Modi in US: What scares CEOs about doing business with India

Indian taxes are not so much administered by laws as by the rules these officers take it upon themselves to write when the political masters have completed drafting the broad strokes.

Narendra Modi

Prime Minister Narendra Modi delivering a speech during his US visit.

Just hours before Prime Minister Narendra Modi sat down to a dinner with a group of CEOs in New York, back home the finance ministry issued a release clarifying that a zero tax regime will continue for foreign companies that do business with India but have not set up base on its shores.

The timing was obviously not coincidental. However, the contents of the release had a lot to do with those CEOs’ concerns about India, more specifically about the bureaucracy and even more particularly, the tax officers.
Indian taxes are not so much administered by laws as by the rules these officers take it upon themselves to write when the political masters have completed drafting the broad strokes.
In 2006, the Indian Parliament wrote an act to promote special economic zones. That act is still on the books but investments in the zones have dried up. That’s because, over the years, the revenue department has written in clauses often as rules in other acts that defeat most of the benefits to investors promised in the SEZ act.
In contrast, there’s the Benami Transactions (prohibition) bill that has been introduced in the Lok Sabha in May this year. The bill had to be brought in primarily because since 1988 the older act sat like a dummy without the rules being framed. Unless prodded vigorously this act too could go the way of the former. So while the SEZ act that promised investment sops galore turned sterile by rules, the act to extend the Executive’s powers to curb black money became a dead letter through the same means. This is what concerns the CEOs. The commitment made by the political executive in India is often nullified by the rule-making powers of the bureaucracy. While these rules are supposed to operate only under the umbrella of the act, they have often gone beyond, thwarting the very causes espoused by the economic legislation. For instance Thursday’s release was undoing a plan to levy minimum alternate tax (MAT) on all companies that did business in India irrespective of their country of origin. Those plans had killed promises made by a succession of finance ministers of a predictable and a reasonably low tax rate regime. As the Partha Shome Committee has pointed out, it should be made mandatory from now on for the tax department to spell out through press releases the reasons why they have made changes in rules when they make them. That will go a long way towards checking the capriciousness of the bureaucracy and to make international investors commit funds to India. It is an announcement that will help the Prime Minister in his meetings abroad.

 

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MAT revision likely in Budget

In a move aimed at giving a push to its ‘Make in India’ programme, the government could introduce in the coming Union Budget a differential minimum alternate tax (MAT) rate for certain segments of domestic manufacturing.

According to those privy to the development, the Budget makers are looking to give an impetus to Indian manufacturers, particularly the micro, small and medium enterprises (MSMEs), special economic zones (SEZs) and those in the infrastructure sector.

“We are considering bringing in the Budget a differential rate of MAT for MSMEs and SEZs. But nothing has been finalised yet,” said an official. MSMEs account for eight per cent to India’s gross domestic product.

MAT for key sectors was under review, said another. “MAT for all sectors that are crucial to development of the nation, such as infrastructure, SMEs and SEZs, is under review, and is likely to be part of the Budget,” he said.

The government had introduced MAT to ensure no profit-earning company used exemptions and incentives to avoid tax liability. The current rate for MAT is 18.5 per cent; the effective rate goes up to 20 per cent after including surchange and cess. The rate for corporation tax, 30 per cent at present, nearly touches 33 per cent with cess and surcharge.

Though the differential MAT has not yet been finalised, it is believed to be set in the range of five per cent to 10 per cent.

Looking at ways to incentivise and promote domestic manufacturing, the commerce & industry ministry had earlier this year made a pitch for lowering of MAT for domestic manufacturing. So far, there is no specific provision in the income-tax Act to incentivise domestic manufacturing, though certain relief is given to SEZs. The pitch is for restoring relief for SEZs and providing SMEs with some leeway.

“A separate and lower rate of MAT for manufacturing companies could help showcase the (Narendra) Modi government’s clear mindset and focus on promoting and incentivising India’s manufacturing sector. Such companies could also be allowed to claim MAT credit for an indefinite period, as against the existing time limit of 10 years,” said Naveen Agarwal, partner, KPMG in India.

MAT credit can be carried forward for only 10 years — almost corresponding with the holiday period for SEZs. This 10-year restriction, coupled with the way MAT set off is allowed under the existing tax provisions, results in permanent loss of a significant portion of the MAT paid.

“This is a significant dampener and goes against the spirit of treating SEZ units as tax-free zones. With the government planning to give a boost to the manufacturing sector, the industry needs to see relaxation on levy of MAT and probably DDT (dividend distribution tax) on SEZ units,” said Rajesh H Gandhi, partner, Deloitte Haskin & Sells LLP.

The proposal to impose MAT on book profits — of both SEZ developers and units in these enclaves —was announced in Budget 2011-12 by the then finance minister, Pranab Mukherjee. Besides, DDT at almost 20 per cent was also imposed for dividend distributed to shareholders.

MAT came into effect from April 2012, amid severe protest from SEZ developers and units. It was introduced through a proposal in the Finance Act, even as the SEZ Act specifically mentioned a stipulated tax holiday be given to these zones.

Another measure specific to manufacturing companies, pressed for by industry and being considered by the government, is allowing deduction of investment allowance for MAT computation purposes.

In the previous Union Budget, the government had reduced the threshold for claiming the 15 per cent tax deduction of the actual cost of new plant and machinery by manufacturing companies from Rs 100 crore to Rs 25 crore.

This provided a fillip to the manufacturing sector and acted as a catalyst for capital infusion.

The investment allowance could be permitted as an adjustment for MAT purposes.
TWEAKS ON THE CARDS
Differential MAT could be introduced in the Budget for SMEs and SEZs; revision could be in the range of 5-10%
MAT was introduced to ensure no profit-earning company used exemptions and incentives to avoid tax liability
The current rate for MAT, at 18.5%, goes up to 20% with surcharge and cess
The pitch for differential MAT rate for various sectors came from the commerce ministry, which has been looking at ways to promote domestic manufacturing
The government is also considering deduction on investment allowance for MAT computation purposes