Budget 2011: Tax reform beats tax lobbies

Pranab Mukherjee has presented a few commendable proposals on direct taxes to enable a stable tax regime. Among them is a masterstroke ending tax holidays for developers of Special Economic Zones (SEZs) and the companies located within such zones. In doing so, the government has fast-tracked reform and said clearly it is shunning patronage.

It has also resisted pressure from companies housed in software technology parks to extend the tax holiday on export profits beyond 2011. A higher Minimum Alternate Tax on zero-tax companies shows the government's resolve to end exemptions. Correctly, the government does not want to persist with incentives for pre-selected economic activities, estimated to cost `88,000 crore this fiscal.

A lower corporate surcharge also signals the government’s intent to end temporary levies and cut the corporate tax burden. A bolder reform would have been to abolish the surcharge and prepare the ground for a cut in the corporate tax rate to 25% next year.

Thankfully, Mukherjee has not announced any scheme to reward tax cheats. Instead, there are proposals to curb tax evasion and prevent companies from stashing billions of dollars in tax havens. Any sanction on countries that refuse to share information on suspected tax evaders is an indirect punishment. It will make the cost of doing business in these places more expensive, diminishing their attractiveness. New transfer pricing rules for multinational companies will ensure that they do not shift profits outside the country. Overall, compliance and collections will improve.