The Finance Minister Mr. P. Chidambaram, presented the 5th budget on February 29th, 2008 on an inspirational note that the Indian economy recorded a growth rate of over 8% up to December 2007 and that the growth in Gross Domestic Product during the last 3 years was recorded at an average of 8.8%. The drivers of the growth continue to be “services” and “manufacturing” which are estimated to grow at 10.7% and 9.4% respectively. The agricultural sector despite having a fine start in the first half of 2007-08, recorded a growth rate of only 2.6%. Further, world prices of crude oil, commodities, and food grains rose sharply in the period April 2007 to January 2008.1 In addition, capital inflows were far in excess of the current account thereby requiring corrective steps for maintaining monetary and financial stability.
This Bulletin attempts to provide an overview of the key budgetary proposals affecting the common man, industry and corporate community.
1. Main highlights
The Budget undoubtedly addresses inflation control and encourages consumer spending. Contrary to its expectations, it provides a bounty for personal tax payers with more money in their hands net of taxes and benefit people of lower socio-economic strata. In a populist way, it has waived INR 600 billion of loan for 40 million farmers, wooing the biggest vote bank of all. Further, it has endeavored to give some incentives, although moderate, to the healthcare and infrastructure sectors. Regarding the latter, the endowment for a 5-year tax holiday for building 2 to 4 star hotels in specific areas will result in reinforcing tourism and will address the needs of business travelers by retorting to the hiked hotel prices thereby providing boost to the hospitality industry. Overall, the budget oscillates between neutrality and positiveness. The good news is that the income-tax exemption limits have been raised for the benefit of tax payers, relief has been given to certain sectors in terms of reduction in customs duty, excise duty too is reduced to provide benefit to automobile, food processing, oil industry etc.
2. Indirect Taxes
The Indian government collects indirect tax mainly through customs, excise duty and service tax.
The rates of custom duties have been left broadly unchanged and relief is provided to certain sectors.
Customs duty on project imports is reduced from 7.5% to 5%. In chemicals and petro chemicals industry, the duty on crude and unrefined sulphur is reduced from 5% to 2% and is unified at 5% for phosphoric acid. However, the custom duty exemption available to naptha for manufacture of specified polymers is withdrawn. Further, in order to promote exports duty on un-worked corals,2 cubic zirconia-rough and polished both,3 specified machinery for manufacture of sports goods4 plus the raw material in respect thereof has been reduced thereby benefiting those engaged in gems & jewellery and sports industry.
In Information Technology Industry the duty on specified convergence products is reduced from 10% to 5% and on specified raw materials and inputs for use in IT/electronic hardware industry from 10%/7.5% to nil on end-use basis. Further, duty on specified set-top boxes is also reduced from 7.5% to nil on the end- use basis.
Relief is given to those taking treatment by way of drugs for cancer/diabetes/asthma/Hepatitis B and other ailments. Customs duty on 6 specified drugs/kits and bulk drugs for their manufacture is reduced from 10% to 5% with nil Counter Vailing Duty (“CVD”) by way of excise duty exemption. Further, specified duty on raw materials for manufacture of ELISA kits5 has been reduced from 10%/7.5% to 5%.
In the metal industry now no duty will be levied on iron, steel melting and aluminum scrap. However, power generation projects (other than mega power projects) transmission, sub-transmission and distribution projects, and goods for high voltage transmission projects are affected since the previous available exemption from additional duty of customs of 4%6 has been withdrawn.
General Central Value Added Tax (“CENVAT”) rate is reduced from 16% to 14%. The other ad valorem rates of 24%, 12% and 8% remain unchanged. A reduction from 16% to 8% excise duty is proposed on all drugs (formulations) and on instant sterile dressing/burn therapy pads, first aid boxes, blood grouping reagents etc. Further, Anti-AIDS drug ATAZANAVIR, and bulk drugs have been fully exempted from this duty.
In the auto sector too a reduction of the duty is proposed in case of small, hybrid, electric cars,7 buses,8 two-wheelers9 etc. Packaged tender coconut water, puffed rice, tea/coffee pre-mixes, specified refrigerated equipment for the installation of a cold storage, cold room, on end-use basis in the food processing sector will be fully exempted from this duty.
