Minister chose to be consistent

Minister chose to be consistent
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First Published: Sat, Mar 01 2008. 12 26 AM IST

Updated: Sat, Mar 01 2008. 12 26 AM IST
The much awaited last budget of the United Progressive Alliance government was finally presented amid high expectation from the corporate sector.
However, in contrast to expectations, the finance minister chose to be consistent and has not introduced any significant reform in tax rates on companies or tax breaks except for the hotel and hospitality sector.
The most significant amendment is with respect to the increase in the short-terms capital gain tax rate from the existing 10% to 15% which brings STCG at par with dividends. This amendment not only impacts companies and foreign institutional investors (FIIs) but also hurts individual tax payers for whom stock market trading is increasingly becoming the most attractive way to channelize savings.
Some relief to domestic companies has been given by reducing the cascading effect of dividend tax up to one level so that the parent company can now claim set off of dividend distribution tax paid by the subsidiary company for onward distribution of dividend to final stakeholders. However, this benefit is not available to intermediate holding companies (where the level is more than one) and also when the dividend is declared by a domestic company to a foreign parent.
Tax breaks have been given for five years for hospitals that will start functioning after 1 April 2008 but before 31 March 2013.
However, hospitals in metros and semi-metro cities have been excluded from this benefit. Further, tax breaks have also been given for five years to two- to four-star hotels located in specified districts having the world heritage site status and which start functioning after 1 April 2008 but before 31 March 2013.
Other significant amendments impacting companies are:
* Banking Cash Transaction will not be applicable after 31 March 2009.
* Securities transaction tax (STT) has been introduced on options and futures in securities. The tax burden of STT will increase for companies due to change in the deduction mechanism.
* Due dates for returns filings proponed by one month for companies and entities requiring tax audits.
* Foreign exchange currency bonds (FECB) have been placed at par with foreign currency convertible bonds (FCCB); exchange of FECB with shares of any company will not be a taxable event and the cost of FECB will be the cost of shares acquired in exchange.
The direct tax budget brings mixed reactions for individual tax payers who—on the one side enjoy a tax saving of up to Rs45,000 (on taxable income of Rs500,000 or more) due to increase in the threshold limit of the tax slabs, and on the other side feel burdened with the increase in tax rate for short-term capital gains from 10% to 15% on shares.
Budget 2008 focuses more on government outlay on agricultural, health, education and social sector and the finance minister has counted on buoyant tax collections, thereby not making any significant tax reforms to widen the tax base… may be the intention is to defer the reforms for a while which would be introduced by presenting a new Direct tax Act in Parliament sometime in near future.
(The author is partner and national tax director, Ernst & Young)
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First Published: Sat, Mar 01 2008. 12 26 AM IST