Opinion: Use Corporate Tax Levers to Boost Investment
India is among the faster growing emerging economies in the global economy, which is otherwise showing signs of gloom. The Narendra Modi government is taking pains to showcase that India is open for business. Initiatives like 'Make-in-India' and 'Start-up India' aid this; but a key aspect, which will aid business growth and resurrect India's image in the business world, is the corporate tax reform. Given that employment generation, attracting FDI and encouraging investment is on top agenda world over, the Union Budget presents an opportunity to the government to meet these objectives inter-alia through policy changes/amendments in corporate tax law.
Finance Minister Arun Jaitley had in the last Budget announced that corporate tax rates would be gradually slashed to 25 per cent. The Finance Minister should follow up on this promise by outlining a clear roadmap for reduction in tax rates.
The government should rid India of the ghost of retroactive amendments, which christened the indirect transfer rule. The government has done a little, in bringing in clarificatory amendments to the rule (e.g. defining substantial value, exempting small shareholders etc.), but continuing to allow retroactive operation of the rule in the statute book is counterproductive to the cause of a friendly business environment. Similar retroactive legislation deeming as royalties and payments for purchase of software should also be re-examined to keep the IT sector upbeat.
PM Modi recently announced that the start-up world will be given a tax holiday to promote growth and entrepreneurship. One hopes that the tax holiday will be carefully structured, keeping in mind business realities. For instance, many start-ups burn cash in initial years. Thus, tax sops which extend ability to indefinitely carry forward business losses; exempting application of Section 79 of the tax law when there is greater than 49 per cent change in shareholders in the start-up company, etc. should be considered. One wonders whether the start-up world would be better served by having access to a VC fund, promoted by the government. The Finance Minister could certainly think along these lines.
The GAAR (general anti-avoidance rule) provisions become operative in just about a year from now. In an environment when countries are competing for capital, the timing when GAAR becomes operational should be reconsidered. The tax law contains residency provisions which deem a foreign company to be an Indian tax resident if its place of effective management (PoEM) is in India. The government is being consultative in determining detailed rules in the application of PoEM principles, but given that the rules are not yet finalised, one hopes that the provisions relating to PoEM are amended to be applicable from a later tax year (currently they are applicable to the tax year 2015-16). It is also recommended that due weightage is given to international tax principles and country practices when the PoEM rules are legislated.
One scheme of the government of India, which faced the brunt of policy back and forth, is the special economic zone (SEZ) scheme. The scheme, which was initially marketed for its 100 per cent tax holiday status across legislations, saw a serious setback with the levy of minimum alternate tax (MAT) and dividend distribution tax (DDT) on them. The SEZ scheme saw a large amount of interest from foreign investors. To revive foreign investor sentiment in the India story, one wishes that the income tax sops, in the form of exemption from MAT and DDT, are re-introduced. With an eye on employment creation and attracting FDI, one may even consider re-introducing the income tax incentives available under the STPI scheme, which was hugely popular in the early 2000s. This would also help the ailing real estate sector in driving interest in commercial property development and sales.
The government has time and again acknowledged that the litigation environment in direct tax laws is particularly poor. Delinking tax collection targets from being assigned to tax authorities could be a key step in containing aggressive framing of assessments. The AAR needs to be consistent in its functioning, and the decision to increase the number of benches should be quickly implemented, so as to provide taxpayers with speedy certainty on issues. Certainly more needs to be done to resolve India's tax litigation woes, and simplification of the tax law could be the first step in this process.
(K T Chandy is tax partner at EY India)
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