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Pre-Budget Memorandum 2011-2012 The Associated Chambers of

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The Explanation 4A to section 431 which was inserted with the specific object of curbing the perceived evil practice in sale and leaseback transactions

    Pre-Budget Memorandum

    2011-2012

    The Associated Chambers of Commerce and Industry of India

    ASSOCHAM Corporate Office

    1, Community Centre, Zamrudpur, Kailash Colony, New Delhi 110 048

    Tel : 011-46550555 (Hunting Line) Fax : 011-46536481 / 82

    Email : assocham@nic.in Website : www.assocham.org

    I N D E X

     TOPIC Page No.

     EXECUTIVE SUMMARY (iii)

     DIRECT TAX ISSUES 6-43 1 CORPORATE TAX 6 2 PERSONAL INCOME-TAX 15 3 INVESTMENT IN INFRASTRUCTURE PROJECTS 21 4 MINIMUM ALTERNATE TAX 22 5 TAX DEDUCTED AT SOURCE (TDS) 22

    SIMPLIFICATION & RATIONALISATION OF TAX LAWS & 28 6 PROCEDURES

    7 RETROSPECTIVE AMENDMENTS 29 8 INTERNATIONAL TAXATION 30 9 EXTENSION OF SUNSET CLAUSE FOR 10A/10B UNITS 34

    TAX HOLIDAY FOR UNDERTAKINGS ENGAGED IN COMMERCIAL 35 10 PRODUCTION OF MINERAL OIL AND NATURAL GAS

    11 ISSUES PERTAINING TO AGRO SECTOR 36 12 ISSUES PERTAINING TO THE HOTEL INDUSTRY 38 13 ISSUES PERTAINING TO THE CEMENT INDUSTRY 39 14 ISSUES PERTAINING TO THE POWER SECTOR 39 15 ISSUES PERTAINING TO THE HEALTH & SCIENCE SECTOR 39 16 WEALTH TAX 42

     Topic Page No.

     INDIRECT TAX ISSUES 45-141

    1 EXCISE ISSUES 45

    2 CUSTOMS ISSUES 73

    3 SERVICE TAX ISSUES 98

    4 GST ISSUES 114

    5 CENVAT ISSUES 123

    6 CST & VAT ISSUES 132

    7 POLICY ISSUES 139

     ii

    EXECUTIVE SUMMARY

    The economic growth rate in India has returned to the 8.5% to 9% level which was achieved prior to the global slowdown, due to the liberalised economic policies followed by the Government in the recent past and prudent financial management. The gradual and calibrated tax reforms under taken by the Government during last one decade helped (a) Indian industry and services sectors to improve its competitiveness to international level and (b) encouraged domestic and foreign investment thereby accelerating the growth momentum. ASSOCHAM being a premier knowledge chamber, has always supported Government‟s pragmatic economic policies and tax reforms and played an active role of a catalyst in the change management and expanding the knowledge across the country. During the last 12 months ASSOCHAM held more than 20 conferences on GST in different states with the active support of the Finance Ministry and State Governments. ASSOCHAM also held several seminars on Direct Tax Code and submitted constructive suggestions to the Govt. In this context ASSOCHAM would like to

    make following key recommendations for the Union Budget 2011-12 for the consideration of the Government:

1. NEED TO ACCELERATE THE PROCESS TAX REFORMS:

    ASSOCHAM is quite concerned that the process of tax reform in the recent past has not

    only slowed down but in some cases has been reversed. The implementation of direct tax

    code has been delayed. Introduction of GST has again missed the revised deadline and

    there is no indication as to when it will be implemented. Rational GST is quite essential to

    simplify indirect tax structure and make India a common market. On the other hand the

    many States have unilaterally changed the tax rates under VAT and changed the structure

    disregarding the uniform rate structure recommended by the Empowered Committee of

    State Finance Ministers. The trade and industry fear that if this process continues, the

    country will go back to old discretionary tax regime which would have serious impact on

    Industry‟s competitiveness and slow down of growth in due course. ASSOCHAM strongly

    recommend the Central Government to play active role in ensuring that the process of tax

    reforms continues.

