Mukherjee prepared Indian Budget
Indian Finance Minister Pranab Mukherjee showed the country’s annual budget on February 28, which contained measures to ease the tax burden on investment as well as changes to indirect taxes, proposals to tackle ‘black money’ and a commitment to move forward with the new Direct Taxes Code.
Pointing on direct taxes, the Finance Minster said: “In the formulation of these proposals, my priorities are focused towards making taxes moderate, collection of taxes easy for the tax collector and payments simple for the taxpayer.”
“In the situation of corporate, my idea of phasing out the surcharge continues,” Mukherjee announced. “I propose to reduce the current surcharge of 7.5% on domestic companies to 5%. Simultaneously, I propose to increase the rate of Minimum Alternate Tax (MAT) from the current rate of 18% to 18.5% of book profits to keep the effective rate of the MAT at the same level. As a measure to ensure equal sharing of the corporate tax liability, I propose to levy MAT on developers of Special Economic Zones as well as units operating in SEZs.”
In an attempt to encourage the repatriation of foreign dividends, Mukherjee proposed for the year 2011-12, the 15% tax on dividends received by an Indian company from its foreign subsidiary would be lowered. “It has been represented that the taxation of international dividends in the hands of resident taxpayers at full rate is a disincentive for their repatriation to India and they continue to remain invested in other countries. I do think these funds will now flow to India,” the Finance Minister added.
To attract foreign funds for financing of infrastructure, Mukherjee offered the cestablishing of special vehicles in the form of notified infrastructure debt funds and to subject interest payments on the loans of these funds to a lowered withholding tax rate of 5% instead of the current rate of 20%. Income from these funds could also be exempt from tax.
Other tax incentives proposed in the budget contains the extension of an investment-linked deduction to businesses engaged in the production of fertilizers and to businesses that develop profitable housing; and an increase in the deduction on payments made to National Laboratories, universities and Institutes of technology, for scientific research to 200% from 175%.
Regarding indirect taxes, Mukherjee said that despite healthy growth in revenues in 2010-11, he would not take the opportunity to roll back the Central excise duty to levels prevailing in November 2008. “I have chosen not to do so for a few reasons,” he meant. “I would prefer to see improved business margins translated into higher investment rates. And also I would like to stay my course towards GST. I have therefore decided to continue the standard rate of Central excise duty at 10%.”
The Finance Minister did, however, propose obvious changes in the Central Excise rate structure to prepare the ground for the transition to Goods and Services Tax (GST), starting with a reduction in the rate of exemptions. Currently, there are about 100 items that are exempt from Central Excise as well as State VAT. In addition, there are as many as 370 items that enjoy exemption from Central Excise duty but are chargeable to VAT. “I suggest to withdraw the exemption on 130 of these items that are mainly in the nature of consumer goods. The remaining 240 items would be brought into the tax net when GST is introduced,” he announced.
A nominal Central Excise duty of 1% will be imposed on the 130 items that are entering the tax net, however basic food and fuel would continue to be exempt, Mukherjee said. This levy would also not apply to precious stones and metal, and in case of jewellery and articles of silver, gold and precious metals, the levy would apply only to goods sold under a brand name. In addition, the lower rate of Central Excise duty will be raised from 4% to 5%.