India Budget 2007

Managing the tax rupee The opportunity horizon

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CONTENTS Foreword Managing the Tax Rupee Macro Economic Outlook 3 Impact at a Glance 4

Direct Tax Proposals Corporate Income Tax 8 Personal Income Tax 15 Banking Cash Transaction Tax 16

Indirect Tax Proposals Central Excise 17 Service Tax 22 Customs 27 Central Sales Tax 30 Effective dates 31

A Look beyond… 32

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FOREWORD Today, vigorous growth with strong macro-economic fundamentals characterizes the Indian economy. The only caution factor being the increasing inflation rate. In this backdrop the Finance Minister (FM) presented his tax proposals for 2007-08. The stability in income tax rates and the rationalization of the central sales tax and duties continue. To the pleasant surprise of all the FM has not increased the service tax rate. The FM has provided certain incentives for SMEs, infrastructure development, development of hotels/convention centres in wake of the Commonwealth Games in and around the NCT and promotion of scientific R&D.

Nevertheless, he has also provided some irritants for the business in the form of increased dividend distribution tax, fringe benefit tax on stock

options, minimum alternate tax on 10A/10B units enjoying tax holiday status, service

tax on commercial rentals and works contract. From the Corporate India perspective,

these are opportune times with the entrepreneurial outlook on its upbeat. While

the tax rupee appears expensive in the global market (effective tax in India is amongst the highest in the ASEAN region), for Corporate India, its just about efficiently managing the tax

rupee and focusing on the opportunity horizon for the pleasures.

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MANAGING THE TAX RUPEE A MACRO ECONOMIC OUTLOOK This section provides an overview of the Government’s tax targets at a macro level for the year 2007-08. The tax targets have been set in the backdrop of a GDP growth rate of 9.2% and an average rate of inflation ranging from 5.2% to 5.4%. The GDP growth rate is not just a cyclical upturn but is a result of a structural shift in the economy induced by consistent performance of the industry and services sector. Tax Policy of the Government The government’s intention in framing the tax policy during this budget was to have a broad based structure with moderate tax rates and increase the tax/GDP ratio in harmony with the overall growth objective. It seeks to achieve this by expansion in scope of taxes specifically service tax and removal of exemptions and improvement

in tax administration. This would push towards increased tax compliance, efficiency in tax administration and intense focus on recovery of arrears of tax revenues and prevent further build-up of such arrears. Tax Performance & Targets Revenues from Corporate Income Tax and

Personal Income Tax have grown by 55.2 per cent and 30.3 per cent respectively in April to December 2006 over the corresponding period for 2005. Buoyant growth in direct taxes revenue has helped take its share in total revenue to 49.0 per cent in 2006-07 (Revised Estimate - RE).

The overall tax revenues have seen a jump of

27.78 % from 2005-06 to 2006-07 (RE). The target tax revenue for 2007-08 estimates a growth of 17.16% in the overall tax revenues against 2006-07(RE).

The revenue foregone remains high in terms of

overall revenue collection. However, a

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reduction trend is observed in 2006-07. In 2006-07, it is projected to reduce to 50.27% against the 56.43% per cent in 2005-06.

Out of the total revenue receipts, as per 2006-

07 (RE) the total tax receipt contribute 86% and is estimated to contribute 87% in 2007-08.

The composition of the budget estimates of tax

revenues for 2007-08 is as follows

Revenue Rs. in Million

Corporate Tax 1,684,010Income Tax - others 987,740Customs 987,700Central Excise 1,302,200Service Tax 502,000Other Taxes 17,570Total 5,481,220

Composition of Tax Revenues (BE – 2007-08)

31%

18%18%

24%

9% 0%

The tax proposals on direct taxes are estimated to yield a gain of Rs.3,000 crore. On the indirect taxes side, the proposals are revenue neutral – Finance Minister, Budget Speech.

