This could change business fundamentals for the better - Views on News from Equitymaster

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  • Nov 18, 2009 - This could change business fundamentals for the better

This could change business fundamentals for the better

Nov 18, 2009

The average listed company has to comply with several laws as it goes about conducting its business. Of these, there are three pieces of legislation that arguably have the most impact on its business. First, there is the Companies Act, which governs the corporate form. Then there is the Income Tax Act, which taxes the income of the company. Finally, there are indirect taxes (Excise, Customs, Service Tax, VAT, Sales Tax etc.) which essentially tax consumption. The government is proposing several important changes in each of these areas of late. The Companies Bill
The new Companies Bill takes a fresh look at what companies can and cannot do. It has been tabled in the Parliament in August this year and is currently being examined by a parliamentary committee. The new bill has a fresh take on several issues such as insider trading, independent directors, class action suits, public deposits, fair valuation, consolidation of financial statements, mergers & acquisitions and special courts. One of main criticisms of the bill is that the main Act has been shortened and powers have been delegated to 'rules' which will be formed under the Act.

The Direct Tax Code
The all important Income Tax Act is set for an overhaul with the introduction of the Direct Taxes code proposed to be launched by April, 2011. The new code stresses on simpler sections. It also proposes lower tax rates on the basis that lower rates improve compliance. However there are objections from several quarters regarding such areas as income from salaries and capital gains; taxation of charitable organizations, minimum alternate tax based on assets and international taxation. On its part, the government has assured that the suggestions regarding these areas will be incorporated in the bill.

The Goods and Services Tax
India is set to take the most important step ever towards indirect tax reforms with the introduction of the 'goods and services tax' (GST) from April, 2010. It will abolish the 'central sales tax' and include services under 'value added tax' (VAT). Hence, for the first time, state governments will be able to tax services. The GST will have a uniform tax rate structure through out the country. It will create a common market within India for the first time. Another key feature of GST is that a set off on all indirect taxes paid on inputs (be it material goods or services) will be provided. It maybe noted that about 150 countries around the world have GST. However, the preparations for the April 2010 launch seem inadequate at this point. The bill will be introduced in the winter session of the parliament and details are still not out. Also, it has implications on the financial relations between the centre and states in a federal structure like India. That needs to be sorted out.

The importance of a legal framework cannot be stressed enough. It acts as the invisible infrastructure that supports business activity. Hence, in our opinion, the government's focus on updating business laws is welcome. The rapidly changing business landscape in India does require a legal framework which is in tune with the times. However, in the matters of law, the devil always lies in the details. Getting these details right requires a sustained push from the government. It is also requires a great deal of time for the back and forth between the various interested parties before the laws settle down.

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1 Responses to "This could change business fundamentals for the better"

R.Radhakrishnan

Nov 18, 2009

Well said. These measures, especially the Direct Tax Code and GST will enormously improve compliance and put a kind of brake on black money generation. Rightly said, the legal framework has to work better.
Along with these steps, if corruption in high places can be checked, India's progress would be faster and sustainable.
R.Radhakrishnan

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