The Finance Minister (FM) has presented the first full year India budget since the global financial meltdown. Amongst other things, he was burdened with a bulging fiscal deficit of 6.2%, an ever increasing revenue deficit of 4.6%, decelerated growth of 6.1% (8.8% in the previous year) and the index for industrial production pointing towards a sharp slowdown with growth being placed at a dismal 2.4%.
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The economic survey pumped up already high expectations making some recommendations which appeared to be path breaking. It’s wish list included public sector divestment of Rs. 25,000 crores (approx US$ 5B) per year, introduction of new income-tax code, rationalization of Dividend Distribution Tax, phasing out of Securities Transaction Tax, surcharge and cess on income tax, increase in foreign direct investment (FDI) limits for insurance companies and phased increase in FDI limits in banks. The survey clearly acknowledged that the speed with which the Indian economy would return to the high growth path in the short term depended upon how the Government pushed certain critical policy reforms in the coming months. The budget provided a great platform to make those announcements.
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However, the FM has apparently chosen to defer all but a few of the big ticket announcements.. Some of the announcements that were made were:-
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-The Central and State Governments would work to remove policy, regulatory and institutional bottlenecks which will help speedy implementation of infrastructure projects. It is proposed that the India Infrastructure Finance Company Limited (IIFCL) would, in consultation with banks, evolve a takeout financing scheme which would facilitate incremental lending to the infrastructure sector. Institutions/banks financing the infrastructure projects will have an arrangement with IIFCL for transferring their outstanding loans in respect of Infrastructure projects in their books on a pre-determined basis. This would also effectively address the asset-liability mismatch of commercial banks arising out of financing infrastructure projects and also to free up capital for financing new projects.
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-The FM has encouraged people to participate in the disinvestment programme. Indirectly, he has hinted that disinvestment in the Public Sector Undertakings (PSUs) would follow shortly. It is anticipated that the Government is open to disinvestment up to 49% in PSUs. It also appears that divestment in public sector banks and insurance companies is unlikely in the short term and Government will continue support their growth and competitiveness and this may vey well include capital infusion if so required.
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-Public Limited Companies may no longer be able to remain listed without adequate retail participation. The threshold for non-promoter public shareholding for all listed companies, which is currently averages less than 15%, is likely to be raised in a phased manner.
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-The big ticket items on the tax front are the removal of Fringe Benefit Tax on the value of fringe benefits provided by employers to their employees and the abolishment of Commodity Transaction Tax levied on taxable commodities transactions entered in a recognized stock exchange. With a view to bring structural changes in direct taxes, the long awaited new Direct Taxes Code is proposed to be released within 45 days. Goods and Service Tax will also be introduced by 1 April, 2010.
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-While there are no changes proposed in the Corporate tax rates, the tax rate on companies paying Minimum Alternate Tax (MAT) is proposed to be raised to 15% of book profits. The period allowed to carry forward the MAT tax credit has been increased from seven years to ten years.
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-A welcome relief for individuals is the removal of surcharge on direct taxes. However, the surcharge on corporate income tax continues. The threshold for levy of wealth tax is also increased from Rs. 15 Lakhs to Rs. 30 Lakhs. This, coupled with a minor increase in personal income tax exemption limits, should leave additional disposal income in the hands of individuals.
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-Zero Coupon Bonds issued by an infrastructure capital company and infrastructure capital fund or public sector company are considered to be long term capital assets if held for a period for more than 12 months. Gains on the sale of such bonds are subject to a lower tax rate (10% or 20% as the case may be). It is proposed that bonds issued by Scheduled banks including nationalized banks will also be eligible for the same treatment. It is anticipated that, in view of the preferential tax treatment, these banks will be able to issue such bonds to source long term funds.
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-It is proposed to exempt the income of the National Pension Scheme (NPS) Trust from income tax. Companies which pay dividend to this trust would also not be required to pay Dividend Distribution Tax on such dividend payment. Similarly, all purchase and sale of equity shares and derivatives by the NPS Trust will be exempt from the Securities Transaction Tax. Self employed persons would be able to participate in the NPS and avail of the tax benefits.
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In order to further improve the investment climate in the country and facilitate the resolution of tax disputes faced by foreign companies within a reasonable time frame, it is proposed to create an alternative dispute resolution mechanism within the Income tax department for resolution of transfer pricing disputes and disputes involving foreign companies. To reduce the impact of judgmental errors in determining the transfer price in international transactions, it is proposed to empower the Central Board of Direct Taxes to formulate safe harbor rules. Under the mechanism, the tax officer would issue a draft order of assessment in respect of any variation in taxable income. The tax payer would have a time limit of 30 days to raise any objection with the dispute resolution panel and the tax officer. The dispute resolution panel would issue appropriate directions for resolving the dispute within a period 9 months.
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The FM appears to have done his best under the prevailing circumstances. There are no major negatives. Of course, expectations remain unfulfilled. But this is not the last word from the FM. We should expect more announcements in the near future.
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- By Punit Shah, Executive Director and Suresh Swamy, Associate Director, Financial Services – Tax and Regulatory Services, PricewaterhouseCoopers Pvt. Ltd.
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