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IMPACT AT A GLANCE In this section, we have attempted to highlight certain significant amendments / changes impacting business in general. Direct Taxes 1. Corporate tax rates stable. Marginal increase in

effective tax on account of secondary education cess of 1%. Proposed effective rate 33.99% for taxable income exceeding Rs 10 Mil

2. Dividend distribution tax increased to 16.995% 3. MAT introduced for units enjoying tax holiday

STP/EOUs (Section 10A/10B) 4. Time-limits for transfer pricing assessments

extended 5. Fringe benefit tax on ESOPs /sweat equity 6. Scope of advertising expenses not liable to

FBT extended to include display products and distribution of free or concessional samples

7. Withholding tax provisions amended for applicability and rates

8. Migration of existing units to SEZ curbed

Effective rate of tax

H

L H

Transaction reviews

Immediate review for implementation

Strategic tax framework review Resource

planning

1

23

45

6

7

8

Eff

orts

*

* Management time and cost of compliance The schematic is only indicative and requires case specific review.

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Indirect Taxes

1. Peak rate of customs duty reduced to 10% 2. Rate of CST reduced to 3% 3. e-payment of central excise made mandatory to

specified assessees 4. Service tax on renting of properties could lead

to increase in cost of infrastructure by 12.36%. 5. Services in relation to execution of works

contract made liable to service tax. 6. Test of delivery of service outside India relaxed

for export of services 7. Introduction of special audit of service tax

records by the Commissioner. Practically, based on experiences under the Central Excise, it may be inferred that large CENVAT credit availers could be targeted.

8. Scope of deemed manufacture expanded to include certain electronic goods. This would make such goods dearer.

9. New provisions introduced to value job work transactions. It is believed that this would lead to payment of higher excise duties when compared to the current regime.

10. Purchase of goods by domestic units from units in FTZs to become dearer. Will be liable to full rate of central excise duties.

Effective rate of tax

H

L H

Transaction reviews

Strategic tax framework review

Resource planning

1 2

3

4

5

6

7

89

10

Immediate review for implementation

Effo

rts

The schematic is only indicative and requires case specific review.

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DIRECT TAX PROPOSALS CORPORATE INCOME TAX … Tax Rates Domestic Company

Taxable Income (Rs.) Proposed Effective Rate

Existing Effective Rates

Upto 10,000,000 30.90% 33.66%

Above 10,000,000 33.99% 33.66%

- Marginal relief shall be available in certain cases Foreign Company

Taxable Income (Rs.) Proposed Effective Rate

Existing Effective Rates

Upto 10,000,000 41.20% 41.82%

Above 10,000,000 42.23% 41.82%

- Marginal relief shall be available in certain cases - The above excludes cases liable to special rates

of tax (such as, non-residents earning interest income, royalty income or fee for technical services). Even in

these cases, the tax rate would be increased by a surcharge of 2.5% (for income in excess of Rs. 10 Mil) and education cess of 3%.

Minimum Alternate Tax - Domestic Company

Taxable Income (Rs.) Proposed Effective Rate

Existing Effective Rates

Upto 10,000,000 10.30% 11.22%

Above 10,000,000 11.33% 11.22%

- Marginal relief shall be available in certain cases Other Rates – Domestic Companies

Tax Particular Proposed Effective Rate

Existing Effective Rates

Dividend

Distribution Tax

16.995% 14.025%

Fringe Benefit Tax 33.99% 33.66%

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Widening the Tax Base The source rule with respect to interest income,

royalty income and fee for technical service earned by a non-resident has been clarified with retrospective effect. The subject income which is deemed to accrue or arise in India would be liable to tax in India irrespective of the situs of the services or any territorial nexus of the non-resident in India.

SEZ units would need to be formed as a new

undertaking to be eligible to claim the income tax reliefs. Conditions in relation to formation of units similar to those existent in Section 10A/10B have been introduced in this regard. It may be noted that the amendments are effective 10 February 2006.

A venture capital company or fund would now

have a pass-through status only in respect of income from investment in a venture capital undertaking (VCU) engaged in specified businesses.

VCU’s defined to mean a non-listed domestic company which is engaged in the business of: – nanotechnology, – information technology relating to hardware

and software development, – seed research and development, – bio-technology, – R&D of new chemical entities in the

pharma sector, – production of bio-fuels, – composite hotel-cum-convention centre

with seating capacity of more than three thousand,

– dairy industry or poultry industry.

Any expenditure incurred in respect of which payment is made otherwise than by way of an account payee cheque drawn on a bank or account payee bank draft will either be disallowed or if the accrual was in an earlier year the same shall be treated as income of the current year. Earlier the disallowance was restricted to 20% of the expenditure.

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The relief available upon re-investment of capital gains in certain long-term specified assets has been capped. The investments made on or after 1 April 2007 should not exceed Rs 5,000,000. Further the definition of long-term specified assets has been rationalized.

