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BUDGET 2009: NEW TAX REGIME

Team YS
17th Jul 2009
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“Collect revenue as it becomes due just as one plucks fruits from a garden as they ripen". Kautilya, the author of Arthashastra.



After the remarkable electoral triumph of the Congress, the much speculated budget has been announced by the Finance Minister. While the western countries like the US A have responded to the economic downturn by raising taxes, India seems to have chosen a different path to fight this menace. Kudos to Mr Pranab Mukherji for resisting the temptation to increase tax rates, despite the shortfall in advance tax collections and ever increasing fiscal deficit.


 No changes have been made in the Corporate Tax rates. The Finance minister sought to reduce the burden on industry by abolishing the Commodities transaction tax(CTT),which was introduced in 2008. Fringe Benefit Tax(FBT) provided by employers to their employees is to be abolished which would surely reduce compliance costs of the company. However , Minimum Alternate Tax (MAT) has been hiked to 15 per cent of book profits from 10 per cent. The period allowed to carry forward the tax credit under MAT is to be extended from seven years to ten years. Often, it is very important for a company to have immediate cash flows especially in a downturn. Even if there was some justification for introducing MAT, increasing the rate at this time will surely have a deleterious effect.

 

Exemption limit in personal income tax has been raised by Rs.15,000 from Rs.2.25 lakh to Rs.2.40 lakh for senior citizens; by Rs.10,000 from Rs.1.80 lakh to Rs.1.90 lakh for women tax payers; and by Rs.10,000 from Rs.1.50 lakh to Rs.1.60 lakh for all the other categories of individual taxpayers. Deduction under section 80-DD in respect of maintenance, including medical treatment, of a dependent who is a person with severe disability has been raised from the present limit of Rs.75,000 to Rs.1 lakh. The benefit of deduction in respect of contribution to the New Pension System (NPS) has been extended to all individuals, including self employed persons. Receipts/ withdrawals from NPS utilised for purchase of annuity plan would not be taxable .Also the Surcharge on various direct taxes is to be phased out. Eliminating the surcharge of 10 percent on personal income-tax will increase the disposable income in the hands of individuals and boost the consumer-spend which in turn will inject more cash into the economy.

 

The proposals have also been sought to rectify the discrepancies, adversely affecting units in special economic zones , by securing them the benefit of full tax exemption in respect of export profits. The tax holiday for software technology park units has been extended for another year. These proposals should bring relief to the technology sector. Scope of provisions relating to weighted deduction of 150% on expenditure incurred on in-house Research and Development (R&D) to all manufacturing businesses has been extended except for a small negative list. The Government has put a huge focus on R&D and it is good to see the continuity of fiscal stimuli on it. Businesses are to be incentivized by providing investment linked tax exemptions rather than profit linked exemptions. Investment linked tax incentives are to be provided.


India has introduced the Limited Liability Partnership (LLP) in 2009. Most countries around the world treat LLPs as tax transparent entities with the profits taxed directly in the hands of the partners. The budget however, proposes LLPs to be taxed in the same manner as general partnerships. LLPs will be regarded as separate taxable entities with profits not being taxable in the hands of individual partners. As a result, losses may not be passed on to the partners for the purpose of set off or carry forward. The conversion of general partnership to LLP to have no tax implications if rights and obligations remain same and there is no transfer of any asset or liability. 


In the field of service tax four new areas have been included. Service Tax to be imposed on Service provided in relation to transport of goods by rail; Service provided in relation to transport of coastal cargo and goods through inland water including National Waterways; advice, consultancy or technical assistance provided in the field of law (this tax would not be applicable in case the service provider or service receiver is an individual) and cosmetic and plastic surgery service. This will surely boost the revenue generation scope from service tax.


After much debate and deliberation, the budget has formally announced the introduction of a goods and services tax (GST)at both, federal and state levels from April 1, 2010 to replace the existing excise, service and sales / value added taxes. An agreement has been reached on the basic structure of GST in keeping with the principles of fiscal federalism enshrined in the Constitution. Broad contour of the GST Model envisages dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively.


Lately, foreign companies have been subjected to coercive tax collection methods adopted by the Indian tax authorities. Recognising this fact, the budget proposes to constitute an alternate dispute resolution panel to review the orders of the assessing officer prejudicial to taxpayers, before they are finalised. This is a unique attempt towards providing an efficient dispute redressal mechanism at an early stage and also will boost the confidence amongst the business communities.

 

To conclude, it is a conservative but intelligent budget. The budget on the whole seems to meet reasonable expectations. The budget put forth by the government is positive and focuses on an inclusive development.Though, much needed provisions dealing with taxation like Indian depository receipts and taxation of cross-border Merger and Acquisitions (M&A) , have not been incorporated, it is hoped that they will be addressed in the new Direct Taxes Code. Also a meagre raise of income tax slabs has received a lukewarm response from the middle class professionals. But we have to appreciate the fact that in the midst of the economic slowdown, it is not easy to boost revenues. Keeping in mind the wellbeing of Aam Aadmi the option of raising or levying new taxes was virtually out of question. The only option left was to focus on better compliance by adhering to a tax payer friendly administration. The Finance Minister seems to endeavor towards achieving the same by focusing on better tax administration and simplifying the provisions relating to tax deduction at source.


Syed Burhanur Rahman, Attorney, New Delhi. E mail-syedburhanurrahman26@gmail.com


Syed Burhanur Rahman is an alumnus of St. Stephen’s College and Campus Law Center, Delhi University. A Quiz aficionado, he has featured in premier T.V Quiz shows including Mastermind India(BBC),University Challenge Quiz(BBC) and Nat Geo Genius Quiz (National Geographic Channel). 

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