PHDCCI moots tax rationalisation

Direct Taxes

Dividend distribution tax
The Indian resident companies are required to pay a dividend distribution tax at the effective rate of 14.03 per cent inclusive of 10 per cent surcharge and 2 per cent education cess. At a time when the Government is moving towards streamlining and rationalization of the taxation structure, levying the dividend distribution tax, which adds to the burden on the companies, is not justified. It is suggested that dividend distribution tax should be withdrawn. Alternatively, necessary amendments may be made to avoid double taxation.

Fringe Benefit tax
FBT has caused confusion and imposed additional burden on the companies, besides taxing even the legitimate business expenses. In addition to enhancing the cost of compliance, it has also increased the potential tax of litigation due to subjectivity involved in determining as to whether an expense is related to business or personal benefit.

It is therefore suggested that Fringe Benefit Tax should be withdrawn. Alternatively, normal business related expenditure and its reimbursement should not be subject to fringe benefit tax, especially in cases where there is no employer-employee relationship.

Thus, following expenses should be kept out of the purview of FBT:

Rate of depreciation
Depreciation has been reduced to 15 per cent. In view of the rapid technological obsolescence, the lowered depreciation is not adequate to meet the requirement of replacement of the asset. It is suggested that depreciation on machinery should be allowed @33.3 per cent to provide assessees with sufficient plough back of funds. However, necessary safeguards like creating a depreciation reserve for providing funds for replacements may be introduced.

Encouraging investment in research and development
In the prevailing economic order based on competition, economic growth would be driven, inter alia, by the ability of firms to achieve ''excellence'' in performance made possible through innovation and Research & Development. It is suggested that there should be a long-term policy for incentivising R&D.

Tax administration and treatment of tax payers
There is a need to usher in an era of efficient, transparent, simple and rational direct tax law and to create an environment where there is minimum interface between the government and tax collectors so that it reduces discretion with the tax authorities.

This would reduce harassment of assessees and encourage a better treatment for the taxpayers. The income tax returns should be picked up for scrutiny on a random, non-discretionary basis.

Definition of the word "intangible asset" (Section 32)
Explanation 3 to Section 32(1) provides for deduction of depreciation on intangible assets. There is a lot of confusion whether goodwill purchased is covered as intangible asset for purposes of depreciation. Goodwill purchased should expressly form part of block of assets and be eligible for depreciation. Accordingly, the definition of intangible assets should be amended.

Fluctuation in rate of exchange – capitalisation in accounts (Section 43A)
Presently, in respect of plant & machinery against credit facilities provided either by the foreign suppliers or by financial institutions, the foreign exchange fluctuations are not allowed to be adjusted with the original cost except when the payment is made.

This has brought about an unnecessary deviation between the financial accounts and income tax records necessitating separate and complex information / documentation. Also, this has resulted in a movement from the mercantile system to cash accounting.

It is suggested that foreign exchange fluctuations should be allowed to be adjusted with the original cost in line with the mercantile system of accounting as per the earlier provision under section 43A.