Minimum Alternate Tax (MAT) extended to

income entitled for tax relief under sections 10A and 10B.

Dividend distribution tax (DDT) has been

increased to 15% from 12.5% (excludes surcharge and cess).

The DDT rate has been increased to 25%

(excludes surcharge and cess) on dividends paid by money market mutual funds and liquid mutual funds to all investors.

Transfer Pricing (effective 01 June 2007) The existing provisions require the assessing

officer to determine the taxable income having regard to the transfer pricing order. However,

now the taxable income has to be determined in conformity with the order passed by the TPO.

The time-limits for completion of assessment

of total income by the assessing officer in cases selected for transfer pricing scrutiny has been extended by twelve months.

Further, the transfer pricing officer needs to complete the transfer pricing assessment at least 60 days before the expiry of the new statutory time limit for making the assessment.

Fringe Benefit Tax [effective FY 2007-08] FBT has been levied on any specified security

[Employee Stock Option Plan (ESOP)] or sweat equity shares allotted or transferred to an employee or former employee either free of cost or at a concessional rate.

Time limit for the completion of TP audits for FY 2004-05 would be 31.10.2008.

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The employer would be liable to fringe benefit tax on the value of benefit arising to the employee (or former employee) at the time of exercise (i.e. fair market value less exercise price recovered from the employee). The methodology for determining fair market value is yet to be prescribed. It should be noted that there exists an ambiguity on the value liable to fringe benefit tax. The same should be inferred as “yet to be determined”, a view outlined by the FM during a media interview. Further the capital gains upon transfer of the shares would be the differential between the sale consideration and the value of the benefit.

The scope of advertising expenses not liable to FBT has been expanded to include expenses incurred for display of products; and distribution of samples free or at a concessional cost.

The due dates and installments for payment of advance tax on fringe benefits have been aligned with that of advance tax on income.

Tax Relief’s Interest earned on notified bonds issued by

State Pooled Finance Entities would be exempt from tax.

Income of Investor Protection Funds set up by

commodity exchanges in India would be exempt from tax subject to conditions.

The weighted deduction for scientific research

and development expenses would be available for five more years i.e. till 31 March 2012.

Accumulated losses and unabsorbed

depreciation of amalgamating public sector companies in the business of aircraft would be eligible for set off and carry forward by the amalgamated company.

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Tax reliefs available to undertakings engaged in infrastructure developments has now been extended to specified undertakings engaged in cross country natural gas distribution network, including gas pipeline and storage facilities integrated to the network and to navigation channel in the sea.

Time limit for undertaking owned by an Indian

company and set up for reconstruction or revival of a power generating plant is extended to 31st March 2008 from 31st March 2007.

The tax reliefs under Section 80IA would not

be available to the amalgamated or resulting companies if the enterprise or undertaking is acquired on or after 1st April 2007.

The time-limit for setting up of industrial

undertakings in the State of Jammu and Kashmir for the purpose of being eligible for tax relief’s has been extended by five more years i.e. the units need to commence operations before 31 March 2012 to be eligible for the tax reliefs.

A five year income tax holiday for two, three or four star hotels and for convention centres with a seating capacity of not less than 3,000 has been proposed. The hotel or centre should be completed and begin operations in National Capital Territory of Delhi and the districts of Faridabad, Gurgaon, Ghaziabad or Gautam Budh Nagar during April 1, 2007 to March 31, 2010.

Insurance premium paid on the health of

employees under specified schemes, eligible for deduction irrespective of mode of payment (except cash). Earlier the condition required payment by mode of a cheque.

Withholding Taxes (effective 1 June 2007) Tax would be deducted at source (TDS) in case

of interest payments exceeding Rs 10,000 payable on 8% Savings ( Taxable ) Bonds, 2003.

The threshold limit for TDS in case of interest

paid by a banking company, co-operative

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society engaged in the business of banking, post office under any scheme framed and notified by the central government has been increased to Rs 10,000.

TDS has now been introduced on payments

for contract work made by individuals or Hindu Undivided Family whose turnover from business exceeds Rs 4,000,000 or gross receipts from profession exceeds Rs 1,000,000 during the immediately preceding financial year. However no TDS will be deductible if the payments are exclusively for personal purposes.

