If the Direct Taxes Code Bill is passed in its present form, a firm will end up paying taxes even on loans raised by it to finance capital expenditureNoor Mohammad Delhi
The Direct Taxes Code proposed by the government seems to be a well-intentioned move aimed at removing ambiguities that mar the existing direct tax legislations and give rise to litigations, thereby encouraging tax evasion. However, some of its provisions are not well thought out and raise suspicion that the drafting of the bill was rushed by officials in the department of revenue.
A case in point is the proposal in the draft of the Direct Taxes Code Bill that seeks to levy Minimum Alternate Tax (MAT) on the basis of gross asset value of a business entity instead of its book profits. That means even a loss-making enterprise will have to pay taxes. Not only that, the proposal makes no distinction between equity and debt component of an asset. So, a firm will end up paying taxes even on loans raised by it to finance capital expenditure. This will hit infrastructure projects such as power plants hard as dependence on debt for financing capital expenditure here is relatively high - usually in the debt-equity ratio of 70:30.
"A serious implication of the provision is that any business which earns less than eight per cent profit cannot survive. The government's message is loud and clear - the country's limited financial resources should be deployed in businesses where profits are attractive. Sub-optimal utilisation of resources is not acceptable and hence the proposal," Ajit Krishnan, a taxation expert from global consultancy firm Ernst and Young (E&Y), told Hardnews.
Unsurprisingly, the proposal has drawn fierce opposition from leading industry chambers such as Confederation of Indian Industry and Assocham. They have pointed out that MAT as proposed in the tax code is more in the nature of wealth tax and will have a significant impact on companies' cash flow. In any case, the proposal is not in line with international best practices in direct taxation. The draft code proposes that minimum two per cent MAT would apply on the gross asset value of a company instead of the current levy of 15 percent on book profits. The industry would have to pay MAT from the day it acquires both movable and immovable assets.
Globally, Argentina and Nicaragua have introduced gross assets as the basis for taxation. However, they resorted to this as a last option to deal with extraordinary circumstances - hyperinflation in the range of 400 per cent. Even then, they provided companies with a choice to pay tax linked to either assets or profits. However, the proposed draft does not offer any such flexibility to companies.
The question is if the government is really concerned about efficient utilisation of the country's financial resources, why does it not close down some of the loss-making companies in the public sector, which are quite a few. Most of these companies are a strain on the exchequer.
The draft's provisions on the fate of deductions and exemptions available to schemes such as life insurance, Public Provident Fund (PPF), pension and superannuation funds under the existing law are also sketchy. Similarly, the draft is also silent over whether tax incentives applicable to infrastructure projects such as power plants will be continued under the regime or not. This uncertainty will affect future investments, Assocham has warned.
There is another provision in the draft that says each and every business will be required to compute its total taxable income separately regardless of whether such business enjoys any tax incentive or not. This will increase the compliance cost for businesses. What the government intends to achieve is not clear.
"The draft code provides for investment-based incentive scheme for the entities engaged in the capital intensive upstream sector, in the business of generation, transmission or distribution of power and the business of operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of the network scheme. This is a big relief for companies operating in these areas. However, the refinery sector has been ignored," said Sanjay Kaul of Deloitte.
Draft provisions relating to oil and gas exploration sector are also vague. For example, there is no specific mention if claims for expenses relating to depletion of mineral oil in mining areas will be permitted, unlike the Income Tax Act which has a specific provision to this effect. It is also not spelt out whether the amount paid for purchase of land can be claimed in view of the specific inclusion in business expenditure.
There is no reference to the central government having the power to make exemption for companies engaged in the business of prospecting for oil and gas exploration as is currently available. As per the I-T notification dated March 8, 1996, persons with whom the government has entered into any agreement for association or participation in any business for exploration or production of mineral oils are not assessed as association of persons or body of individuals but are assessed only in respect of their share of income. But the draft has no such specific reference.The draft code also ignores the basic principle of equity and fairness.
For instance, delay of one day in filing of tax return will result in disentitlement of all brought-forward losses but rectification application is treated as rejected if the order is not passed within six months. Further, notices and orders would be deemed to have been served on the fifth day, whether received or not. Taxation experts have warned that this could prove to be the thin end of the wedge in the hands of tax officials.
The draft code also seeks to tax all receipts like customer advances, security deposits, profit on sale of capital assets. However, neither deduction for related capital expenditure is permitted nor security deposits are allowed to be deducted at the time of refund. The profit on slump sale will be taxed in the year of sale whereas loss can be written off through depreciation.
The Central Board of Direct Taxes (CBDT), however, maintains that the Bill has been drafted after due diligence and that feedback from all stakeholders will be taken into cognisance of while finalizing it. "The draft is easy to understand as it uses simple language. It is logically structured as its provisions are better classified and organised. It also incorporates many international practices. As the finance minister has already stated, the government will take into consideration the views of all concerned before finalising the draft code," CBDT spokesperson Shishir Jha told Hardnews.
He also said that the CBDT will continue to have powers to issue circulars and notifications. "The power to issue circulars and notifications is within the ambit of delegated legislation, which Parliament has assigned to the CBDT. These will remain with the CBDT. It needs to be understood that circulars and notifications are issued for the benefit of taxpayers. The proposed Bill does not obviate the need to issue circulars and notifications, it only imposes certain restrictions," Jha clarified.
On the positive side, the simple language of the Bill should help in bringing down cases of conflicting interpretations of the same provisions by tax officials and tax payers. The bill has also taken cognisance of the fact that post-liberalisation, sector-specific regulators are in place. So, there is no need for micromanagement of regulatory issues through tax laws.
For most taxpayers, particularly those in the small and marginal category, the tax law is what is reflected in the Form. Therefore, the structure of the tax law has been designed so that it is capable of being logically reproduced in a Form.