• Budget 2011

The Indian economy has emerged with remarkable rapidity from slow down caused by the global financial crisis from 2007-2009.  With growth in 2010-11 now estimated at 8.6%, the turnaround has been fast and strong and has shown the signs of strong resilience.  While some clouds linger such as continued high inflation and a temporary slowdown in the industrial growth the dynamism in the overall growth is evident.

In light of the above background the Finance Minister presented the Union Budget 2011-12 and as usual there were high expectations of a ‘Dream Budget’ and the taxpayers expected a road map on the long pending tax reforms including enactment of Direct Tax Code (‘DTC’) and  Goods and Services Tax (‘GST’).

On the direct taxes front, reiterating his promise to enact and implement the DTC effective from April 1, 2012, the Finance Minister mentioned that he has limited his proposals to initiatives that require urgent attention.

On the indirect taxes front, the Finance Minister has proposed to introduce the Constitutional Amendment Bill for GST in current session of Parliament.  The Finance Minister expressed that the reform would result in moderation of rates, simplification of laws and better compliance.

The need of the hour to tackle the high food inflation and to make rapid stride in the infrastructure development to maintain growth rate was clearly evident in the Budget 2011.  With the Government’s obsession to make amendments to tax law in every budget and with the changing short term priorities in a volatile globalized economy, it is imperative to understand the budget proposals and capitalize on it before a new amendment crops up in the next budget.

Following are the key tax benefits of Budget 2011.

Agriculture
While announcing several initiatives for agriculture development, the Budget also proposed to boost fertilizer production, by providing investment linked deduction in the form of 100% deduction of capital expenditure (other than land, goodwill and financial instruments) for businesses engaged in production of fertilizers.

* Reduction in Basic Customs duty (‘BCD’) on specified agriculture machinery to 2.5% from 5% and on spares of the machinery to 2.5% from 7.5%.

* Reduction of BCD on micro irrigation equipment is reduced to 5% from 7.5%.

* Exemption from payment of BCD on import of De-oiled rice bran oil cake.  However, levy of export duty on export of De-oiled rice bran oil cake @ 10% introduced.

* The scope of full Customs duty exemption to water supply projects for Agriculture and Industrial use was expanded to the water pumping station and water reservoir of such projects.

* Cold storage equipment and the conveyor belt systems used in cold storage exempted from excise duty.

Infrastructure
On the infrastructure front, considering much needed long term fund requirement of the sector, the Budget proposed the following incentives for promoting investment in the sector.

* Extension of terminal date for 10 year tax holiday to power sector to March 31, 2012 from March 31, 2011.  The extension would provide tax relief to upcoming power generation, distribution and transmission units.

* Extension of investment linked incentives to businesses engaged in developing and building affordable housing projects under scheme to be framed by the Government and notified by CBDT; This would help in bridging the gap for affordable housing.

* Reduced withholding rate of 5% on interest payments to foreign investors on notified infrastructure debt funds (to be formed as special purpose vehicles).  The income of such dedicated infrastructure debt fund would also be exempt from tax.

* Extension of deduction for investment in long term infrastructure fund up to Rs 20,000 for FY 2011-12

* Concessional rate of 5% BCD and 5% Counter Veiling Duty (‘CVD’) and “Nil” Special Additional Duty (‘SAD’) to parts and components for manufacture of specified high voltage transmission equipment;

* Exemption from payment of Service Tax under the category of Works Contract Service provided within a port or Airport;

* Excise duty rate on Cement rationalized;

* Complete Excise duty is exempted for supplies made to Mega / Ultra Mega power projects under specified conditions;

* Service tax is being exempted / refunded on the services received by SEZ developer.

The above measures should result in savings and increased investment in the sector.

Research
Reiterating the importance of research & development, the Budget increased the weighted deduction on payments to National Laboratories/University/IIT for approved scientific research programme to 200% from 175%.

