It is said that certainty of punishment is more important than its severity. In other words, the heavy hands of law coming down on a crime with punishment without discrimination or delay is a greater deterrent than the theoretical possibility of one say a murderer going to the gallows someday as the slow process of law grinds on.
Ditto for corporate India. It does not expect confetti of sops to be showered on it. What it expects in Budget 2017 a fortnight down the line is certainty in the following areas among others:
1) The income tax law has been conferring 100 percent depreciation on certain industries in a piecemeal basis every year thus encouraging jockeying in the run up to the budget every year. At present, cold storages, oil and gas pipelines, hospitals having certain number of beds etc make the grade. The government should not play favorites. Let 100 percent depreciation be the norm except for a small negative list containing the typical vice industries like liquor, cigarette and the like. It would not only be good for capital goods industries but also conducive to capex budgeting which always has a long term tilt. Jockeying is also borne of uncertainty.
2) Minimum Alternative Tax (MAT) on corporates has been on since 1996 along with the tax perversion called the dividend distribution tax (DDT). Both had a fig leaf of rationale went brought in---Zero tax companies were adding salt to injury by not only not paying tax but also paying dividend to shareholders. Now that many of the tax breaks have been phased out or are being rationalised, MAT should go in lockstep with its Siamese twin DDT. Dividend ought to be taxed in the hands of recipients. Every year expectations are rife about the end of the MAT regime. This year it must end without further uncertainty.
3) Section 37(1) follows the ‘either or’ approach when it comes to majority of expenses also known as omnibus expenses. It says if they are capital in nature, they would be completely disallowed. In all fairness, if they are capital in nature they must be allowed say over a period of five years equally. Bulk of the litigation in income tax matters center around this potentially vexatious provision. Apart from imparting fairness to assessments, the move would also end costly and prolonged litigation. The pointed disallowance of corporate social responsibility (CSR) spends under the same section seems to be incongruous---you expect corporates to behave like good citizens but their gesture in this regard would go abegging. Altruism does not necessarily mean heightened tax payments. Disallowing CSR pointedly bespeaks of smallness of mind and pettiness.
4) The regime of weighted deduction for in-house scientific research encourages charlatans as much as the serious ones. The government must replace this with grants for the serious ones on the basis of application as it happens in the US in the matter of medical research. Universities apply and are given grants and then the progress is monitored. This is as it should be. Research is a serious business, and ‘me-toos’ must not be encouraged because their focus is on the hefty tax deduction and not on research. It may perhaps be a better tax regime if those getting patents abroad are granted a tax break. Under the weighed deduction regime, authorities could swoop down to verify if genuine research is going on which is not conducive to certainty.
5) Section 72A allows the unabsorbed business losses and unabsorbed depreciation of amalgamating company to be carried forward for set off by the amalgamated company. While there is a rationale behind the requirement that the amalgamated company should carry on at least for five years the business of the amalgamating company---there should be no asset stripping---there is no rationale behind the requirement that the amalgamating company should have been in existence for at least three years. Bleeding and hemorrhage must be stopped at the earliest. A wound should not be allowed to fester. In addition the government can prescribe other conditions for losses to be thus transferred. These should be spelt out and not be brought out in fits and starts in the interest of certainty.
The Finance Minister Arun Jaitley has walked the talk in so far as progressively reducing the corporate tax rates to 25 percent is concerned. He must do more.
For full coverage of Union Budget 2017, click here.
Updated Date: Jan 16, 2017 12:05 PM