’Big Four’ expecting major tax reforms in the Budget

All eyes are now set on the Finance Minister who would present his maiden annual Budget with expectation of significant reform measures to set the course of economic policy for the new government. However, experts are divided on how far the FM would push through tax reforms.

That has not stopped industry experts placing their bets on big tax reforms. VCCircle gathered the opinions and Budget recommendations from the Big Four global accounting cum consulting giants. Here's what they have to say on economic policy and specific measures for tax reforms.

SV Sukumar, partner - management consulting, head strategy & operations practice, KPMG India, emphasised on the direct and indirect tax sops changes that are expected to boost the manufacturing sector and give impetus to Make-in-India campaign.

KPMG has called for a cut in minimum alternate tax (MAT) levy on manufacturing from 18.5 per cent to 10 per cent. It says as the manufacturing sector has a high gestation period to reach profitability, MAT stretches the path to breaking even. It has also called for computation of MAT on profits to be allowed on similar lines as investment allowance for heavy and medium capitalisation was allowed in the computation of tax profits in the previous two budgets.

Sukumar stresses on the need for removal of MAT and Dividend Distribution Tax (DDT) on SEZ units and SEZ developers as it would help push development besides rationalisation of taxes on royalty for technical services from the current 25 per cent to 10 per cent.

"There is a huge stress on businesses for compliance with multiple state tax legislation and an early roll-out of ‘Goods and Service Tax’ is very imperative. An affirmation by the government that GST would be rolled out in April 2016, along with indicative transition steps, would help build reinforce positive sentiments," he said.

While the recommendations as far as tax structure are somewhat similar across industry there are a few minor differences.

The EY (formerly Ernst & Young) team collaborated with industry body CII for highlighting required tax reforms.

It has touched upon transfer pricing regulations and a prescription for a reasonable cost-plus margin manufacturing arrangements by MNCs with their Indian manufacturing units, besides the MAT and DDT topics.

It has also called for profit-linked incentives, currently given for infrastructure and crucial sectors, to be continued till the end of the Twelfth Five Year Plan, to encourage investment and growth of infrastructure sector.

To encourage fresh capital flow into the country, it has also called for zero withholding tax regime on loan granted for a period exceeding three years. Also it has recommended that the condition of borrowings within a specified window period should be done away with.

The report also states that the rate of additional depreciation can be increased and also highlights reforms in the field of scientific research in terms of rebate on R&D and investment allowances.

The Union Budget wish-list of PwC focuses on specific sectors while stressing on the need for tax reforms under the Make in India campaign, smart cities and Digital India initiative.

For the healthcare industry, it has called for the government to allow CSR spends as tax deductible business expenditure and additional exemption of Rs 5,000 for preventive health check-ups over and above the current exemption limit of Rs 15,000 in a year for medical expenses.

On the direct tax front, the general view is that the government will defer implementation of General anti-avoidance rules (GAAR) and address computational issues regarding capital gains on indirect transfers.

Vivek Mishra, leader indirect tax practice at PwC, expects the deletion of CENVAT duty that the government amended in the previous Budget and also expects removal of interest payable on delayed payments of service tax. Gautam Thakkar, partner, indirect tax, PwC, points to the correction of the inverted duty structure.

Deloitte, on the other hand, in its pre-Budget expectations webcast pointed out that the government should target the supply side by curtailing the banking sector losses and increasing their profitability and to increase its divestment targets.

The biggest of the Big Four, which has just got an Indian-born as its new global chief executive, expects the FM to lay more stress on Make in India and other initiatives by reinventing the PPP model. One specific provision it is looking forward to is allowing foreign tax credit at the withholding stage.

It is also expected that the government will bring clarity on the Direct Tax Code (DTC) issue and to accept the recommendations of TARC committee.

On the indirect tax front R Muralidharan, senior director, indirect taxes at Deloitte, expects some clarity on the purview of GST and the transition mechanism and timelines for implementation from the government. He expects the government to provide clarity on service taxability of amount recovered by employer from employee and on cost sharing transactions.

While the reports by the Big Four mention some major reforms on the tax front, what remains to be seen is whether the government with its limited resources would be able to implement all these in the current session. As the government is focused on improving the ease of doing business in the country, an improvement in the measures suggested by the Big Four would go a long way in ensuring that the country attracts more private capital and investors for its projects.

(Edited by Joby Puthuparampil Johnson)

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