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Date: 12 March 2008		Compiled by : M. Sathya Kumar
	Budget 2008 Analysis Direct taxes - A balanced budget The economic backdrop to the Budget 2008 was mixed; though India has witnessed high growth rate in the recent past, coupled with burgeoning foreign exchange reserves and phenomenal increase in the direct tax collections, the fear of US slowdown, inflation, ever-strengthening rupee and high interest rates, are a matter of some concern. With buoyancy in tax collections, the industry expected a reduction in effective corporate tax rates (including surcharge and cess), Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT). This would have given further fillip to investment, which would help in sustaining the high growth rates. The Budget proposals have left a mixed feeling. The Finance Minister opened the Direct Tax Budget speech, stressing on the buoyancy in tax collections and on attaining a Tax—GDP ratio of 12.5 per cent in 2007-08 from 9.2 per cent in 2003-04. Let’s look at some positives in the Budget: It has proposed a fiveyear tax holiday to hospitals situated in non-metros and hotels constructed in specified areas. With a view to encourage outsourcing of scientific research, the benefit of weighted deduction of 125 per cent has been extended to payments made to an approved research company. DDT payouts between parent and subsidiary companies are now allowed to be set off in order to mitigate the cascading effect up to one level. Though, on the Fringe Benefit Tax (FBT) front there has not been much relief, the Budget has provided for rationalisation of these provisions to exclude payments made to sponsor a sportsman and for organising sports events. A long-standing demand of service industry to extend the benefit of amortization of certain preliminary expenses has finally been accepted. The proposal for removal of Banking Cash Transaction Tax (BCTT) from April 1, 2009, would help reduce multiple taxes. Now, something that could have been avoided: An increase in the short-term capital gains tax on shares from 10 per cent to 15 per cent on a justification to align it with the dividend rate is unlikely to be received well by industry and stock market. Similar to the past practice, certain amendments have been made with retrospective effect (for example, addition of deferred tax and DDT in book profits for the purpose of MAT, clarification regarding written down value of assets for the purpose of computation of depreciation, penalty provisions etc., which annul the impact of certain judicial precedents. This may have the effect of opening another series of litigation for settled matters. The Finance Minister, taking cognizance that the growth in fiscal year 2008-09 would not be what was witnessed in the earlier years, has taken certain steps, including granting indirect tax incentives like reduction in excise duty to boost the industry sentiment, while holding on the reduction in the corporate tax rate. On the whole, the Budget seems to be a balanced one. Indirect tax - More of the same Budget 2008 does not have any radical or bold moves on the indirect tax front. This is probably just as well, given that in an election year, the best that one can expect is no overly populist measures. Amongst the indirect taxes, reduction in the peak rates of excise duty from 16 per cent to 14 per cent is the most significant change. This is in accordance with the intention to align the duty levied on goods and services. This reduction also has the impact of decreasing the effective customs duty on import of goods. The Finance Minister, in continuation of his focus on the infrastructure sector, reduced the basic customs duty rate on project imports from 7.5 per cent to 5 per cent. However, contrarily he has also withdrawn the exemption from special additional customs duty of 4 per cent to specified power generation projects. The information technology sector may be the sector that is most impacted by the indirect tax proposals in this Budget. The government appears to be slowly abandoning the shelter that it had previously provided this sector. There is increase in excise duty on packaged software from 8 per cent to 12 per cent. Additionally, a new taxable service category is being introduced for taxing services provided in relation to information technology software. Finally, the category of consulting engineering services will no longer exclude services in relation to computer software. Ironically, making software development taxable will be a huge positive development to the software export industry, as they will now get a refund of input taxes (both for input services and for equipment). In the banking sector, commission earned on foreign exchange broking has been subject to service tax for many years. There was a dispute on whether service tax would apply on purchase and sale of foreign currency by the bank on its own account. This will now be taxable. The composition rate of 2 per cent of the total value of a works contract has been doubled to 4 per cent. This increase would bring in line the composition rate with general composition rate applicable under various state VAT laws and may be another step forward to align the duty levied on goods and services. This will certainly increase the effective cost of construction in the hands of the customer. A very promising change is the continuation of the Central Sales Tax (CST) phase-out. The FM mentioned that the CST rate would be reduced from 3 per cent to 2 per cent. This is very welcome as CST is one tax that conspicuously harks back to an earlier era where taxes were non-creditable. The Finance Bill 2008 has also dealt with certain CENVAT credit provisions. Taxpayers using common goods, services for rendering taxable as well as exempted services, now have an option to either reverse the proportionate credit attributable to the exempt portion or pay an amount of 8 per cent of the value of exempted services. Therefore, this is a Budget that pushes along the overall agenda of tax reform and rationalisation on the indirect tax side, albeit a bit gingerly. Direct - Balanced authored by Mr.Gaurav Taneja , Partner & National Tax Director, Ernst & Young Indirect - More of the Same authored by Mr. Vivek Mishra, Partner & Leader , Indirect Taxes, Ernst & Young
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