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Overview
The Finance Minister, Mr Pranab Mukherjee, seemed much at ease while presenting Budget 2010 having seen off the turbulent and uncertain environment of the global financial crisis compounded by a mounting fiscal deficit. Defying the public anxiety on withdrawal of the fiscal stimulus package and the apprehension of bringing in the Revenue-friendly provisions from the Direct Taxes Code (‘Code’), Budget 2010 largely focussed on the macro needs of a recovering and expanding Indian economy.
The Finance Minister announced that the process of revamping the Indian direct and indirect tax regimes is underway and that the Government will endeavour to introduce the Code and the Goods and Services Tax regime by April 1, 2011. He also reassured that the Government would continue to support the Special Economic Zones regime. There was no promise to extend the tax holiday for software technology park units and export oriented undertakings.
Direct tax
Tax rates
| • | Indian companies received marginal relief; surcharge is proposed to be reduced from 10 percent to 7.5 percent; effective tax rate reduced from 33.99 percent to 33.2175 percent
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| • | No change in the tax rate applicable to foreign companies; effective tax rate to continue at 42.23 percent
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| • | Slabs applicable to individual taxpayers, Hindu undivided families, associations of persons, bodies of individuals and artificial juridical persons revised as under:
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| Income |
Rate of tax (Percent) |
| Up to INR 160,000* | NIL |
| INR 160,001 to INR 500,000 | 10 |
| INR 500,001 to INR 800,000 | 20 |
| INR 800,001 and above | 30 |
* INR 190,000 in the case of women taxpayers resident in India and INR 240,000 in the case of resident taxpayers above 65 years of age
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| • | Individual taxpayers eligible for an additional deduction of INR 20,000 for investment in long term infrastructure bonds over and above the existing limit of INR 100,000
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Minimum Alternate Tax (‘MAT’)
| • | No change in basis for levy of MAT as proposed under the Code
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| • | Rate of MAT proposed to be increased from 15 percent to 18 percent; effective MAT rate will increase to 19.9305 percent for domestic companies and to 19.0035 percent in the case of foreign companies having a permanent establishment in India
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Withholding tax
| • | Withholding tax regime remains largely unchanged
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| • | Threshold limits in relation to prescribed payments to Indian residents up to which tax withholding does not apply increased with effect from July 1, 2010 as follows:
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| Nature of payment |
Nature of payment |
Proposed |
| Winnings from lottery or crossword puzzle | 5,000 | 10,000 |
| Winnings from horse race | 2,500 | 5,000 |
| Payment to contractors | 20,000
(single transaction); 50,000 (aggregate)
| 30,000
(single transaction); 75,000 (aggregate)
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| Insurance commission | 5,000 | 20,000 |
| Commission or Brokerage | 2,500 | 5,000 |
| Rent | 1,20,000 | 1,80,000 |
| Fees for professional or technical services | 20,000 | 30,000 |
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| • | The expenditure subject to tax withholding will not be disallowed if the tax withheld during a financial year is deposited by the due date of filing of the return
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| • | Penal interest increased from 12 percent per annum to 18 percent per annum for the period between the due date of withholding of tax and the actual deposit of such tax
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| • | The proposed discontinuation of issue of withholding tax certificates by the payer with effect from April 1, 2010 reversed
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Scope of income of non-resident clarified
| • | Income streams such as interest, royalty and fees for technical services deemed to be sourced in India and liable to tax in India if the debt or services are utilized in India regardless of whether or not:
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| ° | the non-resident has a residence or a place of business or business connection in India |
| ° | the services are performed in India |
| This provision has been taken from the Code and proposed to be brought into effect retrospectively from June 1, 1976 |
Conversion of an Indian company into a Limited Liability Partnership (‘LLP’)
| • | Conversion of small Indian companies (determined on the basis of turnover) into LLPs is proposed to be exempt from levy of capital gains subject to the satisfaction of prescribed conditions
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| • | Post such conversion, the LLP will be allowed to carry forward business losses and unabsorbed depreciation of the converted company. Period of carry forward to get a fresh life of 8 years
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| • | MAT credit, if any, of the converted company will be lost
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| • | Absence of clarity continues in relation to tax liability in the hands of the shareholders of the converted company and of accumulated profits on the conversion of the company into an LLP
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Anti-abuse provisions in relation to transfer of shares in Indian company
| • | Transfer of shares of a private company to a partnership or a company at a consideration less than the fair market value, would be taxable in the hands of the transferee, unless the transfer is pursuant to a tax-exempt merger or a demerger. The difference between the consideration and the fair market value will be taxable as income in the hands of the transferee. This provision is proposed to be introduced from June 1, 2010. This will restrict the ability to reorganize ownership structure within the group, in a tax neutral manner.
