Mr. Rohan Shah, Managing Partner, Economic Laws Practice

The annual exercise of announcement of Budget by the Finance Minister draws a level of industry and media attention which is unprecedented elsewhere in the world. A reason for such high level of interest is that the Budget announces the tax policy, provisions, tax rates and tax concessions for the year. Given the high level of incidence of taxation in India the tax related measures announced in the Budget are often the determinant of the annual prospects and profitability of myriad businesses. This article briefly discusses certain key expectations which the industry holds from this year’s Budget which is to be announced on 26th February, 2010. Given the fact that the Goods and Services Tax (GST) has been a highlight of the last three budgets and with indications of its introduction by 2011, the Finance Minister is expected to use this year’s Budget as one of the last instrumentalities for taking definitive steps towards successful smooth transition into the GST regime. One of the expectations is the unification of the rates of Excise duty and Service tax and alignment thereof to the rates to be brought in for the GST. Accordingly, the Excise and Service tax rates are expected to be revised to bring them closer to the expected GST rates. However, the Finance Minister is expected to tread this path cautiously as such a move could be perceived as withdrawal of the stimulus benefits which have been announced over the last two years. The other expectation is the phasing out of the Central Sales tax which is essential for an effective introduction of GST. Finally, from the GST perspective, it is also expected that the various exemption notifications will be streamlined and pared down towards the end of having a larger tax base and ensuring continuation of the credit chain. The industry also expects the Government to rationalize Customs duty in relation to certain intermediaries and raw materials to address the issues in relation to inverted duty structure marring various sectors such as electrical equipments, chemicals, auto components, etc. The inverted duty structure impacts the domestic industry adversely as it has to incur a higher cost for the raw material in terms of duty, whereas, the finished product on the other hand lands at lower duty burden and therefore sells at a lower price. The domestic industry which is recovering from the downturn set off by the global recession, has been pitching for a correction in duty structures to address such anomaly. The need for addressing such inverted duty structure has gained momentum with duty rates on finished products being reduced pursuant to increasing bilateral/ multi-lateral trade preferential agreements. From the Income Tax perspective, a first one would be lowering of the corporate tax rates like that of other tax payers to 30% (by abolition of surcharge). This is in preparation of the Direct Taxes Code prescribing a 25% rate. Such a move would make the companies globally competitive and help emerge out of the existing worldwide economic recession. The Government can also be reasonably expected to clear the air on the issue of withholding tax in respect of payments made to non-resident. The decision of the Karnataka High Court in Samsung Electronics case has created a situation where every payment which an Indian entity makes today to a non-resident will suffer a withholding tax, unless a no-deduction certificate is obtained from tax officers. The CBDT had earlier issued circular permitting non-deduction of tax in respect of payments to non-residents on the basis of an accountant’s certificate. The High Court’s decision has rendered this position superfluous. The Budget is expected to at least restore the status quo, thereby allowing reliance on an accountant’s certificate as regards withholding of tax. To conclude, the key challenge before the Government is to take key definitive steps to ensure smooth transition towards the impending DTC and GST regime.

Mr. Rohan Shah