The Hindu : Business : Reduction in marginal tax rate hinted at

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Friday, Dec 07, 2007
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Reduction in marginal tax rate hinted at

Special Correspondent

Finance Ministry ‘proposes to simplify Income-tax Law’

NEW DELHI: The Union Finance Ministry on Thursday hinted at a possible cut in the marginal tax rate next fiscal in view of the nearly 45 per cent growth in direct tax collections during the first eight months of the current financial year.

Speaking at a conference on taxation here, Parthasarthy Shome, Advisor to the Finance Minister P. Chidambaram, said, “With improvement in voluntary tax compliance and tax administration, direct tax collections are growing by around 45 per cent. For voluntary compliance, we cannot have [a] marginal tax rate that is too high.”

Revenue collections through direct taxes increased by 44.86 per cent to Rs. 1,45,053 crore during April-November this year. Dr. Shome pointed out that although the rates of income tax in India were comparable to those at the international level and other countries in the region, the whole taxation structure would have to be looked at if voluntary compliance increased.

Referring to Brazil where third-party information on taxpayers’ expenditure is received from over 40 sources, Dr. Shome said the Central Government would eventually have to increase the number of Annual Information Returns (AIR) sources from the current level of seven. At present, the Government is provided with such information by banks and other sources.

In fact, the Finance Ministry has been receiving representations from various political parties and industry chambers to review personal income tax rates. Even Mr. Chidambaram had earlier observed that he might revise the tax rates if voluntary tax compliance improved.

On the new income tax code, Dr. Shome said that it “proposes to simplify the main Income Tax Law as well as simplify the overall structure of the income tax. It will be a model income tax code.” The code could be put on the website for public comments by the month-end.

Fresh look at DTAs

Alongside, the Finance Ministry is having a fresh look at the double taxation avoidance (DTA) treaties that India has with various countries to make it as favourable for Indian investments abroad as it is for foreign inflow. He said the Government was seeking to protect not only revenue at a time when foreign capital comes into India and returns go abroad but also when domestic companies invest abroad. The objective was to encourage such firms investing abroad to send their profits back to India through market mechanism, he said.

Over the last one year, Indian companies have invested more than $20 billion overseas. The Finance Minister had also said that the Government was for reviewing some provisions of the DTA treaty with Mauritius, as some Indian companies were involved in round-tripping of funds. The Ministry had already tried to tighten the norms regarding origin of residence while negotiating DTA with some other countries.

According to the DTA between India and Mauritius, capital gains from sale of shares is taxable in the country of residence of the shareholder and not in the country of residence of the company, whose shares have been sold. Thus, a company resident in Mauritius and selling shares of an Indian company would not pay tax in India.

Since there is no capital gains tax in Mauritius, the gain would escape tax altogether.

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