2. NEED TO BRING TRANSPERANCY IN CORPORATE TAX:

    There is a need to amend the provisions of Income Tax Act especially in relation to cross

    border transactions and taxation of non residents comparable to international practices to

    facilitate introduction of direct tax code. The detailed suggestions are given in Part-1 of this

    memorandum. There is also need to bring greater transparency in tax administration. For

    instance thin capitalization principle is applied in certain cases without such provision in the

    law resulting in litigation and advance ruling. Such uncertainties adversely affect investment.

    There is also urgent need to issue suitable guidelines for assessment transfer prices in view

    of significant increase in disputes.

3. INTRODUCTION OF RATIONAL GST STRUCTURE:

    Indirect tax reform by replacing multiple taxes with GST is crucial to improve Indian

    industry‟s competitiveness and make India a common economic market. Hence its

    introduction should be expedited. However, it is equally important that the GST structure has

    to rational and stable and all indirect taxes on tradable goods and services should be

    subsumed in GST. ASSOCHAM fully support the views of finance ministry that any change

    in the GST rates should be with concurrence of all states and center and there has to be

     iii

    independent dispute resolution tribunal for GST. Our detailed suggestions on various aspect

    of GST are given in PART -2 under Para 4 of this memorandum.

4. CENTRAL SALES TAX (CST):

    The Government in the past had committed to phase out CST to facilitate introduction of

    GST. After initial reduction, the CST rate remained at 2%. ASSOCHAM request the

    Government to reduce the CST rate to 1% in the Budget 2011-12 for sales between

    registered dealers to remove cascading effect and facilitate common market.

5. REVIEW OF ESSENTIAL COMMODITIES UNDER CST:

    The change in the economic structure of the country requires review of essential

    commodities listed in Schedule 14 of the CST Act. For instance natural gas which is used

    extensively as input in several industries and power generation moves across the country

    into different states through pipelines. It is recommended that Natural gas be included in

    schedule 14 of CST Act and similar other products should be added.

6. TAX INCENTIVE FOR INVESTMENT IN INFRASTRUCTURE:

    The income tax holiday for certain infrastructure projects under Section 80I and in export

    oriented units under section 10A is expiring. In view of significant gap in meeting the

    demand for key infrastructure like power , ports and airports, the tax holiday should be

    extended for another 5 years to encourage investment in such projects. Similarly significant

    shortfall in trade balance between import and export, the tax holiday to EOU and STPI units

    should be extended for at least 2 more years.

7. OTHER SUGGESTIONS FOR UNION BUDGET 2011-12:

    There are several other suggestions received from trade and industries for the Budget

    20011-12 relating to income tax, excise, customs duty and service tax which are stated in

    Part 1 and 2 of this memorandum. These include the need to moderate corporate tax rate to

    25% and MAT to 15% and rationalization of CENVAT credit. We request the Government to

    consider them favourably.

     iv

DIRECT

TAXES

v

1. CORPORATE TAX

1 A. Corporate Tax Rates

Recommendations:

    In order to remain globally competitive, it is suggested that the corporate tax rate be reduced from 30% to 25%. This will result in generating more surpluses in the hands of companies with the consequential impact on investments and growth. Tax rate for corporates be liberalized which has been a long pending corporate demand of the people.

Rationale:

    In the current global tax scenario, it is inevitable that to be a competitive and attractive investment destination, our tax rates must be in tune with others. The trend world over has thus been to gradually bring down corporate tax rates, especially in the recent years global average corporate

    tax rate has come to around 25%.

1 B. Rate of Minimum Alternate Tax

Recommendations:

    The present rate of Minimum Alternate Tax (“MAT”) is 19.93%. The rate was 8.48% in F.Y. 2000-

    01. Therefore, the rate of MAT has almost doubled in last 10 years and therefore it is suggested that:

     the rate of tax under MAT should be restricted to 15%, or

     MAT may be levied on the book profits after reducing the amount which has been deployed

    back to the growth of the industry i.e. the book profits can be reduced by an amount of

    profits redeployed for new investments/new business or transfer to specified reserves. If the

    same is redeployed for business expansion etc. this would help the industry to redeploy the

    profits and contribute to the growth of the economy, or

     MAT should be abolished or alternatively reduced substantially.