The rate for TDS on payments towards

commission, brokerage, fee for professional or technical services have been increased to 10% from 5%.

In relation to TDS on rent payments, the

existing definition of “Rent” as amended by the Taxation Laws (Amendment) Act, 2006 has come into force from 13th July, 2006 and in this definition rent on three new items, viz. machinery, plant and equipment have been

inserted. The TDS on rent paid towards machinery, plant and equipment has now been reduced to 10%.

In cases where TDS on income payable to non-

residents (other than interest) is to be borne by the person by whom the income is payable, such person can prefer an appeal for a declaration that no tax was deductible.

Earlier an appeal could be preferred in situations where the payer had denied his liability to deduct. However, now the same is restricted to non-resident payments where the tax is borne by the payer.

Changes are proposed in the interest

calculations for failure to deduct or pay tax at source. The interest would now be computed at the rate of 1% per month or part of the month.

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Tax Administrative Measures The registration requirements for charitable or

religious trusts or institutions in order to claim tax exemptions have been rationalized.

The process of approval and monitoring funds

/institutions established for charitable purpose and eligible for tax reliefs has been rationalized.

In light of the electronic filings of tax returns,

certain provisions have been rationalized to facilitate annexure-less returns. Further rules are expected on the same.

The assessing officer is required to provide the

taxpayer an opportunity of being heard, prior to directing a special audit.

Assessment and re-assessment orders in search

cases need to be approved by the Joint Commissioner

The time-limits for grant of stay by the

Appellate Tribunal have been rationalized.

Settlement commission scheme has been revised.

For the purpose of imposition of penalty,

concealment of income will now include cases where during a search proceeding, it is found that a taxpayer has not declared in his return prior to such search, income represented by any unrecorded assets or by a false expense entry in the books of accounts.

Others

The definition of “India” has now been amended with retrospective effect to provide for a more comprehensive definition aligned with the Constitution of India.

Rationalization of deduction in respect of

special reserves created and maintained from profits derived from an eligible business by specified entities (such as financial corporations, housing finance company, banks, co-operative banks, etc). The relief is now restricted to 20% of the profits transferred vis-à-vis the 40% threshold provided earlier.

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INDIVIDUAL INCOME TAX Tax Rates All (Except Resident Women and Senior Citizens)

Income (Rs.) Proposed Rates Existing Rates

0 – 100,000 Nil Nil 100,001 to 110,000 Nil 10% 110,001 to 150,000 10% 10% 150,001 to 250,000 20% 20% 250,001 and above 30% 30%

Notes: 1. Basic exemption limits increased in this budget 2. In case of resident women below the age of 65

years, the basic exemption limit has been increased to Rs 145,000 from Rs 135,000

3. In case of all resident senior citizens (i.e. age of 65 years or more) the basic exemption limit has been increased to Rs 195,000 from Rs 185,000.

4. A surcharge of 10% for individuals with taxable income in excess of Rs 1,000,000 is applicable in addition to tax

5. A cess of 3% is further leviable on the income-tax (including surcharge, if any)

6. Marginal relief shall be available in certain cases

Proposals Archaeological collections, drawings, paintings,

sculptures, or any work of art are now considered to capital assets. Earlier these could have been considered to be personal effects not liable to tax.

In relation to the definition of perquisite the

term “concession in the matter of rent” has now been clarified.

The compensation received from the

Government in the event of any disaster has been exempt from tax. The relief would not be available to the extent any loss or damage has been allowed as a deductible expenditure.

Tax relief in respect of contribution to notified

pension schemes extended to all employees. Earlier it was restricted to employees of the Central Government.

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Insurance premium paid under specified schemes, eligible for deduction irrespective of mode of payment (except cash). Further the eligible limit for relief has been increased to Rs 15,000 (in case of senior citizens the limit is increased to Rs 20,000).

Tax relief in respect of interest paid on loan

taken for higher education has now been extended to include loan taken in relation to higher education of the spouse and children.

BANKING CASH TRANSACTION TAX Offices or establishments of the Central and

State Governments are excluded from the purview of BCTT.

The cash withdrawal limit for levy of BCTT on

individuals and HUFs has been raised to Rs 50,000 from Rs 25,000 [Effective 1 June 2007].

