Corporate Update Budget Special July 2009 *

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1 Corporate Update Budget Special July 2009 * Content Page No. Budget At a Glance 2-3 Direct Taxes - Income-Tax 3-5 TAX Indirect Taxes - Customs - - Excise - Service Tax WTS Alliance - Infoletter Page 1

2 TAX INDIAN BUDGET The Finance Minister, Government of India presented Annual Budget proposals in the parliament yesterday on 6th. Taking note of present global economic scenario, to give boost to the domestic demand, fiscal stimulations are proposed. Fiscal deficit this year is expected to be higher at 6.8% of GDP, taking into account proposals as made. The budget as presented has made big allocation to programmes for Urban and rural infrastructure, rural employment as well as various other schemes for rural development. No changes have been made in the Corporate Income-tax rates. Re. personal income-tax rates, beside token changes in tax rates, surcharge as 10% on income exceeding Rupees 1 million has been withdrawn. There are a few other changes in the Income-tax Act including withdrawal of Fringe Benefit Tax, Commodity Transaction tax, increase in rate of Minimum Alternate Tax from 10% to 15%. In respect of indirect taxes, in general, no changes in rates of customs duty and central excise duty have been made except for some specific exemptions and rationalization of duties in respect of certain goods. WTS Alliance - Infoletter Page 2

3 The reduction in rates of excise duty (CENVAT), service tax as announced in the beginning of 2009, to provide stimulus to Indian industry, are to be continued. As a result, the peak rate of customs duty remains at 10% and mean rate of excise duty at 8%. The Finance Minister has reiterated that an integrated Goods and Service Tax (GST) is to be introduced from next financial year beginning from 1st April 2010 Direct Taxes Income-Tax Tax Rates 1. a) No changes are proposed in respect of corporate tax rate. b) The surcharge as applicable has been withdrawn for all categories of tax payers except for corporate tax payers and foreign companies. c) Personal Income Tax exemption limit has been raised as under: For senior citizens tax payers from INR 2,25,000 to INR 2,40,000 For women tax payers from INR 180,000 to INR 1,90,000 For other individual tax payers from INR 1,50,000 to INR 1,60,00 d) New tax rates shall be as follows: Income (Rs.) Tax Rate Up to Rs. 1,60,000* Nil Rs. 1,60,001 to 3,00,000 10% Rs. 3,00,001 to 5,00,000 20% Above Rs. 5,00,000 30% *for individual other than senior citizens and women Minimum 2 a) MAT rate has been raised from 10 to 15 per cent of book profits. Alternate Tax b) MAT tax credit can now be carried forward for 10 years (earlier 7 years). Increased c) It is also proposed to amend the meaning of book profits to provide that any amount set aside as provision for diminution in the value of any asset debited to the profit and loss account, shall be added to net profit, as shown in the profit and loss account for the purpose of computation of book profits with retrospective effect from AY WTS Alliance - Infoletter Page 3

4 Weighted 3. Weighted deduction for costs incurred in house research and development Deduction for (up to 150% of the actual cost ) has been extended to manufacturer of all Research and items except those specified in Schedule 11 of the Income-tax Act. Development Extended to All industries New 4. In order to provide investment linked tax incentives, a new section 35AD Investment is proposed to be introduced to allow 100% deduction of capital expendilink incentive ture incurred (other than on acquisition of land, goodwill and financial to certain instrument ), subject to various conditions, for following specified businesses. Businesses. a) setting up and operating a cold chain facility or a warehouse facility for storage of agriculture produce, if such business commences its operations on or after 01/04/2009. b) laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution, if business commences its operations on or after 01/04/2007. Exemption to 5. Exemption as available u/s 10A to units set up in Free Trade Zones and u/s Exporters 10B to Export Oriented Units engaged in the business of manufacture and production of articles/things and software has been extended by another year i.e. up to F.Y (A.Y ). Provisions for 6. A new provision has been introduced to make provisions for taxation of Taxation of Limited Liability Partnership (LLP). LLP s will be treated at par with a Limited partnership firm and will be taxed at the firm level. Income of partners Liability LLP will be exempt from tax. Partnership Introduced Fringe Benefit 7. Fringe Benefit provisions have been withdrawn.some of the Fringe Benefits Tax Benefits would be now taxed in the hands of employees as perquisites. Withdrawn Transfer 8. (a) The Finance Bill 2009 proposes to introduce Safe Harbour Rules to Pricing reduce litigation in the determination of Arms Length Price. The Safe Harbour Rules normally provide for a band of profit margin in respect of specific industries. The Assessing Officer would not make any adjustment, if the profit margin disclosed by a tax payer falls within the band notified by the Government, in respect of a specific industry (b) Proposal to amend the proviso to sub-section (2) of section 92C The existing proviso to sub-section (2) of section 92C lays down that where more than one price is determined by the most appropriate method the arms length price shall be taken to be the arithmetic mean of such WTS Alliance - Infoletter Page 4

