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Thursday, January 18, 2007
India's Union Budget 2007-2008: A sneak preview

DWS does some crystal-gazing to read the mind of finance minister P Chidambaram

At a recent meeting with the finance minister P Chidambaram, captains of Indian industry have sought several tax exemptions and benefits to drive the domestic industry. The meeting last Tuesday was attended among others by Ratan Tata, VN Dhoot, Venu Srinivasan, Sunil Mittal and Malvinder Singh among others.

The leaders are reported to have requested the finance minister to give tax benefits in India's Budget 2007-2008 for Indian companies acquiring foreign companies. Indian corporates acquired foreign companies for a total of nearly $10 billion in 2006. The Indian corporates want total tax on such acquisitions to be brought down from 38% to 25%. The Budget is the perfect platform to make strategic shifts in taxation of this scale.

The industry has also called for correction in the inverted duty structure and a reduction in fringe benefit tax in India. Fringe benefit tax (FBT) imposed two years back has been a permanent source of disaffection between the industry and the Indian government. Last year too, before the Union Budget 2006-2007, India Inc had requested a reduction or removal of FBT, but the finance minister did not pay heed.

Telecom companies want the service tax paid by telecom companies to the Department of Telecommunications to be reduced. Currently, the service tax rate is 12% in India. There have even been ominous indications that the rate may go up in Chidambaram's upcoming Union Budget 2007-2008.
In their pre-budget memoranda, the pharmaceutical companies have requested the government to offer tax benefits on R&D done in India, in the wake of large amounts of R&D work on medical field being outsourced to India.

Finance minister P Chidambaram has repeatedly said that any further tax cuts in the Budget will depend on the level of tax compliance. Yet, the minister has not spelt out at what level of tax compliance the cuts will begin. There has also been no mention on how the ministry plans to check the level of compliance.

Yet again, the Prime Minister last week said that tax exemptions may be on their way out in India. Removal of exemptions will begin with the corporate sector exemptions, and later spread to individual taxpayers as well. The UPA government wants to reduce and eliminate all tax exemptions in an attempt to simplify the tax structure in India.

The following are pointers to some of the sectors which are expected to see significant changes in the Union Budget 2007-2008.

Cars: India's 2007-2008 budget is expected to change the excuse duty structure for cars. In the last budget, finance minister P Chidambaram has reduced the excise duty on small cars from 24 to 16%, while retaining duty on large cars at 24%. This budget, he is expected to reduce small car duty from 16 to 12%, while duty on large cars may be brought down to 16%. The government has been trying to incentivise production of small cars in India with the aim of making the country a hub for small car production in Asia. However, makers of large cars are not amused with the proposal. The industry feels that there is no need to have a differential duty structure for cars, since the prices vary widely anyway, making for two clear markets. Currently, cars under 4000 cm length in India classify as small cars for duty purposes, if they have a petrol engine under 1400 cc or a diesel engine under 1500 cc.

Housing: With the ongoing real estate boom in India, the budget is likely to take some steps to regulate this sector. It is not clear if the proposal to set up the real estate regulator will be announced in the budget. The real estate developers association of India has requested the finance minister in a pre-budget memorandum that first-time buyers of property should be exempted from stamp duty. They have also said that building raw materials should be exempted from excise duty, to bring down the cost of construction. However, rather than appeasing the developers, the government is likely to extract more revenues in this booming sector by imposing additional levies and taxes.

Income tax surcharge: The Union Budget 2007-2008 is likely to remove the 10% surcharge on corporate and personal income tax. The tax surcharge was introduced by the previous Union government of the National Democratic Alliance, and when the UPA came to power, it increased the rate from 7.5% to the current 10%. The industry bodies have been clamoring for the reduction of the tax surcharge. This is likely in the Union Budget. With the tax collections in India growing by leap and bounds, the government is now in a position to reduce or abandon the tax surcharge without making a dent in the revenue inflows. The announcement is likely in the Budget. Reducing or scrapping the surcharge will reduce the burden on taxpayers.

