Keep it simple

Every budget has its own charm and excitement and the Annual Budget for the year 2016 is no exception. There are significant expectations from Budget 2016. What we have is a government focused on ‘Make in India’, ‘friendly tax regime’ and improving ‘ease of doing business’.

The salaried class expects revival of the once most popular term called “Standard Deduction”. This was perceived as the most potent force to take care of legitimate expenses of this class, otherwise not allowable as a deduction. Even senior citizens should be entitled to this deduction since their savings are channelised largely in fixed deposits, where the post tax yields are only around 5-6 per cent.

Increase limits While Section 80 C continues to be the most popular savings oriented deduction, the limit of ₹1.5 lakhs needs to be enhanced to at least to ₹2.5 lakhs so since there is a move to reduce the rate of interest on instruments such as PPF.

Why not earmark this extra ₹1 lakh as investment in the recapitalisation of public sector banks instead of government trying to bail them out?

A tax advantage may encourage the tax paying citizens to contribute for this purpose. Likewise, reinvestment of sale proceeds of capital gains in specified bonds should not have a cap of ₹50 lakh per financial year, since assessees in some cases are more than willing to invest more with a lock-in of 10 to 15 years and are reconciled to a 6 per cent yield on such investments.

On the corporate tax front, Budget 2016 should bring some clarity on the much talked about discussion ‘the phasing out of exemptions and reduction of corporate tax rate’. Further, there is prime need to revisit the existence of Minimum Alternate Tax (MAT). The effective tax rate has climbed from 18 per cent in 1990s to around 21 per cent now.

This being the situation and the proposal to phase out all incentives over a period of 4 years, book profit as the only measure for corporate tax is the most acceptable solution. MAT has witnessed enormous litigation on various fronts.

Close them please The decision of the government to review all pending cases (Vodafone-like) relating to indirect transfers has to conclude in some sort of finality and closure. An announcement on these lines will send positive signals to the international community which seeks stability and certainty.

Finally, Place of effective Management (‘PoEM’) and the draft guidelines have already led to confusion and uncertainty. Indian companies going global need more time and wherewithal to stabilise their operations in the overseas markets. Till such time, it is better to defer PoEM.

A policy framework on tax matters over a three year horizon needs to be put in place. Annual budgets should not tinker or change this framework so that any businessperson can plan accordingly.

The biggest worry for the Finance Minister is the low tax to GDP ratio which is now around 10 per cent. Shrinkage of overall revenues and a low base of population paying taxes is the reason for the low tax to GDP ratio.

The challenge is to balance the requirements of improving the tax base and similarly provide the necessary incentives to the middle class tax paying population.

The writer is Tax Partner, EY. The views are personal

COMMENT NOW