India's Tax Rate Dilemma

by Lorys Charalambous, Tax-News.com, Cyprus

01 March 2006

India's corporate and personal income tax rates remain unchanged after Finance Minister Palaniappan Chidambaram announced the Indian government's budget for 2006/7 on Tuesday, although analysts have questioned how the government intends to pay for a number of ambitious infrastructure projects without raising extra revenues from income tax.

In a budget that was largely focused on the UPA government's continued "assault on poverty," Chidambarman announced billions of dollars worth of infrastructure projects designed to improve the quality of life of India's rural poor.

The finance minister also announced billions in extra spending on the transport infrastructure, particularly a network of new highways connecting India's major cities, and US$2 billion in extra spending on defence.

With India's booming economy - an ambitious growth target of 10% has been set for this year - providing extra tax revenues, and with the budget deficit set to fall to 3.8% of GDP next year from 4.1% this year Chidambarman claimed that there will be no need to change rates of personal income tax or corporate income tax in the year ahead, nor will any new taxes be imposed.

However, while the budget has been generally well received, some analysts are unsure that Chidambaram can fulfil his ambitious spending projects without raising taxation.

"The budgetary proposals on infrastructure and social sectors sound good, but one concern is how will the government find resources for funding these projects", Gurunath Mudlapur, managing director at the Atherstone Institute of Research in Mumbai, was quoted as saying in an online report by BBC News.

"There could be fresh taxes to mobilise resources and that could be a concern," he added.

Other noteworthy proposals contained in the budget included:

• the 'one-by-six scheme' obliging certain categories of persons to file income tax returns has also been abolished.
• marginal revision in certain tax rates in the quest for equity: Minimum Alternate Tax (MAT) rate has been increased from 7.5 per cent of book profits to 10 per cent
• Section 80IA of the Income Tax Act applying to infrastructure facilities: the terminal date for developing an industrial park extended from March 31, 2006 to March 31, 2009; for the power sector, the date extended to March 31, 2010.
• investments in fixed deposits in scheduled banks for a term of not less than five years included in section 80C of the Income Tax Act: limit of Rs.10,000 in respect of contribution to certain pension funds removed in section 80CCC subject to overall ceiling of Rs.100,000.
• definition of open-ended equity-oriented schemes of mutual funds in the Income Tax Act aligned with the definition adopted by SEBI: open-ended equity-oriented schemes and close-ended equity oriented schemes to be treated on par for exemption from dividend distribution tax.
• long-term capital gains from sale of securities will be included in calculating book profits.

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