How FM Can Woo Corporates

<div>As the world eagerly awaits the FIFA World Cup in Brazil, the corporate sector in India is equally anticipating the forthcoming budget.&nbsp; Like the seven knock-out matches to be won to lift the FIFA World Cup Trophy, here is the list of top seven direct tax measures which will improve the chances of Arun Jaitley winning the golden ball:<br /><br /><strong>Corporate Tax rates:&nbsp;</strong>India is already on top of the bracket in terms of corporate tax rates. With a headline tax rate of 33.99 percent coupled with the dividend distribution tax rate pegged at 16.225 percent, Indian tax rates are far higher compared to the global average tax rate of 24 percent.Overall tax liability of corporates should be limited to not more than 30 per cent in keeping with the international trends.&nbsp; In view of progressive phasing out of various tax exemptions, lowering the corporate tax rates will help reduce stiff competition of attracting FDI from neighboring countries.<br /><br /><strong>Retrospective amendments:&nbsp;</strong>Whilst the Finance Minister has given indication of doing away with the retrospective amendments in the income-tax laws, it may also be worthwhile to consider the recommendations of the Expert Committee on indirect transfers of shares, as the current provisions are ambiguous and will lead to unintended consequences and hardships to the investors in future.<br /><br /><strong><img width="200" vspace="3" hspace="3" height="300" align="right" src="/image/image_gallery?uuid=bb2a9f6a-b795-402f-9aff-84795bc7f67c&amp;groupId=36166&amp;t=1402730545049" alt="" />Special Economic Zone (SEZ): </strong>Incentivizing SEZ units with direct and indirect tax benefits in the year 2005, was seen as a unified scheme to provide impetus to the SEZ story.&nbsp; However, the roll back of the exemption from MAT and DDT, left little incentive for setting up a SEZ unit. By restoring the income-tax exemption from MAT and DDT, the Central Government can make the mantra of &lsquo;Growth through SEZs&rsquo; relevant <strong>again.<br /><br />Research and Development (R&amp;D):</strong> India is emerging as major center for R&amp;D projects for global MNCs. However, currently the benefit of weighted deduction is restricted to in-house R&amp;D for manufacturing units only.&nbsp; This leaves a large number of service companies having a huge R&amp;D spend outside the ambit of the R&amp;D incentive.&nbsp; The benefit of weighted deduction can be extended to other sectors as well.<br /><br /><strong>Corporate Social Responsibility (CSR): </strong>India is the only country that has made legislature for CSR spending. This will significantly bring in private participation in the social welfare landscape. However, what is leading to discomfort is the lack of clarity on the deductibility of CSR expenses under income-tax laws. While the revised draft of DTC indicates that the Government is not in favor of giving tax allowances on social welfare spend, such a position requires a re-think. Given that CSR spend will be in the nature of a statutory impost, the case grows stronger for tax allowance on such CSR expenditure.<br /><br /><strong>Tax administration</strong>:&nbsp; While the Government&rsquo;s urgency in getting its ministerial and bureaucratic set up in order is in news, one is hopeful that the same commitment will also percolate down to the administration of our tax laws. Tax litigation is one of the major issues that is being faced by India Inc. today. Mandatory time bound redressal of appeals, departmental circulars clarifying position on complex tax issues are some of the steps which will go a long way in dismantling the image of an adversarial tax regime.<br /><br /><strong>Transfer Pricing (TP) Audits:&nbsp;</strong>TP audits in India have been characterized by intense scrutiny and aggressive positions by transfer pricing officers.&nbsp; Though, APAs have emerged as a proactive strategy to settle international tax disputes upfront, the bilateral APA mechanism is not available for TP disputes involving countries with whom India&rsquo;s treaties do not contain provisions for TP adjustments [correlating with Article 9(2) of the OECD Model Tax Convention]. <br /><br />Since bilateral APAs offer more meaningful resolution of tax disputes to mitigate double taxation, India should re-consider its stand of not allowing corresponding adjustments, absent express provision in the tax treaties.<br /><br />As India Inc. awaits the forthcoming Budget with a gasp, the Finance Ministry has to strike a balance by supporting the current economic recovery without any dent in investor&rsquo;s confidence. This necessitates appropriate planning and approach by the Government, similar to the intense strategy required by a football team for championship!<br /><br /><em>The authors are Girish Vanvari, Co-Head of Tax, KPMG in India and Suruchi Drolia, Manager, KPMG in India. The views and opinions herein are those of the authors and do not necessarily represent the views and opinions of KPMG in India. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.</em></div>