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Tuesday, March 9, 2010

India Union Budget Highlights 2010 - News Updates

India Union Budget Highlights 2010: Sensex Up, Experts Down.

In the aftermath of India’s Union Budget 2010 announcement the Wall Street Journal, increasingly vitriolic as it has become under Rupert Murdoch, said that investors had reacted with a yawn to Finance Minister Pranab Mukherjee’s presentation.

How gratifying then that the key Indian stock market index
, the Sensex, had it’s best two day rally for more than two years, beating even last year’s post election buzz. The market today crossed 17,000, the first time it has done so since it slumped at the start of the year. Take that, WSJ.

One of the experts on Emerging Markets investing, Mark Mobius, who manages over $34 billion of assets mainly in BRIC (Brazil Russia India China) countries for Templeton Asset Management, helped to explain the surge by saying that India will outpace other emerging markets in the next few years.

Union Budget 2010: Is Indian auto sector out of woods?

By the time you read this article, you would have seen price rise across the board!! What's the reason? Is it due to the partial rollback of
fiscal stimulus package further flared by much feared increase in prices of petroleum products? This would have thrown up many questions in the readers' mind on the sustainability of the Indian growth story, given the strong performance in the recent month running up to the Budget.

While one may conclude that FM has done something unwarranted, the answer is not so simple. If product prices are rising, share prices are rising as well. So, what is it in the Budget that has thrown up this contradictory phenomenon: rise in product prices coupled with share prices? Auto sector, which is immediately impacted due to 2 per cent rise in excise duties and increase in prices of petroleum products, could be a good example to analyse this.

Auto companies have passed on the increase in excise duty to the customers. Still auto majors have gained in stock markets. Well, possible reason could be increase in disposable income of consumers with significant relief on personal taxation. It would be important to consider two more aspects typical to the Indian auto market. Many car buyers in India are first time buyers. Since, FM has not fully rolled back excise duty benefits provided under stimulus package, price hike may not be significant enough to change minds of first time car buyers. Indian auto market is largely driven by credit market and increase in EMI may not be significant given the modest rise in excise duty. Thus, significant relief on personal taxation front could possibly outweigh negative factors. In addition, the excise duty rollback is only one third of the total cut (6 per cent) doled out through the stimulus package. Hence, this partial rollback was factored in. There were no further negative surprises in the budget. This may be reason for positive sentiments in stock market.

It would be important to touch upon other significant budget proposals relevant for auto sector. While corporate income tax rates remain unchanged, reduction of surcharge on domestic companies from 10 to 7.5 per cent would lessen the tax burden. However, Minimum Alternate Tax (MAT) increases from 15 to 18 per cent, offsetting the benefit due to reduction in surcharge.

One of the budget proposals enhances weighted deduction for eligible companies having an approved in-house R&D unit from 150 to 200 per cent of the expenditure incurred. This would stimulate additional investment in R&D activity paving way for innovation. With the growing trend towards providing advanced driver assistance features, safety and comfort features in vehicles, continuous innovation and adoption of new systems will be vital to retain competitiveness in the automotive industry. Certain companies were required to call back large number of vehicles in recent past due to technology issues. This tax measure could possibly work as a fillip to increase focus on R&D in long term resulting in better technology products.

Union Budget 2010: Woes of the new perquisite valuation rules

The Central Board of Direct Taxes (CBDT) announced the new perquisite valuation rules on December 18, 2009, after keeping the whole country
waiting for almost six long months (from July 2009 when Budget 2009 was released). The finance minister had axed Fringe Benefit Tax (FBT), finally giving in to the long-standing demand of the corporate India. So, what does this mean for the common man? This means that he would have to bear the tax burden on most of the employer provided benefits!

As such, the rules are largely similar to the rules that were prevalent before the introduction of FBT by the Finance Act 2005. However, they have not brought good news for the employees in the New Year. Not only do they seek to tax most of the employer provided benefits, they have also come into force with retrospective effect from April 1, 2009.

Employees will have to pay tax on the perquisites provided to them during this financial year, over a period of three months (January-to-March). Whether there would be any relaxation on the employers for not complying with the provisions of deducting tax on the perquisites provided for prior months is still not clear.

Under the FBT regime, costs incurred by an employer towards a motor car provided to employees for personal or official use and the expenses borne on running and maintenance were subject to FBT in the hands of the employer. This benefit would now be fully taxable in the hands of the employees, where the car provided (owned or hired by the employer) is for personal use. However, only small notional perquisite values would be taxable where the car is provided for both personal and official use.

The value of meals (free food and non-alcoholic beverages) provided to employees is also a taxable benefit now. However, a limit of Rs 50 per meal has been fixed up to which the benefit will not be taxed, if the meals are provided during working hours at office premises or through paid vouchers. While setting the limit of Rs 50 per meal, the government has definitely not considered the ever rising food prices (even with the annual inflation in food prices rising to almost 18 per cent).

Another benefit, which was earlier subject to FBT and is now taxable in the hands of the employees, is shares allotted to them under a stock incentive plan. The employee will have to pay tax on the difference between the Fair Market Value (FMV) of the shares on the date of exercise and the price paid by him/her. This will cause some hardship to employees who do not want to sell their shares, but just wish to exercise and hold. They may be forced to sell their shares; else they may be out of pocket bearing the tax burden.