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INDIRECT TAXES… CENTRAL EXCISE Tax Rate The rate of central excise duty remains unchanged at 16%. In addition to the education cess of 2% a new cess of 1% (for higher and secondary education cess) introduced. Effective rate to be 16.48%. Levy Goods manufactured in Free Trade Zones and

cleared in the domestic to be liable to normal duty of excise. Hitherto, the levy of excise was equivalent to the duty of customs leviable on like goods imported into India.

In the following cases packing or repacking,

labelling or relabelling including alteration of retail sale price would tantamount to manufacture. – Portland cement-dry, coloured and slag

– Printers, with or without functions of copying or facsimile

– Personal computers, printers, monitors, keyboards, scanners, mouse and modems

– Set top boxes for gaining access to internet or for televisions

Valuation New provisions for valuation of job work transactions introduced. The value would be: Transaction value

(selling price) of the principal manufacturer if the goods are directly sold from the job workers’ premises;

Normal value of the goods at or about the

same time if the goods are sold in the same form from any other place;

Manufacture of goods on job work liable to central excise at the sale value of such goods by the principal.

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In any other case, the price as may be determined in accordance with other existing provisions subject to adjustment of cost of transportation.

CENVAT Credits Secondary and higher education cess entitled to

CENVAT credit against education cess or secondary or higher education cess on excisable goods or education cess on taxable services.

Computational method for determining eligible

amount of CENVAT credit for general insurance companies revamped. Where the insurance company provides both taxable and non taxable / exempt services, the input credits to be computed based on the ratio of taxable vis-à-vis non-taxable / exempt turnovers in lieu of the current system of 20% of output tax.

On the changeover from CENVAT credit

scheme to exemption scheme by the manufacturer / service provider, the duty

element contained in inputs lying in stock on the date of changeover to be paid back to the Central Government.

Exemptions Basic exemption threshold for small scale units

raised from Rs. 10 Mil to Rs. 15 Mil. Exemption on manufacture and supply of

specified goods currently available to non-commercial research institutions extended to all other research institutions other than hospitals, with a cap on the value of goods at Rs. 50,000 per annum. To be noted that such institutions are required to be registered with the DSIR.

Rationalization The powers to grant remission of duty on

goods lost or destroyed amended. Now, permission of the Commissioner required only in cases where the duty involved is in excess of Rs. 500,000.

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Procedural e-payment of central

excise mandatory for assessees having duty payouts of more than Rs. 5 Mil (other than through use of CENVAT credits) during the preceding financial year.

Invoices issued by manufacturers / dealers to

contain the address of the concerned central excise division in addition to the registration number.

Rebate or Refund Procedure relating to grant of refund of

CENVAT credits to manufacturer exporter relaxed. The requirement of attestation of original shipping bill or bill of export has been amended to suffice attestation of photocopy of such documents.

Exporters eligible for rebate of additional duty

of customs paid on inputs used in export goods.

Duty rate changes

Description WEF 01.03.2007

Upto 28.02.2007

Motor spirit-Petrol 6% + Rs.5 PL

8% + Rs.5 PL

High Speed Diesel 6% + Rs1.25 PL

8% + Rs1.25 PL

Bio diesel Nil 16% DVD Writers Nil 16% Flash memories Nil 16% Plywood, veener panels and similar laminated woods

8% 16%

Wadding, gauze 8% 16% Yarn/fabric mercerising & fabric dyeing machine

8% Nil

Biscuits in packaged form with MRP not more than Rs. 50 / kg

Nil 8%

All kinds of food mixes including instant food mixes

Nil 8%

Water purification machinery not requiring electricity

Nil 16%

Toothbrush 16% 8% Woven fabrics of man made synthetic filament yarn

12% 8%

e-payment of central excise mandatory for specified assessees

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Settlement of Cases Cases which are pending for revisions or

before any appellate authority restricted from being applied for settlement.

Cases which have been referred back to the

adjudicating authority to be eligible. Cases for short levy on account of

undervaluation, inapplicability of exemption notification or CENVAT credits allowed.

Cases involving improper maintenance of daily

stock register restricted. The minimum amount of duty involved raised

from Rs. 200,000 to Rs. 300,000. The powers of the Settlement Commission to

grant immunity under Indian Penal Code or any other Central Act has been withdrawn.

Similar amendments have been made under the Customs Act, 1962.

Others In respect of refunds which may arise due to a

judgement, decree, order or direction of an appellate authority, the time limit for making an application (1 yr / 6 months, as the case may be) for refund would be reckoned from the date of such judgement etc.

