India’s latest budget, unveiled by Finance Minister P Chidambaram on 29 February, includes a number of tax provisions that impact businesses and individuals.
The budget had been expected to include significant changes to the Indian tax system, but these failed to materialize. The corporate tax rate remains unchanged at 30% and there have been no increases to surcharges and education levies. There has also been no extension to the tax holidays available to software technology parks, which some observers fear may result in a migration of such units to other countries.
A proposal was put forward to increase short-term capital gains tax from 10% to 15% for securities sold on Indian stock exchanges while a new commodities transaction tax could be introduced along the same lines as the current securities transaction tax. The budget also contained plans to eliminate banking cash transaction tax by 1 April 2009.
In a separate change, the budget proposed a deduction available to parent companies for dividend distribution tax (currently payable at 15%) paid by subsidiaries at the time of distribution of dividends to shareholders. While this is a desirable amendment, the proposal appears incomplete as it excludes multi-tier subsidiaries.
The budget contained good news for individual taxpayers with an increase of income tax slabs. The new tax slabs will be 10% for income of Rs150,000-300,000, 20% for Rs300,000-500,000 and 30% for income over Rs500,000. The threshold exemption for female taxpayers has been increased from Rs145,000 to Rs180,000 and for senior citizens from Rs195,000 to Rs225,000.
The focus of the budget on sectors such as education, health, manufacturing, infrastructure and hospitality, has been reflected in changes to indirect taxation. There are new customs duties for a range of goods that promote technological development and clean technologies, while the basic customs duty remains unchanged at 10%.
There are also new service taxes, which are expected to contribute significantly to Indian tax revenue. A proposed change would increase the service tax exemption for small service providers from Rs800,000 to Rs1 million.
Software services, previously exempt, are now within the scope of service tax, which, along with the termination of the beneficial income tax provision, may have an adverse impact on the Indian software industry. A host of other services have also been added including internet telecommunications and information technology software services.
The budget also proposes to phase out central sales tax to make way for a new value-added tax system and the introduction of the goods and services tax (GST) on 1 April 2010. In the meantime, the central sales tax will be reduced from 3% to 2%.
Chidambaram noted that all direct tax proposals would be revenue neutral but that indirect tax proposals would result in a loss of Rs50 billion (US$1.25 billion). He also emphasized that the cornerstone of the government’s public policy this year will be to keep inflation under control.
In a step to strengthen bilateral trade and investment ties between India and Luxembourg, the Cabinet Committee on Economic Affairs, chaired by the prime minister, Manmohan Singh, gave its assent on 21 February to a double taxation avoidance agreement between the two countries. The treaty will come into effect after notification by the government.
With the Indian economy growing at 9% annually and Luxembourg being a prime financial centre with investible assets of approximately €1,800 billion (US$2,800 billion), a beneficial tax treaty could open up new avenues for trade.
Although it is not possible to determine the specific implications of the treaty before it is notified, there are indications that it will have beneficial provisions for the financial services and manufacturing industries.
The Department of Industrial Policy and Promotion (DIPP) issued a series of press notes on 12 March, formalizing a wide range of liberalizations to the foreign direct investment (FDI) regime that were first announced by the government in January.
The first press note relates to credit information companies, allowing foreign investment of up to 49% through the FDI route, as well as investment by registered foreign institutional investors (FIIs). The latter is limited to 24% under the portfolio investment scheme. The investments are subject to a number of conditions. Prior to the change, credit reference agencies were included in the list of non-banking finance companies (NBFC) in which 100% FDI was allowed under the automatic route. The press note deletes it from that list.
The second press note relates to commodity exchanges, where foreign investment through the FDI route, together with investment by registered FIIs, is now allowed up to 49%. FIIs are restricted to 23% and there is a new cap of 5% ownership of any commodity exchange by a single foreign investor or entity.
The third press note allows for FDI of 100% under the automatic route in new and existing industrial parks. The note clarifies that the limits and conditions outlined in Press Note 2 of 2005, which apply to construction and development projects, will not be applicable to industrial parks.
The fourth press note relates to civil aviation, further liberalizing and extending FDI norms for air transport services and other services like domestic passenger airlines. FDI of up to 74% is now allowed in non-scheduled airlines under the automatic route. Meanwhile, FDI of up to 100% is permitted in maintenance and repair companies, flight training institutes, helicopter and seaplane services and technical training institutions.
The fifth press note raises the ceiling on foreign investment in public sector petroleum refining from 26% to 49%. It also abolishes the requirement for foreign investors to divest up to 26% of their equity in favour of the Indian partners (or the public) within five years from the commencement of the trading and marketing of petroleum products.
The sixth press note of the series permits 100% foreign investment in mining and mineral separation of titanium-bearing minerals and ores subject to government approval.
The changes provide some welcome liberalizations and clarifications to existing FDI policy, but have been criticized for failing to address the real estate and retail sectors. Extensive analysis of the likely implications of these reforms was provided in the March issue of India Business Law Journal.
The government has put forward a draft Medical Devices Regulation Bill.
The bill calls for the compulsory registration of bodies and practitioners with the Medical Device Regulatory Authority of India (MDRA). It also proposes to classify medical devices into various categories for efficient monitoring and regulation, and to introduce penalties for non-compliance with various regulatory issues including safety, registration, associated risks and quality.
The bill seeks to harmonize Indian standards with global norms in order to promote exports and to ensure that medical devices imported into India satisfy the requirements of the Indian Drugs and Cosmetic Act.
The wrap is compiled by Nishith Desai Associates, a Mumbai-based law firm that provides legal and tax counselling. The authors can be contacted at [email protected] The wrap is designed to provide general information on key legislative and regulatory developments. Readers should not act on the basis of this information without seeking professional legal advice.