BUDGET EXPECTATIONS IN DIRECT TAXES

[Dr. Sanjiv Agarwal]

As India evolves out of the longest ever and deepest economic downturn in recent times, of course, owing to global melt down, it is high time to reorient, reshape and transform the nation, its priorities and economy. Infact, in one word, socio-economic metamorphosis   is called for. This seems to be possible as India has the most talented team of economists and financial reformists under the leadership of Dr Manmohan Singh as Prime Minister. Fiscal and tax reforms should be high on agenda, given the stability of the present government at the centre.

According to the current forecasts, Indian economy is likely to grow at 7 percent in current fiscal despite economic slowdown. The IIP production has started showing signs of improvement, liquidity is adequate and credit off take has also gone up, through still low at about 17 percent.

So far as tax reforms are concerned, which should find prominence in the budget, it can be said that India is on a threshold of the biggest tax reform of the century. While direct taxes are due for an overall rationalization and simplification, indirect tax reforms in the pipe line, if done, shall be historic.

We are living in a web of taxes - both direct and indirect. In direct taxes, form of taxes include taxes such  as income tax, wealth tax, minimum alternate tax (MAT), dividend distribution tax (DDT), fringe benefit tax (FBT) and securities transaction tax (STT). While STT is a tax on transaction, not on income, DDT is paid as a tax to distribute dividend to shareowners. MAT was introduced as a tax on book profits but it is not the case now. FBT is per se bad.  It a tax, just to shift the burden of tax upon shareholders. Infact, certain expenses are taxed as benefits which is absolutely absurd. In all fairness, FBT ought to be abolished. Ideally we an have one common tax structure to meet the objective and government should work in that direction.

On direct tax front, it is expected from this budget that tax amendments and policies should be made progressive, objective and forward looking keeping in mind the larger benefit of the nation rather than just revenue collection. E-governance is the rule of the day and India must soon fully migrate to e-payment, e-filing and e-assessments. We have done it successfully to a large extent in capital market and company law and a strong will power can make this happen, more so with the help of tax return prepares.

As our economy is passing through tough times, certain sectoral benefits and incentives (not concessions) ought to be given. Areas of concern today are real estate, textiles, gems and jewellary, infrastructure, housing, exports and so on, besides general slackness. At the same time, government spending needs to be reduced or judiciously done. Some ideas that come to mind include reintroduction of investment allowance to boost fresh investment, fiscal benefits to exporters, continuation of certain area based incentives, extension of TUFFS scheme for textile sector, relaxation in conditions for STPs or EOUs to convert into special economic zones (SEZs), rationalization of income tax slabs (to be reduced) and abolishing surcharge on corporate taxation etc.

Some tax measures that will boost the overall economy and sentiment must be taken. These could include the following -

> reduction of income tax slabs for corporates or withdrawal of education cess for which separate budget allocation  should be made.

> Dividend distribution tax @ 15 percent is on a higher side and needs to be reduced to atleast 10 percent, if not withdrawn. It has a double taxation effect in case of subsidiaries.

> Rationalization of tax incentive to investment and its enhancement to atleast Rs 2 lakh.

> New pension scheme (NPS) be made at par with either NSCs or PPF to make it attractive and achieve its objective.

> Tax audit limit was fixed over two decades back. It needs to be revised upwards to atleast rupees one crore.

> Standard deduction from salary income could be restored back, atleast for private sector employees so as to cover employment related expenses, given the fact that pay cuts and pink slips are the rule of the day, unlike government and public sector jobs. This will provide some solace to the private sector employees who are already facing financial crisis and job insecurity.

> Some incentives could be provided to new housing loons and new purchase of residential property. This will have twin effects of providing affordable houses to the needy and at the same time boost real estate sector.

> Exemption in wealth tax can also be considered for purchase of second house. If this is done, demand for houses can be pepped up and piling inventory of real estate sector be brought down as new demand would have a multiplier effect.

> Depreciation on capital goods used in business or profession may be enhanced to spur up the demand which will also add to productivity and efficiency.

> Investment in knowledge based sectors and education should be encouraged so that more players enter this sector for sustained development.

> TDS provisions have indeed become tedious. These need to be simplified and made friendly with very less paper work   and procedures. Government should not forget that assessees are doing the job of tax collectors through TDS and TCS and it should not become a burden on them.

India now has one more form of corporate entity - Limited liability partnership (LLPs). Presently only 40 LLPs have been registered till 19th June 2009 and main reason for such a slow pace of registration is non-clarity on taxation and stamp duty issues. Whether LLPs will be taxed like firms or companies is to be decided. Once this is clear, LLPs will become popular, as in other parts of the world. Needless to say, LLPs are better option on so many counts.

While there is a case for wealth tax on agriculture land and levy of tax on corporate agricultural income, India should also move towards tax inclusion , in whatever little way it could be, just as social or financial inclusion. That will happen if taxes are made simple and easily workable.