Rationale:

    The regular increase in the rate of MAT is hampering the growth of industry.

    MAT was introduced to bring into the tax net the companies paying dividend and enjoying benefits of higher depreciation and other tax exemptions, resulting in nil/lower taxable income. However, the various tax exemptions and benefits including depreciation rates have been reduced over the years. Consequently, continuance of MAT has become redundant and therefore the said provision, which is giving rise to unnecessary litigation should be amended

1 C. Dividend Distribution Tax

Recommendations:

    Clause 21 of the Finance Bill, 2008 has amended the provisions of Section 115-O of the Income-tax Act, 1961 (“the Act”), to mitigate the cascading effect of Dividend Distribution Tax (“DDT”) in a single tier structure, by inserting sub-section (1A) which reads as follows:

    ASSOCHAM Pre Budget Memorandum 2011-12 6

    “(1A) The amount referred to in sub-section (1) shall be reduced by,-

    (i) the amount of dividend, if any, received by the domestic company,

    during the financial year, if:

    a) such dividend is received from its subsidiary;

    b) the subsidiary has paid tax under this section on such dividend;

    and

    c) the domestic company is not a subsidiary of any other company”

    It is therefore suggested that the clause (c) under the newly inserted sub-section (1A) should be deleted so that the elimination of multiple taxation of dividend distribution can be extended to further step-down subsidiary within a group. This will also be at par with the earlier provisions of Section 80M (dealing with deduction available in case of inter-corporate dividends) which were there on the Statute at the time when dividends were taxable in hands of the recipient.

Rationale:

    As per the provisions of section 115-O of the Act, domestic company is required to pay tax on the dividends distributed @ 16.61% (including surcharge and education cess). The said provisions had resulted in multiple taxation of profits distributed as dividends, particularly in a case where the corporate group had a holding company and its step-down subsidiary. In view of the fact that the DDT was paid at every stage of dividend distribution flowing from the subsidiaries to its holding company within the group.

    The amendment to section 115-O of the Act mitigates the cascading effect of taxation of dividend, it however, restricts elimination of double taxation only at one level. In other words, the cascading effect of dividend distribution tax has been removed only in case of corporates, adopting a single tier holding structure i.e. a parent and its subsidiary. By providing under clause (c) that in order to avail a set-off of the dividend received from its subsidiary of any other company it would mean that the second level and the further step-down subsidiary although in the same group and distributing dividend will continue to pay DDT without any relief on account of cascading effect.

    In case of infrastructure business, the infrastructure projects are developed by parent company generally through its holding company which in turn develops and operates/maintains these projects through subsidiaries (Special Purpose Vehicle). There is no rationale behind eliminating the cascading effect only partially by granting the benefit only in case of horizontal structure of holding subsidiary and not extending it to the vertical structure wherein there will be more than one step down subsidiary.

1 D. Short-term capital gains tax Section 111A

Recommendations:

    The tax rate for short-term capital gains has been increased from 10% to 15% over the last few years. The lowest income-tax slab is at 10% which was earlier in line with the short-term capital gains tax rate. The present rate has resulted in a disparity in the said tax structure. This anomaly needs to be corrected by reducing the short-term capital gains tax to 10%. In fact, this will also result in giving a boost to the stock market.

    ASSOCHAM Pre Budget Memorandum 2011-12 7

Rationale:

    For example, if an individual has no other income and only short-term capital gains of Rs. 2 lakhs, he will have to pay a tax of Rs. 40,000 @ 15% and not at the lowest slab of 10%. Therefore, the tax rate for short-term capital gains needs to be revised.

1 E. Tax on Dividend received from overseas subsidiaries

Recommendations:

    To encourage more and more investment by Indian companies in the world market by setting-up overseas corporate entities like joint ventures and subsidiaries, dividends received from such entities in convertible foreign exchange in India should be fully exempt from tax in line with the dividend received from any domestic company. Alternatively, if the dividends are already been taxed in the source country then tax credit for the same should be available in India.

