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FM lightens tax burden, just a tad

FM lightens tax burden, just a tad
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First Published: Fri, May 04 2007. 12 02 AM IST
Updated: Fri, May 04 2007. 12 02 AM IST
Finance minister P. Chidambaram announced several amendments that sought to refine and tweak Finance Bill 2007 (the Union Budget), which was approved by the Lok Sabha, India’s lower house of Parliament, on Thursday.
Abheek Barua, the chief economist at ABN Amro, said that the amendments correct some of the distortions (in the Bill) and factor in feedback from industry.
Accordingly, Chidambaram rolled back duty hikes on cement and iron ore, provided partial relief to companies on the newly-introduced fringe benefit tax (FBT) on employee stock options (Esops), exempted venture capital investments in infrastructure, and extended concessions to employees who get rent-free accommodation. The minister also pruned tariffs on nickel, an important input for steel manufacture, and permitted duty-free imports of refrigerated motor vehicles and aircraft for training and non-scheduled charter operations.
Chidambaram signalled his intent to root out black money and further prune tax exemptions. He also indicated that the government was looking to rework the double taxation treaty with Mauritius.
The indirect tax concessions on key manufacturing inputs, such as cement and steel, are part of the government’s effort to cool the price rise in manufactured products. The average inflation rate for 2006-07 was 5.4%, but the annual inflation rate has stayed over 6% for most part of 2007.
“I am confident that inflation will be moderated,” said Chidambaram.
The minister’s decision to replace the dual excise rate for cement, which punished manufacturers who charged more than a certain price for the product (the move was envisaged as an inflation-fighting one), comes in the wake of stiff opposition from cement companies. Accordingly, cement sold at a price of more than Rs190 for a 50kg bag will now be charged excise duty as a percentage of retail sales price in future. This will bring about an effective reduction of Rs7 per bag in excise duty, said Chidambaram.
On the direct taxes side, the finance minister emphasised that FBT on companies who issue ESOPs would stay. But the amended Finance Bill calculates FBT on ESOPs differently, lowering the burden on employers, and giving them the option of transferring the burden to employees, according to Kuldip Kumar, principal consultant at audit firm PricewaterhouseCoopers. Ficci, an industry lobby, issued a media statement that said that “ESOPs are only employees’ perks and should be liable to tax only at their hands; employers at best could be required to deduct tax at the determined difference in prices from the employees on the vesting date”.
Chidambaram made an addition to the kind of Indian venture capital funds that would get pass-through benefits, whereby the income is tax exempt. Funds that are dedicated to investing in infrastructure (power, telecom, ports and development of industrial parks) are the new addition to the beneficiaries who were part of the Finance Bill.
Executives from the venture capital industry, who spoke to Mint, felt the tax proposals would have a muted impact on investments as most of private equity and venture capital money coming into India comes from overseas entities, which are not affected by the tax proposals.
Despite the addition of infrastructure-oriented funds, an executive in the venture capital industry who did not wish to be named, was disappointed that funds focused on health care and education do not qualify for tax benefits.
Chidambaram also partially rolled back the export levy on iron ore with ferrous content less than 62%, from Rs300 per tonne to Rs50 per tonne. This grade of iron ore, which is of lower grade, accounts for 30% of total fines exported.
Witnessing a boom on the back of Chinese demand, India exported 89.2 million tonnes of ore last year. The finance ministry had imposed a blanket duty of Rs300 per tonne on all ore grades in the budget, a move opposed by mining companies spearheaded by the Federation of Indian Mineral Industries. R.K. Sharma, its secretary general, said that the government should have removed duty on all grades of fines as there is a surplus in the country.
The steel industry, on the other hand, which has been lobbying for a phased ban on ore exports, said the decision goes against preservation of minerals in the country.
In other measures, the finance minister has permitted duty-free imports of cut and polished diamonds, reduced excise levies on zip fasteners to 8%, and exempted biscuits whose retail sale price does not top Rs100 per kg from excise.
(Maitreyee Handique, Rahul Chandran, Mehul Srivastava also contributed to the story.)
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First Published: Fri, May 04 2007. 12 02 AM IST
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