We're counting down hours to the budget; the first to be presented by the new UPA (United Progressive Alliance) government that came to power on the back of a historic mandate. So expectations are high that the budget will lay out a vision, a roadmap for the next five years. But this budget also faces extreme conflicts. A rocketing deficit demands fiscal discipline but a slowing economy needs fiscal stimulus. The country desperately needs more infrastructure for which the government needs more revenue but a burdened corporate sector wants lower taxes. So what can we really expect on Monday? CFOs, lawyers, tax consultants and investment bankers debate on what to expect on Monday.  

America did it, United Kingdom (UK) did it and now the question is will India do it as well? Raise taxes, on the rich and on companies to help bridge the deficit?

Uday Phadke, President-Finance, Legal & Financial Services, M&M

I have not seen the budget document, but I hope not!

Ajay Bahl, Partner, AZB & Partners

They’re fairly high as it is.

HP Ranina, Senior Advocate, Supreme Court

The rates have already been increased last year.

V Balakrishnan, CFO, Infosys

I don’t think it is the right time to do it.

MR Prasanna, Legal Head, Aditya Birla Group

Every year the corporates do expect tax to come down.  But this year there is a justification to that expectation.

Then where's the government going to get the money from? After all, the disinvestment program promises to be anything but aggressive? Here's one idea that's making a comeback after 12 long years. A tax amnesty scheme to bring back unaccounted money stashed offshore or maybe for undisclosed onshore wealth as well.

Sudhir Kapadia, Partner, E&Y

I don’t think anybody debates or disputes today that there is a very significant unaccounted money component in the Indian economy and that is going virtually tax free. So I would argue that the inequity exists even today without an amnesty. So what is the big deal? In fact even if I recover 10% tax on something that comes in in pursuance of an amnesty, it’s only incremental saving.

Nishith Desai, Nishith Desai Associates

There is no use going into the argument why money has gone out. I think the more important issue here is what we do in the future. A new generation has come into place. They want to play clean, adopt corporate governance by and large. If we allow them to bring that money back and announce some kind of amnesty, that’s very, very important.

Ashok Jha, Former Finance Secretary

There have been five such Voluntary Disclosure of Income Scheme since 1951. If we do not factor in the demonetization of high currency notes that took place in around 1946, none of these schemes have unearthed any substantial amount of money. The last one in 1997 - the amount disclosed was around 25,000 crore or so and the tax raised was about 7,500 to 7,800 crore.

Sudhir Kapadia, Partner, E&Y

If you take the experience which a country like Italy had for example - Italy introduced an amnesty giving complete tax exemption, not even a concessional rate, and they mopped up USD 60 billion, which is serious money by any stretch of imagination. Germany did it with a concessional rate of 25% and was perhaps not as successful, but still significant amount of money was mopped up. I think the key here is—and people rightly observe and point out that in the past these amnesty schemes have yielded modest revenues and not discouraged people from continuing to evade taxes. I think what was lacking is a very strong enforcement machinery because these two go hand in hand. I am not for a moment suggesting an amnesty and then letting everyone carry on with life as usual.

Putting bad money to good use by funding infrastructure maybe one way the government can justify a tax amnesty scheme. But money is not all that the infrastructure sector needs. It also needs better tax policies and better financing structures.

MR Prasanna, Legal Head, Aditya Birla Group

I think you need to look at a structured way of making the infrastructure project very attractive for two reasons. One, the infrastructure project is constructed on a build-operate-transfer (BOT) model or Build-Own-Lease-Transfer (BOLT) model whichever you take, the recovery of investment cannot be 50 years or 40 years - that concession is going to kill a private sector. It has to be something short-15 years and you don’t have to tax the individuals. Whatever tax you impose on a private partner in infrastructure, he is going to pass it on to the end user. For example, heavy tax on person who is operating a toll in Bandra sealink, everything will get passed on to auto drivers. So it’s a win-win situation! You make the front end taxability of various projects less and that will be passed on to the consumer

Nishith Desai, Nishith Desai Associates

If we want to take infrastructure into the next space, it’s not going to happen in the way in which we administer tax laws. There are too many confusions, whether certain projects will constitute aspect-oriented programming (AOP), if you pay a royalty for example in some cases, royalties subjected to income tax act and would it again be subjected to service tax, there are double tax issues-similar on customs and IT. You need to do something about it.

Uday Pimprikar, Partner, E&Y

Today there are certain kinds of services being provided for construction of ports, airports which are exempted. Construction services for ports are exempted but dredging services are not. And one would think that there is a need for broad-basing and that would happen in this budget. The second line of change or amendments that would come about is rationalizing the existing incentives. For example, incentives that are given for the power sector or the mega power projects wherein instead of a conditional exemption from excise duty possibly there would be a specific clarification on refunds of excise duties that are paid.