The method of valuation of the FMV on the date of exercise has also been notified in the rules and is pretty much a replica of the rules which existed in the FBT regime. This was one aspect on which employers had hoped for changes, especially for shares listed outside India. The rules still require the employers to obtain a valuation certificate from a merchant banker on the date of exercise, for shares listed outside India.

Union Budget 2010: Impact on retail and consumer products

On one hand where the FM has given clarity on likely introduction of DTC & GST by April 1, 2011, on the other hand the FM has made only a
reference to Prime Minister's remarks on opening up of retail trade without announcing any further policy change in this regard.

However, reduction in over all income tax slabs for individuals and 30 per cent levy on income exceeding Rs 8 lakhs will definitely result in ensuring higher purchasing power in the hands of consumer and consequently increasing the demand for consumer goods. From a corporate perspective, reduction in surcharge from 10 per cent to 7.5 per cent will result in higher disposable cash in the hands of corporate and will help in fuelling expansion/ reduced prices of goods. However, increase in MAT rate from 15 per cent to 18 per cent will act a dampener for the companies which are still falling under MAT regime.

Enhancing the exemption limit for tax audit and presumptive taxation under section 44AD from Rs 40 lakhs to Rs 60 lakhs for persons carrying on business or profession will help in reducing the compliance cost for small retail players.

Exemption from Special Additional Duty ('SAD') is a key winner in today's budget and is sure to spread cheer amongst the various stake holders as claiming refund for SAD was posing lot of administrative difficulty.

Gems & Jewellery

Increase in Customs duty on precious metals will have an impact on the pricing for consumers and will act as a negative. However, refined serially numbered gold bars made from the ore/concentrate stage will now attract excise duty of Rs 280 per 10 grams (instead of 8% ad valorem) with Cenvat credit facility on inputs and capital goods, which will certainly act as a breather.


Roll back of stimulus and increase in general excise duty rates from 8 per cent to 10 per cent will adversely affect textiles. However, extension of interest subvention of 2 per cent for exports for one more year covering handicrafts, carpets etc is a welcome measure.

Food Processing

In this budget, providing necessary stimulus to food processing sector has been the mantra of the FM. The FM has expanded the definition of "infrastructure" under the ECB policy to include cold storage or cold room facility, farm level pre-cooling, preservation or storage of agricultural and allied produce, marine products and meat.

The Finance minister has provided concessional custom duty of 5 per cent under project import scheme with full exemption from service tax to the initial setting up and expansion of cold storage and cold rooms for agricultural and related sectors produce.

The FM has also provided central excise exemption to specified equipment for preservation, storage and processing of agriculture and related sectors and service tax exemption to storage and warehousing of their produce.

The FM concluded his budget speech by quoting "Our actions today will determine our tomorrow". The initiative of the FM to extend sops to food processing sector gives a clear cut indication of the government's effort to contain spiraling food inflation. Overall, the budget will usher in more purchasing power and overall growth. However, the hope on FDI opening in retail continues to be next big dream.

Union Budget 2010: Rough deal for media and entertainment industry

When the Finance Minister in his budget speech acknowledged that the film industry has been experiencing difficulties, it appeared that the
entertainment sector, and more specifically Film Industry, should finally be getting a respite from controversies relating to valuation of the content being imported. While the FM did rationalise the customs duty structure, on the flip side, he has slapped entire media and entertainment (M&E) sector with service tax. This, no doubt, is a big blow to the M&E sector, which is already burdened with one of the most unfavourable tax regime in India (only tobacco and alcohol could be considered to be in the same league!).

An analysis of the indirect tax impact on the M&E sector is below.

Customs duty: There was an anomaly in Customs Tariffs which granted an exemption on the royalty value on import of movies on cinematographic film reels only. However, when the same movie was imported on other media such as a betacam tapes (by broadcasters), stamper (by home entertainment companies) or on VCDs or DVDs, the said import was liable to customs duties on the entire value including royalty or license fee that was payable as a condition of sale. The Government has tried to rectify this anomaly.

Now, similar to cinematographic film reels, customs duty will be payable on the cost of the media (such as betacam tapes, stampes, VCDs, DVDs) and value of freight and insurance. While the exemption appears to be intended for all types of content being imported, at a ground level, there are some apprehensions that the revenue could seek to restrict the exemption only to certain content being imported on media. Hopefully, the Government will clarify its intentions.

Import of promotional materials like trailors, making of the film etc imported free of cost in the form of Electronic Promotion Kits / Betacams has been exempted from custom duties.

Service tax: The service tax ambit has been extended to a number of areas in the M&E sector:

# Temporary transfer or permitting the use or exploitation of all copyrights except original literary, dramatic, musical and artistic works.

# Grant of rights to exploit any event including events relating to art, entertainment, business, sports or marriage is also covered within the service tax net. Thus, exploitation rights granted by any person in events such as company sponsored cricket match, film award functions, celebrities' marriages, beauty contests or music concerts is proposed to be liable to service tax.

# Contracts for promotion or marketing of a brand (of goods, services, event or endorsement of name) of a business entity are made liable to service tax. Prior to this amendment, endorsement of goods or services was considered as taxable business auxiliary services. However, promotion of brand (without reference to a particular good or service provided) of a business entity is now proposed to be a taxable service.

# Sponsorship received for a sports event, hitherto excluded from service tax, is now proposed to be made taxable.

News Credit : Economic times

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