india budget 2009 challenging agenda*. direct taxes

India Budget 2009Challenging Agenda*

Direct Taxes

PricewaterhouseCoopersJuly 07, 2009

Slide 3India Budget 2009

Corporate Tax Rates

No change in tax rates• Corporate tax• Surcharge & Cess• DDT

Rate of MAT hiked from 10% to 15% of book profits.

Fringe Benefit Tax withdrawn from 1st

April 2009

Commodities Transaction Tax

withdrawn from 1st April 2009

Period of MAT credit increased

from 7 years to 10 years

PricewaterhouseCoopersJuly 07, 2009

Slide 4India Budget 2009

New Tax Holiday / Deduction• Commercial production of Natural Gas for NELP VIII (Sec 80IB(9))

• Investment-linked tax incentive for Pipeline (Sec 35AD)

• Weighted deduction extended to all Manufacturing / Production of any article / thing (except Negative list) (Sec 35(2AB))

• Anomaly in formula for computing tax holiday benefits for SEZ units resolved prospectively

PricewaterhouseCoopersJuly 07, 2009

Slide 5India Budget 2009

Project Sunset Date - Earlier

Sunset Date - Now

Power Generation, T&D (Sec 80IA(4)(iv))

March 31, 2010 March 31, 2011

Reconstruction & revival of Power Plant(Sec 80IA(4)(v))

March 31, 2008 March 31, 2011

Refining of mineral oil for private sector(Sec 80IB(9))

March 31, 2009 March 31, 2012

Export units / FTZ units / 100% EOU(Sec 10A / 10B)

March 31, 2010 March 31, 2011

Tax Holiday – Sunsets Extended

PricewaterhouseCoopersJuly 07, 2009

Slide 6India Budget 2009

Pipeline Tax Holiday• Deduction under section 80IA for laying and operating a cross country

Natural Gas distribution network discontinued

• 100% deduction on capital expenditure in the year of incurrence, for Companies engaged in “specified business”

• Capital expenditure exclude land or goodwill or financial instrument

Specified Business CommencementSetting up and operating a cold chain facility April 1, 2009

Setting up and operating a warehousing facility for storage of agricultural produce

April 1, 2009

Laying and operating a cross-country natural gas or crude or petroleum pipeline network for distribution

April 1, 2007

Cross Country not defined Whether available to City Gas Distribution

PricewaterhouseCoopersJuly 07, 2009

Slide 7India Budget 2009

Pipeline Tax Holiday

• Capital asset demolished/ transferred – Business Income Subject to higher tax rate as compared to Capital Gains

• Set off of loss only against specified business as definedLoss may be carried forward for unlimited period

• Expenditure capitalised during earlier years would be allowed in March 31, 2010

PricewaterhouseCoopersJuly 07, 2009

Slide 8India Budget 2009

Tax impact - 80-IA vs. 35AD

Assumptions -• Profit before depreciation and tax (‘PBDT’) for 10 years - INR 100 per annum• Capital Expenditure for year 1 - INR 600• Depreciation rate - 15% on WDV

Y-1 Y-2 Y-3 Y-4 Y-5 Y-6 Y-7 Y-8 Y-9 Y-10 Total

80-IA 1.7 4 5.95 7.6 9.01 10.21 11.23 12.1 12.83 13.46 88.09

35AD 1.7 4 5.95 7.6 9.01 10.21 11.23* 18.29* 33.99 33.99 135.97

Average tax cost for 10 years is 8.8% of PBDT in case of section 80-IA which increases to 13.6% of

PBDT in case of section 35AD

* tax liability after MAT credit

Tax Impact

PricewaterhouseCoopersJuly 07, 2009

Slide 9India Budget 2009

Tax holiday on Natural Gas• Controversy created by memorandum explaining Finance Bill 2008,

whether mineral oil includes natural gas

• Tax holiday now proposed to be available in respect to production of natural gas – Extended only for NELP VIII blocks

Gas produced in CBM blocks ??

Gas produced in Blocks awarded other than NELP VIII ??

