Gentle steps that won't rock policy board: Budget 2011 tax proposals
February, 17th 2011
The pre-Budget buzz is rather muted this year, which, perhaps, is because recent developments, both economic and political, have attracted an unusual amount of attention. The expectations on tax proposals resonate the overall sentiment surrounding Budget expectations. On the direct taxes front, it is widely expected that due to the impending implementation of the Direct Taxes Code (DTC) from April 1, 2012, longterm policy changes are unlikely this Budget. The focus would primarily be on short-term measures targeted to meet budgeted revenue.
Given the rise in inflation and, more importantly, the heat being faced by Centre on the issue, a marginal relief in overall individual tax burden could be expected. This could come in the form of an increase in exemption slabs or a slight moderation of tax rates. This would be in line with the objective set out for the proposed DTC and would also be a populist measure to appease taxpayers. On the corporate tax front, a change in tax rates is unlikely. A major change in the provisions is ruled out due to the proposed DTC.
There is some expectation that the sunset on the present tax holiday available to 100% export-oriented units and units set up in software technology parks could be postponed by another year. Since 2011-12 is intended to be the last year of operation of the present tax regime, an extension of tax holidays by a year would bridge the gap between the sunset of the tax holiday regime and onset of the code that has grandfathering provisions relating to some of the tax holidays.
This will also bring relief to export sector that has been impacted by the downturn and the slow recovery in the destination economies. It would be interesting to see whether Budget 2011 modifies the provisions relating to Dispute Resolution Panel (DRP). The DRP provisions introduced by the Finance Act, 2009, ushered in an alternative mechanism to settle tax controversies and are intended to offer a quick resolution of tax disputes between tax authorities and the taxpayer. However, the experience in the first round of DRP proceedings has not been encouraging. There have been cases where the DRP orders were found to be laconic by the Income Tax Appellate Tribunal (ITAT) and were remanded back.
This has only led to the litigation process being lengthened , contrary to the intended objective . The revenue too has suffered in the process as the collection of tax demand has also been suspended by the ITAT in such cases. The second round of DRP proceedings has commenced and it is hoped that the functioning of the DRP would be streamlined to overcome the challenges faced in the first round. A fundamental change in the concept and process is not expected this Budget.
However, the government may try to address the problem of tax collection being suspended totally where the taxpayer opts for the DRP process. The issue of black money has attracted a lot of attention recently with the finance minister making a statement on the measures to curb black money menace. As per the statement, The government has formulated a five-pronged strategy that consists of joining the global crusade against black money , creating an appropriate legislative framework, setting up institutions for dealing with illicit funds, developing systems for implementation and imparting skills to the manpower for effective action.
The statement also enumerates the steps being taken by the government to tackle this problem. These initiatives include, inter alia, entering into bilateral arrangements with tax treaty partners and other countries for exchange of information, setting up of overseas tax offices, etc. However, it will not be surprising to see provisions aimed at strengthening the existing rules for checking tax avoidance to underscore the points made by the finance minister in his statement. So, can we expect another amnesty scheme for bringing out black money ? Improbable, but not impossible.
As far as tax proposals are concerned , the bigger challenge for the finance minster lies on the indirect tax side. With prices spiralling out of control , the government would be wary of casting an additional duty burden that may put upward pressure on prices . On the contrary, a duty cut on crude oil could be expected given the upward revision in petrol and diesel prices announced in the recent past coupled with the fact that the outlook on international crude price is not very encouraging given the developments in west Asia.
The general sentiment about the countrys economic situation has changed in the past few months. The euphoric mood of the investor and business community has been replaced with wariness. Additionally, the government will be looking at appeasing the common man, who lately has not had much to cheer about. The Budget exercise is going to be even more testing this year, and let us hope that the finance ministers Budget team is able to pull through this one.
Straight Road Ahead
DIRECT TAXES: With the DTC set to roll in 2012-13 , expect change in slabs or moderation of tax rates
CORPORATE TAXES: Again, small changes, such as extension of tax relief for 100% EOUs and STPI units
DISPUTE RESOLUTION PANEL: The rule that allows suspension of tax collection may be modified
BLACK MONEY: Provisions may be strengthened to check tax avoidance. Also, introduction of amnesty scheme is not ruled out.