In case of suo motu review of any proceedings

by the Committee of Chief Commissioner or Commissioners, the time limit for passing the order has been reduced from 6 to 3 months from the date of order of adjudicating authority. Further, the time limit for preferring an appeal against such order by the officer has been reduced from 3 to 1 month.

‘Joint ventures in India’ which are eligible to

prefer an application for advance ruling have now been given a meaning. It would mean a contractual arrangement for undertaking an economic activity wherein the non-resident

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equity holder / partner has a substantial interest.

Issue of excise invoice without delivery of

goods based on which the user becomes entitled to avail CENVAT credit shall be liable to penalty of an equivalent amount of duty subject to a minimum of Rs. 5,000.

The minimum penalty leviable on account of

contravention due to incorrect possession of goods, removal of goods, accounting of goods, failure to register or evade duties has been reduced from Rs. 10,000 to Rs. 2,000.

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SERVICE TAX Tax Rate Service tax rate remains unchanged at 12%. In addition to the education cess of 2% a new cess of 1% (for higher and secondary education cess) introduced. Effective rate to be 12.36%. New Services The following services are proposed to be brought under the service tax net: Renting, letting, leasing or

licensing of immovable properties.

Services provided in

relation to execution of works contracts. In this regard, the Finance Minister has suggested an optional Composite Scheme for levy of tax @

2% of the contract value. The details of the scheme are yet to be notified.

Development and supply of content for use in

telecommunication services, advertising agency services or online information and database access or retrieval services.

Asset management including portfolio

management and fund management services when provided by persons other than banking company, financial institution, NBFC, body corporate or any commercial concern. These

services provided by specified persons have since been taxable under banking and other financial services.

Design services in

relation to furniture, consumer products, industrial products, packages, logos, graphics, websites and corporate identity designing and production of

Renting, letting, leasing or licensing of immovable properties liable to service tax if the same is for use in the course or furtherance of business or commerce other than to educational bodies (other than commercial training or coaching centres) and by or to religious institutions

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three dimensional models. However, interior decoration and fashion designing would not be includable herein but remain taxable under the respective heads.

Services relating to mining of minerals, oils and

gas. Scope Expansions The scope of certain existing taxable services has been enlarged to levy service tax on additional services by existing service providers. Space selling services to include sale of space

for advertisements in business directories, yellow pages and trade catalogues meant for commercial purposes.

Computer hardware engineering

services taxable under ‘consulting engineering’.

Banking and other financial

services to include cash

management services. Further, such services would be taxable only when provided by ‘commercial concerns’. The amendment in the previous Budget to include services provided by ‘any other person’ has been reversed in specific to banking and other financial services.

Management consulting services expanded to

include services in relation to business. These services have been rechristened as ‘management or business consulting services’.

Telecommunication related services enlarged to

include services provided to any person other than a subscriber. Hitherto, such services were liable to tax under specific categories only when provided to subscribers.

Rent-a-cab services which hitherto included

only motor cabs and maxicabs has been expanded to cover other motor vehicles which are constructed or adapted to carry more than 12 passengers.

While the computer software engineering services continue to be excluded, only computer hardware engineering services are proposed to be taxed.

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‘Event management, ‘Mandap keeper’ and

‘Pandal or shamiana’ services have been expanded to include ‘marriage functions’.

Basic Exemption The basic exemption threshold for payment of service tax enhanced from Rs. 400,000 to Rs. 800,000. Consequentially, the limit for registration also enhanced from Rs. 300,000 to Rs. 700,000. Others Exemptions The following would be exempt from service tax: Technical testing and analysis provided by

approved clinical research organisations (CRO) to conduct clinical trials of newly developed drugs including vaccines and herbal remedies on human participants.

Taxable services provided by a technology

business incubator (TBI) or a science and technology entrepreneurship park (STEP)

recognized by the National Science and Technology Entrepreneurship Development Board of the Department of Science and Technology.

As a further facilitation, services provided by

entrepreneurs located within the TBI or STEP, for a period of 3 years provided the turnover does not exceed Rs. 5 Mil during the current or previous financial year.

Club or association services provided by

‘resident welfare associations’ to its members provided the monthly consideration does not exceed Rs. 3,000.

