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With Finance Minister Arun Jaitley all set to present the Budget next week, all eyes are now on the tax reforms promised by Prime Minister Narendra Modi and Jaitley during their interaction with India Inc leaders at the Make-In-India week. Here are some of the top tax reforms Jaitley can look at:
1. Scrap Minimum Alternate Tax (MAT)
This will put significant cash flow in the hands of taxpayers to make much needed investments. Today, in view of the Dividend Distribution Tax (DDT), no dividends can be paid without tax of almost 21% by the companies. If corporate tax rate is to be reduced to 25% over the next three years and the investment and profit linked exemptions and deductions are to be phased out, then there is a very good case to phase out the MAT and ultimately scrap it, say Khaitan & Co’s Daksha Baxi and Raghav Bajaj. With the rationalisation of deductions, exemptions and incentives should narrow the difference between taxable income and book profits. The difference between the basic tax rate and the effective MAT rate is likely to narrow and eventually lead to a phasing out of the MAT.
2. Replace DDT with compulsory Dividend Withholding Tax
Regardless of the tax status of the recipient shareholder- except reduction in DWHT (dividend withholding tax) due to the provision of applicable tax treaty. DDT is not available for credit to the investor in its home country against the local tax on the dividend received. This results in high tax incidence for investing in India: Corporate income tax plus DDT plus tax on dividend in the home country. This encourages complex tax reduction structures, which no jurisdiction appreciates, as borne out by the BEPS (base erosion and profit shifting) action points. India can move to DWHT in place of DDT. This will reduce significant amount of tax litigation.
3. Restore Capital Gains Tax Treatment for buy-back of shares
The additional tax payable by companies upon buy-back of shares is on the amount which is the difference between the amounts paid by the company less what the company received from the shareholder. Restoring the tax treatment to capital gains in the hands of the investor would remove this anomalous situation.
4. Retro Tax
Inspite of Modi government making repeated announcements that retro tax will not be implemented, the income tax department has continued to send notices to tax payers. This has created an image among investors abroad that the government and the tax department — well known for chronic corruption — are not in sync. Jaitley should bury the retrospective tax on old transactions once and for all, say tax lawyers.
5. Clarify tax sops to SEZs
There is concern about the future of SEZs in the event tax incentives are phased out. SEZs have lost popularity since FY12, when a Minimum Alternate Tax (MAT) and a Dividend Distribution Tax (DDT) were implemented to prevent erosion of the tax base. Phasing out tax holidays could reduce investments in SEZs further amid sharply slowing exports, as per Stanchart.