Direct taxes - A balanced budget

“Certain amendments have been made with retrospective effect, which annul the impact of certain judicial precedents. This may have the effect of opening another series of litigation for settled matters” — Gaurav Taneja

The economic backdrop to the Budget 2008 was mixed; though India has witnessed high growth rate in the recent past, coupled with burgeoning foreign exchange reserves and phenomenal increase in the direct tax collections, the fear of US slowdown, inflation, ever-strengthening rupee and high interest rates, are a matter of some concern. With buoyancy in tax collections, the industry expected a reduction in effective corporate tax rates (including surcharge and cess), Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT). This would have given further fillip to investment, which would help in sustaining the high growth rates. The Budget proposals have left a mixed feeling. The Finance Minister opened the Direct Tax Budget speech, stressing on the buoyancy in tax collections and on attaining a Tax—GDP ratio of 12.5 per cent in 2007-08 from 9.2 per cent in 2003-04.

Let’s look at some positives in the Budget: It has proposed a fiveyear tax holiday to hospitals situated in non-metros and hotels constructed in specified areas. With a view to encourage outsourcing of scientific research, the benefit of weighted deduction of 125 per cent has been extended to payments made to an approved research company.

DDT payouts between parent and subsidiary companies are now allowed to be set off in order to mitigate the cascading effect up to one level. Though, on the Fringe Benefit Tax (FBT) front there has not been much relief, the Budget has provided for rationalisation of these provisions to exclude payments made to sponsor a sportsman and for organising sports events.

Experts speak Motilal Oswal Rajiv Kumar Rajiv Memani Vivek Mishra Amitabh Singh Srinivasa Rao

A long-standing demand of service industry to extend the benefit of amortization of certain preliminary expenses has finally been accepted. The proposal for removal of Banking Cash Transaction Tax (BCTT) from April 1, 2009, would help reduce multiple taxes.

Now, something that could have been avoided: An increase in the short-term capital gains tax on shares from 10 per cent to 15 per cent on a justification to align it with the dividend rate is unlikely to be received well by industry and stock market.

Similar to the past practice, certain amendments have been made with retrospective effect (for example, addition of deferred tax and DDT in book profits for the purpose of MAT, clarification regarding written down value of assets for the purpose of computation of depreciation, penalty provisions etc., which annul the impact of certain judicial precedents.

This may have the effect of opening another series of litigation for settled matters.

The Finance Minister, taking cognizance that the growth in fiscal year 2008-09 would not be what was witnessed in the earlier years, has taken certain steps, including granting indirect tax incentives like reduction in excise duty to boost the industry sentiment, while holding on the reduction in the corporate tax rate.

On the whole, the Budget seems to be a balanced one.

Gaurav Taneja is Partner & National Tax Director, Ernst & Young