Why the FM needs to remove FBT, corporate surcharge

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Today, the Indian economy is dominated by the three major events that have taken place in the recent past, namely, global meltdown, stock market crash and recent corporate fraud. Almost every day there are news flashes apropos the presentation of the Annual Budget 2009. The roadmap envisaged by the new government for the Budget this year is expected to be a strategy to take up recent economic challenges, stock market trends and complex issues impacting the economic growth of our country. It would be pertinent to understand the seeming philosophy of economic expediency which could have a bearing on the forthcoming Finance Bill, 2009.

For the current financial year 2009-10, Annual Budget could not be passed in February due to the electoral process being in vogue and instead a vote-on-account was announced in the month of February 2009. There were more expectations from the vote-on-account which were felt unaddressed.

Subsequent to the vote-on-account, a stimulus package was announced on February 24, 2009, which provided certain concessions and reliefs. Apart from the above, the United Progressive Alliance (UPA) government had earlier resorted to two massive stimulus packages, one in December 2008 and the other in the month of January 2009. These two stimulus packages focused on duty reductions while the third one announced a cut in service tax and a further reduction in excise duty on certain goods. In spite of these stimulus packages, India Inc. felt that the revival package lacked real substance.

Resultantly, all eyes are now set on the new government assuming power to meet the growing demand of the Annual Budget to unveil the new stimulus package. Repossession of power by the UPA would spur them as they will be in session for another five years, enabling them to be far bolder in their policies.

This Budget should be a Budget for the "aam admi". Therefore, few significant aspects out of the entire gamut of expectations in the Budget wishlist for the revival of economic growth and reduction of fiscal deficit have been elucidated as under:

Tax exemption for exports

The export community has sought an extension of tax holiday under Sections 10A and 10B of the Income Tax Act, 1961 (the Act). It is also demanded that the Fringe Benefit Tax (FBT) on the Export Oriented Units be withdrawn as this defeats the very objective of a tax holiday.

Such sops will assist the export units in pricing their products competitively. These initiatives, if taken, will help boost the much-needed exports in India adding to the economic growth of our nation.

It is recommended that there should be a blanket service tax exemption on all services used during exports in order to do away with the prevailing procedural delays in the refunds processes. It is also suggested that Export Credit be available at 7 per cent across the Board without linking it to Prime Lending Rate and that the interest subvention scheme be continued till March, 2012.

Market expectations

For augmenting capital markets, it is imperative that there be a phased reduction of the Securities Transaction Tax (STT). The removal of STT would improve the retail participation in the capital markets by reducing the transaction costs.

Moreover, it is also required that the losses incurred in currency derivatives be treated as business losses and not as speculative losses. It is suggested that the investments in real estate mutual funds by retail as well as institutional investors be given tax benefits for the development of the sector and the fund. Similarly, benefits be extended to Provident Funds as well as Pension Funds to invest in mutual fund units.

Corporate taxation

It is recommended that the FBT and the corporate surcharge on income tax be removed to ease the difficulties of the corporates. In ensuring public welfare, considering that the government ought not to lose sight of its ultimate goal of increasing tax collection, the government may contemplate enhancing its revenue by bringing their agricultural activities under the tax net.

Relief in personal taxation

At personal taxation level, in order to increase the purchasing power of the people, tax rates must fall and our ability to pay taxes must rise. Presently, individual taxable income for males up to Rs 1.50 lakhs, females up to Rs 1.80 lakh and senior citizens up to Rs 2.25 lakh are exempted from that tax net. Therefore, it is expected that, the government in this Budget would reconsider the exemption slab and make an endeavor to bring back the "standard deduction" as a relief to the salaried employees.

Another proposal for the benefit of the individual taxpayers would be to hike the Rs 1-lakh limit for tax-deductible investments under Section 80C of the Act. This would be a welcome move for the government to promote investments in long-term savings which can then be utilized for funding infrastructure projects and other initiatives.

Rationalizing of scheme of tax regulations

The scheme of the Act and the rules made thereunder as they stand today, are interwoven with a plethora of sections, sub-sections, clauses, cross references, explanations and proviso's. Therefore, it is time that the Income Tax Act be re-written on a new slate so that a new tax code is devised. An endeavor must be made for the removal of ambiguity and redundant provisions, lesser use of legal jargon, grouping of similar provisions and laying out well thought out procedural laws.

Furthermore, it is suggested that the Government weeds out the archaic laws imposing taxes and duties generating very minimal revenue, which in turn will go a long way in making the regime more tax payer friendly.

Certainty in cross-border tax issues

In 2001, the government introduced Transfer Pricing Regulations (TPRs to ensure that international transactions between group companies are benchmarked at arms length basis, anti-tax avoidance measures are embedded in the Act and litigation are minimized.

However, there is no clarity on the aspect of attribution of percentage of branch profits. The Central Board of Direct Taxes (CBDT) needs to give clarity on the subject of attribution of profits to Permanent Establishment (PE), especially on how the PE should correctly capture its economic substance so that the profits attributable to the PE are in consonance with its functions performed, assets employed and risks assumed.

Clarify LLP Taxation

At this juncture, when the Indian Parliament has passed the Limited Liability Partnership Bill, 2008 and such forms are expected to prove as a proficient form of commercial organization, it is vital that the tax framework for the Limited Liability Partnership regime which came into effect from 1st April, 2009, be clarified.

Implementation of GST

It is imperative that a clear pathway including the timelines for interpretation of Goods and Services Tax (GST) be announced in the forthcoming Budget. Considering that the proposed date of implementation of GST is April 1, 2010, GST would herald the next generation of tax reforms and is much eagerly awaited.

It would be interesting to see whether these policy expectations find their manifestation in the forthcoming Budget which shall be laid before the House on July 6, 2009.