In the last few years, the Indian Government has taken many positive steps to create an efficient and transparent tax system in India. Reforms measures such as implementation of the historic Goods and Services Tax (GST), lowering of GST rates, ensuring a smooth transition and steps to improve ease of compliance, significant efforts to improve clarity and administration and determined measures to check black money generation have been truly transformative and industry welcomes these positive tax reforms.
This article, as a part of the CII Pre-Budget recommendations series, discusses the various recommendations related to tax reforms. These recommendations have already been submitted to the Finance Ministry for their consideration.
Lower corporate tax burden: An efficient tax system designed for boosting growth of the country, should promote investment and employment, bring clarity and certainty in law, ease the compliance pain and improve dispute resolution mechanisms.
For boosting growth, the first step in tax reforms should be the lowering of the corporate tax burden, which is one of the highest in the world. With more and more countries such as the US, UK, Singapore and Vietnam moving towards a lower tax regime, with a corporate tax rate within 20%, India should also consider designing a roadmap for the reduction in the corporate tax rate at the earliest.
The Government has assured a reduction in the corporate tax rate from 30% to 25%. CII proposes that the tax rate could be progressively reduced to an all-inclusive 18%, in line with the effective tax rate in other countries. CII has also suggested that most tax exemptions may be withdrawn with this rate. Government may also consider withdrawal of surcharge and cesses for lowering the tax burden.
Rationalization of Minimum Alternate Tax and Dividend Distribution Tax is also suggested.
Dividend Distribution Tax (DDT): The current DDT rate is 20.36%, which is much higher than the treaty rates of 5% or 10% in most Indian treaties. Thus, CII has recommended rationalizing the DDT rate to 10%.
CII has suggested the liberalization of DDT rollover benefit for dividend received from all companies, whether or not subsidiaries. Currently DDT rollover benefit is restricted to dividends received from subsidiaries.
The Government may also consider restoration of the classical system of dividend taxation whereby shareholder pays the tax.
Minimum Alternate Tax (MAT): CII has proposed the abolition of MAT in view of removal of most incentives. Alternatively, the MAT rate should be bought down to 10%. In such cases, the levy of MAT should be restricted to those incomes that are taxable under regular provisions. Foreign dividend should be exempt from MAT, like domestic dividend. Additionally, MAT should be removed from SEZ profits and the profits must be left with the companies for further investment.
To curtail the existing litigation and provide relief to the assessee, all carry forward losses should be reduced from book profits of the current year before MAT is levied.
Valuation of Unquoted Shares: Currently, Rule 11UA does not provide adequate relief/ safeguard to the genuine commercial transactions. CII has proposed that transfer of shares amongst group companies should be kept out of Rule 11UA as in substance it does not lead to a third party transfer. Further, the group transactions can be defined to include – (a) transfer of shares between holding and subsidiary company; (b) transfer of shares between fellow subsidiaries. For ensuring consistency, the holding and subsidiary companies should be defined as per the Companies Act, 2013.
CII has suggested that Government should exempt the transfer of assets between relatives (as defined under section 56) on account of family settlement or otherwise from the applicability of section 50CA and amended Rule 11UA. Considering the practical difficulties relating to sale of unquoted shares, they should be valued at higher of transaction value or discounted value of 50%. Minority shareholder can be defined to mean shareholders with shareholding upto 26% and who do not hold control or management rights.
Other CII suggestions relate to creating an Alternate Dispute Resolution mechanism parallel to the normal litigation process, the rationalization and simplification of the Alternative Investment Funds, With-holding Tax (WHT) provision for Foreign Portfolio Investors and Tax Deducted at Source.
These reforms would work in congruence with the existing tax reforms introduced by the Government and will provide a much needed boost to growth through an effective tax system. Industry looks forward to the Budget to be presented on 1st February and is hopeful of a progressive and reform oriented budget which would drive the Indian economy on a sustainable growth path.
Also read last year’s CII Union Budget 2017-18 Analysis