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Fringe Benefit Tax withdrawn from 1st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withdrawn from 1st April 2009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



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



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



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



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



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



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 ??



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



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



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



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



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



Direct Tax - Others

• Gifts in kind liable to tax – individuals & HUF

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



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



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



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)



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



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%



Unfinished Agenda

• Rationalisation of DDT regime

• Tax reforms for outbound investments

• Re-engineering of tax processes

• New Tax Code

india budget 2009 challenging agenda*. direct taxes

Documents

tax pbdt

tax liability

prospectivelyindia budget

yearsindia budget

pipeline tax holidaydeduction

higher tax rate

wdvaverage tax cost

commodities transaction