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What does 2010’s budget hold for the main growth sectors of the Indian economy? We analyze.

Auto Sector

• The standard rate of excise duty on all non-petroleum vehicles increased from 8 percent to 10 percent. On large cars, Multi Utility Vehicles and Sports Utility Vehicles, the rate of excise duty increased from 20 percent to 22 percent.
• Electrical vehicles, including cars, two-wheelers and three-wheelers (like the Soleckshaw), which were earlier exempted from the excise duty, are now liable for excise duty at the rate of 4 percent. The possibility of claiming input credit is to be examined.
• Customs duty on petrol and diesel increased from 2.5 percent to 7.5 percent to increase the cost of running vehicles; this could impact demand.
• The MAT increased from 15 percent to 18 percent to increase tax costs; this would lead to marginal relief on account of reduction of surcharge from 10 percent to 7.5 percent for domestic companies on demand.
• Weighted deduction for in-house R&D increased from 150 percent to 200 percent of the expenditure to encourage R&D impact.
• Allocation to the defense and infrastructure sector, including roads and highways are likely to indirectly benefit the sector.

Infrastructure and Power Sector

1. Direct tax proposals

• An amendment in the condition for investment-linked deduction under section 35AD of the Act to the petroleum product pipeline network: the specified proportion of the total pipeline capacity is to be made available for use on common carrier basis by any person other than the assessee or an associated person. It is to be increased from ‘one-third’ to ‘one fourth’. The amendment is effective retrospectively from April 1, 2010 (AY 2010-11).
• For the natural gas pipeline network, the condition remains unchanged (i.e. not less than ‘one-third’ of its total pipeline capacity should be available for use on common carrier basis).
• An additional deduction of Rs. 20,000 on investment in infrastructure bonds, leading to mobilization of individual savings for infrastructure development.
• The MAT increase will have a negative impact on infra companies.

2. Indirect tax proposals

• Monorail projects for urban transport granted a status of ‘Project Imports’ under the customs.
• Resale of the specified machinery imported for road construction projects without payment of duty permitted on payment of import duty at depreciated value.
• Exemption from customs duty granted to tunnel-boring machines for hydro-electric power projects and ground source heat pumps (for geo-thermal energy applications).
• A concessional rate of BCD at 5 percent and exemption from CVD provided to specified machinery items required for initial setting up of solar power generation projects
• Excise exemption to goods supplied against International Competitive Bidding now extended to goods supplied to mega power projects, including projects awarded through tariff-based competitive bidding, from which power supply has been tied up through tariff-based competitive bidding.
• Excise duty exemption provided to additional specified raw materials for the manufacture of rotor blades for wind-operated electricity generators.

3. Other key proposals

• Changes in the definition of ‘infrastructure’ under the ECB policy are being made to cover specified activities relating to the food processing sector
• Government ensuring for continued growth of SEZs for promoting exports
• Rs. 1,73,552 crore provided for infrastructure development
• Road transport allocation raised by 13 percent, i.e. to Rs. 19,894 crore
  Rs. 66,100 crore allotted for rural infra development
• Allocation for urban development at Rs. 3,500 crore
  Increased allocation for railway by Rs. 950 crore, which is in total Rs. 16,752 crore
• A Coal Development Regulatory Authority to be set up
• Mega power plant policy modified to lower cost of generation; allocation to power sector more than doubled to Rs. 5,130 crore
• Clean Energy Fund to be created for research in new energy sources
• Target of 20,000 MW of solar power by the year 2022 has been set under the mission
• Government proposes to increase the plan outlay for the Ministry of New and Renewable Energy by 61 percent to Rs. 1,000 crore

Information Technology Sector

• Proposed increase in MAT rate from the existing 15 percent to 18 percent could result in increased tax cash outflow for STP companies paying tax under the MAT regime. Proposed reduction in surcharge to 7.5 percent from existing 10 percent will bring marginal relief.
• The Budget 2009 had corrected the formula anomaly in the computation of deduction for units in SEZ w.e.f. April 2010. This had created a lot of controversy in previous years. This controversy is proposed to be favorably resolved by making the correction retrospective.
• Non-extension of STPI and EOU deduction beyond March 31, 2011, is in sync with the proposed introduction of the Direct Tax Code from April 2011 onwards.
• Finance Minister’s speech restates the Government’s commitment to ensuring continued growth of SEZs to attract investments and boost exports and employment.
• Conditional exemption from excise duty and additional duty of customs on the consideration for transfer of rights to use packaged or canned software for commercial exploitation now amended to remove the condition of commercial exploitation.
• Presently, the scope of ‘Information Technology Software Service’ is limited to cases where the said service is used ‘in the course, or furtherance, of business or commerce’. The scope of the said service is now being expanded to cover all cases, irrespective of its use in furtherance of business or commerce.
• Exemption from service tax on the service of providing packaged or canned software, provided either excise or customs duty has been paid on the same.
• Process of getting the refund of accumulated CENVAT credit to exporters of service made easy by amending the definition of export of services and procedures.

Real Estate Sector

• Relaxation in the conditions of Section 80IB(10) proposed. Housing projects approved on or after April 1, 2005, should be completed within a period of 5 years from the end of the financial year in which the project is approved, as against the earlier period of 4 years. The commercial area can be 5,000 sq. ft. or 3 percent of the built-up area, whichever is higher. Applicable from financial year ended March 31, 2010.
• Transactions involving the sale of immovable property, being a capital asset for the acquirer, will be taxed in the hands of the acquirer only if the property is received without consideration. This is a positive in cases where the property was transferred for less than the stamp duty value due to distressed market conditions, since it is applicable with retrospective effect from October 1, 2009.
• The supply of under-construction properties where payments are made before the grant of the completion certificate are deemed to be taxable services from a service tax perspective.
• Certain additional services provided by a builder to the prospective buyer, such as providing preferential location or external/internal development of complexes for extra charges are proposed to be liable for service tax. Services in relation to providing vehicle parking are kept outside the purview of the service tax.
• A retrospective amendment has been proposed w.e.f. June 1, 2007, to provide the renting of immovable property liable to service tax, thereby overruling the Delhi High Court judgment in the case of Home Solution Retail India Ltd.
• Service tax proposed to be levied on rent of vacant land to be used for undertaking construction of buildings or structures on such land for furtherance of business or commerce during the tenure of the lease.

©Entrepreneur February 2010

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analysis, auto, Budget, Budget 2010, information technology, infrastructure, power, real estate, sector