial compulsions to establish subsidiary company in India such as forming joint venture with other industry groups, for carrying on diversified activities, etc. Like the erstwhile Section 80M, the Government should consider providing exemption from payment of dividend distribution tax in respect of income which has been distributed twice.

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