'Increase after-tax salary'

Here’s a bit of advice for the new UPA government. According to an Ernst & Young report “Worldwide Fiscal Stimulus—tax policy plays a major role”, the new government would do well to slash corporate and personal tax rates and introduce progressive treatment of business losses and accelerated depreciation programme. Says Satya Poddar, Partner (Tax Policy Services), E&Y: “The last two stimulus packages in India have focussed on indirect tax rate cuts, increased government spending and some accelerated depreciation provision policies. However, depreciation rates in India are still very restrictive.

Measures introduced in the last two fiscal stimulus packages Indirect tax rate cuts Increased govt. spending Accelerated depreciation Industry-specific incentives Key measures introduced by other countries but missing in the Indian fiscal measures Cut in personal income tax Carry-back of losses Corporate income tax reduction Tax treatment of debt Profit repatriation regulations Tax incentive for green energy

The government needs to bring in significant changes in tax policies and should begin careful money market interventions to expedite the recovery process.” The study points out that accelerated depreciation programmes help businesses improve cash flow by allowing them to write off the costs of investments rapidly.

On the other hand, indirect tax changes seek to maintain demand by reducing the cost of goods and services. The report, which covers 24 nations, mentions that while spending measures have received more mainstream attention over the last few months, tax measures actually represent 56 per cent of the net effect of fiscal stimulus globally.

The report adds that reduction of direct tax rates would increase overall demand by increasing after-tax pay, particularly for lower and middle income taxpayers.

Moreover, if a government introduces provisions for carry-back of business losses, it would provide cash flow assistance by giving traditionally profitable companies more latitude in using net operating loss credits they are accumulating in the current environment.

As part of stimulus measures, many countries have given greater emphasis on promoting green energy. “The Indian government should have provided additional tax incentive to equipment and technology used in promoting green energy. Energy investments not only create new jobs but also spur technological innovation and energy independence,” adds Poddar.

—Manu Kaushik