The economy is reeling under towering inflation, impact of global recession, sluggish GDP growth and widening fiscal deficit. These will certainly be areas of concern for the Finance Minister in the Union Budget, 2012.

On the aspiration front, the Finance Minister will seek to achieve economic growth rate of 7.5 per cent in the near term, and the country is looking forward to the coming Budget session with expectations of a strong fiscal policy.

One of the most common expectations of the public is accepting the Parliamentary standing committee's recommendation to increase the basic tax exemption limit to Rs 3 lakh and Rs 3.20 lakh rebate for eligible investments. This would be conducive to economic growth, and at the same time, to a certain extent, would shield the common man from inflation.

In sync with DTC

With the enactment of Direct Taxes Code (DTC), one may expect numerous changes in the existing Act to bring it in synchronisation with the DTC. With Transfer Pricing not being an exact science and one of the most litigated arenas in the Indian tax regime today, introduction of an Advance Pricing Agreement Mechanism would bring upfront certainty in cross-border transactions of multi-nationals with their group enterprises.

Settlement of the ‘Look At' and ‘Look Through' controversy in the most deliberated upon the Supreme Court judgment of Vodafone has raised multiple-open ended questions.

With the Union Budget around the corner, the Government is expected to lend clarity on the legislative intent of Section 9 of the Act. Section 9 may be amended in line with DTC to consider “indirect transfers” as taxable.

In the backdrop of Vodafone-like transactions and with the intention of broad-basing the sources of revenue, the Finance Minister may also introduce anti-abuse rules in the Indian tax regime for the first time to empower the tax authorities to alter/re-characterise the tax consequences transactions that lack commercial substance.

The controversy surrounding characterisation and taxation of “off-the-shelf” software payments also seems to be intensifying in the light of various conflicting court rulings rendered in the recent past.

In view of the fast-paced growth of IT-ITes industry and exponential increase in cross-border software transactions, the industry also awaits introduction of a set of coherent guidelines on software taxation, in line with prevalent international views and practices. This should deliver more predictable tax consequences to software suppliers and simultaneously, obviate the need for unwarranted litigation and associated litigation costs.

Tax breaks

Apart from the aforementioned policy reforms, on the sectoral front, the Finance Minister would be expected to extend/ renew the tax breaks for infrastructure, automobile, service and IT- ITes industries.

Extension/ re-introduction of profit-linked tax holiday to infrastructure sector and capital gains tax exemption to infrastructure capital companies/funds would bring the much needed relief.

The corporate sector and investing community would be elated if spared from an increase in headline direct or indirect tax rates and the return of the Budget towards fiscal rectitude.

Post this year's budgetary proposals and policy announcements, the economy may anticipate a calibrated exit from the expansionary fiscal stance of the last few years and progressive reduction and elimination of the Centre's revenue deficit, followed by the emergence of a revenue surplus by 2014-15.

In summary, the Finance Minister would need to do a tight balancing act in managing the expectations of India Inc, general public and at the same time dealing with the difficult economic situation the country is going through.

(The author is Partner, KPMG.)

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