There are expectations galore for Budget 2007 the past year surely warrants the same. The Indian economy was at an unprecedented high with all sectors showing tremendous growth. Much to the satisfaction of the Finance Minister, tax collection figures also stood substantially increased. It is in this setting that the FM will present the Budget on February 28. The question thus arises as to what exactly he has on his mind and what are the challenges that he will look at addressing.

Simplification of the tax laws should definitely be on the cards. There has been talk of a new, simpler Income-Tax Act for some time now. A simpler law would, hopefully, result in better compliance by the taxpayers, including the small and medium enterprises (SMEs), who may currently not be able to comply due to the complexities involved.

The vast existing diaspora of tax exemptions currently provided under Income-Tax Act, 1961 is also under scrutiny. There has been talk of possible removal of a large number of exemptions and simultaneous lowering of overall tax rates. The lower tax charged would surely come back into the economy either via savings and investments or through greater spending.  However, this is a deviation from the traditionally followed philosophy of keeping tax rates high and providing exemptions for specific sectoral growth. If executed, the new philosophy would lead to more equitably distributed tax collections and widening of the tax base aspects which surely merit attention in light of the great economic performance. Care should, however, be taken to ensure that the development of backward areas, infrastructure and the countrys competitiveness in the global outsourcing industry is not adversely affected once the exemptions are done away with. The challenge before the FM is to strike a fine balance between high tax rates and more exemptions on one hand, and low tax rates and few exemptions on the other.

The tax litigation aspect also warrants the FMs attention. Speedy disposal/settlement of cases should be the order of the day. The constitution of the National Tax Tribunal is a step in the right direction, but the implementation should be done effectively and soon.

Revenue laws of a country should be very much in line with the current needs of the economy. In an economy like India, certainty of tax cost will be a big factor in diverting the savings into investments. The FM should look at a consistent and unambiguous tax regime on a long-term basis. Clarifications on taxability of current issues should also be regularly brought out, be it the issue of taxability of shrink wrapped software or taxability of lease line connectivity payments.

Thus, though the setting might be good, the FM has enough challenges on his hands, albeit of a different nature now.

Gaurav Taneja
The author is the national tax director and partner, Ernst & Young.