These proposals are expected in the new Direct Taxes Code likely to be announced by Finance Minister P Chidambaram on February 28.
Among the changes is one that proposes to bring in an "anti-abuse, anti-avoidance" provision in the Double Taxation Avoidance Agreements between India and countries like Mauritius.
The provision is aimed at ensuring that the benefit of such treaties is available to only residents of either or both the contracting nations and prevent treaty-shopping, which has been a source of considerable debate.
Official sources said, "As a strategic measure, the government is considering introducing the provision as a part of the new direct tax code, rather than as a standalone provision in Finance Bill 2007."
Another proposal expected to find its way into the Budget is to give foreign banks a level playing field by allowing them to claim 3 per cent of their non-performing assets as deduction for tax purposes.
Currently, foreign banks are not allowed deductions on account of bad loans, though a 5 per cent deduction is already available to Indian banks.
In addition, the finance ministry is considering making it mandatory for liaison offices and representative offices to have a Permanent Account Number.
The need for a PAN for such entities comes in the backdrop of the recent Authority for Advance Rulings' decision in the case of UAE Exchange Centre LLC. The authority concluded that the "profit" attributable to the "permanent establishment" (the liaison office) would be taxable in India even under a DTAA.
An amendment is also likely to Section 115A, which provides for taxing income from dividends, royalty and technical service fees for non-residents (not being a company) at lower rates of 30, 20 and 10 per cent, depending on the date of the agreement.
Further, the Ministry of External Affairs has given go-ahead for introducing an amendment to Income Tax Act, 1961, which will define India (for taxation purposes) on the same lines as provided for in the tax avoidance agreements.
The amendment will be incorporated in the coming policy announcement. The present Act defines a permanent establishment as a fixed place of business and this has resulted in a lot of tax litigation.
Among other proposals, the Draft Direct Taxes Code Bill is also expected to omit sub-section (2) of Section 92A in the Income Tax Act, 1961, on the ground that it clashes with the concept of associated enterprise contained in another sub-section .
Further, the time limit for issue of a notice under Section 149(3) is expected to be increased to six years, to align it with the time for reopening an assessment.
Section 35DDA (2) and (3) is also expected to be amended to make its benefits available to all assessees and not just Indian companies.
However, three crucial sections - 115AB, 115AC, 115 AD - which deal with tax treatment of individual non-residents and foreign institutional investors are unlikely to be changed in a major way, despite the call for equality from the task force on non-resident taxation.