Monthly Newsletter

Delivering his 2008-09 Budget on Friday, Indian Finance Minister, Palaniappan Chidambaram revealed that no changes would be made to corporate tax rates, but unveiled changes for individual taxpayers, changes to customs and excise duties, and changes to the Dividend Distribution Tax, Securities Transaction Tax and Banking Cash Transaction Tax regimes.

With regard to individual income tax, Chidambaram announced that exemption limits would be increased as follows:

• Up to Rs. 150,000 - Nil
• Rs.150,001 to Rs.300,000 - 10%
• Rs. 300,001 to Rs. 500,000 - 20%
• Rs.500.001 and above - 30%

Changes were also announced with regard to the Securities Transaction Tax (STT). STT will now be treated like any other deductible expenditure against business income. Further, the levy of STT in the case of options will be only on the option premium where the option is not exercised, and the liability will be on the seller. In case where the option is exercised, the levy will be on the settlement price and the liability will be on the buyer. However, there will be no change in the present rates.

Commodities Transaction Tax (CTT) was additionally introduced in this year’s Budget, and will work along the same lines as STT, but will be imposed on options and futures.

Banking Cash Transaction Tax (BCTT) will be withdrawn from April 1st, 2009, Chidambaram revealed.

This move was made because the information gathered by means of BCTT is also available to the Income Tax Department through other instruments introduced in the last few years.

Relief was also provided with regard to Fringe Benefit Tax (FBT) for certain class of tax payers. Crèche facilities, sponsorship of an employee-sportsperson, organizing sports events for employees and guests will all now be excluded from the FBT.

A five year tax holiday was announced for the establishment of hospitals anywhere in India, specially in tier-2 and tier-3 towns serving the rural interland, although certain specified urban areas will not be covered. This window will be open for the period April 1,2008 to March 31, 2013, during which the hospital must commence operations. For the purpose a new sub-section 11 C in Section 80-IB will be inserted into the Income Tax Act.

Similarly, a five year holiday from income tax was announced for two, three and four star hotels established in specified districts which have been declared ‘World Heritage Sites’. The hotel should be constructed and start functioning during April 1,2008 to March 31, 2013. The measure has been taken in view of significant rise in tourist arrivals, specially for cultural tourism.

Four more services were brought under the Service Tax umbrella, namely: asset management services provided under ULIP, to bring them on a par with those under mutual funds; services provided by stock/commodities exchanges and clearing houses; customized software, to bring them on a par with packaged software and other IT services; and right to use goods, in cases where VAT is not payable.

It was also clarified that the money changers, persons running games of chance and tour operators using contract carriage vehicles, are liable to service tax.

Although there were no changes made to the peak rate of customs duty in the Budget, customs duty was reduced for certain industries with a view to provide a fillip or to remove anomalies.

Customs duty on project imports was reduced from 7.5% to 5%, and the duty on steel melting scrap and aluminium scrap was reduced to nil from 5%.

In addition, specified parts of Set Top Boxes and specified raw materials for use by the IT and electronic industries were fully exempted from customs duty.

The duty on convergence products was lowered to 5% from 10%.

Customs duty on certain specified life saving drugs was also brought down from 10% to 5%. Bulk drugs used for manufacture of such drugs have been totally exempted from customs duty or countervailing duty.

Commenting on the state of the Indian Economy, Mr Chidambaram observed that:

"The India growth story, so far, has been an absorbing and inspiring tale. Beginning January 1, 2005, the economy has recorded a growth rate of over 8% in 12 successive quarters up to December 31, 2007. In the first three years of the UPA Government, the Gross Domestic Product (GDP) increased by 7.5%, 9.4% and 9.6%, resulting in an unprecedented average growth rate of 8.8%."

" In the current year too, according to the Advance Estimates by the Central Statistical Organisation (CSO), the growth rate will be 8.7% - although I am confident that we will maintain the average of 8.8%. The drivers of growth continue to be "services" and "manufacturing", which are estimated to grow at 10.7% and 9.4%, respectively."

"Nevertheless, 2007-08 has been the most challenging of the last four years. At the beginning of the year, the outlook for the global economy was benign. Our economy, thanks to our own policies as well as globalisation, was poised to record another year of high growth: in fact, the first half of 2007-08 returned a growth of 9.1%."

"However, since August 2007, the financial markets in the developed countries have witnessed considerable turbulence that has not yet abated. The consequences for developing countries are also not yet clear."

Chidambaram nevertheless revealed that there had been an "unmistakable boom" in both domestic investment and foreign investment in India, explaining that in the case of the latter:

"During the period April-December 2007-08, foreign direct investment amounted to US$12.7 billion and foreign institutional investment to US$18 billion."

He added that: "Our policy is to encourage all sources of investment, domestic and foreign, private and public."

Speaking, meanwhile, about the forthcoming introduction of a nationwide Goods and Services Tax (GST), the Finance Minister announced that:

"Following an agreement between the Central Government and the State Governments, the rate of Central Sales Tax was reduced from 4% to 3% in this financial year. It is now proposed to reduce the rate to 2% from April 1st, 2008."

"Consultations are underway on the compensation for losses, if any, and once agreement is reached the new rate will be notified. I am also happy to report that there is considerable progress in preparing a roadmap for introducing the Goods and Services Tax with effect from April 1st, 2010."