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No Ado On Tax front

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 “Budget 2013 – Not good, not bad”, says Sonu Iyer, tax partner at Enrst & Young. Like it should be, an economist would say. Just that the memory of 2012 still haunts tax advisors.
 
It surely didn’t meet up to the high expectations that had been drummed up leading to the day. For example, with the impetus on reviving growth, there was hope that sops would be announced to revive investment. There weren’t any on the face of it. Even the nominal increase in minimum exempted income level that had become the norm in the last few years was done away with. A Rs 2000 tax credit for those with taxable income below Rs 5 lakh will give a targeted benefit to that section. At the other end of the spectrum, those with a taxable income (that is, after eligible deductions) of above a crore, have been imposed an additional ten percent surcharge. Companies will also see their effective tax rate increase from about 32.5 per cent to 34 per cent, with the increase in surcharge by 5 per cent (A surcharge is calculated on the tax payable, so it essentially takes the tax payable up by 5 per cent). Although these measures will impact tax payers, in the face of the burgeoning fiscal deficit, they were necessary, says M Lakshminarayanan, partner at Deloitte Haskins and Sells.
 
Uday Ved, Head of tax at KPMG, calls it a 'reasonable and balanced budget'. Ved still has a few niggles though. One is an  innocuous line that says the Tax Residency certificate is a minimum but not sufficient condition for availing of the treaty protection under a Bilateral Tax treaty with another country, like Mauritius (where you can take the benefit of a foreign tax rate, if it is lower). This opens up the threat that the tax officials could deny such benefits (known as treaty protection) on flimsy grounds. His second worry is that nothing was said regarding the scrapping of the retrospective amendment that sought to tax Vodafone like transfers. While the consensus at the finance ministry also seems to be that such a move should be only prospective - no new cases have been reopened on this account last year -, the worry is that staying silent might be interpreted as a sign that the government stands by its retrospectivity.
 

Of course, foreign companies have reason to worry. The FM took the attractiveness out of several schemes that multinational companies were allegedly employing to reduce tax payments. For example, royalty payments to the parent firms was known to be a way of reducing the taxable profit in India (and by extension, tax paid). The tax to be withheld before making such payments to a non resident was increased from 10 per cent to 25 per cent. Similarly, companies that were cutting down on dividend distribution tax by disguising them as buy backs, will have to pay tax on that now.
 
Two announcements that many practitioners, such as Ketan Dalal, the joint tax leader at PwC India, would welcome would be that the Direct Tax Code will be introduced as early as the ongoing session of Parliament, and setting up a Tax Administration Reforms Commision. This could be an opportunity for the government to discuss various measures that are adding to the hassle corporates face, including introducing accountability at the level of income tax officers who pass orders. Dalal says that “while the move is heartening, one hopes that something will translate on the ground very quickly”.
 
On the indirect tax front, imported and SUV cars as well as cigarettes will be more expensive, but again, the reaction was muted. Says Sachin Menon, national head of Indirect taxes at KPMG,  “While the Budget seeks to strike a balance by hiking Excise and Customs duties on luxury items and reducing duties on basic necessities, it leaves the Service Tax anomalies under Negative list unresolved.” The talking point will be the possibility of an early introduction of the Goods and Services Tax, with Chidambaram talking about the states’ request to be given more say in finalizing the GST Bill. Plus, an allocation of a further Rs 9,000 cr as compensation to states will again help to bring the states on board.