IT and communication sector too will enjoy complete exemption from excise and CVD in case of wireless data modem cards thereby bringing internet within the affordable reach of cyber-savvy individuals and corporates. However, packaged software will become costly due to increase in duty from 8% to 12%.
Duty on writing/printing/packing paper, is reduced from 12% to 8%. Further, a national calamity contingent duty @ 1% is leviable on mobile phones.10 Further, the rate of duty applicable to clearances of goods to domestic tariff area from export oriented units, software technology parks etc. is revised from “25% of the basic customs duty + excise duty payable on like goods” to “50% of the basic customs duty + excise duty payable on like goods.”
The service tax rates remain unchanged at 12% (plus an education cess of 3%). Few additional services proposed to be included in the list of taxable services are:11 (i) Information technology software service for use in the course, or furtherance, of business or commerce; (ii) Management of investments by life insurers under Unit Linked Insurance Plans; (iii) Services provided by a recognized stock exchange in relation to securities; (iv) Services provided by a commodity exchange in relation to sale or purchase of any goods or forward contracts;
(v) Services provided by processing and clearing houses in relation to processing, clearing and settlement of transactions in securities, goods or forward contracts; (vi) Supply of tangible goods, without transferring right of possession and effective control of the tangible goods; (vii) Internet telephony service which would include internet access/backbone services, including services by one internet service provider to another.
Further, the annual threshold limit of service tax exemption for small service providers is increased from INR 8 lakh (approx. USD 19777)12 to INR 10 lakh13 (approx. USD 24,722). In addition, exemption will be provided to the taxable service provided by a person located outside India for a customer located outside India, and received by a hotel located in India, in relation to booking of an accommodation in the said hotel located in India. Further, 75% of the gross amount charged as freight for services provided in relation to transport of goods by road in a goods carriage by a goods transport agency, unconditionally has been exempted.14
The rate of central sales tax is reduced from 3% to 2%.15 According to the Finance Minister, considerable progress has been made in the preparation of introducing goods & services tax from April 1, 2010 though no concrete roadmap was unveiled.
3. Direct Taxes
On the personal tax front, the Finance Minister has rewarded the tax-payers by raising the threshold exemption for all income-tax assessees from INR 1.10 lakh (approx. USD 2719) to INR 1.50 lakh (approx. USD 3708). For women, the exemption limit is raised up to INR 1.80 lakh (approx. USD 4450) and for senior citizens INR 2.25 lakh (approx. USD 5562). There is no change in the rate of surcharge which is presently applicable @ 10%, where the annual income exceeds INR 10 lakh (approx. USD 24,722) subject however to the marginal relief.16
Further, no changes were proposed in the corporate income tax rates leaving corporate community disappointed. The rates continue to be @ 30% and @ 40% for domestic and foreign companies respectively.
The fringe benefit tax (“FBT”) rates remain the same i.e. @ 30% of the value of fringe benefits. However, the surcharge shall be increased as follows: (i) in case of association of persons/body of individuals surcharge shall be 10% of such tax when FBT exceeds INR 10 lakh (approx. USD 24722), (ii) in case of firm/domestic company17 10% of such tax, and (iii) in case of a company other than domestic company 2½% of such tax. Further, Crèche facilities, sponsorship of an employee-sportsperson, organizing sports events for employees, and guest houses will be excluded from its purview. Now, any expenditure on or payment made for the maintenance of any accommodation in the nature of a guest house shall be excluded from the levy of FBT thus benefiting the employer providing such fringe benefits. The valuation of expenditure on or payment for festival celebrations is reduced from 50% to 20%. Further, securities offered under an employee stock option plan will now be considered fringe benefits which means that retaining and attracting talent would become costly since it would deter the employers from giving out stock options because of the added cost.
4. Other tax proposals
- It is proposed to remove banking cash transaction tax currently leviable @ 0.1% on the receipt or withdrawal of cash on exceeding INR 1 lakh (approx. USD 2472) for a company.18
- The definition of “charitable purpose”19 is modified to exclude carrying of any activity in the nature of trade, commerce, or business or rendering of service of such nature for a consideration under the garb of “advancement of any other object of general public utility.”