5 prices such prices or at the option of the assessee the price which may vary from the arithmetic mean by an amount not exceeding 5% of such arithmeticmean. The tax payers interpretation regarding the application of proviso to section 92C(2) is that the arithmetic means should be adjusted by 5% to arrive at the arms length price. This view has been upheld by some Tribunal decisions. The Department s view, however, has been that if the variation between the Transfer Price and the arithmetic mean is more than 5%, no allowance in the arithmetic mean is required to be made. The amendment proposes that the arms length price shall be taken to be the arithmetic mean. However, if the arithmetic mean so determined is within 5% of the Transfer Price then the Transfer Price shall be treated as the arms length price. This amendment will take effect from the 1st October, 2009 and shall apply in relation to all cases in which proceedings are pending before the Transfer Pricing Officer. Dispute 9. Proposal for constitution of alternate Resolution Mechanism Resolution Mechanism To facilitate expeditious resolution of disputes in the international arena, a new Dispute Resolution Mechanism (DRP) has been proposed in the Finance Bill. The proposal relates to disputes arising as a consequence of orders passed u/s 92CA(3) and any other order passed in respect of a foreign company. The DRP would comprise of a collegium of three Commissioners of Income-tax. Deduction of 10. A few changes have been made in the rates of deduction of tax at source Tax at source (withholding) in respect of payment to resident contractors, Subcontractors and renting of land, building, furniture, equipment. Higher 11. A provision has been introduced which provides that if PAN Number is not Withholding if furnished to the deductor, the deductor will be required to deduct tax at the PAN Number highest of the following rates: Not provided a) The rates specified under the Income tax Act, or b) At the Rates in force i.e. the rates mentioned in the Finance Act, or c) At the Rate of 20%. Further no relief of lower deduction of tax or Tax exemption u/s 197 or 197A will be granted to the deductee, unless PAN No. of the deductee is mentioned on the application or declaration filed in specified form. New Direct 12. A New Direct Tax Code is expected to be introduced for public debate with- Tax code in 45 days of presentation of Budget. WTS Alliance - Infoletter Page 5

6 INDIRECT TAXES Customs 1. Peak Rate: 1.1 There is no change in the peak rate which remains at 10%. 2. Changes in Rates 2.1 Certain reductions have been announced in Basic Customs Duty (BCD) in respect of specified articles falling under health care, electronics hardware, textile, renewable energy sector, etc. Reductions vary from 2.5% to 5%. 2.2 BCD has been enhanced on gold bars, gold coins, etc and silver. 3. Exemptions / Withdrawal of Exemptions 3.1 Exemption from CVD (Additional Customs Duty u/s 3(1) of the Customs Tariff Act) has been provided on the portion of the value of packaged or canned software which represents the consideration for transfer of the right to use such software, subject to specified conditions. 3.2 List of imports, exempt from BCD, for manufacture of sports goods, leather goods, textile products, footwear for export has been expanded. 3.3 Certain sector specific exemptions from CVD have been announced in respect of life saving drugs, specified heart devices, etc. 3.4 Exemption from CVD on Aerial Ropeway Projects has been withdrawn. 3.5 BCD exemption on concrete batching plants of capacity of 50cum per hour or more is withdrawn. 4. Major Amendments in Customs Act, New section is proposed to be inserted to provide for refund of import duty paid on imported goods, if found defective or not confirming to the specifications agreed upon between the importer and the seller, subject to certain conditions. 4.2 Power has been granted to HC to condone delays in filing appeals/ applications/ memorandum of cross objections, with retrospective effect. 5. Major Proposed Amendments in Customs Tariff Act, For the purpose of calculation of CVD, the Tariff value fixed by the Central Govt. under central excise law shall be adopted for similar imported articles. WTS Alliance - Infoletter Page 6

