The main challenges outlined by the Finance Minister, Mr. Pranab Mukherjee, while presenting his Budget speech for the short term and long term perspective of the Indian economy are:
- to lead economy to high GDP growth rate of 9% p.a. at the earliest;
- to deepen and broaden the agenda for inclusive development; and
- to improve delivery mechanisms of the government.
In keeping with tradition, the Budget proposals are a mixed bag of the good and the bad. Some of the biggest disappointments in the Budget proposals are that there are no provisions for any reforms in the FDI policy, the public sector enterprises such as banks and insurance companies are to remain in the public sector and there is a projected fiscal deficit of 6.8%. The major positives are the proposals to abolish Fringe Benefit Tax (FBT), Commodities Transaction Tax (CTT) as well as to phase out surcharge on income tax starting with its elimination in this Budget from personal income tax. Another significant benefit is the clarification on taxation of Limited Liability Partnerships (LLPs).
This synopsis prepared by the tax team of ALMT Legal, summarises some of the important direct and indirect tax proposals that were made by the Finance Minister in his Budget speech on 6 July 2009. The full text of the Budget speech and proposals can be found on the website http://indiabudget.nic.in/
BUDGET 2009-10 – SUMMARY OF PROPOSALS
The Budget focuses on improvement on the efficiency of the tax system by proposing setting up of a Centralized Processing Centre (CPC), introduction of a new direct tax code for simplified filing of returns as well as constituting a Dispute Resolution Panel to address disputes relating to international taxation.
Some of the important Budget proposals are as follows:
- Fringe Benefit Tax, controversially introduced a couple of years back, to be abolished with effect from 1 April 2010.
- No change in corporate tax rates.
- Surcharge on direct taxes to be phased out – currently eliminated for personal tax but not for corporate tax.
- New direct tax code to be released within 45 days for public comments and to be tabled in the Parliament in the winter session.
- LLPs to be taxed in the same manner as general partnerships. Conversion of general partnership to LLP to have no tax implications if rights and obligations remain same and there is no transfer of any asset or liability.
- Commodities Transactions Tax which was introduced in 2008 to be abolished.
- Sections 10A and 10B tax holiday (for free trade zones and Export Oriented Units) to be extended by one more year.
- Alternate dispute resolution mechanism (called the Dispute Resolution Panel) to be constituted which will be applicable to any person aggrieved by an order passed by the Transfer Pricing Officer.
- Safe harbour rules to be framed to provide for circumstances in which the income tax authorities shall accept the transfer price declared by the assessee.
- Arm's length price to be the arithmetical mean in cases where more than one price is determined by the most appropriate method. However, if such arithmetical mean is within 5% of the transfer price, then the transfer price declared will be deemed to be the arm's length price.
- Minimum Alternate Tax (MAT) rate to be increased from 10% of the book profit to 15%. However, carry forward and set off of tax credit against MAT paid to be allowed up to 10 years (previously allowed up to 7 years).
- Weighted deduction of 150% allowed under section 35 for R&D to be extended to all manufacturers other than those engaged in items specified in the Eleventh Schedule of the Income Tax Act, 1961.
- Investment linked tax incentives to be introduced in a phased manner starting with the introduction of a new section 35AC applicable to a few categories of businesses like business of setting up and operating cold chain facilities for specified products, warehousing facilities for storage of agricultural produce, laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution and storage. 100% deduction allowed in respect of capital expenditure (other than acquisition of land, goodwill or financial instrument) to such businesses.
- As a relief to small businesses, the benefit of presumptive taxation to be extended to all businesses having gross turnover/ gross receipts up to INR 4 million not availing deductions under sections 10A, 10AA, 10B, 10BA or under Chapter VIA (deductions in respect of certain incomes). No advance tax requirements applicable to them. Presumptive rate of income prescribed at 8% of gross turnover/receipts.
