Will Budget 2012 be taxpayer friendly?

After Indian tax authorities lost their tax dispute with Vodafone, it looks like the Parliament’s Standing Committee on Finance is genuinely concerned about protecting the interests of investors and is mooting for a taxpayer-friendly Direct Tax Code (DTC).

Chaired by BJP leader Yashwant Sinha, the parliament panel will meet tomorrow to finalise its report. However, it does seem like the eagerly-awaited DTC is likely to be introduced from 1 April, 2013, against the earlier deadline of April 2012.

The Committee recommended the widening of tax slabs and urged a higher income-tax exemption limit of Rs 5 lakh. The draft report is also believed to have recommended raising the limit for long-term savings, such as life or health insurance, to Rs 1.50 lakh from the proposed Rs 1 lakh. The combined limit for expenditure on life and health insurance, along with expenditure on children’s education, should be raised from the proposed Rs 50,000 to Rs 1 lakh.

It has also suggested that insurance policy dividends should be be exempted from dividend distribution tax and that no tax be deducted at source (TDS) on brokerage fees paid for stock market transactions. More importantly, it agrees with a DTC proposal to levy a minimum alternative tax on special economic zones.

Sources told Business Standard that the committee has also agreed to lower the corporate tax on foreign firms to 30 percent from the current 40 percent.

With the Double Taxation Avoidance Agreement (DTAA) with Mauritius resulting in no real breakthroughs, the panel also wants the finance ministry to end the ambiguity in tax treaties with other nations in order to prevent tax evasion.  It has been alleged that Mauritius is used as a tax haven from where most investments flow into India to avoid paying taxes to  the government, according to the DTAA.  Almost 42 percent of foreign direct investment and 40 percent of foreign institutional investment is routed through Mauritius, a low-tax jurisdiction.