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India: India releases draft report on Income Tax Act simplification

The government has released proposals for public comments in which it has set out the manner in which exemptions and deductions will be phased out.

Dharawat-RakeshGangadharan-Hariharan-100
Rakesh DharawatHariharan Gangadharan

A couple of months back, the government had set up a committee with a view to simplifying the provisions of the Income-tax Act, 1961. The committee is headed by a retired judge and contains nine other members comprised of outside experts as well as government officials.

The committee has come out with its first batch of recommendations (for public comments) which covers numerous issues which were on the litigation radar of several taxpayers. The committee will come up with its next batch of recommendations, covering issues which are more complex and which require a more exhaustive and deeper review.

Recommendations towards characterisation of income from sale of shares (capital gains versus business income), no disallowance of interest expenditure for earning exempt dividend income, doing away with requirement to furnish a Permanent Account Number (PAN) for non-residents, allowing a taxpayer to make a fresh claim in tax audit proceedings, deferment of Income Computation and Disclosure Standards (ICDS), stay of demand and so on are among the several key changes recommended. The committee has also indicated that it will deal with more contentious issues in its next batches of recommendations. It is expected that quite a few of these recommendations could be incorporated in the upcoming Union Budget which will be announced on February 29 2016.

Phase-out of tax exemptions

The Finance Minister, in his Budget Speech of 2015 had announced a phased reduction in corporate tax rates from the current 30% rate (excluding surcharge and cess) to 25% over a four year period. It was also announced that this reduction in corporate tax rates would be accompanied by a corresponding phasing out of exemptions and deductions.

In this regard, the government has now released proposals for public comments in which it has set out the manner in which exemptions and deductions will be phased out. This phase out is based on the following principles:

  • Profit-linked, investment-linked and area-based deductions will be phased out for both corporate and non-corporate taxpayers;
  • Incentive provisions having a sunset date will not be modified to advance the sunset date;
  • Similarly, sunset dates provided in the Act will not be extended;
  • In case of tax incentives with no terminal date, a sunset date of March 31 2017 will be provided either for commencement of the activity or for claim of benefit depending upon the structure of the relevant provisions of the Act; and
  • There will be no weighted deduction with effect from April 1 2017.

From an economic standpoint, a decision to phase out incentives is a non-controversial one. However, given the practical implications on industries, regions and jobs, it is hoped that a phase out will be undertaken with great care to ensure that there is no undue hardship to the economy.

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com) and Hariharan Gangadharan (hariharan.gangadharan@dhruvaadvisors.com)
Dhruva Advisors
Tel: +912261081000
Website: www.dhruvaadvisors.com

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