With only few days left before the re-elected government is due to announce its budget, the speculations are ripe with what will make it to the budget and what may get shelved till the next financial year. While every finance minister faces this challenge of prioritizing and keeping all the stakeholders happy, the government is expected to focus largely on the priorities that are central to the UPA namely the rural sector, infrastructure and economic growth.

In the context of rural sector, one could expect budget proposals aiming at broadening and deepening access to credit to those ‘excluded’ thus far.  These could assume the form of strengthening the banking correspondent framework laid out by the Reserve Bank of India and providing incentives to micro-finance institutions.

As for infrastructure, considering the significant funding requirements it entails, I expect initiatives directed towards creating a more stable, deep and efficient debt market in the country. Finally, boosting the economic growth is a function of far too many things and this column would touch upon a select few of them.

Corporate tax reforms

“In the days of financial stress, tax rates must fall and our ability to pay taxes must rise.” These were the precise words of the Finance Minister, when he presented UPA’s interim budget in February this year.  It would be interesting to see, whether this policy leaning finds its manifestation in the final budget. Towards this end, there has been the demand of industry to simplify and stabilize the tax rates and abolish additional surcharges and cesses. The proposal for withdrawal of fringe benefits tax is also on the cards.

In light of the unprecedented global financial crisis and the Satyam-scam, which have impacted the IT/ ITES sector in India, demand for the extension of tax holiday for all the software technology park units and export oriented undertakings for a minimum period of 5 years deserves due consideration. Along with that the FM should announce clear policy on the Special Economic Zones and parameters for transition of existing STP units to SEZs such that it incentivizes additional investment in infrastructure.

Encouraging entrepreneurship

During the current times, when the need for risk capital is enormous, it could work well for the Government to extend the tax exemption for venture capital funds to investments across all sectors (as against investment in select sectors under the extant law), effectively restoring the pre-budget 2007 regime. Further, the Government should announce the tax regime for Limited Liability Partnerships (‘LLPs’). LLPs, which combine the legal benefits of a company and the tax advantages of a partnership, are commonly used by private equity players world over for their investments. This could signal creation of a stable and enabling tax environment for the risk capital, encouraging venture capitalists and entrepreneurs to foster stronger partnership.

Cross-border tax reforms

It has been a long standing demand of the foreign companies doing business in India to rationalize the withholding tax regime for non-residents. The current regime places onerous obligations on them for payment of withholding tax and other compliances. There is also a need to have lucid and reasonable rules for foreign companies operating in India through permanent establishments and attribution of profits thereto.

Effective system of dispute resolution where a tax payer does not have to shell out taxes upfront pursuant to the aggressive assessments made by the revenue authorities and having to fight through the lengthy litigation appellate procedure to claim them back would be a positive signal to the international business community. Introduction of advance pricing arrangements for international transactions between related parties would be a welcome move as it will establish certainty and help in avoiding litigation in transfer pricing cases.