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Settlement Commission
| • | Application to Settlement Commission is proposed to be made permissible in cases where proceedings relating to assessments in pursuance of search operations by the Revenue department are pending
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| • | An application to Settlement Commission can be made only if the additional income-tax payable on income disclosed in the application exceeds INR 5 million
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| • | The Settlement Commission is allowed to dispose off applications within a period of 18 months from the date of application
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| • | Similar amendments have been made in wealth tax provisions
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| • | These amendments will come in force with effect from June 1, 2010
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Other budget proposals
| • | Simplification of return forms for individuals
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| • | Relaxation for tax exemption rules for institutions engaged in activities of general public utility to undertake activities in the nature of business so long as the receipts do not exceed INR 1 million in a financial year
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| • | Increase in weighted deduction for research and development activities and for payments to notified organizations undertaking research and development activities
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| • | Investment linked deduction for new hotels (2-star category and above) set up anywhere in India
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| • | Increase in threshold for applicability of mandatory tax audit by practising chartered accountants and increase in penalty for failure to furnish tax audit report
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| • | High Courts are empowered to condone any delay in filing appeals in matters related to income tax and wealth tax where there is a reasonable cause for such delay
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Indirect tax
Customs
| • | Median rate of basic customs duty unchanged
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| • | Exemption granted from additional duty of customs on pre-packaged goods intended for retail sale, apparels and accessories, cellular handsets, and watches
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| • | Electricity supplied from SEZ to DTA or non processing areas of SEZ subject to basic customs duty of 16 percent ad valorem with retroactive effect from June 26, 2009
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| • | Rate of basic customs duty on key petroleum products like motor spirit, high speed diesel, etc increased by 5 percent
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| • | Rate of specific customs duty on import of precious metals like gold, silver and platinum increased by 50 percent
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| • | Duty on cinematographic films, music and gaming software, other than in pre-packaged form for retail sale, to be charged on the aggregate of cost of carrier medium and related insurance plus freight
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| • | Duty exempted on the value of “transfer of right to use” of packaged and canned software
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| • | Project import benefit at 5 percent basic customs duty extended to mono rail projects, food grain handling systems, cold storages etc
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| • | Duty rates on medical, surgical, dental and veterinary equipment rationalized to attract a basic customs duty rate of 5 percent and countervailing duty of 4 percent
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| • | Conditions on use of duty free import of capital goods for road construction relaxed
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| • | Scope of cases which can be taken to Settlement Commission expanded
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| • | MRP based levy of countervailing duty at the time of import of goods has been extended to cover goods covered under Medicinal and Toilet Preparations (Excise Duties) Act, 1955
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Service tax
| • | Service tax rate retained at 10 percent
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| • | Significant change in conditions relating to export qualification; no requirement to demonstrate use of services outside India
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| • | Scope of taxability of oil-field related services expanded when performed in continental shelf and exclusive economic zone
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| • | New services proposed to be taxed:
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| ° | Services by hospitals, etc to employees of business entities in relation to health check-up or preventive care
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| ° | Services by hospitals, etc to an insurance company in case of payments related to cashless insurance policies for health check up or treatment
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| ° | Promoting of a brands (such as celebrity endorsements)
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| ° | Permitting commercial use or exploitation of any event; this may include sports, business, social and personal events
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| ° | Copyrights involving temporary transfer of rights, or permitting use or enjoyment of rights related to recording of cinematographic films and sound recording
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| ° | Services provided by builders for provision of preferential location or development of real estate complexes
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| ° | Promoting, marketing or organizing of games of chance, including lottery, bingo or lotto (new expanded category)
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| ° | Services of electricity exchanges for trading, processing, clearing and settlement of specified contracts
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| • | Modifications in existing services:
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| ° | All air passenger transport liable to tax (domestic or international)
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| ° | Information technology software services coverage expanded
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| ° | Sponsorship of sport events now taxable
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| ° | Sale of immovable property deemed to be taxable unless entire consideration paid after issuance of completion certificate by a competent authority
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| ° | Retroactive reinforcement (from June 1, 2007) of taxability of rentals from immovable property (to counter Delhi High Court judgment)
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| ° | Rent for vacant land taxable if:
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| | - | the land is intended to be used for construction; and
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| | - | the use is for business purposes
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| ° | All services provided within ports and airports made taxable
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| • | Exemptions granted to:
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| ° | News agencies providing ‘online information and database retrieval service’ and ‘business auxiliary service’ and covered under section 10(22B) of the
Income tax Act, 1961 exempt subject to conditions
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| ° | IT software services relating to packaged or canned software, pre-packed in retail packages for single user exempted subject to conditions
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| ° | Transmission of electricity
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| ° | Taxes charged by any Government on air passenger transport service
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| • | Exemptions withdrawn:
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| ° | Transport of goods by rail, except for specified goods; abatement of 70 percent to be allowed
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| ° | Vocational training, except if provided by specified institutes
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| • | No penalty to be levied where service tax along with interest is paid before issuance of show cause notice
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Excise
| • | Median rate of excise duty enhanced from 8 to 10 percent
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| • | Rate of excise duty on motor spirit (petrol) and HSD (diesel) increased by Re 1 per litre
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| • | Transfer of right to use packaged or canned software exempted from excise duty in all cases
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| • | Technical inconsistencies in provisions related to refund of unutilized credit for exporters of goods and services (under Rule 5) removed; procedures also simplified
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| • | Clean energy cess suggested at INR 50 per tonne on coal, lignite and peat
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| • | Attempt towards mitigating the disputes to expedite collection of duty:
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| ° | Widening the scope of Settlement Commission
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| ° | Non-levy of penalty in case of deposit of duty prior to show cause notice
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| ° | Retrospective amendments to facilitate cenvat reversals towards exempt goods
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| • | Exemption of excise duty on supply of goods to mega power projects subject to specified conditions:
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| ° | Where supply of power has been tied up through tariff based competitive bidding; or
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| ° | Where mega power project has been awarded to the developer on the basis of the tariff based competitive bidding
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Conclusion
Overall, the market sentiment for Budget 2010 seems to be positive. While there are not too many changes in the direct taxes, it seems to be in anticipation of the introduction of the Code next year. As regards the dispute resolution reforms, the recent introduction of the Dispute Resolution Panel and the soon to be introduced safe harbour rules for arm’s length price between related parties has laid out a roadmap. A simple and stable tax regime along with judicial and administrative reforms should provide a positive impetus to the growing Indian economy. From an indirect tax view point, changes have been largely focussed at correcting anomalies and prescribing new tax rates for specific products. The unstated intention of the changes is to pave the way for GST introduction. |
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