Tax policy is a key influencer to nation’s economic growth and can be effectively leveraged to spur consumption, growth, employment and investor sentiment. The upcoming Union Budget 2019-20 is an opportunity for the government to boost consumption, job creation and investments through appropriate tax policies. It is believed that tax system of any economy has to adjust to the requirements of a market economy to ensure international competitiveness.
It has to be acknowledged that Indian businesses are bearing high tax cost as corporate tax rate along with dividend distribution tax pushes India’s overall tax rate for companies beyond 50%, which is quite high. The rate is much higher than the corporate tax rate prevalent in key global economies. To be globally competitive and with a view to spur domestic investments and demand, the government should consider reduction in corporate tax rate across the board to 25% in the upcoming budget. Overall thrust should be on broadening the base of tax and lowering the tax rates. It is expected that this would spur economic growth and increase overall tax collections.
Secondly, the purpose behind introducing Minimum Alternate Tax (MAT) was to bring all zero tax companies in the tax net and to neutralize the impact of certain benefits/ incentives. The concept of MAT needs an overhaul with phasing out of exemptions and deductions. Moreover, adoption of Indian Accounting Standards (Ind-AS) has further added to complexities in the MAT regime due to fair valuation adjustments which are pervasive under Ind-AS. In nutshell, to keep pace with our growing economy, we need to move to a simpler tax regime. It is indeed the right time that the government should contemplate abolition of MAT. A simpler Alternate Minimum Tax as is currently applicable to non-corporates can be extended to corporates but at a reduced rate of 10%.
Thirdly, it is being observed that there are several provisions in the law that have little economic or policy justification. Particularly, allowing carry forward of losses only in case of amalgamation of companies that own ‘industrial undertaking’ is highly restrictive especially in a service sector dominated economy. To remove this anomaly, Section 72A of the Income Tax Act, 1961 should be amended to allow benefit of carry forward of losses, pursuant to amalgamation, to all companies irrespective of their line of business especially services business. Section 72A of the Act be further extended to merger and demerger undertaken between Limited Liability Partnerships.
Fourthly, scientific research is the key to innovation and lifeline for businesses. Like Make in India, Ease of Doing Business and encouragement to Start Up initiatives of the government, innovation and scientific research initiatives should be given equal weightage. Withdrawal of weighted deduction in respect of scientific research expenditure will adversely affect the ‘Make in India’ initiative of the government. Innovation and digitisation are not limited to industrial sectors and has gained momentum in service sectors as well. Weighted deduction allowed to various modes of scientific research expenditure under the Income Tax Act be restored and benefit should be extended to include research activities in service sector.
Lastly, the enactment of Insolvency and Bankruptcy Code, 2016 (IBC) ushers in a paradigm shift in the manner in which insolvency proceedings are carried out in India. It is necessary to ensure that tax consequences do not act as a deterrent in achieving the policy objectives of IBC. In this regard, non-applicability of section 50CA and section 56(2)(x) on transfer or issue of shares as per the Resolution Plan approved under IBC are vital issues which merit attention. These carve outs are warranted, since transfer or issue of shares under an approved insolvency resolution plan happens through lender dominated proceedings under oversight of National Company Law Tribunal (NCLT) in a transparent manner where existing promoters have very little say.
(The author is Chairman, FICCI Taxation Committee and Partner and National Leader, Transaction Tax, Ernst & Young LLP)