INDIA GROWTH STORY: Driving growth in challenging times

UDAY VED

EXECUTIVE DIRECTOR – HEAD OF TAX KPMG INDIA

    THE EUPHORIA OF THE CONGRESS FORMING a stable government at the Centre has resurrected confidence in the economy and raised public expectations from the budget 2009. The government's resolve to open the innings with a spectacular "First 100-days in office" only means that the finance minister will have to look at the balance sheet with a magnifying glass. Rising fiscal deficit, falling exports and still recovering domestic demand will bring challenge to allocating funds to large investment projects and fulfiling non-negotiable promises made to rural India on healthcare, education and employment. However, as the government is expected to remain focused on raising GDP growth and pushing Corporate India towards economic recovery, the industry and taxpayers can reasonably hope that the FM will present a liberal fiscal budget 2009.
    The key expectations from the budget are as follows:

• Reduction in corporate and individual effective tax rates to 30% by removing surcharge. As per a recent global study, the average corporate tax rate is approximately 25.9%. The average tax rate in India also has shown declining trend in recent years. This would help Corporate India attract more investments by offering a tax rate that is competitive with countries such as China (25%), Malaysia (26%) and Hong Kong (16.5%). In the context of individual tax payers, again there is a case to reduce tax rates in order to increase disposable income and spur growth. The peak tax rates in some of the peer countries like Russia and Brazil is 13% and 28%, respectively.

• Extension of tax holiday for the IT/ITES sectors beyond 2010 for at least three years would further help these sectors to grow and make them more competitive in global markets. This should specially help the SME sector that constitute over 40% of the exports made from software technology parks.

• The government needs to remove ambiguity in the formula for computation of tax holiday benefits to SEZ units with reference to total turnover of such units. Ideally the formula should suggest that the profits exempt under section 10AA of the Incometax Act, 1961 should be in the proportion of the export turnover of the undertaking divided by the total turnover of the undertaking. Currently the way the section is worded, the profits exempt from tax are to be computed in the ratio the export turnover of undertaking to the total turnover of the business of the tax payer. This tends to exempt a very small portion of the profit of tax payers operating multiple undertakings even though it has exported a high percentage of their total production/turnover.

• Some of tax-holiday incentives for infrastructure sectors and power projects including renewable sources of energy will expire soon and need to be extended so as to give a fillip to the sectors.

• Clarification is required on availability of tax holiday benefits on production of natural gas. Under the existing tax provisions, 100% deduction is permissible in respect of the profits derived from the commercial production of 'mineral oil.' The Notes on Clauses to the Finance Bill, 2008 purports to exclude natural gas from the purview of the expression 'mineral oil.'

• Road map for introduction of GST. It is now an accepted fact that India needs to completely revamp the existing indirect tax structure to address issues such as multiplicity and cascading of taxes, lack of uniformity and high compliance cost. With the new government having reaffirmed the commitment to GST transition from April 2010, it is expected that the FM would discuss the concrete road map and framework for GST. This is also an opportunity for the government to ensure a smooth GST transition by bridging the gap between present regime and the desired GST framework. Similarly, the CST phase-out plan should be clearly chalked out, possibly with reduction in existing rate from 2% to 1%. Any discussions around the timelines for major milestones (such as release of white paper/ draft legislation, constitutional amendments etc.) would be welcome by all.

• Elimination of fringe benefits tax (FBT) and cut in dividend distribution tax (DDT) has been a long standing demands of the industry. If these taxes are not removed, the government could consider rationalising them such that say FBT would become a creditable tax, and provisions similar to section 80M could be introduced to take care of the DDT. The amendment made to give credit for DDT in the last budget is widely thought to be inadequate to deal with a situation where there are multiple holding companies.
    Further, the stated tax policy of government is simplification, rationalisation and providing certainty to tax payers. This is also helpful for creating right investment climate in the country. Towards these, the government has taken steps in the past on rationalisation of tax regime.
    There is an endeavour to simplify direct tax laws by introduction of much awaited Direct Tax Code and providing mechanism for reducing tax disputes. There is a need to rationalise transfer pricing norms and introduce the concept of Advance Pricing Agreements in line with countries such as the US to reduce protracted litigation.
    The government is expected to continue its reform agenda in areas such as public-private partnership, foreign direct investment in sectors like defence, insurance, pensions, multi-brand retail and higher education. It is expected that the budget would aim for stable tax policies and set the platform for growth in the long term.