Prebudget recommendations

Direct Tax

Reduction in Corporate tax rate:   Presently, the base corporate tax rate is 30 per cent. Considering that the weighted deductions and tax holidays are being phased out, the corporate tax rates should also be reduced for large companies in line with governments objective to widen the tax base and make these companies globally competitive.

Reduction in minimum alternative tax (MAT) rate: Presently the effective rate of MAT is 21.34 per cent (including surcharge and education Cess). It is most desirable that it should be restored to 15 per cent, as the levy of MAT is nothing but the tax on genuine incentives provided in the statute itself on fulfilment of the development needs of the country.

No levy of interest and penalty on retrospective amendments: A specific provision needs to be introduced to provide that in the event of any retrospective amendment pertaining to withdrawal of deduction, claim, incentive, etc., no interest/penalty would be charged if the demand is a consequence of such retrospective amendments.

Carry backward of business losses: It is suggested that similar provisions be introduced in the Indian Income-tax Act, 1961 and carry back of losses up to three years should be allowed.

Tax Credit under section 115JAA: Section 115JAA should be amended to provide that in case of an amalgamation, where the amalgamating company has carry forward MAT credit, the provisions of said section 115JAA would apply and the amalgamated company would be eligible to set off and carry forward the MAT credit of amalgamating company.

Incentive of tax holiday deduction for North-Eastern states [Section 80IE]:

It is suggested that sunset date of March 31, 2017 be extended to March, 31, 2019 to provide financial assistance to those assesse who have made substantial investment in setting up the facilities but were unable to commence operations before March 31, 2017.

Further, in order to ensure that assessees do not lose out on tax incentives and get the full benefit for a total period of 10 years and to further encourage the development of industries in these states, it is suggested that section 80IE should be amended so as to provide for deduction for any 10 consecutive years out of 15 years beginning from the year in which the undertaking begins to manufacture or produce articles or things, or commences operation or completes substantial expansion.

Provisions relating to taxation of ESOPs: It is suggested that ESOPs should not be subject to tax on notional perquisite value and taxed only on capital gains arising from the sale of shares, as was the position till March 31, 2006.

Safe harbour rule for contract manufacturing:  It is requested that safe harbour guidelines be provided for pharmaceutical companies who are manufacturing and exporting the product as contract manufacturer/ loan licensee. This will enable company to deploy their resources efficiently and will promote the concept promoted by PM Modi.

Tax deduction for Corporate Social Responsibility (CSR) spending under the Companies Act, 2013: It is recommended that the government should consider in larger interest allow such expenditure in computing taxable income and delete Explanation 2 to section 37(1) of Income Tax Act, 1961.

Depreciation on non-compete fees: It is recommended that Explanation 3 to Section 32(1) be suitably amended to include Non-Compete fees under expression Intangible assets so as to specifically allow deprecation on the same under Income Tax Act, 1961.

Disallowance of expenditure u/s. 40(a) (i) & (ii) for non-deduction of TDS:  Presently, the tax payer is getting penalised twice to a default for deduction of tax at source i.e. disallowance u/s 40(a)(i) / (ii) as well as u/s 201 /(1A) under the Income Tax Act,1961. The provisions of Sec. 40(a) (i) & (ii) should be deleted as the tax payer is getting penalized twice for the same default under Sec. 201 & 201(1A) as well as under 40(a)(i) & (ii). Moreover, there are sufficient penal provisions u/s 201 & 201(1A) to safeguard against the violation of TDS provisions.

Transfer Pricing

Safe Harbour Rules for PE: It is recommended that the clear guidelines, including definitive safe harbours, stating when it considers a PE to have been created and how income and expenses should be allocated between and among related or controlled entities be issued.

Issuance of shares by Indian companies to its AEs: It is suggested that there should be a clarification in the Act, or a circular should be issued, explicitly clarifying the above. This would provide the necessary transparency and certainty to the investor community and encourage foreign direct investment flows into India.

Expenditures on AMP: Indian transfer pricing regulations do not provide any guidance to deal with arm’s length price for AMP in the context of low risk distributors, full-fledged manufactures and so on. It is recommended that emphasis should be placed on OECD principles, which recognise methodologies for valuing consideration that can be payable for transactions involving marketing intangibles. Further, it is also recommended that specific guidelines in this regard be issued to ensure certainly and reduce litigation in the area of transfer pricing.

Intra group service charges: Application of ‘benefit test’ in relation to these intra group charges is very subjective and can prone to different arm’s length result. Hence, it is necessary that specific guidelines be issued including ‘safe harbour’ to provide certainty in this area of growing litigation.

Finally, companies are penalised in cases involving disagreements over technical tax obligations.  Companies should not be penalised when making a good-faith effort to comply with tax laws. It is recommended that penalties should only be imposed on exceptional cases of tax fraud, and not on regular tax disputes which involve technical interpretation of complex case law and statutory interpretation.                                

GST

Distribution of physician samples and movement of date expired goods:  No GST should be payable at factory level/transfer between distinct and related person as contemplated under Schedule I and Input tax credit should be reversed at the first point (i.e. factory (where physician samples/ nutrition product samples are manufactured at factory) / HUB (in case physician samples/ nutrition product samples are being procured from third party) because throughout the supply chain, physician samples/ nutrition products samples are to be given on FOC basis. This position will also be in accordance with the intention clarified by issuance of FAQ.

Further, it is a revenue neutral position from government standpoint as the value of samples are always factored in value of saleable goods on which the GST will be paid on destination based consumption criteria.   

Difficulties in relation to movement of expiry goods:  The expiry return / near expiry goods should be allowed to be returned without GST on the basis of delivery challan and manufacturer should be allowed to issue credit note against the same (of course subject to reversal of ITC by the distributor / retailer). For this purpose, the Board may notify the expiry / near expiry returns in Rule 55 (1) (d) of CGST Rules, 2017. Further, Transition provision [under section 142 (1)] may be amended to provide a mechanism to issue credit note with taxes for such return of goods and remove the onerous requirement of issuance of invoice by the registered dealers returning such goods.

Continuity of the area based indirect tax exemptions benefits: The existing value benefit in the excise exempt/concession zones needs to be protected. 

Refund of unutilised CENVAT in case of loan licensee operations in pharmaceutical industry: Suitable amendment be made in transition rules/ Section 54 of CGST Act, 2017 to allow refund of closing CENVAT credit lying with LL or principal on appointed date (i.e. 1st July’2017). Alternatively, the law should provide an option in case of Job Work arrangements, under which, the Job worker/ Loan Licensee should be allowed to pay GST on the goods which is manufactured by him as a job worker/ loan licensee model, and avail credit on the inputs used therein, which is supplied (on a free issue basis), by the principal manufacturer.

( The writer is chairman- CII, medical technology division & MD of Poly Medicure )