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New Tax Proposals in India Budget 2010
Expectations leading up to the presentation of the annual Budget of the Government of India for 2010-11 were relatively modest. The Government was expected to bring down the fiscal deficit from the projected 6.5 percent for the current year to 5.5 percent and set out targets for further reductions in the years ahead. Industry was braced for a roll-back of the tax reductions introduced as part of earlier stimulus packages, but was hoping that the retracing would be partial rather than total. It was also expected that the focus on the Government's flagship programs for securing more inclusive growth would continue. There was some anxiety that fiscal discipline may not be adequately restored or that it may be achieved through an increase in overall taxation rather than through efforts at improved expenditure management and better targeted subsidies.
Fortunately, the Budget proceeded along expected lines - expectations have been met for the large part while the anxieties proved to be unfounded. As a result, the overwhelming sense immediately following the Finance Minister's presentation of the Budget proposals was one of relief. By emphasising the Government's commitment to steer the economy back onto a higher growth path, the Budget 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. So overall, the Budget provides a sense of relief intermingled with a sense of optimism.
Taxand India explores the main tax changes presented in the budget.
The key tax proposals presented in the Budget are as follows:
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.
No change in the tax rate applicable to foreign companies; effective tax rate to continue at 42.23 percent.
Minimum Alternate Tax ('MAT')
No change in basis for levy of MAT as proposed under the Code.
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 that have a Permanent Establishment in India.
Withholding tax regime remains largely unchanged.
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.
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.
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 utilised in India regardless of whether or not:
- the non-resident has a residence or a place of business or business connection in India; or
- the services are performed in India.
This amendment does not however, change the position under the Tax Treaties that India has entered into.
This provision has been taken from the Code and proposed to be brought into effect retrospectively from 1 June 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.
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.
MAT credit, if any, of the converted company will be lost.
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.
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 reorganise ownership structure within the group, in a tax neutral manner.
Other budget proposals
Increase in weighted deduction for research and development activities and for payments to notified organisations undertaking research and development activities.
Investment linked deduction for new hotels (2-star category and above) set up anywhere in India.
Median rate of basic customs duty unchanged.
Exemption granted from additional duty of customs on pre-packaged goods intended for retail sale, apparels and accessories, cellular handsets, and watches.
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.
Rate of basic customs duty on key petroleum products like motor spirit, high speed diesel, etc increased by 5 percent.
Rate of specific customs duty on import of precious metals like gold, silver and platinum increased by 50 percent.
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.
Duty exempted on the value of "transfer of right to use" of packaged and canned software.
Project import benefit at 5 percent basic customs duty extended to mono rail projects, food grain handling systems, cold storages etc.
Conditions on use of duty free import of capital goods for road construction relaxed.
Service tax rate retained at 10 percent.
Significant change in conditions relating to export qualification; no requirement to demonstrate use of services outside India.
Scope of taxability of oil-field related services expanded when performed in continental shelf and exclusive economic zone.
Median rate of excise duty enhanced from 8 to 10 percent.
Rate of excise duty on motor spirit (petrol) and HSD (diesel) increased by Re 1 per litre.
Transfer of right to use packaged or canned software exempted from excise duty in all cases.
Technical inconsistencies in provisions related to refund of unutilised credit for exporters of goods and services (under Rule 5) removed; procedures also simplified.
Clean energy cess suggested at INR 50 per tonne on coal, lignite and peat.
Exemption of excise duty on supply of goods to mega power projects subject to specified conditions.
While there are not too many changes in the direct taxes, it seems to be in anticipation of the introduction of the Direct Tax 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. The impending Direct Tax Code and the changes now proposed in the Budget makes it important for the taxpayers to revisit their tax strategies, withholding tax positions and plan their business structures appropriately.
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 the introduction of GST from 1 April 2011.
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