If one is to go by the reaction of the stock markets, it seems that the industry has truly welcomed the Budget.
Anticipated reduction in Corporate Tax rate by 5 per cent was delivered by Mr. Chidambaram. However, the same does not translate into an effective tax rate reduction of 5 per cent, since surcharge has been enhanced from 2.5 per cent to 10 per cent.
In line with the Kelkar Task Force recommendations, the tax depreciation rates have been brought down from 25 per cent to 15 per cent. The economic rationale justifying such reduction is that the depreciation rates ought to be aligned with the efficacious life of the capital asset.
Though the fundamental assumption made for determining 15 per cent rate of depreciation is that the same resembles the average life of the asset, one would expect accelerated depreciation for Plant & Machinery, whose useful life is less than 10 years due to technological obsolescence.
Further, to give impetus to fresh investments in new Plant & Machinery, the initial depreciation in the year one would be 20 per cent instead of 15 per cent.
The Hon'ble Finance Minister's announcement setting out a sunset clause for undertakings entitled to tax holiday, which are set up in special economic zones is clearly suggestive of the end of 'exemption raj'.
Though, the same aligns with the Task Force recommendations as set out in the Fiscal Responsibility and Budget Management Act, one wonders what would be the fate of impending SEZ Bill.
The tussle between the Ministry of Finance and Ministry of Industry & Commerce on provision of tax holiday to SEZ units would get further accentuated.
The weighted deduction of 150 per cent of expenditure incurred on scientific research and development available to the companies which are engaged in the activity of bio-technology, manufacturing of drugs, pharmaceuticals, electronic equipments, tele-communication equipment has been retained for another period of two years.
Whereas, the credit for Minimum Alternate Tax so determined, shall be allowed to be carried forward for a period of five successive years is a welcome measure, imposition of Fringe Benefits Tax is surely a dampener. The rationale for imposition of FBT is to tax the 'personal element' of the benefit(s) enjoyed by the employee. It envisages a host of business expenses, which ordinarily are fully deductible at the hands of the employer. In my personal opinion this is a retrograde step, which besides defeating the fundamental canons of taxation would enhance the cost of tax compliance.
Besides the fact that the tax payer and tax gatherer would get into a subjective analysis of what would constitute a personal benefit and what is relatable to business, certainly the overall transaction cost of business would be enhanced and on top of it, potential tax litigation is also on the anvil.
Another welcome measure announced in the Finance Bill relates to the reduction of rate of withholding tax on royalties and technology fees from the existing 20% to 10% in respect of all agreements signed on/after June 1, 2005. This would be an exceptional situation where a resident tax payer would resort to domestic withholding tax provisions in preference to the double taxation avoidance agreements. India's DTAA's with several countries still provide for withholding tax rate in excess of 10% on royalties and know-how fees.
The continued tax exemption of interest on foreign currency deposits is also in line with the broader expectation of the Non Resident Indian community. This would ensure the continued flow of savings and would mitigate the compliance cost which would have arisen had such exemption been withdrawn.
Keeping in view the recent re-organisation and consolidation which the banking sector is witnessing, new provisions to provide for set-off of losses of the banking company against the profits of a banking institution, where such banking company has been amalgamated with the Banking institution under the scheme sanctioned by the Central Government under the Banking Regulation Act, 1945 have also been announced.
As anticipated, the finance minister announced a 33 per cent across the board increase in the rate of securities transaction tax for delivery and non-delivery based transactions. The moderate increase in STT coupled with clarity on taxability of derivative transactions will enable overall strengthening of the capital markets. The characterisation of derivative transaction as business income (and not speculative) is in line with the special class of definition of securities envisaged under the Securities Contract (Regulation) Act, 1956.
However, the finance minister's proposal to impose Banking Cash Transaction Tax so as to establish the trail of cash transaction and check tax evasion has surprised most of the tax payers, besides the expected uproar in the parliament!
These proposed provisions are not in any manner equitable in nature. It shall have a regressive impact on the general sentiments of people at large. This in my view, is a case of rushed legislation without appreciating the practicality associated with it. Only the coming few weeks would illustrate the need for imposing such hardships.
The industry and the profession, in line with the Finance Minister's concluding part of the speech, eagerly await the proposed Tax Amendment Bill. The ever complicated scheme of the Income Tax Act needs to be revisited, more particularly when one considers that not only the compliance cost has increased at the same time, the tax administration needs to be strengthened. I would reckon that enabling provisions would be facilitated via the proposed Amendment Bill.
In summary, the overall tone of the budget is reformist and forward looking, except that proposals of imposing Fringe Benefits Tax and Banking Cash Transaction Tax should be thoroughly debated before the same are legislated.
The author is Partner, BMR and Associates
