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Abolition of Tax, a standing demand
June, 29th 2009

Corporates would be happy to see the end of the levy of surcharge and cess, in the forthcoming Budget, says Mr Jayant Jain, Executive Director, Tax & Regulatory Services, PricewaterhouseCoopers Pvt Ltd, Chennai (www.pwc.com). While the surcharge and cess were introduced for specific purposes, unfortunately once introduced, the Ministry is reluctant to remove it, he adds, during a recent email interaction with Business Line.

Are there further niggling direct taxation issues that corporates would like to see relief from? Yes, says Mr Jain. Abolition of FBT (fringe benefit tax) has been a standing demand from all fronts right since its introduction owing to the added compliance, procedural and interpretation issues and consequential litigation, he observes. Given an option, corporates would welcome an appropriate increase in the corporate tax rates to offset the loss of revenue from FBT abolition.

Excerpts from the interview.

In what ways does FBT compliance continue to burden the corporates?

Though the compliance aspects of FBT are similar to that of income-tax with regard to payment of advance tax, filing of return and assessment, clarity is not reached with respect to classification of expenses. Further there are certain other procedural difficulties with regard to reasonable estimation of FBT liability for advance tax purposes and reconciliation of expenses at the time of assessment, and these issues cause a higher burden for the corporates both in terms of time and cost.

Can you tell us about things that the global investor would be happy to see clarity on, with respect to direct taxation?

The global investor would be happy to see clarity on taxability at the time of exit of its investment or economic interest from an Indian company, considering the recent issue in the case of Vodafone. Further, some clarity is also expected on withholding tax issues especially on software payments, and taxability of import of equipment under a composite contract.

Your views on the taxation of foreign-sourced income.

As the hunger for outbound investments is still on the raise, corporates expect some incentive to encourage such investments in the form of tax-free dividend receipt, and also allowing deduction for the interest cost of borrowings on such outbound investments irrespective of whether foreign dividend is taxable or not.

Another aspect that requires clarity is with regard to taxation of business activity carried on outside India through a permanent establishment. While the Apex Court has held that the income of foreign PE should be not taxed in India if already subjected to tax in the foreign jurisdiction, income-tax authorities are adopting a tax credit mechanism rather than a tax exempt mechanism. Clarity in line with the judicial precedents would be a welcome move.

Tax incentives should be provided for income earned out of the foreign sourced income to encourage inflow of capital.

Which of the sectors do you foresee as benefiting from amendments to direct tax provisions in the Budget 2009?

With the global slowdown, every sector is trying to get some benefit out of this Budget. We expect that there will be some more incentive to boost infrastructure, IT/ITES, and textile sectors in the form of extension of tax holidays or reduction in duty rates.

On tax administration and reforms.

While the Income-tax Department has taken a step towards paperless filings, it seems that there is a duplication of efforts since the tax authorities are not equipped with a full-fledged system to access the documents and information online. The complete automation of the tax assessment, detection and collection system will go a long way in proper tax administration.

Corporates expect that the tax authorities should go slow when it comes to collection of demand, especially during this tough time of economic downturn.

Any other points of interest.

The concept of LLP (limited liability partnership) has been introduced in India. One expects more clarity on the taxation of LLP in this Budget.

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