• Budget 2011

How will Budget 2011 impact key sectors of the Indian economy?

Retail Sector
* Intent to liberalize FDI, but no specific reference to the retail sector
* Excise duty on prepared foodstuff like sugar confectionary, pastry and cakes to be increased from 4% to 5%
* Optional payment of excise duty on branded readymade garments to give in to a mandatory levy – 10% rate to apply on 60% of MRP
* Excise duty introduced at 5% on specified computer parts, branded jewellery and articles of precious metals
* Sugar and textile items omitted from Additional Duties of Excise (Goods of Special Importance) Act, 1957 – States can now levy VAT on these items
* Service tax to apply on the serving of foods and beverages by air-conditioned restaurants having license to serve alcohol

Oil & Gas Sector
* Tax holiday on E&P activities discontinued for blocks awarded under NELP IX; investment linked incentive provided under proposed DTC
* Increase in MAT rate will marginally impact the E&P companies who are availing tax holiday
* Reduction in tax rate on dividends from foreign subsidiaries may be used by companies having investments in oil blocks outside India for repatriating cash back to India
* No rationalization of duty structure of petroleum products in order to control the rising product prices

Education Sector
* Recognizing the importance of education in the growth of the country, the budgetary allocation for education sector will be increased by 24% to Rs 520 billion.  Further the allocation to the Sarva Shiksha Abhiyan will be increased by 40% to Rs 210 billion
* With a view to increase co-operation amongst educational institutions, the government will connect 1,500 institutions of Higher Learning and Research through optical fibre under the National Knowledge Network  by March 2012
* To promote creativity and innovation, the government has set-up a National Innovation Council under Sam Pitroda to prepare a roadmap for innovations in India
* Taxation of education institutions including trusts and societies remain unchanged from last year
* Under the current provisions, unrecognized courses offered by institutions having recognized courses as part of the service offerings were not subject to service tax.  As part of the proposed amendment, all unrecognized courses, whether imparted by recognized or unrecognized institutions will be subject to service tax.

Media & Entertainment
* In line with the representations made by the Film industry, the
additional duty of customs (equivalent to the excise duty) has been fully exempted in cases of color unexposed cinematographic film
in jumbo rolls of 400 feet and 1000 feet.
* Service tax on temporary use or benefit of copyright continues to exist in spite of numerous representations made to the Central Government.
* The concessional basic customs duty of 5 per cent and CVD of 5 per cent, presently applicable to high-speed printing presses imported by newspaper establishments is being extended to mailroom equipment
* The proposed levy of MAT of 18.5% on book profits of units in SEZs has come as a blow to the M&E companies operating animation, visual effects and digitization units in SEZs.
* It is now proposed to bring transactions entered into with unrelated persons located in notified jurisdictions within the ambit of transfer pricing.  M&E companies who have dealings with IPR companies situated in such notified jurisdictions outside India, will have to reexamine their operating arrangement to ensure compliance with the Indian transfer pricing regulations.

Real Estate
* Extension of 1% interest subvention on housing loans of Rs 15 lakh (where the cost of house does not exceed Rs 25 lakh). Further, it is proposed to increase the limit of housing loan in urban area from erstwhile INR 20 lakh to INR 25 lakh, under priority sector lending
* Minimum Alternate Tax (MAT) rate to be increased from 18% to 18.5%. MAT to be made applicable to developer of Special Economic Zone (SEZ) as well as the units located in the SEZ. Currently, SEZ developers and units are exempt from levy of MAT
* Dividend distributed by SEZ developer on or after 1 June 2011 to be subject to Dividend Distribution Tax (DDT). Such dividend will continue to be exempt from tax in the hands of recipient shareholders
* Investment-linked deduction proposed to be extended to developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government and notified by the Central Board of Direct Taxes
* Input Service definition specifically excludes construction of building, part thereof except where the service provider is providing such services. This could significantly impact the tax cost of real estate developers developing commercial property for the purpose of renting purposes as they may not be able to  avail Cenvat credit of the Service tax charged from them in respect of the construction of the complex

Banking
* Final RBI guidelines for granting banking licences to private sector players expected before the close of this financial year
* Capitalization of public sector banks by Rs 6,000 crore and regional rural banks by Rs 500 crore, to maintain prescribed Tier I capital ratio
* Establishment of Central Electronic Registry under the SARFAESI Act, 2002 to mitigate frauds in loan cases
* Banking companies to pay the government an amount equal to 50% of Cenvat credit availed, as a major component of income being from interest is out of the tax net

Technology Sector
* Curtains down on income-tax benefits for software units under the Software Technology Park of India [‘STPI’] Scheme, with no further extension of income-tax holiday benefits proposed in the Budget.  STPI units to be subject  to a 32.5% corporate tax on profits from April 1, 2011;
* Marginal increase in the rate of Minimum Alternate Tax [‘MAT’] to 20%, and increase in its scope to cover units and developers of Special Economic Zones [‘SEZ’] is a setback to the industry which is keenly looking at opportunities for expansion into SEZs;
* Indian MNCs to get a onetime reduction in tax on dividends repatriated from foreign subsidiaries from the current rate of 30% to 15% (plus surcharge and cess).  The tax is levied on a gross basis, with no deduction available on expenses incurred on earning income;
* Point of Taxation Rules introduced to determine the trigger of service tax, which will now be based on provision of service, date of billing or receipt of payment, whichever is earlier;
* The taxation of packaged software has been partially clarified, by providing for an exemption from excise and customs duty on value of licenses, for packaged software without MRP.

Healthcare Industry
* On the direct tax front, weighted deductions for payments inter-alia made to National Laboratory or a university or a specified person for the purpose of approved scientific research program increased from 175% to 200%
* On the indirect tax side, diagnostic and testing services (other than in a government hospital) would be liable to service tax, with an effective rate of 5%.
* There are also some concessions for endovascular stents and some life savings drugs on the customs side and some reduction in excise duty rates of sanitary napkins and diapers.  Also there is a levy of 1% excise duty on vaccines, intravenous fluids and Medicaments (including those used in Ayurvedic, Unani, Siddha, Homeopathic or Bio-chemic systems), where there is no cenvat credit being availed.

Textile
* Reduction in basic customs duty on raw silk ( not thrown) from 30% to 5%.
* Reduction in basic customs duty in nylon chips, fiber and yarn from 10% to 7.5%.
* Increase in central excise duty on textile goods and intermediaries from 4% to 5%.
* Optional levy of excise duty scheme for branded ready-made garments and textile article is being withdrawn.  Now, the branded garments would be subject to excise duty at the rate of 10% on 60% of retail sale price.
* Textile items are being removed from Additional Duties of Excise (Goods of Special importance) Act, 1957, thus empowering the States to levy VAT.
©Entrepreneur March 2011

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analysis, banking, Budget 2011, education, entertainment, HEALTHCARE, media, oil & gas, real estate, retail, sectors, Technology, textile