The revamp of income tax rules that is currently in the works should meet broader objectives and result in extensive changes, said experts.
“The scope of the committees seem restricted,” said Ketan Dalal, Managing Partner, Katalyst Advisors. “If a new legislation is put in place without considering the broader aspects, there will be a reluctance to address important issues in the next 2-3 years, which would be a very sub-optimal outcome.”
The government recently formed 22 sub-committees to review various aspects of the Income Tax Act, with an aim to simplify language, reduce litigation and weed out obsolete provisions.
While the intent is laudable, the law should be amended to meet some of the other objectives like manufacture in India and dovetail with the changes made in SEBI regulations and the like, according to Dinesh Kanabar, CEO, Dhruva Advisors. “Sweeping changes are best carried out in one stroke,” he said.
Here are some areas that could be looked at:
Mergers, acquisitions
“We live in a volatile world and provisions related to M&As and internal restructuring need to be aligned with on-ground reality. Certain definitions like “demerger” need to be rationalised to facilitate restructuring,” said Dalal.
For example, currently a loss of a company A which merges into B is allowed to be set off only if A is a manufacturing company, which is a major impediment.
“Section 56 deems transactions at less then quoted prices to be resulting in deemed income, which has made transactions in listed entities difficult. We have issues with cross border inversions. Addressing them will considerably ease the implementation of these transactions,” said Kanabar.
Capital gains
In the last Budget, government rationalised the capital gains structure in terms of holding period of assets and tax rates. Some other aspects, if addressed, will make the rationalisation of capital gains complete, said Ganesh Raj, National Policy Leader, EY India.
For computation of capital gains arising on slump sale u/s 50B, the holding period for business undertaking should be reduced from 36 months to 24 months, he said. Gains on transfer of unlisted debentures held for more than 24 months are still treated as short term capital gains. Investments made by sovereign wealth funds and pension funds into India in the form of debt or share capital or unit should be exempt from this provision, Raj said.
Personal tax
The additional surcharge, which was introduced as a one-time measure, should go so that the maximum marginal rate of tax is capped at 35 per cent, said Kanabar.
Dalal feels that the standard deduction needs to be aligned with the level of salary and ESOP taxation at the stage of exercise needs to be shifted to the point of sale.
Pendency
Pendency of litigation is a big area of concern and the review can introduce binding statutory timelines for disposing of appeals at CIT (Appeals) and the ITAT level, said Gaurav Mehndiratta, Partner and National Head, Corporate and International Tax, KPMG in India.
“Rationalisation of TDS provisions and multiplicity of TDS rates is needed for ease of doing business. Further, there should be avenues of dispute resolution for high stake matters where assessees may like to suo moto pay up taxes and get the litigation settled,” he said.
About 4.9 lakh cases are pending before CIT (Appeals) at the end of March last year.
Raj believes that the government needs to amend provisions relating to Boards for Advance Rulings to allow withdrawal of cases pending before the erstwhile Authority for Advance Rulings. Another suggestion is to bring in new Alternate Dispute Resolution mechanisms like Mediation and private ruling in select areas.
Miscellaneous
The eligibility criteria for emoluments limit in section 80JJAA needs updation, said Mehndiratta. He feels the review exercise can aim at simplifying tax regime for non-residents who are earning royalty or technical service fee from India, whether with or without a permanent establishment in India. The government can introduce filing of tax returns at a consolidated level for the group in sectors like infra and real estate, he said.