Digitized delivery of the contents of

cinematograph films if the same is transmitted directly to the cinema theatre through satellite, microwave or terrestrial communication line. No exemption would be granted if the same is transferred through any physical means.

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Export of Services Taxable services hitherto qualified as ‘exports’ only when such services were among others, ‘delivered outside India’. This requirement has been relaxed and the test of ‘delivered outside India’ has been dispensed with. It would henceforth suffice if such services are ‘provided from India and used outside India’. Rationalization Provisions for conduct of special audit under

the Central Excise Act, 1944 made applicable to Service Tax. Consequently, if the Commissioner has reasons to believe that the credit of duty availed or utilized by the service providers is not within the normal limits, he may direct an audit of the accounts by the cost accountant nominated by him.

Telephone, telegraph, telex, leased circuit,

pager and facsimile services consolidated as ‘telecommunication services’. Services which are specifically classifiable under ‘on-line

information and database access or retrieval’, ‘broad casting’ and ‘internet telephony’ services are excluded herefrom.

Procedural The onus of payment of service tax in respect

of sponsorship services is cast upon the recipient of services only if the recipient body corporate or firm is located in India.

Excess payment of service tax by a service

provider may be adjusted against subsequent payments: – Without any monetary limit, if it is on

account of delayed receipt of information from other offices in case of a multi office service provider

– Upto Rs. 50,000 per month if the adjustment is due to any other reason

– No adjustments would be allowed if they are due to change in interpretation of law

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Clarifications Pre-recruitment screening of candidates,

verification of credentials and antecedents of the candidate and authenticity of documents submitted by the candidate are clarified to be covered under manpower recruitment and supply agency services.

‘Finance lease’ (liable to tax under banking and

other financial services) has now been explained. It refers to an agreement for use and occupation of an asset by the lessee in consideration for lease rentals comprising of full cost and interest and further where the lessee has an option to purchase the asset at the end of the lease period.

‘Joint ventures in India’ which are eligible to

prefer an application for advance ruling have now been given a meaning. The meaning as detailed under the central excise module would be applicable hereunder.

Compliances Mistakes or omission in the half yearly returns

may be rectified by filing a revised return. Revised return may be filed within 60 days from the date of original return.

Filing of delayed returns facilitated with a late

fee to be prescribed. The maximum fee shall not exceed Rs. 2,000. .

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CUSTOMS Rate of duty In furthering the Government’s declared policy

of bringing the customs duty structure to the ASEAN levels, the peak rate of duty on non-agricultural products is reduced from 12.5% to 10%.

A secondary and higher education cess @ 1%

of the aggregate duty introduced. This is in addition to the education cess @ 2% currently payable. All provisions applicable to education cess would apply mutatis mutandis to secondary and higher education cess.

Valuation Valuation provisions have been restructured to replace the ‘deemed value’ concept with the ‘transaction value’ for levy of duty on import goods. Further, it would include; Any costs / services paid by the buyer Commission / brokerage

Engineering assists Design work, royalty and license fee Transportation upto the place of importation Insurance and handling charges

The method for determining the transaction value and the conditions applicable thereto are yet to be prescribed. Export duty Exemption from export duty granted for iron ores and concentrates or chromium ores and concentrates withdrawn. Export duty would be payable as follows:

Description Duty

Iron ores and concentrates of all forms

Rs. 300 per tonne

Chromium ores and concentrates of all forms

Rs. 2,000 per tonne

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Exemptions The sunset date for exemption of additional

duty of customs of 4% on parts, components and accessories of mobile handsets and cellular phones extended, from 30.04.2007 to 30.06.2009.

Digital cinema development projects

sponsored by Ministry of Information and Broadcasting are notified as ‘project imports’. Goods imported hereunder would attract basic customs duty @ 7.5%.

Concessional rate of basic customs duty @ 5%

and exemption from the whole of the additional duty currently applicable to non-commercial research institutions extended to all other research institutions other than hospitals with a cap on the value of goods imported at Rs. 50,000 per annum. To be noted that such institutions are required to be registered with the DSIR.

Concessional rate of duty on goods imported as passenger baggage extended to include the specified equipments / materials required for launch vehicles, satellites and payloads.

Goods liable to a concessional rate of 5% of basic customs duty when imported for R&D by the R&D wing of Pharma and Bio-Technology sector widened to include 15 other goods.

