Mountain of hope, but can the Budget scale the height?

India is expected to grow at 7% for this fiscal, and there are hopes that Finance Minister Pranab Mukherjee will provide the much-needed sops to enable India to return to a high growth trajectory. While India still struggles to keep its fiscal deficit within prudent limits, it shall be closely watched as to how best Mukherjee, in Budget 2012, can balance ground realities with expectations.

Amid the looming fear of global meltdown, India continues to be one of the sought-after destinations for foreign direct investment.

Thus, to attract investments, it’s imperative to rationalise the corporate tax regime to be in sync with other developing economies. A reduction in present corporate tax rate applicable for domestic companies from 30% to 25% would certainly result in the much-needed cash savings, which could be ploughed back for expansion, modernisation and technological upgradation.

Furthermore, reduction in minimum alternate tax (MAT) rates will surely be welcomed by the corporates.

The present profit-linked tax holiday regime has over the years attracted investments in long gestation and capital-intensive sectors such as power and infrastructure.  Investment flow into such sectors is likely to continue, provided the attractiveness of these sectors is maintained by continuing the incentives for such industries. It is suggested that the profit-linked sops currently available to infrastructure and other crucial sectors, especially power, should be continued for an additional 10 years to encourage investment and growth.

In today’s environment, multi-layered corporate structures are a common phenomenon, some of which are attributable to commercial and regulating reasons. The present tax law only seeks to mitigate the cascading effect of dividend distribution tax (DDT) in the case of single-tier structures. Such a restriction acts as a barrier to creation of a holding company regime in India and impedes downstream investment by holding companies in India. Given this backdrop, there is a need to extend the benefit (i.e. eliminate DDT at intermediary levels) to multi-tier structures.
Owing to high tax rates in India, companies find it unattractive to repatriate their earnings back to India. Accordingly, to boost inflow from such repatriation of overseas income, the government should consider introducing provisions of participation exemption which are currently available in many European countries.

Levy of MAT and alternate minimum tax (AMT) continue to cannibalise industrial and infrastructural investments in India. Hence, there is an immediate need to abolish MAT/ AMT on infrastructure and SEZ developers.

Transfer pricing (TP) plays an increasingly critical role in global businesses. With major tax administrations intensifying TP enforcement, it has resulted in an unprecedented rise in controversy as multiple jurisdictions vie for the same taxable income. The exponential rise in the quantum of TP adjustments has been one of the key areas of concern for taxpayers in the recent past. With multinational enterprises seeking clarity and consistency in application of the TP rules, it is expected that the government may introduce an advance pricing agreements (APAs) programme in India in the upcoming Budget. In order to ensure that APAs are successful and achieve the objective of providing certainty considering the business aspect and realities, it would be important to set up an independent mechanism and authorities playing an unbiased role.

Given that the implementation of Direct Taxes Code 2010 (DTC) is deferred, it is expected that certain key provisions of DTC 2010 such as controlled foreign company (CFC) legislation, general anti-avoidance rule (GAAR) and the taxability of indirect transfers may be introduced in this Budget.

According to a report of the Swiss Banking Association 2006, Indian nationals hold $1,456 billion in bank deposits within Switzerland while a Global Financial Integrity (GFI) study estimates the flight of gross illicit assets from India for 1948-2008 to be a staggering $462 billion. 
To curb tax evasion, the government should adopt the model chosen by countries with efficient administration and minimal evasion — simplify the tax laws, lower the tax rates, provide few opaque exemptions, thereby making the administration of tax laws much simpler. The government should continue its focus on use of IT or e-governance as it is essential for increasing transparency.
The government should further strengthen the dispute resolution mechanism to instill increased confidence in the judicial system. While the government took the initiative to set up the dispute resolution panels (DRPs) for expeditious settlement of disputes, they need to be more independent and accountable.
The deficit gap is widening and at the same time, the economy is showing signs of slowing.  Any move to mop up taxes should not result in an extra burden on corporates. Instead, the move should be to widen the tax base and bring resources into the system; this will not only create a permanent increase in the collection of taxes, but also fuel the economy through capital investment and employment generation.
The FM has a challenging task to balance the revenue collection vis-a-vis the expenditure and also meet political compulsions. We hope that the FM will maintain the confidence of the business by creating opportunities, rationalise the revenue collection, curtail expenditure and bring back Indian money.
The writer is tax partner with a member firm of Ernst & Young Global.
Shashidhar Upinkudru, a senior tax professional with a member firm of Ernst & Young Global, also contributed to the
article. Views expressed are personal