- Tax holiday under section 80-IB(9) to be extended to natural gas from blocks awarded under the NELP-VIII round of bidding. Definition of "undertaking" to be inserted with retrospective effect from 1 April 2000, to mean all blocks awarded in any single contract by the Government of India in case of mineral oil and natural gas.
- Definition of the term "manufacture" to be newly inserted to remove ambiguity on the applicability of the tax incentives to manufacturers.
- Clarificatory amendments to be made to the powers of income tax authorities and reassessment proceedings with retrospective effect.
- Taxation of gifts received in excess of INR 50,000 (without consideration or for inadequate consideration) to be extended to immovable property (land and/or building), shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art. Stamp duty value in case of immovable property and fair market value in case of movable property to be computed.
- Tax deducted at source (TDS) rates to be rationalised and reduced to 2% in case of use of machinery or plant or equipment and to 10% for use of any land or building or furniture or fittings for all persons. Uniform TDS rate for a contract, sub-contract and advertising contract, at 1% in case of individual/HUF and 2% in case of any other entity. If no PAN is quoted, TDS rate to be 20% in all cases.
- Threshold limit for payment of wealth tax to be increased from INR 1.5 million to INR 3 million.
The Finance Minister has confirmed the introduction of the Goods and Services Tax (GST) by the targeted date of 1 April 2010. It will be a dual GST comprising of a Central GST and a State GST, whereby the Centre and the respective States will legislate, levy and administer the same. Another significant proposal is the role of the Authority for Advance Rulings (AAR) constituted under the Income Tax Act, 1961 to also act as an Authority for the purposes of Customs, Central Excise and Service Tax. Some of the important Budget proposals are summarised below:
- Legal advice, consultancy or assistance (other than appearance in courts) provided by any entity (not being an individual) to be included in the list of services chargeable to service tax.
- Cosmetic and plastic surgery services to be included in the list of services chargeable to service tax.
- Services provided in relation to transport of goods by rail and transport of (i) coastal goods; and (ii) goods through inland water including national waterways to be included in the list of services chargeable to service tax.
- "Business and auxiliary service" definition to be amended to provide exemption from services provided in relation to 'excisable goods' under excise, thus resulting in elimination of double taxation of such services.
- Definition of "stock broker" to be amended to exclude sub-brokers.
- Service providers who provide services that are taxable and are exempt and do not maintain separate accounts of inputs, to be required to pay an amount equal to 6% of the value of exempted services (reduced from 8%).
- Exemption from service tax to be provided to inter-bank purchase and sale of foreign currency between scheduled banks.
- Two of the taxable services, namely, "Transport of goods through road" and "Commission paid to foreign agents" to be exempted from the levy of service tax, if the exporter is liable to pay service tax on reverse charge basis. Thus, an exporter will not be required to first pay the tax and later claim refund in respect of these services. However, as the present cap of 10% on commission agency charges has been retained, the exporter will have to pay service tax on the amount of commission which is in excess of 10%.
Customs / Import Duty
- On packaged or canned software, an exemption of Additional or Countervailing Duty of Customs (CVD) to be provided on the portion of the value which represents the consideration for transfer of the right to use such software, subject to specified conditions.
- A new section, section 26(A) to be introduced to the Customs Act, 1962, to provide for refund of import duty paid, on goods which are defective or not as per agreed specifications and which are returned by the buyer.
- Provisions to be made for a High Court to condone delays in filing an appeal and filing cross objections beyond the prescribed period.
- Section 9 of the Customs Tariff Act, 1975, to be amended retrospectively so as to extend the machinery provisions of the Customs Act, 1962, to CVD levied under this section.
- The excise duty rate on items currently attracting 4% duty to be increased to 8% with certain exceptions such as specified food items, drugs and pharmaceutical products, medical equipment, etc.
- High Courts to be empowered to condone delays for filing of appeals and memorandum of cross objections.
- A manufacturer of both dutiable and exempted goods, who does not maintain separate accounts of inputs, to pay an amount equal to 5% of the total price of exempted goods (earlier 10%).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.