Changes in Import duties

Description WEF 01.03.2007

Upto 28.02.2007

Medical equipments 7.5% 12.5% Dredgers NIL 5% Polyester staple fibers 7.5% 10% Polyester filament yarn 7.5% 10% Cut & polished diamonds 3% 5% Second / defective iron and steel

10% 20%

Food processing mach. 5% 7.5% Crude sunflower oil 50% 65% Refined sunflower oil 60% 75% High ash coking coal NIL 5% Watch dials & movts 5% 12.5%

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Description Wef

01.03.2007 Upto

28.02.2007

Aircrafts and helicopters 3% NIL Private import of parts of gliders or simulators of aeroplanes or aircrafts

3% Nil

Recorded magnetic tapes for TV Serials

10% Nil

TV Camera and audio recording equipment

10% Nil

Rationalization Erroneous payment of drawbacks by the

Central Government would henceforth be repayable with interest form the date of payment. Hitherto, the interest was payable only for the period in excess of 2 months from the date of demand.

Certain special administrative provisions

contained in the Customs Act relating to SEZs are omitted. Thus, the provisions as contained in the Special Economic Zones Act, 2005 would only apply.

Penal provisions in relation to mis-declaration

of the value of goods or for dealing in goods which are liable for confiscation is extended to include fraudulent claims of drawback.

Provisions in relation to joint ventures in India,

refunds arising out of any judgement, decree, order or direction of an appellate authority and suo motu review powers of the Committee of Chief Commissioner or Commissioners amended. These amendments as detailed under the central excise proposals would be equally applicable.

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CENTRAL SALES TAX Proposals In terms of the policy for phasing out of CST,

the rate of tax has been reduced from 4% to 3%.

Aviation fuel sold to aircrafts with a maximum

take-off mass of less than 40,000 kgs operated by scheduled airlines notified as ‘declared goods’

.

Vision 2010 to introduce national level GST remains in focus. The empowered committee of State finance ministers to work closely with the Central Government to prepare the roadmap for introducing the GST

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EFFECTIVE DATES The effective dates for the Indirect Tax proposals are as follows: Customs & Central Excise

Particulars Effective Date

Changes in duty rates & exemptions

01.03.2007

Levy of secondary and higher education cess

01.03.2007

Levy of export duty 01.03.2007 Valuation of job work transactions

1st April 2007

Central Sales Tax

Particulars Effective Date

Levy of tax at 3% 01.04.2007

Service Tax

Particulars Effective Date

New services introduced To be notified Expansion of scope in existing services

To be notified

Levy of secondary and higher education cess

To be notified

Amendment to Export of Service Rules 1st March, 2007

Basic exemption limit of Rs.800,000 1st April, 2007

Eligibility to file revised returns / belated returns

To be notified

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A LOOK BEYOND… This section is looking beyond the proposals to identify decision points requiring quick attention:

Should dividend be declared before the finance bill obtains the presidential assent or after 31 March?

Is there merit in exercising the stock options prior to 31 March 2007? – Valuation methodology unknown – Implications for Indian MNC subsidiaries

participating in overseas parent company’s plan

– Tax impact to be passed on to the employee or borne by the employer (if company’s plan not in accordance with the Central Government guidelines prescribed under existing provisions, the employee would be neutral to bearing the cost )

Track developments for new income tax code expected to be tabled during 2007-08

Impact of MAT for 10A/10B units may be lowered? – Foreign tax credit planning – Carry forward of MAT credits

Benefits to SME segment (no surcharge and excise duty) likely to improve their competitiveness. Does it trigger a need to evaluate cost of economies with a larger supplier vis-à-vis use of multiple vendors?

Invoice formats need a relook! Similar to education cess of 2%, would the secondary or higher education cess require a separate and distinct disclosure / indication on the face of the sales invoice?

Need to review effective tax cost of Purchases from units in FTZs. Would the increase in central excise offset the increase in CENVAT credits available?

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The views expressed and the information provided in this newsletter are of general nature and is not intended to address the circumstances of any particular individual or entity. Further the above content should neither be regarded as comprehensive nor sufficient for making decisions. Although we endeavour to provide accurate and timely information, there is no assurance or guarantee in this regard. No one should act on the information or views provided in this publication without appropriate professional advise. It should be noted that no assurance is given for any loss arising from any actions taken or to be taken or not taken by anyone based on this publication. This is meant for private circulation only.

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