The following further phase off is also recommended under the second option:

Tax on book profit

Abolition of minimum alternate tax is one of the major suggestions made by the task force. However, the task force wants the gap between the profit as per the published accounts and that computed for tax purposes to be narrowed.

While this will to a large extent be achieved by the removal of artificial deductions presently available, it has further been suggested that the depreciation rates under the Income-Tax Act should be synchronised with that under the Companies Act.

The task force has also recommended that there should be no difference between business loss and unabsorbed depreciation. In other words, these should be treated on a par and be permitted to be carried forward indefinitely.

Perhaps the most notable proposal in relation to the removal of artificial allowances is that interest on borrowed capital should not be allowed as a deduction. One fails to see how interest is a notional allowance, and if this were to be treated as one, what a real allowance means.

Rates of tax

The task force also recommends that there should be no tax on distributed profits in the hands of corporates, and further that the dividends should not be subjected to tax in the hands of the shareholder for this leads to a double taxation, which is unwarranted. The task force has suggested that the rate of tax on corporates should be reduced from the present 36.75 per cent (including surcharge) to 30 per cent, while the tax on foreign companies should be reduced from 42 per cent (including surcharge) to 35 per cent and further that there should be no tax on long-term capital gains on transfer of equity.

Look at disallowances

While the suggestions are far reaching and recommend the removal of artificial allowances and deductions, it may have been in the fitness of things that the task force also looks into the artificial disallowances such as the one under section 43B.

There appears to be no reason why an artificial disallowance should be made when all artificial allowances are removed, and when the object is to close in the gap between the declared and tax profit.

Is the denial of deductions fair?

MR N.A. Palkhivala in his letter on the Union Budget 1995-96 to the then Finance Minister, Dr Manmohan Singh, wrote:

"Your proposal in C19 of the Finance Bill to amend Section 80IA of the Income Tax Act — with a view to allow a tax holiday in respect of profits and gains from industrial undertakings engaged in development of infrastructure — is well-conceived. But the entrepreneurs will ask the question: Can they be sure that the law proposed by you will be the law of India at the time when the tax holiday begins a few years later".

Stating so he had urged the Finance Minister to start the practice of giving an assurance, which can operate as promissory estoppel. While this has remained a dream, it is alarming to note that the task force has recommended the removal of a number of deductions, which were promised. For example, the task force has recommended that the deductions presently available under Sections 10A and 10B should be removed. One would appreciate that these deductions are available for a period of 10 years on the basis of the provisions as they stand presently. These deductions are available to undertakings which are engaged in the manufacture and production of articles or things, or computer software in an electronic hardware technology park, software technology park, free trade zone, export processing zone or special economic zone, or an undertaking which is registered as a 100 per cent export oriented unit.

Apparently, a substantial expenditure would have been incurred by the assessees for setting up the undertakings, so as to avail of the benefits, which is available for 10 years.

Obviously, the business enterprise would have factored the fact that the deduction is available in taking such a decision. If these deductions were to be withdrawn, it would definitely have an impact on the enterprise. It has to necessarily be remembered that when a promise has been made by the Government that a deduction will be available for a particular length of time, notwithstanding political or other considerations the same must be honoured, for it is only then that the taxpayer will have the confidence and trust in the Government, which is essential for proper compliance. Without going into the merits of why many deductions are recommended for removal, it can only be reiterated that to keep the taxpayer's confidence alive in the system it is important that the deductions which have been promised for a particular period of time should continue to be available until the expiry of that time. Any attempt to do otherwise would necessarily have an impact on the taxpayer's confidence in the Government.

This is also likely to adversely affect the inflow of foreign direct investment into this country for a feeling may develop in the investor that the country does not keep its promises. This could probably be more dangerous than permitting the deductions to continue to be available until such time as they have been promised.

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