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Mukherjee Presents Indian Budget

by Mary Swire,, Hong Kong

02 March 2011

Indian Finance Minister Pranab Mukherjee presented the country’s annual budget on February 28, which contained measures to ease the tax burden on investment as well as changes to indirect taxes, proposals to tackle 'black money' and a commitment to move forward with the new Direct Taxes Code.

Focusing on direct taxes, the Finance Minster said: “In the formulation of these proposals, my priorities are directed towards making taxes moderate, payments simple for the taxpayer and collection of taxes easy for the tax collector."

“In the case of corporates, my initiative of phasing out the surcharge continues," Mukherjee announced. "I propose to reduce the current surcharge of 7.5% on domestic companies to 5%. Simultaneously, I propose to increase the rate of Minimum Alternate Tax (MAT) from the current rate of 18% to 18.5% of book profits to keep the effective rate of the MAT at the same level. As a measure to ensure equal sharing of the corporate tax liability, I propose to levy MAT on developers of Special Economic Zones as well as units operating in SEZs."

To attract foreign funds for financing of infrastructure, Mukherjee proposed the creation of special vehicles in the form of notified infrastructure debt funds and to subject interest payments on the borrowings of these funds to a reduced withholding tax rate of 5% instead of the current rate of 20%. Income from these funds would also be exempt from tax.

In an attempt to encourage the repatriation of foreign dividends, Mukherjee announced that for the year 2011-12, the 15% tax on dividends received by an Indian company from its foreign subsidiary would be lowered. “It has been represented that the taxation of foreign dividends in the hands of resident taxpayers at full rate is a disincentive for their repatriation to India and they continue to remain invested abroad. I do hope these funds will now flow to India," the Finance Minister said.

Other tax incentives announced in the budget include the extension of an investment-linked deduction to businesses engaged in the production of fertilizers and to businesses which develop affordable housing; and an increase in the deduction on payments made to National Laboratories, universities and Institutes of technology, for scientific research to 200% from 175%.

Turning to indirect taxes, Mukherjee said that despite healthy growth in revenues in 2010-11, he would not take the opportunity to roll back the Central excise duty to levels prevailing in November 2008. "I have chosen not to do so for two reasons," he explained. "I would like to see improved business margins translated into higher investment rates. I would also like to stay my course towards GST. I have therefore decided to maintain the standard rate of Central excise duty at 10%."

The Finance Minister did, however, propose certain changes in the Central Excise rate structure to prepare the ground for the transition to Goods and Services Tax (GST), beginning with a reduction in the number of exemptions. At present, there are about 100 items that are exempt from Central Excise as well as State VAT. In addition, there are as many as 370 items that enjoy exemption from Central Excise duty but are chargeable to VAT. "I propose to withdraw the exemption on 130 of these items that are mainly in the nature of consumer goods. The remaining 240 items would be brought into the tax net when GST is introduced," he announced.

A nominal Central Excise duty of 1% will be imposed on the 130 items that are entering the tax net, although basic food and fuel would continue to be exempt, Mukherjee said. This levy would also not apply to precious metals and stones, and in case of jewellery and articles of gold, silver and precious metals, the levy would apply only to goods sold under a brand name. In addition, the lower rate of Central Excise duty will be raised from 4% to 5%.

As expected, Mukherjee also used the budget to propose a number of measures to crack down on the presence of undeclared income. “In order to strengthen our system of collection of information from foreign tax jurisdictions, I propose to provide a toolbox of counter-measures to discourage transactions with entities located in non-cooperative jurisdictions as may be notified by the government," he said.

Mukherjee said that the circulation of "black money" was an area of serious concern to the government, and he announced that India's anti-money laundering laws would be strengthened, and new institutions set up to deal with illicit funds.

“We secured Membership of the Financial Action Task Force (FATF) in June last year. This is an important initiative of G-20 for anti-money laundering. We have also joined the Task Force on Financial Integrity and Economic Development, Eurasian Group (EAG) and Global Forum on Transparency and Exchange of Information for Tax Purposes," he informed parliament.

“The amendment in our Money Laundering Legislation in 2009 has significantly increased its scope and application. The number of cases registered under this law has increased from 50 between 2005 to 2008 to over 1,200 by January this year. The strength of the Enforcement Directorate has been increased three-fold to deal effectively with the increased workload," he added.

Mr Mukherjee said that the introduction of the Direct Taxes Code (DTC) and the proposed Goods and Services Tax (GST) will mark a watershed, resulting in a moderation of rates, simplification of laws and better compliance. After receiving the report of the Standing Committee, he envisaged finalizing the Code for enactment of the DTC during 2011-12. He said that it had been a pioneering effort in participative legislation, with the Code proposed to be effective from April 1, 2012 to allow taxpayers, practitioners and administrators to fully understand the legislation and adjust to the revised procedures.

Unlike the DTC the Finance Minister said that decisions on the GST had to be taken in consultation with the different States of the country, although he was confident that dialogue had made considerable progress in the last four years with areas of divergence narrowed. As a step towards the roll-out of GST, he proposes to introduce the Constitution Amendment Bill in this session of Parliament, and work is also underway on drafting of the model legislation for the Central and State GST.

"This budget matches the challenges that our economy faces — sustained growth and a determined effort to curb inflationary expectations," Prime Minister Manmohan Singh said. Parliament is expected to approve the budget this month.

TAGS: compliance | tax | investment | business | India | interest | law | budget | corporation tax | goods and services tax (GST) | excise duty | legislation | transfer pricing | withholding tax | tax breaks | dividends | inflation | Financial Action Task Force (FATF) | services

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