The last two decades have seen India grow at a faster rate than the First World. On one hand, foreign corporations have been increasingly setting shop in Indian markets, and on the other, Indian corporations are going global at an unprecedented scale. To keep up the momentum, tax laws also need constant overhauling. A stable government this year should give confidence to the Finance Minister to go where no Indian Finance Minister has gone before – to introduce internationally accepted best tax practices.
Capital gains tax parity
Presently, on a sale of a listed security [subject to payment of securities transaction tax (‘STT’)], there is no tax on long-term gains while short-term gains are taxed at 15%. However, if the security is unlisted, long-term gains become taxable at 20% and the tax on short-term gains increases to 30% / 40%.
Such a differential treatment of unlisted entities seeking growth capital vis-à-vis listed securities seems unjustified. It is important to note that the Indian economy is developing and needs capital for its development. A capital gains tax exemption / lower rate is one of the key drivers and a powerful tool to channelise funds into capital markets. Therefore, India should extend concessional tax treatment to unlisted securities and this could be done by introducing STT levy on such transactions.
The other BRIC nations (Brazil, Russia and China) do not levy a distinct capital gains tax. The gains are included in their ordinary taxable income. The tax rate in such nations is specific to residential status and not to the securities, whether listed or not.
The Finance Minister must therefore introduce capital gains tax parity between sales of listed and unlisted securities in the 2009 Budget, by introducing STT on sales of unlisted securities.
Carry forward and Carryback of losses
Existing tax laws allow carrying forward of losses up to four / eight assessment years, subject to change in the shareholding.
This arbitrary limit of four / eight years is unwarranted since often the losses lapse while the business / source continues to exist. Disallowing carry forward of losses beyond a four / eight year limit, tax laws is also in contradiction to the ‘going concern’ assumption.
Most of the developed nations (France, Germany, Australia, UK, etc.) allow carry forward of losses for an indefinite period until the losses are fully set off. The 2009 Budget should introduce an amendment to this effect, in line with carry forward provisions applicable to unabsorbed depreciation.
Similarly, Indian tax legislators should also introduce carryback of losses to broaden the scope of set-off and carry forward provisions in the hands of the assessee. A carryback is a provision that allows any person to use a net operating loss in one year to offset a profit in one or more previous years.
India could consider allowing the losses to be carried back to the profits of the previous year subject to a monetary limit. The assessee should opt to either carry back or carry forward losses in his/her return of income.
France, Germany, Singapore, UK, USA and other developed nations allow such carryback of losses.
A confident corporate India has bloomed in the aftermath of the reforms started in the 1990s and the recognition following Y2K. Be it the designing genius of the Tata Nano or the sheer scale of operation of the Reliance Jamnagar petroleum plant, Indian corporations have stretched their aspirations and visibility beyond Indian borders. In this scenario, it is very important to ensure that the laws impacting on the growth of such Indian corporations do not choke their global dreams.
Participation exemption regime
To boost outbound investments and encourage ‘no-parking of funds overseas’, a participation exemption regime must be welcomed.
Under the participation exemption regime, interest, dividends, and capital gains on sales of shares of subsidiaries are exempt in the residence country. European nations such as France, Germany, Luxembourg, the Netherlands and Switzerland follow such a regime subject to conditions on control, shareholding stake, period of holding, etc.
On the introduction of a similar regime in India, increased volumes of income would likely be generated by the international business of Indian players, repatriated to India in a tax-neutral manner. This would help boost India‘s forex reserves.
Carry forward of tax credit
Imagine an Indian entity with domestic losses but international profits during a particular year. It would pay tax as per the source country but would be unable to claim tax credit in India. To mitigate such hardship, the 2009 Budget should introduce carry forward of tax credit. Countries such as China and Germany allow such a carry forward.
The wish list will definitely be never-ending. The reforms as per this 2009 Budget should keep pace with the international laws. However, the Minister will have to do a careful balancing act between acceding to the wishes of Indian corporations on one hand and the cost to the exchequer on the other, as the need for funds is ever-growing.
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