The Hindu Business Line : Good without the amendment load

THE Finance Minister, Mr P. Chidambaram, has proved that he is an innovator of sorts. He adopted the renowned Tobin tax and brought in the securities transactions tax (STT) in the last Budget. In this Budget, he has proposed banking cash transactions tax and fringe benefit tax. In addition, he has broad-based the tax slabs and attempted major reform of the tax structure.

Time was when the Finance Bill used to be loaded with amendments to the income-tax law making the fiscal system unstable. For the first time, perhaps, a Finance Minister has frowned upon such a practice. Mr Chidambaram has announced his intention to re-codify the tax law by bringing in a revised and simplified Income-Tax Bill in Parliament at a later date.

Sixty-four clauses in the Finance Bill, 2005 relate to amendments to the I-T Act. A new chapter XIIH has been added to levy tax on fringe benefits. Chapter VII is now amended to introduce the Banking Cash Transactions Act. Tax law amendments cover important policies, such as tax benefits for the financial sector, gender justice and rationalisation of tax treatment of savings.

Corporate tax

The Finance Minister has proposed that domestic companies will henceforth be taxed at 30 per cent; the rate currently is 35 per cent. The new proposal aligns both corporate non-corporate tax rates. This means that the form of business organisation should not matter in tax calculations and fiscal neutrality must be maintained. This principle has been advocated for long. The 30 per cent rate compares well with those prevailing in other countries. For example, in Japan it is 41 per cent, Canada 38, the US 35, China 30, Indonesia 30, Malaysia 28, Korea 27, Germany 25 and Singapore 20.

With surcharge and education cess of 2.5 per cent and 2 per cent, respectively, the new rate will be 33.8 per cent, a reduction of nearly 3 percentage points from the current one. The new rate will help the corporate sector compete successfully abroad and also go for outbound investments.

Depreciation

Along with reduction in corporate tax rates, the Finance Minister has also reduced the depreciation rate on plant and machinery from 25 per cent to 15 per cent. As he observed in para 162 of his speech, the corporate income-tax rate, the surcharge thereon and the rates of depreciation are all interlinked. Any reform would have to address all the three elements. As he pointed out, the current depreciation rates are biased towards capital rather than labour.

The reduction in the depreciation rate from 25 per cent to 15 per cent is in keeping with the recommendations of the Kelkar Task Force. It may be argued that the obsolescence rate these days is high. But it must be remembered that the law continues to grant initial depreciation, which will be increased to 20 per cent.

The requirement that there should be a 10 per cent increase in installed capacity for getting the benefit of initial depreciation has been waived. The 25 per cent rate has been in vogue even since the corporate tax rate was 51 per cent. The reduction in corporate tax rate has to be followed by a reduction in the depreciation rate. There will no longer be complaints from fiscal purists that despite apparently high tax rates, corporate houses pay only about 20 per cent tax.

These changes justify the hope of the Finance Minister that the proposed tax structure will be fair, encourage new investments and also ensure equity among all sections of corporate taxpayers.

Continuation of the minimum alternate tax (MAT) even after reducing the deprecation rates and despite the benefit of credit for MAT paid under Section 115 JB of I-T Act being made available for five years is disappointing. The Kelkar Task Force had recommended the abolition of MAT while bringing down the depreciation rate. The 15 per cent tallies with the company law rate.

In Para 163 of the speech, the Finance Minister explained that he was obliged to keep in mind that a number of profit-making companies continue to pay low tax, even if well within the law, by taking advantage of liberal depreciation rates, exemptions and incentives. There may not be much complaints on this score hereafter. Broadly, the corporate tax structure visualised in the Finance Bill should be considered holistic and corporate houses should be happy, though there can be murmurs about the introduction of the fringe benefits tax of 30 per cent on companies providing amenities to their employees.

(The author is a former Chief Commissioner of Income-tax.)

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