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Positive on taxation, but muted on reform

Positive on taxation, but muted on reform
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First Published: Tue, Jul 07 2009. 12 30 AM IST

 Rajiv Memani, Country managing partner, Ernst & Young
Rajiv Memani, Country managing partner, Ernst & Young
Updated: Mon, Jul 13 2009. 05 25 PM IST
Rajiv Memani, Country managing partner, Ernst & Young
Given the absolute majority enjoyed by the new government, the direction outlined by the Economic Survey last week and the upbeat business sentiment, expectations from the Budget were running at a high. That the finance minister would refrain from big-bang reforms became apparent at the start of the session, when he mentioned that “a single budget speech cannot solve all our problems, nor is the Union Budget the only instrument to do so”. So while we have seen some significant and positive pronouncements on the tax front and also on infrastructure, but on other macroeconomic aspects, the finance minister has relied more on “intent”.
On the fiscal deficit, the Finance Commission will set new fiscal responsibility and budget management targets, effective 2010-11. Also, the issue of petroleum pricing has been referred to an expert group, which will advise on a viable and sustainable pricing mechanism. In the case of fertilizers, the government intends to move towards a more consumer-based regime. On disinvestment, which was being seen as a means to cover the mounting fiscal deficit, the finance minister has not said much and the Rs1,200 crore earmarked to be raised from disinvestment receipts is much less than the proposed Rs35,000 crore expected from the pan-India 3G licences. The minister was also quiet on the critical aspect of foreign direct investment.
The market reaction on day one was not positive, which is on account of the above factors and because no definitive timelines have been set for macroeconomic reform. Considering that Mukherjee has been in office for only 45 days, let us not begrudge the lack of big-bang announcements immediately; yet hope that actions will follow soon.
Measures have been more specific and positive on the taxation front. Axing of the surcharge of 10%, applicable on personal income tax, shall have an overall impact of reducing the tax incidence by 3% on individuals earning more than Rs10 lakh.
The abolition of fringe benefit tax has also come as a welcome relief to the corporate world. However, this benefit would be partially offset by application of perquisite tax in the hands of the employees. The list of items on which perquisite tax will be applied remains to be seen to fully understand the impact of this tax.
The taxation of limited liability partnership, which had been hanging in balance ever since its introduction in early 2009 has now been clarified. It is now proposed that an limited liability partnership would now be taxed on the same lines as a general partnership. The introduction of an alternative dispute mechanism and formulation of “safe harbour” rules by the Central Board of Direct Taxes to reduce the impact of judgemental errors in determining transfer price in international transactions would go a long way in reducing time and costs involved in litigation.
The rectification of the dual levy of taxes on packaged software by removing additional countervailing duty on the portion of software used for commercial exploitation is also a much needed reform. A dampener in this year’s Budget has been an increase in the minimum alternate tax (MAT) rate from 10% to 15%. This would have a significant impact on the corporate world as the increased rate would apply to all companies availing exemption under chapter VI of the Income-tax Act. However, an attempt has been made to tone it down to some extent by increase in tax credit available from seven years to 10 years.
Rajiv Memani is country managing partner at Ernst and Young. Respond to this column at feedback@livemint.com
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First Published: Tue, Jul 07 2009. 12 30 AM IST