In the prevalent global theme of tax competitiveness, with dropping corporate income tax (CIT) rates in the developed and the developing economies including the US, the UK and even BRICS, the effective Indian CIT rate of ~48 per cent (inclusive of grossed up dividend distribution tax or DDT) is a distinct outlier.

There is thus a clear case for rationalising DDT, which has doubled since its introduction in 1997 at 10 per cent. Ideally, there is a case for reversal to the classical system of taxing dividends in the hands of the recipient, with deductions akin to Section 80L and Section 80M of the I-T Act to partially alleviate multiple levels of taxation. This would also create a very auditable trail of TDS for resident shareholders and promote wider compliance. The digitisation of TDS compliance and dematerialised shareholding should assuage any fear of tax leakage. Controversy regarding foreign tax credits for non-resident shareholders would also be avoided.

There is a case for the Government to also deliver on the commitment of phased movement to a 25-per cent CIT rate. As a first step, an option to pay 25 per cent tax on ‘book profits’ as per audited accounts can be offered to small and medium enterprises, with safeguards and transition provisions adequately defined. This should prevent additional tax audits, computations and compliance for deductions/claims.

Minimum Alternate Tax (MAT) applicable to companies has seen an inexorable race to ~21 per cent from its introduction at 7.5 per cent. MAT with its variety of upward/downward adjustments is fraught with litigation. The alternative minimum tax (AMT) applicable to non-corporates is a much simpler code and ensures some cash tax collection in lieu of tax incentives claimed. AMT should replace MAT for corporates before the Ind-AS complications vis-à-vis MAT become a source of new litigation.

Time was when India was the preferred destination for service outsourcing including R&D and technical services. India now competes with BRICS and many more countries. China provides a 15 per cent CIT rate to companies with High and New Technology Enterprise (HNTE) status, besides other incentives. There is also no difficulty visualising the fact that when a R&D or a similar centre is set up, there is a multiplier effect on tax due to increased employee tax, GST, et al . To climb up the value chain of R&D services and also to capitalise on the newer areas of AI, robotics and digital, India needs to incentivise relocation of senior resources and technical talent to India. It is expected that the Budget would amend the transfer pricing guidelines/clarifications to promote the location of valuable talent in India without unsettling transfer price methodology on a cost-plus basis.

Regarding the weighted R&D expense deduction, the requirement for approval of the annual expenses by the department of scientific and industrial research (DSIR) should be abolished and replaced by clear rules for non-qualifying expenses notified by the CBDT through rules, framed in consultation with industry and DSIR.

On the administration and digitalisation agenda, it would be quite fitting for the Budget to mandate e-assessments for corporate taxpayers.

The writer is Partner and National Leader, International Tax Services, EY India. The views are personal

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