From corporate tax perspective, one expectation from the Budget is reduction in tax rates. A reduction in tax rates seems unlikely taking into account the spiralling inflation. Though it may be accepted that lower tax rates will set into motion a chain reaction — when people are left with more disposable income, savings and consumption rise, it leads to a more buoyant economy and in turn increases income and fosters increased tax compliance and collection; but given the budgetary deficits, that may not be in Santa's goodie bag. But, as the Government is keen to lower the tax rates in the Direct Taxes Code (DTC), it probably will not increase them either.

From cross border taxation perspective, the focus seems to shift from direct taxes to transaction-based taxes i.e., transfer pricing and indirect tax. There will also be an increased focus on capping tax avoidance measures. Currently, the Government is working hard to renegotiate Double Tax Avoidance Agreements to bring back money from tax havens.

The Government may bring in General Anti-Avoidance Regulations (GAAR) and ‘substance over form' tests within the Income-tax Act, 1961 (the Act). Globally also, regulators are starting to look closely at beneficial ownership and ‘substance' tests and are re-evaluating their rules. As companies seek favourable tax environments, treaty shopping or anti-treaty shopping court cases are likely going to be on the increase. Many cases have already occurred whereby the governments of Korea, Australia and several developing nations have ignored existing tax treaties to protect this lucrative source of income.

So, there might be either an introduction of GAAR provisions, which allow “treaty override”, or separate provisions that pierce the corporate veil and “treaty override”. Therefore, while the headline rates may not change, the environment in which companies are planning their business and tax strategies is going to see a paradigm shift.

Banking/NBFC sector

India is still shining and this is evident in the number of foreign banks wanting to set up shop in India. To reduce litigation it must be clarified that (i) revenue expenses directly incurred for the India branch be allowed in entirety and not subject to ceilings on deduction of Head Office (HO) and general administration expenses; and (ii) based on the principle of ‘single-entity', transactions between HO and branch ought not to suffer any withholding tax thereon.

In recent times section 14A of the Act that denies deduction for expenses incurred to earn exempt income based on a methodology prescribed is embroiled with lot of controversy. Without going into the merits, in case of banks and NBFCs, if the provision is to apply to them, at least a separate methodology may be prescribed which recognises the operating differences vis-à-vis other companies.

Similarly, a bank deals in derivatives for balance sheet management and market making purposes. Banks account for the Mark-to-Market (MTM) gains / losses, on such derivative contracts, as per relevant Accounting Standards and Reserve Bank of India guidelines. Recently, the Central Board of Direct Taxes issued internal Instructions that such MTM losses may be considered as contingent losses. Whilst the Instructions seem to be issued in the context of corporates, to avoid unnecessary litigation, it may be clarified that it does not apply to Banks.

For banks and NBFCs, non-performing assets pose a huge problem not only from a business point but also from a tax perspective vis-à-vis accrual of income. As in the case of banks, even in the case of NBFCs such interest may be charged to tax in the year of receipt or accrual, whichever is earlier.

Insurance sector

Insurance is at the nascent stage of development in India. As it is also a regulated industry there is a time gap between receipt of permissions and start of business during which huge expenses are incurred. There should be specific provision for allowability of such expenditure.

In order to give a fillip to the insurance sector and also as they are in a way fiduciary keepers of public money, the amendment made by the Finance Act, 2009, to provide, inter alia, that realised gains/losses will be taxed/allowed as a deduction may be reconsidered.

(The author is Executive Director, KPMG) .

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