Industry is thrilled at the prospect of cuts in tax rate, but wants exemptions to continue as well.

By  Ashish Gupta

First the likely good news. If Part B of Finance Minister Yashwant Sinha's budget speech is inspired by the report of the Parthasarathi Shome Committee on tax policy and tax administration, tax rates will fall and the whole tax regimen would be a lot simpler.

But (here's the bad news), in return, India Inc. will have to continue paying Minimum Alternate Tax (mat) and give up the host of tax exemptions it enjoys.

All for the sake of more public investment, a constant plea from India Inc. Indeed, the committee was set up to suggest ways to increase the tax-Gross Domestic Product (GDP) from the current 14 per cent to 18 per cent. It's prescription: a mix of lower tax rates, fewer exemptions, and tightening the tax administration (See The Good News and The Bad). Says a committee member: ''Together these will spur economic activity.''

Corporate India is understandably thrilled at the prospect of lower tax rates. Points out Head, Taxation Committee of the Associated Chambers of Commerce and Industry, T.G. Keswani: ''Companies will now have greater surpluses in hand that they can invest.'' A lower tax regimen could also pull in more foreign investment since the tax rate is an important criterion in any investment decision. Says Nikhil Bhatia, Director, kpmg India: ''Given the size of the Indian market, with a comparable tax rate, India could easily become an attractive playground for foreign investors.''

Equally welcome is the suggestion to scrap the dividend distribution tax, a major reason cited for the dullness in the stockmarkets. Companies, says Keswani, were evading this tax by switching over to loan funds to finance their investments since the interest can be deducted from their profits. Coupled with the withdrawal of tax exemptions on small savings, this could see retail investors heading for the bourses once again. The incentives for small savings not only eroded the tax base and lead to revenue loss, they pulled money away from the equity markets and indirectly favoured debt financing.

For a corporate sector that has been gunning for mat since its introduction in July, 1996, there's disappointment in store. The report merely asks for mat to be reconstituted from the existing 7.5 per cent of the book profit to a 0.75 per cent of adjusted net worth, plus 10 per cent of the dividend distributed. Companies were fudging figures, says the Committee member, to evade mat. Counters Shyamal Mukherjee, Partner, PriceWaterhouse & Co: ''Net worth can also be manipulated.'' In any case, points out U.R. Bhat, Chief Investment Officer, Jardine Fleming, the tax burden will be the same. Besides, the new system will penalise companies that post poor returns. Concurs Kapila: ''The capital base, which would be the basis for computing mat, could well be locked up in non-performing assets.'' There's a silver lining, though. The amount paid under mat will be allowed to be adjusted against the future tax liabilities of the company.

The Drawbacks

Industry also isn't ready to forego the various incentives it enjoys. The exemption from tax on the interest paid on external commercial borrowings could well go. This is necessary, says the report, because the lender pays tax on the interest earned from the Indian company. As a result, India's revenue loss becomes a foreign treasury's gain. Sashi Kapila, Head of taxation, Standard Chartered Grindlays, feels this is a bad move. ''Because of our weaker currency, this will push up the cost of loans,'' she points out.

The Committee has taken a dim view of the various excise and customs duty exemptions. Not only are various export promotion schemes-duty drawback, export promotion capital goods, duty-free replenishment certificate-expected to cost the exchequer around Rs 20,000 crore, but the schemes tend to overlap. ''These schemes have to be rationalised,'' insists the Committee member. Exporters, of course, will not accept this. Declared one: ''If there is no exemption on customs duty or payment of drawback, I will not export at all.'' Indian exports, he argues, can never be competitive unless the problems of high cost of credit, the poor quality of infrastructure and high customs duties are solved. Warns S.K. Mishra, Commissioner, Noida Export Processing Zone: ''Any move now to end these incentives when exports have become the engine of economic growth will be unwise.'' With exports growing at 20 per cent, withdrawing sops for exporters won't be easy.

The pampered Small Scale Industry (SSI) sector could also lose some of its privileges. Right now, the sector pays no taxes on capital investment of upto Rs 3 crore and no excise on sales upto Rs 1 crore. Units also take advantage of a plethora of concessions. Entrepreneurs usually close down existing units at the end of the concession period and set up new units to draw benefits again without any industrialisation actually taking place. The report, therefore, recommends the abolition or merger of the various schemes. Pointing out that SSI units get concessional duty, as well as full Cenvat credit, the Committee says units with a turnover of less than Rs 3 crore must pay 85-90 per cent of the normal rate of duty if they opt for Cenvat credit. The industry, of course, will have none of it. Says Vasudev Pahwa, Proprietor, Surya International: ''This will be disastrous. With the threat from Chinese imports, the industry is in the doldrums right now.''

Committee members insist that these incentives have not produced the desired results. Asserts one member: ''These incentives have been more abused than used. Let the money be used instead to beef up infrastructure. But industry won't concede the point. Says Pahwa: ''Infrastructure development is needed to make it convenient to do business; tax incentives are needed to make it lucrative. Both are needed for the best results.'' Subodh Bhargava, Advisor, Eicher Group can see the Committee's point. ''Tax concession,'' he says, ''is just one incentive influencing investment decisions.'' The quality of infrastructure, availability of skilled manpower, and general investment climate are equally important. Counters V.U. Eradi, Tax Consultant and former member of the Central Board of Direct Taxes: ''If tax concessions need to be given to encourage a particular industry, they should have sunset clauses written in.''

Industry may not share that sentiment. But as a government economist argues, ''industry has to make some sacrifice if it wants the government to spend more on public investment.'' As the debate continues, it's time now to stand by for B-Day.

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