Saturday, June 20, 2009

Remove FBT, surcharge

The key pre-budget hope is that the UPA will undertake tax amendments that will enable the following:

Increase the net take home pay of individuals such that their spending power increases in the present challenging times;

Increase the earnings and bottom line of corporates such that they have the ability to invest more in growth;

Generate avenues to increase the tax base such that there is an offset against the loss of tax revenues and fiscal discipline is maintained.

Given the stated objective of the government towards rationalisation of tax policies, simplification of tax laws and expansion of the tax base, there are some actions the government can undertake. Status quo in direct taxes is something that is not anticipated now. This could be the time to take formative steps towards further simplification and rationalisation of the complex tax code provisions.

A reduction in corporate and personal tax rates can be achieved by removing the surcharge. This will reduce the effective tax rates, increase the net take home of individuals and raise the post-tax income of corporates. This will also increase investment and spending. This investment and spending could then achieve other larger objectives of the government to give an economic boost and generate a multiplier effect in the economy. Moderate taxes increase the tax base through larger and better compliances.

Fringe benefits tax could either be abolished or become creditable against corporate tax liability. The cost of compliance that FBT generates for corporates does not seem to be in parity with the tax revenues that the government derives.

Further, the government could instantly provide a boost to core infrastructure projects by renewing expiring tax holidays (for example, in the power sector) and introducing clarificatory amendments that will benefit to genuine infrastructure and priority industries (for example, the natural gas sector).

The government may also consider special tax-holiday extensions for key projects in the public-private-partnership domain, for example, where concession periods have been extended either owing to structural delays or cyclical demand. In these times, exports are the platform of a stable global economy. Therefore, there is a case for extension of expiring tax holidays for IT/ITeS industry and other EoUs. To spur research and development, the government can re-introduce some old expired tax holidays like the 100% tax holiday for RandD companies. A re-introduction of the good old incentive like investment allowance will provide liquidity to the industry to increase spending in infrastructure and other projects. The revenue loss on this account could be more than offset through larger indirect tax collections and generation of additional employment.

To summarise, removal of surcharge, abolition of FBT, extension of expiring tax holidays and re-introduction of some old tax incentives are the platforms that the government can use to provide an impetus to the economy through greater employment, growth and spending.

This will increase its tax base and indirect tax collections, thereby, balancing the loss of tax revenues. Further, towards the roadmap to GST, the government could also rationalise the tax rates for excise duty and service tax.

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