BY ANUJ KAGALWALA & SANJAY KAPADIA

BUILDING on their historical and cultural links, over the years, India and Singapore have developed a strong strategic partnership in bilateral trade.

The strength and intensity of their bilateral economic relations can be seen from the fact that Singapore is India's largest trading and investment partner among the Asean nations.

In such an environment, any economic reform proposed by the Indian finance ministry is closely monitored by the business community in Singapore that has plans to do business with India.

Despite greater expectations of aggressive economic reforms to tide over the global recession, the Indian budget presented on July 6 took a pragmatic approach instead and chose to balance growth with its mounting fiscal deficit.

From a macro economic perspective, finance minister Pranab Mukherjee (below) acknowledged the need to fuel growth by increasing government spending in various flagship programmes. However, there were no significant policy announcements.

TAX REFORMS

Tax payers in India have been feeling the heat on account of the long drawn out litigation process.

Currently, there is a two-tier appeal mechanism wherein a taxpayer is first required to approach the commissioner of income tax and thereafter both the tax-payer and the revenue authorities have a right of appeal to the tax tribunal. This two-stage appeal process has been in place since the inception of the law.

In a landmark development, an alternative dispute resolution mechanism has been proposed for disputes involving foreign companies and transfer pricing.

Under the proposed approach, the taxpayer may request the tax officer to seek validation of the proposed tax treatment from a special designated dispute resolution panel. If still aggrieved by the tax officer's order, the tax-payer can directly approach the tribunal, making it a single tier appeal process.

On the transfer pricing front, in line with global practice, safe harbour rules have been proposed.

The above two proposals can be regarded as significant for foreign companies such as Singapore companies that are carrying on business with or in India.

Further, the finance minister announced that the new direct tax code would be tabled within 45 days for public debate. On the indirect tax front, the government reaffirmed its commitment of the introduction of a combined goods and service tax next year.

ADDITIONAL PROPOSALS

The information technology and software industry has been India's shining sector. This budget extends the tax exemption available to the industry by one more year.

On the corporate tax front, there is no change in the company tax rate. However, the Minimum Alternative Tax (MAT) is being increased from 10 per cent to 15 per cent, making the effective MAT rate almost 17 per cent of book profits. MAT is an alternative to the corporate tax payable by companies based on book profits and not taxable profits. However, the subsequent credit system applicable to the MAT rate may not result in companies ending up paying a higher tax.

In 2005, India introduced an additional levy under the Fringe Benefit Tax (FBT) scheme. FBT replaced the traditional basis of taxing salaried individuals for benefits-in-kind provided by employers, with a tax (FBT) payable by employers on the benefits provided. The FBT scheme caused compliance hardship with consequent increased administrative costs for employers. The budget seeks to abolish FBT and restore employee-based taxation. This is indeed a welcome step.

The government had recently passed the Limited Liability Partnership (LLP) Act, in line with commercial practices prevalent in developed countries.

The budget provides for the taxation of LLPs, by treating them in the same way as normal partnerships.

It is proposed that LLPs will be considered a separate taxable entity. LLP income would thereafter be tax exempt in the hands of the partners. The above tax structure will result in favourable tax treatment for LLP structures as these do not attract MAT or dividend distribution tax which apply to companies.

On the personal tax front, the effective tax cost of the individual assignees who may be seconded to India is reduced by 3 per cent with the removal of the tax surcharge.

However, with the removal of FBT, employees' stock options will be taxed as benefits-in-kind which would add to their tax burden.

On the procedural front, it is now mandatory for foreign companies earning income from India to obtain a tax registration number, failing which taxes will be withheld at a higher rate.

Overall, the budget is positive on the tax front which lays down a positive foundation for a new tax code.

However, separate policy measures will need to be announced in respect of foreign investments, disinvestment of public sector undertakings, as well as the banking and insurance sectors to achieve the targeted rate of economic growth.

The Indian economy continues to show resilience and the budget has attempted to enhance economic growth through a stable tax regime with a strong commitment to tax reforms.

These reforms should foster higher bilateral co-operation and provide a larger framework for economic trade between India and Singapore.

Anuj Kagalwala is a tax partner with PwC Singapore and Sanjay Kapadia is an executive director with PwC India