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The finance minister has done a commendable job in containing the fiscal deficit and simultaneously reducing the proposed market borrowings from ₹4.25 lakh crore to ₹3.48 lakh crore, providing a thrust on infrastructure to propel growth and promote employment. Several meaningful measures have been announced for the agri sector as well as steps taken to change the colour of the currency through a digital era. However, there are some troubling aspects.
Onerous provisionsWeighted deduction on research and development expenditure : The finance minister had announced in the last Budget that while corporate tax would be brought down to 25 per cent over a period of time and all exemptions would be concurrently phased out, there was no respite for large corporates. Industry associations have been representing that even when the rate is brought down to 25 per cent, tax incentive on R&D should be continued. It will also go in line with the Make India campaign.
Out of the total tax incentive of ₹98,400 crore foregone which is getting phased out, the tax incentive on R&D expenditure is only ₹8,100 crore. In several countries including the UK, Israel, Singapore and European nations where the tax rate is 20-25 per cent, the government still provides incentives on R&D expenditure. In China where the tax rate is 25 per cent incentive on R&D expenditure is provided. While the weighted deduction has already been reduced to 150 per cent from the current financial year and to 100 per cent from 2020, the finance minister should reconsider his decision to phase out the incentive for R&D.
Transfer pricing: The provisions on transfer pricing are onerous and assessees face innumerable hardships. Besides, the proposed new Section 92CD provides that as a result of any adjustment of transfer pricing above ₹1 crore, excess money has to be repatriated from the associated enterprises. This is going to pose serious challenges to the assessees concerned.
Thin capitalisation: In line with the thin capitalisation regulations in various countries, there is a provision in the Finance Bill. Interest deductible on a foreign borrowing from an associated enterprise shall be allowed only to the extent of 30 per cent of EBIDTA (earnings before interest,depreciation and taxes), if the total interest exceeds ₹1 crore per annum. However, the Indian situation differs from other countries. We still require external money to grow the economy both in the form of equity and debt. The RBI could come out with guidelines on debt equity ratio with respect to such borrowings.
Private investment may not pick up unless the capacity utilisation improves beyond 80 per cent. While the effective rate of tax of large corporates could be still 25 per cent, several large companies are paying closer to the maximum rate of tax. In addition, there are several disputes and disallowances corporates have to grapple with.
Maximum rate of tax Similar to minimum alternate tax (MAT), the Government can prescribe a maximum rate of tax of, say, 28 per cent; any artificial disallowances may be avoided to provide certainty to the assesses. This would be in line with the finance minister’s stated objective of encouraging the honest tax payer.
The finance minister has gone on record that during the demonetisation drive, banks received deposits of more than ₹80 lakh in 1.48 lakh accounts with an average deposit of ₹3.31 crore, which means we have received deposits of almost ₹5 lakh crore in cash. This number excludes another 1.09 crore people whose average deposit is ₹5 lakh in cash. We hope the income tax department will pursue this trail in a fair and objective manner.
In order to reduce cash transactions, it is necessary to educate people particularly in the rural areas (more than 650 million people) as to how to use digital payments. It is heartening to see that the Government has also addressed the issue of cyber security in the Finance Bill. With the proposed introduction of GST and the thrust towards a digital economy, we hope the Government would be able to widen the tax base in the next few years and simultaneously reduce the tax rate to propel faster growth.
The writer is President and Group CFO, TAFE
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