Rationale:

    To take advantage of the globalization of world trade/opening up of world economies and liberalization of Indian economic policies, many Indian companies have emerged as multinationals and are making investment overseas by setting up manufacturing and other facilities abroad through separate legal entities in the form of Joint ventures and subsidiaries instead of having their own outfit or branch. The dividends received by an Indian company from a foreign company, i.e. either its subsidiary or a joint venture, though received in foreign exchange, are fully taxable in India. Initiatives in line with the above recommendations will boost investment.

1 F.1 Depreciation

Recommendation:

     It is common knowledge that plant and machineries that are generally used for double/triple

    shift basis, permit assessee to claim depreciation at least at the rate as permissible under

    the Companies Act.

     It is imperative to introduce the concept of "free depreciation" where an enterprise may

    choose the quantum of depreciation and the years of claim so that it is in a position to plan

    its cash flows in a better manner to optimise productivity. Since the total depreciation

    allowed to the enterprise will not exceed the cost of the asset, the proposal per-se is

    revenue neutral.

Rationale:

    The rate of depreciation for general machinery and plant has been reduced from 25% to 15%, along with the enhancement of initial depreciation rate from 15% to 20%. The increase in the initial depreciation has not gone far enough to neutralize the impact of decrease in normal depreciation. The intention of the Government seems to be to align the depreciation rates under the Companies Act, 1956 and the Income-tax Act, 1961, without appreciating that the two different sets of depreciation under these two enactments were designed to serve altogether different objectives. While the depreciation rate under the Companies Act is aimed at reflecting a „true and fair view‟ of the affairs of the company, the underlying objective under the Income-tax Act is to provide funds for replenishment and replacement of assets. In the context of rapidly changing technology and the ASSOCHAM Pre Budget Memorandum 2011-12 8

    need for having state-of-the-art machineries and plants in the competitive economy, the need for such funds will continue to be increasingly more. Besides, there is also an incentive aspect; the depreciation rates under the Income-tax Act have often been designed to encourage core and priority sector industries, facilitating funding of such projects through appropriate debt-equity ratios, and to generate cash flows for timely debt servicing.

    That apart, under the Companies Act, the depreciation rate for machineries working on triple or double shift basis calculates at 27.82% and 20.87% on WDV basis respectively, whereas under the Income-tax Act, the depreciation would be only at the rate of 15% irrespective of whether the machinery is used for single/double/multiple shift.

    Further, it needs to be appreciated that in the case of capital-intensive industries, the tax liability has gone up due to reduction in depreciation rates despite reduction in corporate tax rates and allowability of MAT credit.

1 F.2 Depreciation on Leased Assets

Recommendations:

    There is lack of clarity as regards the person who is entitled to claim depreciation in a leasing transaction. To avoid litigation on the issue, the provisions of section 32 read with section 43(1) and 43(6) of the Act, should clearly spell out the allowance of depreciation at the prescribed rates and subject to fulfillment of certain conditions, in respect of leased assets under operating lease/finance lease/sale & lease back cases and other financing arrangements.

Rationale:

    There is a tendency amongst the assessing authorities to disallow the assessee's claim of depreciation in relation to assets given on lease on the ground that such transactions are merely finance transaction and lessor is not the real owner of the assets leased. In the process, neither the lessor nor the lessee is allowed any depreciation with regard to the leased assets. On the top of this, in few cases, even the lease rentals paid by the lessee to the lessor are not allowed as deductible expenditure. It has been observed that such a view by the assessing authorities of disregarding lease transactions in general, by holding them as finance arrangement, without disputing the genuineness of such transactions, have been followed in all the cases - lock stock and barrel.

    The Explanation 4A to section 43(1) which was inserted with the specific object of curbing the perceived evil practice in sale and lease back transactions and Circulars issued by the CBDT clarifying the issues relating to claim of depreciation on leased assets are also disregarded by the assessing and appellate authorities while disallowing the depreciation claim.

1 G Corporate Social Responsibility Expenditure

Recommendation

    In view of promoting the Corporate Social Responsibility (“CSR”), it is suggested to allow deduction of 100% of the capital expenditure incurred as part of CSR and a weighted deduction of 150% of the revenue expenditure under the Act to give incentive to Companies.

Rationale

ASSOCHAM Pre Budget Memorandum 2011-12 9

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