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On 23 July, the finance minister will present her seventh budget, a record. February’s interim budget laid out the then government’s vision for a prosperous India in harmony with nature with modern infrastructure, providing opportunities for all citizens and regions. The minister planned for five years of unprecedented development, laying out ambitious targets for defence, aviation, railways, the marine sector, EVs, bio-manufacturing, green energy and infrastructure. The new coalition government, however, may curb some of those designs.

The finance minister also wished to encourage sustained foreign direct investment (FDI) with investment treaty negotiations developing the spirit of First Develop India. FDI always sees conflict between the taxing rights of source and residence countries. India has had an unwavering commitment to source-based taxation. International investors have a number of concerns in this regard that the budget may, however, resolve.

A clear policy stance on Pillar Two, popularly known as the Global Minimum Tax Agreement, is expected, given 含羞草社区 extensive engagement with the OECD on the BEPS (base erosion and profit shifting) Inclusive Framework. Companies headquartered in India with a cross-border presence will appreciate clarity on this matter.

The rate and scope of the equalisation levy (EL) should be revisited. Originally a temporary measure, it was broad-based. It is uncertain whether a global consensus under Pillar One will be achieved, the UN-backed article 12B will become incorporated in tax treaties or a third solution will emerge to resolve the taxing rights of source countries in the digital economy.

Regarding EL, the provisions governing significant economic presence (SEP), adopted in India to include digital business forms within the ambit of the domestic law’s business connection, should not be ignored. So far, there is no mechanism for calculating profits attributable to SEP. This has led to uncertainty and has allowed entities to adopt positions suiting their convenience. The budget should focus on introducing a framework of SEP law.

India should not add to the intricacies of capital gains taxation. Year after year, modifications to such taxation render the regime increasingly complex, leaving the investor community uneasy. Simplification and rationalisation could establish parity between resident and non-resident rates of capital gains tax. With reverse flipping gaining momentum and the capital market seeing increased buoyancy, investors, particularly those in startups, would benefit from the harmonisation of taxation.

The Finance Act, 2023, extended angel tax provisions to funds raised by Indian companies from non-resident investors. As funding improves, it is crucial that tax laws are not a hindrance. Adequate checks and balances are already in place under exchange control regulations when cross-border funding is raised. Relaxing angel tax provisions would be a welcome step in attracting more FDI in line with the finance minister’s path to prosperity.

The budget should include proposals for effective dispute prevention and resolution. These will need better co-operation between the tax authorities and taxpayers, informed risk assessment by taxpayers and the introduction of more efficient audit practices through the use of artificial intelligence and machine learning. The last proposal will avoid routine and roving enquiries.

As a priority, the government should make the advance pricing arrangements (APA) programme more robust by reducing delays. This is currently between 48 and 60 months for unilateral and bilateral APAs. The safe harbour rules for international transactions could be rationalised, based on trends in concluded APAs, making them more appealing to taxpayers and reducing their burden. The objective should be to mitigate the risk of double taxation by ensuring that the rate does not go beyond an arm’s length range and lowers the substantial cost of compliance.

It is to be seen whether India will become the world’s second-largest economy by 2031 and the largest by 2060, as recently predicted by the Reserve Bank of India. However, this budget could be the foundation to achieve this. The finance minister also holds the record for the longest duration of a budget speech. Maybe the record for the most progressive budget will be in her future.

Mukesh Butani is the founder and managing partner, Seema Kejriwal is a partner and Shruti Lohia is a principal associate at BMR Legal.