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Pranab Mukherjee may soften budget blows
May, 07th 2012

Amid talk of his ascent to the presidential office, there are indications that finance minister Pranab Mukherjee may take a relook at some of his controversial 2012-13 budget proposals when he seeks Parliament's approval for the passage of the Finance Bill this week.

Sources said Mukherjee may water down proposals on General Anti Avoidance Rules (GAAR) and retrospective tax changes related to M&A deals involving foreign companies with Indian assets and also roll back some plans on the indirect taxes front.

Some of the tax proposals have drawn severe criticism from foreign investors and some governments from across the world. US treasury secretary Time Geithner had also conveyed the concerns of investors to Mukherjee during the latter's visit to Washington. Lok Sabha is scheduled to discuss the Finance Bill starting Monday and vote on Tuesday.

Sources said the finance ministry may defer the implementation of GAAR for now. While in case of retrospective amendment related to M&A deals, a move that will hit Vodafone the hardest, the government is expected to announce a 10% capital gains tax on all transactions that took place prior to April. For those that take place this year, the tax rate may be fixed at 20%. In addition, Mukherjee is expected to do away with interest and penalty on all deals that will have retrospective impact.

Vodafone has petitioned the government and top officials from the firm have urged dropping the proposed amendments to the law that will make the telecom giant shell out nearly Rs 11,000 crore capital gains tax for acquisition of Hutch's stake in the Indian venture. The telecom firm has argued that it should not be made to pay tax as the Supreme Court had ruled in its favour saying Indian authorities had no jurisdiction over the "offshore" transaction.

Officials said the stinging criticism to the proposed tax rule changes may prompt Mukherjee to defer some of the changes. "GAAR may be deferred for some time until some of the issues that have emerged are resolved. Discussions are on. Let us see," said a revenue department official who did not wish to be identified. He did not elaborate on the plans.

On the indirect taxes front, the finance minister is likely to announce a rollback of the 1% excise duty imposed on unbranded jewellery and the move to ensure tax deduction at source for purchasing gold. But officials said the finance minister is unlikely to reverse his proposal to double import duty on gold.

Many are looking forward to see how Mukherjee deals with proposed amendments to the Customs Act where provisions have been tightened for alleged duty evasion. Officials said the finance minister may opt to scrap the controversial clause which seeks to make any move such as wrong declaration of value of goods a non-bailable offence. This particular clause had drawn strong criticism from the business community as well as lawmakers who had termed it draconian.

Mukherjee is also expected to use the opportunity to calm fears about the state of the economy and unveil plans to shore up confidence. The lackluster budget unveiled in March has been slammed by investors, commentators and the business community while global business groups have written to the prime minister and Mukherjee to register their displeasure at some of the proposed changes in tax rules.

The finance ministry has mounted a strong defence of the budget and officials have issued statements clarifying some of the moves to pacify angry investors. But an avalanche of bad news has put the government on the defensive.

Last month, global ratings agency Standard & Poor's revised the outlook on India's long term sovereign rating to negative from stable citing slowing growth, high fiscal deficit and debt burden and the government's inability to push through economic reforms.

S&P also said the outlook revision reflected its view "of at least a one-in-three likelihood of a downgrade" if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting.

The S&P statement also sparked off a debate about the state of stalled reforms and the opposition blamed the government for poor economic management. Economists and the Reserve Bank of India (RBI) have also expressed doubts about the government's ability to trim unwieldy subsidies and keep the fiscal deficit within the targeted level of 5.1% of gross domestic product for 2012-13. The finance minister has reiterated the government's commitment to bring down the subsidy bill below 2% of GDP in 2012-13 and to 1.75% of GDP in the next three years. But doubts still remain.

In its monetary policy statement unveiled in April, the RBI had cautioned that any slippage on the fiscal deficit front would have implications for inflation.

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