- Any expenditure incurred by an Indian company after commencement of its business for the extension of any undertaking or any unit and not restricted to only industrial undertaking or only industrial unit will be eligible for deduction @ 1/5th of the expenditure for each of 5 successive years.20
- Security transaction tax (“STT”) paid in the course of business will now be an admissible deduction if the income arising therefrom is included in the income from such business.
- A deduction in respect of commodity transaction tax (“CTT”) is provided to the assessee in the course of his business if the income arising from such taxable commodity transaction is included in the business income. Further, CTT is proposed to be levied on taxable commodities transactions21 entered in a recognized association.
- Tax on short terms capital gains arising from transfer of shares and units is enhanced from 10% to 15%.
- It is proposed to allow a parent company to set off the dividend received from its subsidiary company against dividend distributed by the former, provided that the dividend received has suffered Dividend Distribution Tax (“DDT”) and the parent company is not a subsidiary of another company.
- With respect to minimum alternate tax,22 the Government proposes to increase the book profits of a company by including the amount of deferred tax. Further, the income-tax which would go towards increasing the book profits would include dividend distribution tax, any interest paid, surcharge and education cess.
Though the Budget has been a very good balancing act between fiscal discipline, growth stimulus and welfare yet scope for lot many improvements is not denied. For instance, the cascading effect of DDT (in the backdrop of a proposal to permit a deduction to the company distributing dividends to its shareholders, of an amount equivalent to dividend paid by its subsidiary company) is mitigated only for single tier parent subsidiary structures. This may be a welcome move aimed at tax rationalization; however, it may result in inadvertent discrimination against foreign companies as well as large corporate houses who have multiple tier subsidiaries to house various business units. Further, hiking of the short-term capital gains and scrapping of income-tax rebate on STT has left quite many capital market players gloomy. In addition, new CTT and service tax on commodity exchanges will increase the cost of futures trading leaving the gains of small investors and punters dwindling.
A decrease in corporate tax and some favorable calibrating of the FBT would, no doubt, have boosted sentiments but it is too much to expect a cure-all for all sectors which is largely the result of global factors and local excesses.
17 According to Section 2(22A) of the Income Tax Act “domestic company” means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income.
1 Among commodities, the prices of iron ore, copper, lead, tin, urea etc. are elevated. The prices of wheat and rice have increased in the world market by 88% and 15% respectively.
2 Reduced from 10% to 5%.
3 Reduced from 5% to Nil for rough cubic zirconia and from 10% to 5% for polished cubic zirconia.
4 Reduced from 7.5% to 5% on the specified machinery and from 10% to Nil up to 3% of FOB Board value in case of specified raw material for manufacture of sports goods for export.
5 A medical treatment for detecting antibodies, the components of which have a storage life of 6 months at refrigeration temperature and is equivalent to the best available imported kit.
6 Leviable under section 3(5) of Customs Tariff Act.
7 Reduced from 16% to 12%, 24% to 14% and from 8% to nil is proposed.
8 Reduced from 16% to 12% and on chassis thereof from “16% + INR 10,000/-” to “12% + INR 10,000/-”.
9 Reduced from 16% to 12% in case of two-wheelers and passenger three-wheelers both.
10 On imported mobile phones, this duty shall be levied as additional duty of customs under section 3(1) of the Customs Tariff Act.
11 These changes will come into effect from a date to be notified after the enactment of the Finance Bill, 2008.
12 1 US dollar = INR 40.45
13 Effective from April 1, 2008.
14 Effective from March 1, 2008.
15 Effective from April 1, 2008.
16 Where a person’s net income exceeds INR 10 lakh, the net amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax on such income by more than the amount of income that exceeds INR 10 lakh.
18 Effective from April 1, 2009.
19 Section 2(15) of the Income Tax Act.
20 Ibid, section 35D – Amortization of preliminary expenses.
21 It is proposed to be defined to mean a transaction of purchase or sale in a recognized association of option in goods; or option in commodity derivatives; or any other commodity derivative.
22 Currently, a MAT of 10% is payable on the book profits of the company and the procedure for calculating book profits is provided under the Income Tax Act after carrying out certain adjustments.