Tryst With Tax Reforms

The writing is on the wall. In the name of fiscal consolidation, the Economic Survey has amply outlined the overriding need for tax reforms....

The writing is on the wall. In the name of fiscal consolidation, the Economic Survey has amply outlined the overriding need for tax reforms. Given the broad roadmap of tax restructuring already outlined by the Kelkar Task Force, what will be the major changes in the tax regime on both the corporate and indirect tax front? How much of Kelkar will be seen in Budget 2005?

On the other hand, if anything is worrying Finance Minister P. Chidambaram, it is the near stagnant tax-GDP ratio. In keeping with the FRBM targets, the tax-GDP ratio must grow from 9.2 per cent in 2003-04 to 13.17 per cent in 2008-09. In other words, revamp equals increasing the tax base, doing away with exemptions, and simplifying tax procedures.

Corporate Tax

The broad expectations are that Budget 2005 will definitely see a reduction in exemptions, including perhaps a reduction in the depreciation rate. And a reduction of the maximum corporate tax rate is also on the anvil. Says Vipin Batawia, a senior tax consultant, 8220;I think the tax rate should be restricted to 30 per cent with all the exemptions removed. This will only increase the tax collection by 8 to 10 per cent and will also reduce litigations drastically8221;.

A cut in the depreciation rate would be unpopular, as would an increase in the service tax rate. 8216;8216;As far as exemptions go, the FM could consider taxing the export of services or removing the exemption from MAT for certain tax holidays,8217;8217; says Sudhir Kapadia of KPMG. Either ways, a roadmap to integrate personal income tax and corporate tax will be be unveiled in the budget.

Dispute easing

India Inc expects the finance ministry to simplify procedures on corporate tax, particularly with the dispute settlement mechanism. According to Y.P. Trivedi, corporate tax consultant, 8220;It looks like the government is not going to raise any tax liabilities of corporates. However, the government must strive to reduce the number of layers for resolving tax disputes which is at present dogging the corporate sector,8217;8217; adding that quite a few tax exemptions will go.

Ketan Dalal, Senior Partner, RSM 038; Co consulting firm, also pitched in for simplification of tax dispute mechanism. 8220;Given the notorious record in delays in resolving direct tax disputes, I hope the budget focuses on expanding avenues for resolution of these disputes and simplifies the entire structure8221;, Dalal said.

Indirect tax

Kelkar8217;s recommendations will form the basis of the reform process. The expectation is the number of exemptions in both customs and excise will be reduced. There is also a buzz of some minor rate restructuring in a revenue-neutral manner. Avers Soumitra Chowdhury of ICRA and member of the PM Economic Advisory Council, 8220;On excise front we will see reductions in the number of exemptions and on customs we may see a reduction in the peak duty rate.8221;

Story continues below this ad

Finally, on the reforms front, will Chidambaram spell out his vision on integrating taxes on all services with the existing CENVAT on goods by a VAT-type levy on all goods and services? That would be a definite movement towards the much-awaited central General Sales Tax.