CORPORATE TAX RATE SHOULD BE GRADUALLY BROUGHT DOWN TO 25%

Corporate tax rate of 30% for resident companies, coupled with surcharge of 10%, continuing education cess of 2% and additional education cess of 1%, results in effective tax rate of 33.99%. In addition to this, fringe benefit tax on genuine business expenses, enhanced dividend distribution tax, and lowered depreciation rates impose a further strain on companies. Government should draw up a roadmap for reduction of tax rates and the effective corporate tax rate inclusive of surcharge, cess and other levies should be maintained at 30% for domestic companies and then gradually lowered further to 25%, This was stated by Mr. Sanjay Bhatia, President, PHD Chamber at the Pre-Budget Meeting with the Finance Ministry.

Mr. Bhatia suggested that ESOPs can be linked to individual employees FBT should not be payable in cases where the employee is non resident and thus his salary / benefits are not liable to tax in India. Suitable amendment should be made to clarify that FBT would not be applicable where the employer company does not issue shares but the foreign parent company of the employer grants options.

Mr. Bhatia also suggested that section relating to corporate restructuring under Income Tax Act be amended such that in case of amalgamation / demerger, the benefit of tax holiday should be available proportionately for the period that the undertaking vests in the amalgamating and amalgamated company or demerged or resulting company, and the over all benefit of the tax holiday period does not extend beyond the stipulated number of years, whether availed by the amalgamating or the amalgamated company and the demerged company or the resulting company.

At a time when the Government is moving towards streamlining and rationalization of the taxation structure, levying the dividend distribution tax, which adds to the burden on the companies and results in double taxation of income, is not justified. Moreover, there is an urgent need to provide a mechanism similar to erstwhile section 80M for adjustment of dividend income re-distributed for companies.

Mr. Bhatia suggested that the earlier rates of depreciation should be restored to avoid tremendous hardship to the capital intensive industries. Depreciation on machinery should be allowed at least at the rate of 25% to provide assessees with sufficient plough back of funds. In view of the rapid technological obsolescence, the lowered depreciation is not adequate to meet the requirement of replacement of the asset. In fact, in the absence of investment allowances, there is a necessity to incentivise investment flows into India through attractive depreciation benefits.

Mr. Bhatia highlighted that at present the combined incidence of Central and State levies on goods in India comes to around 30% plus with relative lower rates of taxes on services. This is the prime cause of restricting the competitiveness and growth of manufacturing sector in India on the one hand and reducing compliance level on the other hand. This needs to be brought down.

Mr. Bhatia suggested that the excise duty rate should converge with the service tax rate from the existing standard CENVAT rate of 16%. This will certainly improve the competitiveness of Indian industry both at domestic as well as global level. This is also required for implementation of GST. Further, similar products should attract same duty.

With the implementation of GST, the concessions, incentives, benefits and exemptions will get minimized. However, essential exemptions and benefits based on national priority will have to be there. This is an international phenomenon and even in advanced countries exemptions and concessions are part of their taxation policy.

He said that there is a need for implementing the Goods and Service Tax to consolidate the gains of VAT is well recognised. A number of issues would need resolution before it is implemented, namely:
GST Model to be adopted
Uniform Tax rates across the States
Integrate services into GST framework
Subsume all State taxes, levies and cess under GST regime
Treatment to the existing tax concessions, incentive and benefit schemes
Tracking of Inter-State sales in the absence of CST

Thus if GST has to be implemented by 2010 a tremendous amount of focused work needs to be done with a clear road map for its implementation.

Mr. Bhatia said that the Government should present a reform oriented Budget to address the ongoing concerns in the economy. The key challenges before the Budget are to augment investment in infrastructure - both physical and social - which would enhance long term sustainability of growth and bring in more domestic and foreign investment.

Mr. Bhatia stressed that efforts should also be made to continue the process of fiscal consolidation, rationalise the subsidy burden, promote skill development, correct distortions in our present tax system and step up investment in agriculture.