7 Excise 1. Changes in Rate Structure 1.1 No change in the mean Cenvat rate of 8% ad valorem. 1.2 To facilitate the introduction of Goods & Services Tax (GST), the existing rate of 4% has been increased to 8% for convergence with the mean rate, subject to certain exceptions like food products, drugs, paper, etc. 1.3 Excise Duty has been increased on Manmade Fibre and Yarn, Polyester Chips, etc. from 4% to 8% % Excise Duty on cotton textiles beyond fibre stage has been restored. The assessee has the option to pay the duty & claim cenvat credit. 2. Exemptions 2.1 Exemption has been provided on the portion of the value of packaged or canned software which represents the consideration for transfer of the right to use such software, subject to specified conditions. 2.2 Full exemption from excise duty has been provided to articles of stone, plaster, cement, asbestos, mica or similar products (Chapter 68) manufactured at the site of construction for use in construction work at such site. 2.3 SSI exemption benefit has been extended to printed laminated rolls bearing the brand name of another person. 3. Major Amendments in Central Excise Act, It is proposed that the Chief Commissioner of Central Excise can nominate a Chartered Accountant for conducting special audits. 3.2 Power has been granted to HC to condone delays in filing appeals/applications/ memorandum of cross objections, with retrospective effect. 4. Major Amendments in Cenvat Credit Rules, Inputs shall not include cement, angles, channels, CTD or TMT bars and other items used in the construction of shed, building or structure for support of capital goods and consequently, these inputs used as above shall not qualify for cenvat credit. 4.2 Manufacturer of both dutiable as well as exempted goods who does not maintain separate accounts of inputs, shall pay an amount equal to 5% of the total price of exempted goods instead of 10%. WTS Alliance - Infoletter Page 7

8 Service tax 1. Existing rate of service tax of 10% plus education 3% remain unchanged. 2. New Services introduced 2.1 Service provided in relation to transport of (i) coastal goods i.e. goods transported from one port in India to another; and (ii) goods through Inland Waterincluding National Waterways. Earlier transport of goods through water was not covered. 2.2 Legal consultancy service Service in relation to consultancy, advice or assistance (but not service of appearance before any court, tribunal or authority) in any branch of law has been made taxable. Service will be taxable only when provided by business entity like firms, AOP, BOI, companies etc. to any such business entities. That is, services rendered by individual to any business entity or any other individual are not taxable under this category. Similarly, services rendered by business entity to any individual are also not taxable. 2.3 Cosmetic and plastic surgery service Cosmetic and plastic surgery undertaken to preserve or enhance physical appearance or beauty. The above changes will come into effect from a date to be notified, after the enactment of Finance (No. 2) Bill, Scope of existing services extended or altered 3.1 The existing provision covers service of transportation of goods in containers by rail. However, Indian Railways were exempted. The revised provision applies to Indian Railways also. Further, the services cover transportation of goods by rail in any manner, whether in containers or not. WTS Alliance - Infoletter Page 8

9 3.2 Presently, under the Business auxiliary services, any activity that amounts to manufacture is outside the purview of service tax. The definition of Business Auxiliary Service (BAS) is now amended to provide that only those processes, which result in the manufacture of excisable goods (as defined in the Central Excise Act) are excluded from the purview of BAS. 3.3 Under Stock broker services, the definition of stock-broker is being amended to exclude sub-broker from its ambit. As a consequence, sub-brokers will be outside the purview of service tax. Further, it is clarified that they will also not be liable under Business Auxiliary Service as commission agent. 3.4 Service tax on transfer of right to use IT software Import of Information Technology software which includes packaged software was not subject to any customs duty. However, excise duty of 12% was payable on such software. Therefore, CVD was levied if packaged or canned software was imported. It is now proposed that service tax is payable on transfer of right to use software, and no excise duty and corresponding CVD on such value of transfer of right to use will be levied. In other words, on the value of transfer of right to use software, service tax will be levied. The above changes will come into effect from a date to be notified, after the enactment of Finance (No. 2) Bill, Amendments in the rules and existing notifications 4.1 Rule 3 (5B) of the CENVAT Credit Rules, 2004 is being amended so as to provide that a service provider shall pay back the amount of credit taken on inputs/capital goods fully written off. [Notification 16/2009-CE dated ]. Earlier, only manufacturer was covered. 4.2 Cenvat credit when exempt as well as taxable service provided Rule 6 (3)(i) of the CENVAT Credit Rules, 2004 is being amended to prescribe that a provider of both taxable and exempted services, who does not maintain separate accounts of inputs, shall pay an amount equal to 6% of the value of exempted services instead of 8%. 4.3 Works contract composition scheme Earlier, 4% of gross amount charged for the works contract was payable under the composition scheme. The gross amount for the purpose did not include VAT/sales tax paid on transfer of property in goods involved in the works contract. Now, the meaning of gross amount charged is being enlarged to include the value of works contract, plus WTS Alliance - Infoletter Page 9

