FEBRUARY 25, 2010

Dear FM, high MAT rate calls for reconsideration

By Kavitha Ramachandran

Corporate Taxation (Direct):

1. MAT to be withdrawn for STPI units enjoying a tax holiday since the purpose of providing a tax holiday is defeated if MAT is levied.

In the alternative, reduce the MAT rate to 11.33% since the existing rate of 16.995% is very high.  

2. Sunset clause in Section 10A to be removed. Tax holiday to be made available for a period of 10 years from the date of commencement of business. This would ensure equitable enjoyment of  tax benefit by all the IT companies especially the  newly set-up companies.

3. Though section 10A(STPI)/10AA(SEZ)  provides 100% income-tax holiday, the tax benefit gets mitigated due to anomalies/non clarity in the computation provisions and leads to litigations across IT industry at various levels. (Amendments required with retrospective effect for all open assessments – 10A to be available undertaking-wise, terms technical services/total turnover need to be defined in section 10A).

4. Units set-up in SEZ, enjoy direct tax benefits like exemption from Dividend Distribution Tax, no restriction on carry forward and set off of losses; no time limit in realization of export proceeds etc. such benefits need to be extended to STPI units also.

5. Dividend Distribution Tax of 16.995% is very high and is in addition to the corporate tax of 33.99%. The same needs to be removed.

6. To do away with the 10% surcharge on Corporate Tax.

7. In view of the Karnataka High Court decision on Samsung Electronics, provide better clarity on tax withholding on payment to non-residents

8. Demand arising on account of rigorous transfer pricing assessments on lending rates to subsidiaries impact cross border lending transactions. Transfer pricing assessment officers resort to aggressive/unreasonable benchmarks in order to raise huge demands on the assessee. Transfer pricing demands have increased to around 10,000 crores this  year as compared to 6,000 crores last year.  Hence, mechanisms for benchmarking transfer pricing transactions in advance to be incorporated in the transfer pricing law.

9. Simplify the procedure of filing appeals with the DRP since the documentation involved in filing the appeal is lengthy and complicated involving huge time and cost.

Indirect Taxation:

10. Speed-up the process of providing service tax refund claims to exporters

11.  Provide complete exemption of service tax on SEZ units since the refund mechanism in lieu of blanket exemption involves lengthy procedures, additional administrative costs, cash flow issues  and most importantly the time lag in obtaining the refund. This is evident from the numerous service tax refund applications lying uncleared with the department for SEZ. Further, undue issuance of show cause notices delays the process of obtaining refund.  

12.  Information technology services were brought under the service tax net. These services also include purchase of software licenses which are already taxable as a product under VAT law and as a result purchase of software licenses are getting doubly taxed. This anomaly needs to be removed so as to tax all software licenses only under one law.

Personal taxation

13. Considering the economic downturn and the need for savings and investments the exemption u/s 80C of Rs. 1 lac need to be increased resulting in  tax benefits to individuals on the other hand.

14. Reinstatement of standard deduction and increase the basic exemption  limits.

Direct Tax Code

A.Corporate Tax

15.  MAT

++  Basis of computing MAT to be changed from the proposed basis of gross assets to profits

++ Tax code to have enabling provisions for set off of existing MAT credit against regular tax liability in the future years

++ No concept of MAT credit under MAT as per DTC.

16.  The tax code to have enabling provisions for carry forward and set off of existing business losses.

B. Personal tax

17. All savings/investments/retirement schemes hitherto under the EEE mode of taxation (i.e exempt at the time of investment, accumulation & withdrawal) proposed to be brought under EET mode i.e, taxed at the time of withdrawal needs to be exempt and brought back to the EEE mode.

18.  Tax benefit proposed to be removed for interest on self-occupied property needs to be restored.

19. Clear distinction between short term and long term capital assets to be made. Also to ensure that benefit of indexation is available in the future.

20.  Existing perquisite rules eg: for car perquisite to continue under the DTC.