Sanjay Sethi, ED, Kotak Investment Banking

Till a few years ago there would be issuances of infrastructure bonds by financial institutions like ICICI, IDBI and so on and so forth and the interest income on that would get covered under section 80C in which you would get essentially a rebate upto a certain quantum in so far as your personal savings are concerned in your tax exemptions. So I think that needs to be reintroduced and of course overall 80C limits perhaps should go up as perhaps the exemption limits are expected to go up this year for the individual level. That will funnel a lot of the domestic savings potentially back into infrastructure.

HP Ranina, Senior Advocate, Supreme Court

One view is you tap into the unaccounted economy and people with unaccounted income and wealth are induced to put money in long-term bonds which may not give them tax free benefits but will give them immunity from prosecution or penalties-in other words you don’t have to explain the source. And they will be long-term maybe 7 to 10 years, interest will be low, interest will be taxable, but the only advantage would be that those who invest their money will not be asked any questions and they can then convert their black into white. That is one way of doing it, another way is to restore 54EC, which currently says that if I want to claim exemption from long term capital gains, I have to invest in certain bonds issued by the National Highway Authority of India (NHAI) or by the Rural Electrification Corporation (REC). But it’s currently restricted only to 50 lakhs in a financial year. I can only invest upto 50 lakhs to claim the exemption under section 54EC. So that limit of 50 lakhs may once again be increased. In the past it was without any limit whatsoever. So maybe he will do that in order to promote infrastructure.

A slowing economy means lower tax collections. Not quite the right environment for tax cuts—but if wishes were horses, corporate India would ride! Let's start with fringe benefit tax (FBT), where the opinion is unanimous

Fringe Benefit Tax was the brainchild of Former Finance Minister, P Chidambaram, who introduced it in the 2005 Budget to tax “fringe benefits” or perks enjoyed by employees. But in the last 4 years the FBT ambit has been widened to include even some corporate expenditure such as

·         Reimbursements made to employees for travel, lodging and meals

·         Employers contributions to approved super annuation funds for employees

·         Conferences organized by the employer

·         And expenses pertaining to employees welfare 

 

FBT taxes 5 to 20% of these expenses at a rate of almost 34%. FBT requires separate filings and it's not the additional tax as much as the additional paperwork that’s put Corporate India in a bind. Tax experts estimate that the cost of administering and recovering the tax almost equals the Rs 8,000 cr collected via FBT last year. India Inc has been lobbying hard for the removal of FBT, and there's some buzz that this Budget it may go.

Shailesh Haribhakti, Chairman, BDO Haribhakti

Absolutely expecting it to go. It has been a provision that’s yielded extremely low tax rates at a very high compliance cost.

MR Prasanna, Legal Head, Aditya Birla Group

To expect a tax to simply go away is little far fetched. But there is a scope for addressing some concern as far as FBT is concerned that concerns the corporates. If a particular item of expenditure is not directly or indirectly attributable to employee, even the business expense is treated as FBT. So that I think the government should get rid of.

Ajay Bahl, Partner, AZB & Partners

There are a bunch of rates which are to be applied; what is expenditure is actually converted into income. I don’t think it’s worth the headache.

Seshagiri Rao, Joint MD, JSW

If government is of the opinion that if tax revenues are coming down because of the removal of FBT, even tax rates can be increased to that extent and FBT has to be removed.

Uday Phadke, President-Finance, Legal & Financial Services, M&M

I personally see no connection between scrapping FBT and increasing tax rates. There are so many things the minister will do in the course of framing the budget - he will definitely give some concession, increase rates somewhere. So one cannot have that cause and effect relationship. As an independent proposition, FBT needs to be removed.

HP Ranina, Senior Advocate, Supreme Court

FBT will go and he will use that reason or excuse to slightly increase the rate of corporate tax from 30 to 31%.

Even if Pranab Mukherjee, Finance Minister of India (FM) does increase the corporate tax rate to make up for any loss of FBT revenue, corporate India will not complain. They just want FBT to go. But it's not such a clear opinion when it comes to scrapping Securities Transaction Tax (STT)!

In the 2004 budget Finance Minister P Chidambaram abolished long-term capital gains tax, reduced the short-term capital gains tax rate to 10% and introduced the Securities Transaction Tax or STT. STT is applied on all on- exchange equity and derivative transactions at the rate of 0.01 – 0.15%.

The STT burden is shared by the buyer and seller and can be offset by brokers against business profits. But it is after all a turnover tax, not an income tax and some traders complain that it cuts into their already wafer thin margins.

V Balakrishnan, CFO, Infosys

I think it will stay. It is a small part of the transaction value. I don’t think anyone is talking about the removal of STT. The system is functioning well; I don’t think the government will tinker with STT.

