The Hindu Business Line : Disparity in tax rates is main concern

The year 2007 has been special because India sustained its growth story despite the economic turmoil all over the globe particularly in the US due to the sub-prime crisis. In view of the challenges coming from global volatility, the Union Budget 2008 should clearly lay down initiatives for growth so that we can maintain a GDP growth in the range of 8-10 per cent in the next 5 plus years. Infrastructure is an important area which requires additional emphasis and the Governm ent should actively consider removing procedural and policy roadblocks for private sector initiatives and participation.

It is anticipated that the Finance Minister will revisit numerous tax provisions in the forthcoming Budget. Some of the key policy initiatives that are anticipated to be taken up by the Finance Minister could be towards bringing an end to some obvious disparities in tax rates, removing anti-economic levies and attaining rationalisation.

Salaried class and ‘aam aadmi’

In its first Budget, the UPA Government had set an objective to provide substantial relief to the common man i.e. aam aadmi but has rarely done anything for them. The foremost concern of the aam aadmi is the disparity brought about in the last Budget by providing relief, from levy of surcharge, to firms and companies earning less than Rs 1 crore. It is difficult to digest the fact that the companies are paying lesser tax than individuals earning similar income. This Budget should aim at removing this disparity by providing similar relief to individuals.

As per the existing slab rates, the average rate of tax paid by aam aadmi ranges between 24-27 per cent which is abnormally higher than 15-18 per cent paid on an average by individuals earning similar income in other developing / developed countries. In order to increase the tax base, achieve better compliance and discourage growth of ‘black money’, the Budget should aim at increasing the tax slabs from present 1.1–1.5–2.5 to 1.5–5–10, without compromising on the overall tax rates.

It is an accepted fact that even amongst individuals; the salaried class bears the highest burden of tax. It is high time that some relief is bestowed upon them particularly since the cost of living is increasing day by day. Towards this objective, the Budget should aim at increasing the limits in respect of the deductions being granted to individuals under chapter VIA. It should also reintroduce ‘standard deduction’ to provide some relief towards their legitimate expenses.

Industry expectations

The industry has been exasperated with the burden of fringe benefit tax (FBT) paid by them since its introduction in 2006. While many of the components chargeable to FBT, do not necessarily relate to expenses on the employees, the employer is still required to bear the burden of FBT. To do away with such anarchy, the Budget should aim at removing the genuine business expenses and those where there is no involvement of employees of the company, out of the FBT net.

There is a need to extend tax holidays u/s 10A / 10B to EOU / STP units March 31, 2009, as it would provide a level-playing field to such units vis-À-vis the SEZ units. There are other factors such as rising low-cost alternatives in jurisdictions such as Brazil, the Philippines and China and also considering the difficult global economic scenario due to factors such as appreciation of the rupee, rising skilled manpower costs and probable global recession, demanding such an initiative.

There has been a demand to eliminate MAT altogether, since it only leads to preponement of taxation of book profits of corporates (considering that MAT credit is available against normal taxes paid in future). Elimination of MAT would lead to a simpler tax regime without any substantial impact on the tax revenues over a long-term period.

Service tax

Another issue from the point of view of service tax that has been pinching most entrepreneurs particularly the retail sector, IT / ITES sector, is levy of service tax on rental of commercial property. Most business houses are run on leased premises and levy of tax of such a magnitude on rental payments is a huge disincentive to the entrepreneurs, most of whom run their business on thin margins. Such a levy would have forced many such enterprises to run out of its business and will slowly and surely lead to the down turn of the Indian economy.

Apart from this, the recent amendment relating to non-availability of credit of relevant input service tax has scratched the wounds. The Budget should address these issues.

(The author is Executive Director, PricewaterhouseCoopers)