All that hype ends in a whimper

The Olympic motto – Citius, Altius, Fortius – echoed in my thoughts this morning as I switched on the television to watch the Finance Minister present the Budget for 2013-14. I was eagerly anticipating him to “quicken” the pace of tax reforms, leading to “strengthening” of investor sentiment in India and abroad, thereby laying down the path for a sustainable “high” growth rate in the future.

The Finance Minister has, however, decided to throw caution to the wind and has refrained from announcing big bang reforms on the income tax front. The proposed incentive of investment allowance of 15 per cent for manufacturing companies is a welcome one. It can clearly strengthen the cash flow position of manufacturers, thereby improving industrial output. The Finance Minister could have done better by reducing the investment limit to Rs 10 crores (as against the proposed limit of Rs 100 crores). This could have given the SME sector an incentive to increase its manufacturing output.

India has always been a substantial importer of technology. Increase in the royalty rates for technology imports from 10 to 25 per cent is likely to have a significant impact on the pricing of products to end consumers as most technological contracts are net of taxes. Even when foreign companies may be entitled to claim the tax treaty benefits (where the royalty withholding tax rates range from 10 to 25 per cent), this proposal is a regressive step, especially given the weakening rupee. The Finance Minister can consider bringing down the rate to about 12 to 15 per cent, which corresponds to the average rate of withholding tax on royalties in developing economies.

Extension of the lower rate of tax on dividends received by Indian companies from its foreign subsidiaries by a year would encourage Indian MNCs to repatriate cash into India and facilitate them to invest further in their Indian operations. The removal of the cascading effect of Dividend Distribution Tax on the distribution of foreign dividends is also a welcome one, as it would avoid two-layer taxation on the same income element.

The Finance Minister has sought to introduce distribution tax on share buybacks by unlisted companies as a measure to counter tax avoidance. A rate of 20 per cent is proposed to be levied on the distributing Indian company to the extent of difference between the consideration distributed and the value received by the Indian company (carrying out the buyback) for the issuance of such shares. This could potentially lead to higher tax leakage in situations where there has been a change in the shareholding of the Indian company which intends to carry out the buyback, as the price paid by the buyer, whose shares are being bought back, is not factored in the tax computation.

Increasing the effective tax rates for High Net worth Individuals (HNIs) has been a global trend and hence understandable. The Finance Minister has also decided to closely monitor transactions involving the sale of immoveable properties by introducing a tax deduction at source, where the value of the transaction is in excess of Rs 50 lakhs. While this is a welcome move in the long run, it is recommended that adequate checks and balances are put in place from a procedural perspective so that this avenue is not being abused by tax payers.

Jean Baptiste Colbert once famously said “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.” While the Finance minister has sought to widen the tax base through a slew of measures, it remains to be seen whether investors and the corporate world will hiss or scream in the days to come.

(The author is tax partner, Ernst & Young. Views expressed are personal.)

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