New Delhi: In line with the large-scale tax reforms being envisaged under the direct taxes code (DTC) and the goods and services tax (GST), finance minister Pranab Mukherjee took steps to expand the tax base while keeping the tax rates more or less unchanged.

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“The introduction of the DTC and the proposed GST will mark a watershed... These reforms will result in moderation of rates, simplification of laws and better compliance," Mukherjee said in his budget speech. While DTC is expected to be effective from 1 April 2012, GST implementation could be delayed beyond April 2012. Even though Mukherjee said the Constitution Amendment Bill for the roll-out of GST will be tabled in the current budget session, revenue secretary Sunil Mitra said GST is unlikely to be rolled out at the same time as DTC. “It can be introduced by the first quarter of fiscal 2012-13 if all permissions from the state legislatures come through."

GST is India’s most ambitious indirect tax reform, but has been stalled due to opposition from some states. In a recent meeting to discuss the draft on the constitution Bill, 16 states supported it, while 10 opposed it.

“Areas of divergence have been narrowed," Mukherjee said, talking about the ongoing dialogue with the states.

Almost all announcements on Monday regarding taxation were more or less in line with what is being proposed under the new tax structure. While the rate of central excise duty has been kept at 10%, service tax has also remained unchanged at 10%. “Increase of the rates would have led to inflationary pressures and would have been a retrograde step, keeping in mind the GST proposals," said Pratik Jain, executive director, indirect tax, KPMG.

Around 130 items are being removed from the exemption list of central excise duty, making them chargeable at 1%. Mukherjee has proposed that with GST’s implementation, all the remaining 240 items under the exempted list are brought under the tax net.

Like in the case of excise, new services have been brought into the service tax net. “The relook at the entire tax administration is welcome, including formulation of a new drawback scheme for refund of input service tax to exporters and making service tax an accrual-based levy rather than payment-linked," said Jain. This “aligns it with other taxes and therefore GST."

A public debate will be initiated to discuss the taxing of services based on a small negative list.

As far as direct taxes are concerned, the budget didn’t do much apart from tinkering with the income-tax exemption limit, which has been increased to Rs1.8 lakh, and creating a new category for citizens above 80 years of age. Milind Kothari of MZS Associates said the budget announcements on the direct-tax front are in line with the changes expected once the DTC comes into effect.

In line with the government’s overall aim of moderate tax rates, lesser exemptions and phasing out of profit-linked deductions, the government did not extend the exemptions given to sectors, which were expiring on 31 March 2011, with the exception of the power sector.

The implementation of DTC from 2012-13 is expected to increase direct tax collections as a percentage of GDP to 6.2% in 2012-13 from 5.9% in 2011-12 (budget estimates). It is expected to touch 6.5% in 2013-14.

For sectors such as the information technology (IT) and IT-enabled sectors (ITeS), the adoption of DTC has been accelerated by imposing minimum alternate tax (MAT) on units (IT/ITeS firms) and developers of special economic zones and levying dividend distribution tax on the dividends declared by the developers. “Though it’s only a cash flow issue, it has a long-term impact," said Pramod Bhasin, CEO and president, Genpact.

The budget has also proposed a lower rate of 15% tax on dividends received by an Indian company from its foreign subsidiary. “This move will bring parity in the taxability of the foreign dividends with the dividends received from domestic companies and will encourage corporates to remit earnings into India, where overseas investment is not leveraged," said Prerna Mehndiratta, director, BMR Advisors.

“My proposals on direct taxes are estimated to result in a revenue loss of Rs11,500 crore for the year. Proposals relating to indirect taxes are estimated to result in a net revenue gain of Rs11,300 crore, leaving a net loss of Rs200 crore," Mukherjee said.

Graphic by Yogesh Kumar/Mint

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