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Indian Budget Signals Further Reform Delays

by Mary Swire,, Hong Kong

20 March 2012

India’s 2012 Budget has been unveiled, including a raft of tax measures designed to signal progress in the implementation of a direct tax code and a goods and services tax regime.

The Budget was delivered by Finance Minister Pranab Mukherjee on March 16. During his speech, he told fellow members of parliament that, while the government had intended to implement DTC from April 1, 2012, it did not receive the Parliamentary Standing Committee’s report into the proposals until March 9. As a result, he said, the government will examine the Committee’s recommendations and take steps to enact the DTC at the earliest possible opportunity.

Also alluded to by Mukherjee was the government’s timetable for the introduction of the GST. He reminded listeners that the Constitution Amendment Bill, legislation he says is a preparatory step in the implementation of the GST, was introduced this month, and currently sits before the same Committee. The government is therefore awaiting the Committee’s recommendations, and is in the meantime drafting model legislation for the GST in conjunction with the State governments.

To date, the structure of the GST Network (GSTN) has been approved by the Empowered Committee of State Finance Ministers. The Network will be set up as a National Information Utility and will become operational by August, 2012, Mukherjee said. As he explained, the GSTN will implement common permanent account number (PAN)-based registration, returns filing and payments processing for all States on a shared platform. According to Mukherjee, “the use of PAN as a common identifier in both direct and indirect taxes, will enhance transparency and check tax evasion”.

While Mukherjee admitted that DTC will not be effective from this year, he did however propose the introduction of the DTC rates for personal income tax. The exemption limit for the general category of individual taxpayers will rise from INR180,000 (USD3,600) to INR2m. Mukherjee will also increase the upper limit of the 20% tax ‘slab’ from INR800,000 to INR1m.

No changes will be introduced to corporate tax rates. However, Mukherjee did include a series of measures he says will allow companies to access lower cost funds, and promote higher levels of investment. Included in these measures is a cut in the withholding tax on interest payments on external commercial borrowings from 20% to 5% for three years. The cut will apply to the power, airlines, roads and bridges, ports and shipyards, affordable housing, fertilizer and dams sectors.

Venture Capital Funds are currently restricted to investment in nine specific areas, a restriction which will be removed. Mukherjee also proposed the removal of the cascading effect of the Dividend Distribution Tax (DDT) in a multi-tier corporate structure. Also, the repatriation of dividends from foreign subsidiaries will continue to be taxed at a lower rate of 15% for an additional year, to March 31, 2013.

An enhanced rate of 150% will be applied to the investment-linked deduction of capital expenditure incurred in certain businesses. The businesses affected will be cold chain facilities, warehouses for the storage of food grains, hospitals, fertilisers, and affordable housing. A series of new eligible sectors will also be introduced. The weighted deduction of 200% for research and development (R&D) expenditure in an in-house facility will be extended beyond March 31, 2012, for a further five years. This Mukherjee said, will promote investment in R&D.

Small and medium-sized enterprises (SMEs) will benefit from a higher turnover limit for compulsory tax audits and presumptive taxation. Capital gains tax will be lifted on the sale of residential properties, where the sale is used for the subscription of equity in a manufacturing SME for the purpose of purchasing new plant and machinery.

The Securities Transactions Tax (STT) will be reduced by 20%, from 0.125% to 0.1% on cash delivery transactions. The Alternate Minimum Tax (AMT) will be extended to all persons claiming profit-linked deductions. At present, it is applied only to companies.

A General Anti Avoidance Rule (GAAR) will be introduced, with the aim of countering aggressive tax avoidance schemes. A GAAR panel will be set up, to ensure that the rule is used only in “appropriate cases”. A series of measures will also be introduced to deter the generation and use of 'unaccounted money'. These will include the introduction of compulsory reporting in the case of assets held abroad, and the reopening of certain assessment cases.

Tax collection at source will be imposed in various cases, including the purchase in cash of bullion or jewellery in excess of INR200,000, and the transfer of immovable property (other than agricultural land) above a specified threshold. Tax collection at source will also take place in the trading of coal, lignite and iron ore. “Unexplained” money, credits, investments, expenditures, etc., will be taxed at the highest rate of 30%, irrespective of income.

All services, barring those in the “negative list”, will be taxed. The list comprises 17 heads, and comprises most services provided by the government or local authorities, along with aspects of the education and public transportation systems. A further list of exemptions has also been created, which includes health care, charitable services, religious and sportspersons, performing artists, and independent journalists. Certain construction services will also be exempted. Mukherjee will set up a Study Team to examine the possibility of a common tax code for service tax and the central excise tax, which he says could be adopted to harmonise the two sets of legislations as much as possible.

Concluding his Budget speech, Mukherjee said, “For the Indian economy, this was a challenging year. A number of global and domestic factors militated against the growth that had revived in the last two years. But India has thrived under challenges and India will do so now. In the middle of every crisis, there is also an opportunity. It is an opportunity to rethink, re-assess and make way for new ideas and policies. It is in this spirit that I approached the Budget of this year.”

TAGS: compliance | tax | investment | business | artists | tax compliance | India | tax avoidance | interest | budget | goods and services tax (GST) | audit | food | health care | education | manufacturing | legislation | tax rates | withholding tax | dividends | tax reform | construction | services | research and development

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