?The Union Budget cannot be a mere statement of government accounts. It has to reflect the government?s vision and signal the policies to come in future,? said Pranab Mukherjee in his Budget Speech. By emphasising the government?s commitment to steer the economy back onto a higher growth path, Budget 2010 provides a pro-growth, pro-investment orientation. Equally reassuring is the undertone of pragmatism and realism of confidence that the task set out is achievable. While the stress on the qualitative aspects is indeed welcome, implementation is vital. Budget 2010 provides a sense of relief intermingled with a sense of optimism. Gratifyingly, the Budget proceeded along expected lines ? expectations have been met for the large part.
While maintaining the tax rates, the finance minister has expanded the bands of income to which those rates apply with regard to individuals, resulting in tax savings slightly more than Rs 50,000 for people over the Rs 8-lakh slab. When the Centre introduced the draft Direct Taxes Code (DTC) in August last year, after the initial euphoria of a supposedly simple law died down, there was grave concern on many of the draconian provisions that had been introduced ranging from treaty override to a gross assets tax. Having been hardened by this experience, Budget 2010 is a piece of cake as far as the corporate tax proposals go. However, I believe that this is really a lull before the storm, since the finance minister has clearly stated that the DTC will be introduced with effect from April 1, 2011 and therefore, this Budget may have passed off peacefully only because there would be no merit in making major changes to a law that will die in a year?s time.
While there were encouraging words on the Centre?s commitment to ensuring growth of SEZs, what tempers this is the absence of any announcement on the Centre?s overall policy on tax holidays for SEZ units, and whether these incentives will continue under the DTC still remains a question. Likewise, nothing was said on whether tax holidays for STP units will be extended, as against expectations. Some cheer for the hotel industry?hotels (2 star and above) set up anywhere in India that commence operations after April 1, 2010 will now enjoy an investment linked deduction. Hotels will be allowed to claim a 100% deduction of all their capital investments (other than on land and goodwill) in the year in which the investment is made.
Continuing the boost for R&D initiatives, the weighted deduction for expenses on in-house R&D has been increased to 200% from the present 150%.
Although the surcharge for companies has been reduced to 7.5% from the existing 10%, the dampener for corporate India is the increase in the rate of Minimum Alternate Tax from 15% to 18%. To my mind, there is no economic justification to increase the rate of MAT, particularly, with the uncertainly surrounding the ability of companies to carry forward MAT credits under the DTC.
Transfer of shares of an unlisted company to a partnership firm or to a company for inadequate or no consideration would create a tax liability for the buyer on the difference between the fair value of the shares and the actual consideration. This would also apply in specific situations where seller is otherwise exempt from capital gains tax. This would specifically hamper internal reorganisations between family members and also create several absurdities, such as in case of a transfer between a holding company and its wholly owned subsidiary. It has been provided that conversion of a company to a LLP will not be liable to capital gains. .
While industry always has a long list of expectations and most of them would be disappointed on that measure, since the new tax code is round the corner, the Centre may want to consider these when it rolls out the new code. With the substantial tax savings given to individual tax payers, the Centre seems to have balanced populism with pragmatism.
The writer is partner, direct tax, BMR Advisors. Sharath Rao also contributed to the article. The views are personal.