Income Tax
This was a big disappointment to those expecting a bagful of goodies from the Indian government, that the Union Budget 2009-10 would cut dividend distribution tax, corporate tax rates will be cut and so on. There was no change in the corporate tax rate.
But one concession was given. The much hated Fringe Benefit Tax, introduced by the earlier finance minister P. Chidambaram was removed. Of course, those expecting a FBT-less perk-driven lifestyle were told that the perquisite taxes that existed earlier will come back in a limited form.
This was counter-balanced by a sharp hike in the Minimum Alternate Tax from 10% to 15%. This will affect all the companies who are availing tax holidays or other tax exemptions. The Budget is also proposing a change in the calculation of MAT with retrospective effect. This says that any provision for a dimunition in value of an asset, shall be added back to the book profits and MAT will be calculated on this figure.
Partnership Firms
In partnership firms, if the partner is paid a salary, a deduction is allowed with some limits. These limits have been revised upwards. Now, for book profit earned up to Rs 300,000, it can pay Rs 150,000 or 90% whichever is higher, and on the balance book profit, up to 60%.
Companies running Exempt PFs
Many companies run their own provident fund trusts, in a bid to do better fund management and provide better service. These trusts are known as exempt trusts, but for them to get the same income tax benefits, they have to be recognised by the EPFO. Many applications are said to be pending with the EPFO, which approved only a handful in its recent meeting of the
Central Board of Trustees. The Budget gives the trusts time till December 2010 to get recognition.
Weighted Deduction for inhouse R&D for all industries
If Indian companies need a tax exemption to become more innovative on the product front, so be it. The government will extend the 150% weighted deduction on research and development, so far applicable mainly to pharmaceutical and biotechnology companies, to all industries.
There is a list of industries that will not be covered, what is called the negative list. The government has adopted a general negative list (used for various sections) but it covers industries like steel furniture, office automation products, projectors, cosmetics, toilet preparations, toothpaste, soap and confectionery. There is no reason to not encourage companies in these sectors from doing research.
Zero Coupon Bonds
At times, small changes in the Budget acquire a bigger meaning later on. The government will allow all scheduled banks to issue zero coupon bonds to raise long term funds. Only infrastructure capital companies, infrastructure capital funds or public sector companies were allowed to issue zero coupon bonds.
Transparency in contribution political parties
The government has proposed a 100% tax deduction on donations made to electoral trusts, which are set up for routing donations to political parties. The definition of an electoral trust will be given by the government and it will have to distribute at least 95% of its donations and surplus in any given year.
Capital Investment Benefit
The government is trying to encourage the creation of certain kinds of infrastructure. This is not the first time that incentives are being given, but they seem more liberal. The government will allow companies to claim a 100% deduction on capital investment in certain projects, meaning if a firm invests Rs 10 crore in a cold storage project, and has a profit of Rs 10 crore in the first year itself, it will pay zero tax. It reduces the payback period for these investments.
The sectors are:
a. Cold storage facilities for specified products, including horticultural, poultry, meat products, dairy products, floriculture and processed food items.
b. Warehousing facilities for an agricultural warehouse.
c. laying and operating cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities. (Should not be a dedicated carrier, at least one-third of the capacity should be made available to third parties.)
The profit-linked deduction that gas pipeline companies were getting is being discontinued, since they can get an exemption under this provision now. While this encourages capital investment, it also limits the amount of benefit a company can get to the capital invested in the project.
Sunset Clauses
Export oriented units and free trade zones will now get a tax exemption till March 2010, a one-year extension. Sunset Clauses have been extended for companies set up for reconstruction and revival of a power plant, this exemption will now be available for cases where power generation begins by March 2011. This wil benefit Ratnagiri Gas and Power, which is reviving the Dabhol Power Plant.The benefit for power projects too has been extended from March 2009 to March 2010.
Deduction for Natural Gas and Crude Oil Exploration
Certain tax benefits were available for private sector oil companies only if they began production or refining of oil, by March 31, 2009. They have been given three more years to start production to get a 7-year tax holiday.
The income tax benefits that were being given to crude oil companies are also being given to natural gas from the exploration blocks being given in the eighth round of the new exploration licensing policy. The government is also seeking to plug a loophole concerning what constitutes an undertaking. This is important as the tax holiday is for seven years from the date the undertaking starts production. Some companies have been treating each exploration well as an undertaking, thereby claiming a separate tax holiday for each well. The rule is being amended to say that all blocks awarded under a single contract or in certain other cases is ‘an undertaking’.
Real Estate Industry – loophole plugged
The Income Tax project gives concessions to big housing projects in a bid to encourage house building. The Budget clarifies that this concession will be available only to the original project developers and not to the sub-contractors. Also, one of the conditions is that the house size should not be more than 1000 sq.ft built up area in Mumbai and Delhi, and 1500
sq.ft in other areas. This provision is to ensure that the benefits accrue mainly to middle class housing projects. But builders have been constructing two flats separately and selling them to two members of the same family. This will not be allowed from this year onwards.
SEZ exemption – computation
It has now been clarified that the profits of a SEZ, that will be tax free, will be calculated as a percentage of total exports of the SEZ unit divided by the total turnover of the unit.That is, on a profit of Rs 20, earned on exports of Rs 80 and domestic sales of Rs 20, will be: (80/100)*20= Rs 16. The earlier interpretation was that it would be calculated as a percentage of the total turnover of the assessee, so if a company’s turnover was Rs 400, the exemption would have been only: (80/400)*20= Rs4.