Manufacturing Sector
With the objective of increasing share of manufacturing sector in GDP to 25% in ten years, the Government has announced slew of measures for promoting investment. Also, the Budget announced framework of a manufacturing policy to bring down the compliance burden on the industry through self-regulation and to make Indian industry globally competitive.  The tax proposal include:

* Reduction of BCD on raw silk to 5% from 30%;

* Exemption of BCD on PC – Mobile connectivity equipment;

* Concessional CVD @ 5% and exemption from SAD on LED used for manufacture of LED lights;

* Exemption from BCD and SAD and concessional 5% CVD on import of parts of hybrid vehicles;

* Reduction in BCD to 2.5% from 5% on import of Waste paper;

* Export obligation under EPCG scheme to be also eligible for benefits under Export incentive scheme under Chapter 3 of Foreign Trade Policy.

With the objective of rationalizing the transition to GST, excise duty has been levied @ 1% on specified goods (130 goods);

Service Industry
The Services sector, which contributes nearly 55% of GDP, has not contributed its worth for tax revenues.  Therefore Government has introduced new category of services and expanded the existing services to broaden the base of tax net and provide measures for incentives. The following are the important changes in the Budget have an impact on services sector:

* Rationalization of definition of ‘Input’ and ‘Input Services’ in Cenvat Credit Rules 2004;

* Exemption for organizer of Business Exhibitions for Business Exhibitions held outside India;

* Services wholly consumed within SEZ are exempted from payment of Service Tax and such consumption is to be reckoned with Export of Services Rules 2005;

* Provision on availment of Cenvat credit on payment made under import of Services;

* CVD exemption on import of canned/ packaged software when the importer is registered under Service Tax Rules;

* Shift of Service Tax liability from receipt basis to provision of services basis.  Thus aligning the same with Excise Law.

* Service tax has been introduced on i) Liquor serving in Air Conditioned restaurants, ii) Temporary accommodation provided by Hotels ;

* Expansion of scope of services like i) Life Insurance Services, ii) Health Services, iii) Legal services, etc.

Other Proposals
The move to provide incentive to domestic entities to repatriate money from its overseas subsidiaries by offering a lower effective tax rate @ 16.22% for FY 2011-12 is well intended and a welcome measure since, the foreign dividends being taxed at the full rate of 30% (plus surcharge and education cess) was a disincentive for companies to repatriate profits, on which tax would have been already paid by the subsidiary in overseas jurisdiction.

While the companies would welcome the reduced effective corporate tax rate due to reduction in surcharge from 7.5% to 5%, the extension of Minimum Alternate Tax to SEZ developers and units is a cause of concern.

Personal Taxation
From a personal taxation perspective, the Budget proposes the following benefits:

* Increase in basic exemption limit to Rs 1.8 lakh from Rs 1.6 lakh for men.

* Reducing the qualifying age for senior citizens to 60 years from the current 65 years and further enhancing the exemption limit to Rs 2.5 lakh.

* Creating a new category ‘Very Senior Citizens’, 80 years or above, with enhanced exemption limit of Rs 5 lakh.

The above proposals are expected to increase the disposal income and thereby provide some relief against inflation.

Further extension of deduction for investment in long term infrastructure bonds up to Rs 20,000 extended for FY 2011-12 and allowance of deduction over and above the Rs 1 lakh deduction limit for specified investments on the Employer’s contribution to Employee New Pension System (‘NPS’) would help promote savings.

The Budget also proposes to extend the due date of filing of return of income extended to November 30 for corporates subject to transfer pricing regulations, so as to provide adequate time to comply with the contemporaneous data requirements to justify the arm’s length nature of the international transaction of the taxpayer with its overseas related parties. The Budget also announces steps for effective tax administration by improving IT infrastructure.

With the economy back on the growth trajectory and increase in tax collections, there were expectations on tax reforms particularly additional steps to mitigate tax litigations and ensure certainty for taxpayers and foreign investors.  The Finance Minister has made an attempt to address these issues albeit in small and conservative steps. One can expect more activity in the tax reforms in the coming months in view of the Government’s intention to implement the DTC and Goods and Services Tax (GST). Overall, the Government appears to have adopted a balanced approach while framing the Budget proposals and to keep the India story going.

SHANKAR BALA is Executive Director, Ernst & Young.

©Entrepreneur March 2011

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Budget 2011, Ernst & Young, Finance Minister, Pranab Mukherjee, Shankar Bala