The much-awaited Budget 2009-10 may not have brought cheer to the stock markets but definitely it has to the ?aam aadmi?. In the backdrop of economic meltdown, the finance minister Pranab Mukherjee had a tough job to perform, in trying to stimulate the slowing economy on one hand and controlling the fiscal deficit on the other. Further, in view of reelection, UPA had to live up to the commitment of a generous Budget for ?aam aadmi?.
Tax Proposals
Key proposals on indirect tax suggest that the finance minister has done more to rationalise the duty rates than to juggle with them. The minister also announced a clear intent to implement GST from April 1, 2010 though the preparedness in its implementation continues to remain a question. The FM did not propose to bring any change in the basic duty rates of excise, service tax and customs and chose to preserve the positive sentiments built in the economy. The sectors that would be benefited under customs with reduction/exemption in rates are wind energy, textiles, pharma and telecommunications, while jewellery importers would cough up more by duty on imports. Manufacturing sectors that would gain from exemption/ reduction in rates are textiles, automobiles and petroleum products. Partial exemption has been provided to manufacturers of packaged or canned software, who transfer the right to use for commercial exploitation, so as to tax such transaction only under service tax. Consequent to this, rate of tax on such transactions would increase from 8.24% to 10.30% (with cess). The change would also raise doubts on the applicability of service tax on packaged software, which were hitherto regarded as commodities and taxed as such. The band wagon of taxable services now includes transportation by inland-waterways and railways, services of legal firms, cosmetic & plastic surgery.
On the direct tax proposals, the FM surprised every one by announcing the release of new Direct Tax Code within 45 days. The Direct Taxes Code, along with a discussion paper, will be released to the public for comments. It is expected that the Direct Taxes Code Bill will be introduced in the winter session of Parliament.
The FM tried to bring little cheer to ?aam aadmi? by increasing the basic income tax exemption limit from Rs 2.25 lakh to Rs 2.4 lakh for senior citizens, from Rs 1.8 lakh to Rs 1.9 lakh for women and from Rs 1.5 lakh to Rs 1.6 lakh for all other tax payers. The major relief was removal of surcharge of 10% for individual taxpayers. To encourage education, the FM extended the deduction in respect of interest on loan taken for higher education to all fields of education to be pursued after completion of Class 10 studies.
There is no change in the corporate tax rate. On the other hand, the FM increased the Minimum Alternative Tax (MAT) rates from 10% to 15% allowing the carry forward of MAT credit up to 10 years. The obvious reason for increasing the MAT rate is to give little bit of breather to the increasing fiscal deficit.
The FM also had something in his bag of goodies for the corporate tax payers. A long-standing demand for abolition of Fringe Benefit Tax (FBT) has finally been accepted. Removal of FBT, which was an administrative burden, has been warmly welcomed by the corporate tax payers. Esop?s which are currently covered under FBT, are now proposed to be taxed as perquisites in the hands of the employee. Another goodie granted was the extension of weighted deduction of 150% for in-house R&D to all industries, barring few. The FM also extended his bounty to the IT companies and Export Oriented Units (EOUs) by extension of the sunset clause of income tax holiday by one year ie up to financial year 2010-11. This is a welcome relief to Indian IT industry which is hard hit by the global economic slowdown.
The multinational corporations have been waiting for introduction of measures to handle the aggressive stands taken the by the Transfer Pricing authorities. This Budget came with dual relief on this front. The FM announced the introduction of:
* Alternative dispute resolution mechanism within the Income tax department for the resolution of transfer pricing disputes
* Central Board of Direct Taxes (CBDT) is proposed to be empowered to formulate ?safe harbour? rules to reduce the impact of judgmental errors in determining the transfer price of the international transactions
The government has planned significant investments in the infrastructure sector; however a similar reaction on tax incentives side was missing for this sector. The apparent tax incentive to this sector was extension of deduction under Section 80IB(9) to the natural gas sector. Further, certain investment linked incentives are also been proposed for setting up and operating ?cold chain?, warehousing facilities for storing agricultural produce and the business of laying and operating cross country natural gas or crude or petroleum oil pipeline network for distribution on common carrier principle.
Finally the tax treatment of LLPs has been clarified. Further, a scheme of presumptive taxation for small enterprises was introduced, whereby the taxpayer below 40 lakh of turnover can declare their income at 8% of their turnover and thereby relieved from the burden to maintain the books.
To sum up, industry had greater expectations from UPA on policy and the regulatory front, which may not have been met. However, there have been quite a few reform announcements on the direct and indirect tax and also the direct tax code will be eagerly awaited.
?The writer is head of tax, KPMG