10 the value of supplies made by the service provider under any other contract. In other words, if there is a separate contract for supplies, the value of such supply contract will also be included in the gross amount for levy of service tax under composition scheme. Further, as seen from the clarificatory memorandum issued by the Government, the gross amount will also include free supplies made by the customer. However, in our view, this has not been specifically provided in the amendment made to the Rules. We have to wait for a subsequent clarification from the Government on this aspect. The above changes will come into effect immediately from 7th July Exemptions 5.1 Private bus operators providing point to point transportation of passengers having contract carriage permit have been exempted from service tax 5.2 Exemption from service tax (leviable under Club or Association Service) is being provided to the Federation of Indian Export Organizations (FIEO) and specified Export Promotions Councils. The exemption is valid till Exemption from service tax (leviable under banking and other financial services or under foreign exchange broking service) is being provided to inter-bank purchase and sale of foreign currency between scheduled banks. The above changes will come into effect immediately from 7th July Refund scheme for Exporters Notification No. 41/2007-ST dated provides for refund of service tax paid on services, which though not in the nature of input services, are relatable to export of goods. The scheme is being revamped to ensure speedier grant of refunds to the exporters. The salient features of the new scheme, being notified under two notifications, both dated , are as follows: (a) Two taxable services, namely, Transport of goods by road and Commission paid to foreign agents have been exempted from the levy of service tax, if the exporter is liable to pay service tax on reverse charge basis. However, as the cap of 10% of FOB value of exports on commission agency charges has been retained, the exporter will have to pay service tax on the amount of commission which is in excess of 10%. Accordingly, exemption shall be limited to 1% of FOB value of export goods for which the said service has been used [Notification No. 18/2009-ST dated ]. (b) Following are some of the salient features of the revamped refund scheme, notified in supersession of notification No.41/ 2007-ST dated : WTS Alliance - Infoletter Page 10

11 Terminal Handling Charges is being added to the list of eligible services. The time period for filing a refund claim is being increased to one year from the date of export. The condition for filing refund claims once in a quarter is being dispensed with. Now the exporter can file a refund claim anytime after each export shipment. A simplified format is being prescribed for filing refund claims. Self-certification is being introduced to ensure faster sanction and disbursement of refunds. In a case, where total amount of refund claim does not exceed 0.25% of the total FOB alue of exports under a claim, a self-certification by the exporter on the relevant documents to the effect that: (a) the eligible services have been received by him; (ii) the service tax payable thereon has been reimbursed; and (iii) such services have been used for the export, would be sufficient. The refunds shall be granted within one month without any preaudit. In a case, where amount of refund claim exceeds 0.25% of the FOB value of exports, the documents submitted by the exporter should be certified by the chartered accountant, who audits his annual accounts. On the basis of such certification, the refund claim shall be sanctioned within one month without any pre-audit. [Notification No. 17/2009-ST dated ]. WTS Alliance - Infoletter Page 11

HIGHLIGHTS OF BUDGET

HIGHLIGHTS OF BUDGET 2009 10 No.103, Brigade Links, No.54/1, 1st Main Road, Seshadripuram, Bangalore 560 020 Phone: 080-2344 1114 / 2334 3014 www.nprca.in DIRECT TAXES: Tax Rates for FY 2009-10 All (except