PricewaterhouseCoopersJuly 07, 2009

Slide 10India Budget 2009

Tax holiday to Refineries

• Welcome change to extend time period till 31 March 2012 for private refineries to commence

• Private sector refineries now at par with notified Public sector undertaking refineries

PricewaterhouseCoopersJuly 07, 2009

Slide 11India Budget 2009

Controversy regarding definition of undertaking

• Blocks licensed in a single contract to be treated as “undertaking” for the purpose of computing deduction

• Retrospective amendment wef April 1, 2000

• Position of each well a separate undertaking – not possible

PricewaterhouseCoopersJuly 07, 2009

Slide 12India Budget 2009

Taxation of Limited Liability Partnership (LLP)

• Similar to partnership firms (Not a transparent entity)

• No Dividend Distribution Tax (DDT) and Minimum Alternative Tax (MAT)

• Conversion of partnership firms to LLP – tax neutral

PricewaterhouseCoopersJuly 07, 2009

Slide 13India Budget 2009

Change in TDS Rates

Major changes to rationalise TDS rates

Nature of payments Existing ProposedRent of plant, machinery or equipment

10% 2%

Rent of land & building to individual / HUF

15% 10%

Rent of land & building to persons other than individual / HUF

20% 10%

Payments to individual / HUF contractors

2% 1%

Payments to sub-contractors 1% 2%

Payments for advertising contracts 1% 2%

Payments to small transporters 1% / 2% Nil

Tax will be deducted at 20% (or higher) in all cases if the deductee doesn’t disclose PAN to deductor

PricewaterhouseCoopersJuly 07, 2009

Slide 14India Budget 2009

Direct Tax - Others

• FBT to be abolished

• Employee to pay tax on ESOP gains

- Taxable value would be difference between FMV as on date of exercise and price paid by employee

• Employee to pay tax on contribution to approved superannuation fund exceeding Rs 1 Lakh

• Rules to be framed for other perks

PricewaterhouseCoopersJuly 07, 2009

Slide 15India Budget 2009

Direct Tax - Others

• Gifts in kind liable to tax – individuals & HUF

• Basic wealth tax exemption limit increased from 15 lakh to 30 lakh

PricewaterhouseCoopersJuly 07, 2009

Slide 16India Budget 2009

Transfer Pricing• CBDT empowered to formulate ‘Safe Harbour’ rules.

Will facilitate smooth cross-border transactions

“Safe Harbour” means circumstances in which the Revenue authorities shall accept the transfer price of the taxpayer

PricewaterhouseCoopersJuly 07, 2009

Slide 17India Budget 2009

Transfer Pricing

• New Dispute Resolution mechanism introduced for persons in whose case a Transfer Pricing (‘TP’) adjustment has been made

• Apparently applicable to all foreign companies, whether or not there is a TP adjustment

• Where any objection is received from a taxpayer, a Dispute Resolution Panel shall issue directions to the Assessing Officer to enable him to complete the assessment

• In such cases, the Assessing Officer’s order is appealable directly to the Income Tax Appellate Tribunal

PricewaterhouseCoopersJuly 07, 2009

Slide 18India Budget 2009

Present scenario

Proposed scenario

120 x 0.95= 114

100 x 1.05= 105

14

20

Particulars Revised ALP after 5% range

Transfer Price

100

100

TP Adjustment

Transfer Pricing

• 5% range benefit available only if the Arm’s Length Price falls within +/-5% range of transfer price.

Illustration - Indian captive services provider:

120

120

Arm’s Length Price

(Mean)

PricewaterhouseCoopersJuly 07, 2009

Slide 19India Budget 2009

Direct Tax - Others

• Time limit prescribed for assessment of withholding tax returns for payments to residents - Capped at four years – whether applies to reassessment as well

• Mechanism for computerised processing of statements of tax deducted at source

• Introduction of allotment of a Document Identification Number by the assessing officer

PricewaterhouseCoopersJuly 07, 2009

Slide 20India Budget 2009

Tax Rates - IndividualTax Rates Existing Slabs Proposed Slabs

Nil Upto Rs. 1.5 lakhs Upto Rs. 1.6 lakhs

10% Rs. 1.5 lakhs to Rs. 3 lakhs Rs. 1.6 lakhs to Rs. 3 lakhs

20% Rs. 3 lakhs to Rs. 5 lakhs Rs. 3 lakhs to Rs. 5 lakhs

30% Above Rs. 5 lakhs Above Rs. 5 lakhs

Basic Exemption Limit Basic Exemption Limit

Rs. 1.80 lakhs for women Rs. 1.90 lakhs for women

Rs. 2.25 lakhs for senior citizens Rs. 2.40 lakhs for senior citizens

10% Surcharge for individual tax payers removed Effective Maximum Marginal rate of tax reduced to

30.90%

PricewaterhouseCoopersJuly 07, 2009

Slide 21India Budget 2009

Unfinished Agenda

• Rationalisation of DDT regime

• Tax reforms for outbound investments

• Re-engineering of tax processes

• New Tax Code