Seshagiri Rao, Joint MD, JSW

From the point of view of cost of doing trade in India, because STT is becoming expensive relative to other markets, this justifies removal.

Ajay Bahl, Partner, AZB & Partners

There could be rationalization, in many ways STT represents a dual tax. It was brought in in lieu of capital gains exemption but it is levied even when the capital gains is not exempt. So I think there is some case for some measure.

Uday Phadke, President-Finance, Legal & Financial Services, M&M

I don’t believe that scrapping of STT by itself will lead to a surge in the capital markets. Very difficult to predict!

HP Ranina, Senior Advocate, Supreme Court

There may be slight tweaking of rates for various transactions, I cannot predict what they will be but it will stay. My only hope is that there is no tax on long term capital gains!

So that's the view on FBT and STT. What about the excise and service tax cuts announced earlier as part of fiscal stimulus measures? Does the economy still need them or will they be rolled back?

Last year, as the global economic downturn spread to India, the government responded with a fiscal stimulus package that cut excise duties by 4%.

Then earlier this year, after a lack-luster vote on account, Finance Minister Pranab Mukherjee made up with a 2% cut in service tax from 12 to 10% and also cut the 10% excise rate to 8%. 

And though the economy is still hurting so are the government's finances - so will these service tax and excise cuts be rolled back in this budget?

Ajay Bahl, Partner, AZB

If they have been lowered in the vote on account, you’ve set an expectation. If you’ve created a euphoria or a belief, its fair to let that go ahead.

Seshagiri Rao, Joint MD, JSW

Any rollback of excise or service tax, the affordability factor will go away. So at least in my view this year they should be untouched, maintained at the same level.

HP Ranina, Senior Advocate, Supreme Court

He will make an announcement of increase. I think the reduction last year was purely for voters. Now that elections are behind and he has to take a more realistic approach, he will justify it on the grounds of laying a roadmap towards a Goods and Services Tax (GST) and also for meeting the fiscal deficit.

GST - or the goods and services tax which was meant to become reality on April 1, 2010. Looks like a distant reality right now!

India is plagued with multiple central and state taxes and so India Inc cheered when the 2006 Union Budget proposed a move towards a national level Goods and Services Tax or GST.

GST is to be implemented by April 1, 2010 but as of now the Centre and States are caught in a deadlock over revenue sharing arrangements, and the legislative changes are nowhere close to done. 

Seshagiri Rao, Joint MD, JSW

Repeatedly it has been told by government that GST will come from April 1, 2010. That has been a guidance for the last 2-3 years when the budget was presented. So I am of the opinion that they will introduce from April 1, 2010 in some form which will require modifications at a later stage.

V Balakrishnan, CFO, Infosys

There is no point in pushing it through because the implementation is shoddy, it will impact. If it gets postponed, they have a clear timelag and make a commitment it will happen at some point that will be good.

Porus Kaka, Tax Advocate

If you need something coming in from April 1, 2010 - we are already on July 2009 - you require extensive procedures, reconciliations between the current acts and for industries and states to have it in force. I look at it as a difficult task in the next 7-8 months.

Shailesh Haribhakti, Chairman, BDO Haribhakti

It can be done very easily. To assuage the concerns of the state government, simply the center can give a guarantee that if there is a loss of revenue that will be made good. The evidence on the ground is so clear that value added tax (VAT) resulted in huge incremental revenue for the states, causing many State Domestic Product (SDPs) to become surplus. If that is a case, there is no reason why that wouldn’t be replicated in the context of a GST.

Uday Phadke, President-Finance, Legal & Financial Services, M&M

I think that activity of encouraging manufacturing needs to be given a boost. It might be a good idea for the government to reintroduce investment allowance which we had until the 90s and it’s a one time deduction in the year in which you put in huge plant and equipment. So I think such incentive will be a useful one and it will be a continuations of the process by which the government is trying to encourage the increase in activity level and the improvement in gross domestic product (GDP).

HP Ranina, Senior Advocate, Supreme Court

Alternatively, he may not restore investment allowance but he may have a higher rate of accelerated depreciation. There is another provisions in section 32 which says that in the year in which you install and put in use plant and machinery, apart from normal rate of depreciation, you also get an additional rate. That rate he may increase.

Nishith Desai, Nishith Desai Associates

Two things will be there-environment and employment. These are the two important points I would look at. The third thing is innovation, about which I talked about R&D credit. If any entity manufactures with better environment, introduces more pollution control equipments or develops products or manufactures products which is going to improve infrastructure, they deserve credit. Secondly those sectors which generate large amount of employment-those. It should be employment linked, environment linked incentives; not just across the board that any manufacturing facility set up at any place and therefore you get in. That’s not the right way.