Article

Union Budget 2023-24: Make corporate tax competitive and simplify the capital gains tax regime

By:
Vikas Vasal,
Richa Sawhney
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Contents

Budget 2023: It is that time of the year when Union Budget activity accelerates, and everyone starts jotting down their wishlist. Recently, the World Bank has revised India's Gross Domestic Product growth forecast to 6.9 percent, from 6.5 percent in October 2022, for 2022-23. It has also acknowledged that key factors contributing to India's resilience are its large domestic market and relatively less exposure to global trade flows. Further, as per media reports, it is expected that the fiscal deficit target of 6.4 % GDP is likely to be achieved this year.

It is expected that tax collections for the current financial year may exceed Rs 4 lakh crores in comparison to the budget estimates. This is indeed a remarkable achievement given the difficult economic situation globally. In this backdrop, it will be fair for Corporate India to enlist some of the points that it would like to see in this year's Budget 2023.

Rationalisation and simplification of the capital gains tax regime

Over the years the capital gains tax regime has become complicated and needs to be simplified. Currently, there are different holding periods specified for different asset classes, which is relevant for their classification as a long-term capital asset or short-term capital asset. This categorization, in turn, has a bearing on the applicable tax rates including the surcharge and the way capital gains is computed. This includes availability or non-availability of indexation benefits.

It is felt that there is a need for rationalization of these provisions. In fact, one of the suggestions in the Direct Tax Task Force Report (2019), was that there should be only three categories of assets - equity, non-equity financial assets, and all others including property. This will ensure proper classification of assets and reduce disputes and litigation on this subject.

To bring parity and simplification, rate of surcharge in all cases should be capped at 15%. Also, the base year for computing indexation benefits, which was last revised vide Finance Act, 2017 to make it 2001 should also be revisited now, to make it more current.

Appeal to make India's corporate tax rate very competitive

As per a recent press release, the provisional figures of Direct Tax collections up to 10 November 2022 show that gross collections are at Rs 10.54 lakh crore which is 30.69% higher than collections for the corresponding period last year. The growth in gross revenue collections for corporate income tax is 22.035% and personal income tax (including STT) is 40.64 %.

Currently, there are different tax rates for different types of companies. To bring parity and encourage global investors to set up shop in India, a tax rate of 15% should be considered for all companies. Currently, the 15% tax rate is being offered as an 'incentive' only to companies investing into new manufacturing facilities. There is no doubt that India needs to develop as a manufacturing hub, however, it is also a fact that India has an edge in services sector. Therefore, we should further encourage the development and growth of services and allied sectors.

If India introduces corporate tax rate of 15% for all the companies – operating in all the sectors, then it will have one of the most competitive corporate tax rates in the world among large economies. This will also meet the requirements of the OECD Pillar Two which prescribes a minimum corporate tax rate of 15%, to which India has committed its support.

In fact, this could be a game changer and global MNEs may consider making India a regional hub / regional headquarters, as they expand their operations in Asia Pacific and Middle East region, given the customer base and talent pool that India has to offer.

There is also a need to bring parity in tax rate for all businesses, irrespective of legal structure – companies, partnerships etc., of course after building in adequate safeguards.

New TDS provision is quite 'taxing'

Section 194R of the Income-tax Act, 1961 (Act) was introduced vide Finance Act 2022. The underlying aim was to cover any benefit or perquisite provided to a resident by the businesses and bring in into the tax net. Accordingly, a withholding tax rate of 10% has been prescribed.

The challenge is that the term “any benefit or perquisite” is not clearly defined. It is recommended that necessary clarifications are issued to prescribe its scope and ambit. It may be useful to issue a negative list. The section prescribes a threshold of Rs 20,000 for tax deduction. This limit is quite low. It is desirable to increase this threshold to Rs 1,00,000.

The provision for obtaining lower withholding tax certificate should be extended to section 194R as well. Necessary clarity should be provided to deal with cases where the benefit/perquisite is provided but not utilized/availed by the recipient of such benefit/perquisite for personal purposes.

Incidentally, the circulars issued recently to provide clarity on some of these aspects, have added to the confusion as they give an impression of further expanding the scope of these provisions.

Therefore, there is a need to have a re-look at the section per se along with the clarifications issued, keeping in mind the practical nuances and the commercial business reality.

Ease in compliance burden and simplification of TDS provisions

The rationale for introducing withholding tax or tax deduction at source (TDS) provisions was to create a transaction trail and plug tax leakages. Over the years, with multiple changes and exceptions, the TDS regime has become quite complex, leading to unnecessary disputes and litigation. Therefore, there is a need to review the TDS regime in entirety and rationalize the provision on the following lines.

The data available in the Goods and Services Tax (GST) database, could be used as primary source to establish transaction trail. The Statement of Financial Transactions framework could be further strengthened to ensure that revenue authorities obtain the requisite information.

Key sections where the tax collections are high could be retained. Sections where there is insignificant contribution to the overall tax collections could either be deleted or consolidated with other sections.

Only one or two rates for TDS should be prescribed. This would achieve the twin objective of creating log of the transactions in tax department's database (in cases where trail cannot be established from other sources) and at the same time reduce complexity for the businesses.
The threshold limits under various TDS sections should be suitably revised. Further, TDS credit mechanism in a ledger mode should be introduced to avoid disputes relating to matching of tax credit with a particular financial year.

Conclusion

This decade belongs to India. Therefore, let's usher in a taxpayer friendly tax regime, which sets the tone for a $5 trillion economy and even beyond.