Service Tax: Besides bringing more services into the service tax net, Union Budget 2007-2008 may change service tax rates in India. Currently, those service providers with income up to Rs lakh per annum are exempt from paying service tax. Those with higher revenues have to pay a service tax of 12%. Now, the government is planning to remove the service tax exemption for those below Rs 4 lakh. Instead, a flat levy of 8% will be imposed on all services up to Rs 10 lakh annual income. Also, Those in the higher bracket is likely to pay a higher service tax rate of 14%. Thus, the Budget may bring in a differential regime in service tax. In its budget preparations, the finance ministry has already kicked off an exercise to overhaul the service tax structure in India.

Infrastructure: India's Budget 2007-2008 is expected to ring in new methods for funding infrastructure development. A couple of years back, the Planning Commission had proposed that India's booming foreign exchange reserves could be used to finance development of ports, railways, highways, aviation and electricity sectors. However, after opposition from RBI, the government put the proposal in the backburner. Budget 2006-2007 did not mention anything about the Planning Commission proposal. However, recently, finance minister P Chidambaram revisited the issue, saying that he has asked his officials to prepare a note on the issue. Clearly, the FM has his eyes on refining the proposal and including it in his budget speech. With the increasing demand of funds for infrastructure development, the government has also set up a committee headed by HDFC chairman Deepak Parekh to find ways of raising funds for the sector.

Arts & crafts: Artists, painters, authors and craftsmen may be brought under the service tax net in Union Budget 2007-2008. Currently, they are exempt from service tax in India. With Indian art and literary work gaining importance overseas, the government is determined to bring them under the service tax regime. Artists, sculptors, craftsmen and authors may have to pay service tax of 12.24%. The government is also planning to increase the service tax rate, in lieu of transferring some of the service taxes to states. However, artistes believe that instead of taxing them, the government should support artists and their work.

Naphtha: The naphtha industry hopes that the government will put an end to the differential duty structure on naphtha. In India, the import duty on naphtha is different, depending on the end-use to which naphtha is put. However, the industry feels that through the Budget 2007, the government can remove this diversity, giving a boost to the domestic naphtha cracker industry.

Textile: The textile industry is eagerly waiting for the extension of the TUFS (Technology Upgradation Fund) scheme in India. By now, it is more or less confirmed that the government will announce the continuation of TUFS in the budget 2007-2008. The textiles ministry is in favour of extending TUFS and has already recommended the same to the finance ministry. The government has already made its intention clear about boosting employment-generating sectors. The Textile sector is the largest employment-generating sector in India. So, industry hopes are high that the TUFS will be extended. However, as against the textiles ministry's wish for a five-year extension and its inclusion in the 11th Plan, the Budget may bring in only a one-year extension for TUFS.


posted by a correspondent @ 5:26 AM    
  • At 9:49 PM, February 11, 2007, ajay said…

    How about the boos with regard to computers and duty on import of the components.

  • At 9:51 PM, February 11, 2007, ajay said…

    I am scared about the Services tax and the other services that are going to be included.

  • At 11:44 AM, February 18, 2007, NARAIN DASS CHANDRUKA said…

    FM must act fast to reduce the menance of Black money, which is one of the causes of inflation and political and other type of corruption. Real Estate is the Major area where Black money plays a bog role.
    A regulatory Authority must be appointed to oversee the market Value and the value shown in the sale/purchase deeds of real estate in Metropolis including subrubs such as NCR.

  • At 8:49 AM, June 09, 2007, Anonymous said…

    Govt should give more security to senor citizens in terms of tax concessions on PF utilization/ deposition and raise the income tax limit for them to make them more comfortablre and giving them excess to more cash to make them more mobile to go to Dev bhoomies and other tourist places any where tha tthey have not been able to go during service life
    B S rawat

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