Direct Taxes

Playing Santa Claus to individuals by aggressively slashing the effective income tax rate, the finance minister has certainly brought cheer to the masses. But the corporate sector didn’t feel the festive spirit as no such goodies were offered to them. The FM has hiked the personal income tax exemption limit to Rs 1.5 lakh from the prevailing Rs 1.1 lakh. Further, income above Rs 5 lakh will now attract 30 per cent income tax. The tax to GDP ratio is set to rise to 12.5 per cent in 2007-08 from 9.2 per cent in 2003-2004, reflecting the strong traction in the Exchequer’s revenue collection.

Corporate Taxes See No Change

Expecting a cut from the current 33.99 per cent tax rate, the finance minister left India Inc a little disappointed. Corporate surcharge and dividend distribution tax did not see any changes this year.

If the 5-year tax holiday to hospitals located in any place outside the urban agglomerations, especially in Tier-II and Tier-III towns, asserts the government’s commitment to build the nation’s soft infrastructure, the 5-year holiday from income tax granted to two, three or four star hotels established in specified districts having UNESCO-declared ‘World Heritage Sites’ is aimed to promote tourism and stimulate economic growth.

Short-term Capital Gains Tax Hiked to 15 Per Cent

Aiming to promote medium-term capital formation, the finance minister announced a hike in short-term capital gains tax rate to 15 per cent from the prevailing 10 per cent. While the Securities Transaction Tax (STT) rate has been kept unchanged, the finance minister has announced a levy of STT on option premiums. Earlier, the same was charged upon the option’s value. This would reduce the cost of transactions in option trades. The government would, however, be introducing a commodities transaction tax similar to STT.

The increase in short term capital gains tax clearly creates negative sentiments among all classes of investors, but the fact that they have not touched any other tax sends a balancing view

Indirect Taxes

Customs Duties: Treading the Rationalization Path

Customs duty reduction on crude and unrefined sulphur from 5 per cent to 2 per cent will benefit fertilizer companies as their input cost will go down. Other significant measures as regards customs duties were reduction in customs duty as regard in duties for project import from 7.5 per cent to 5 per cent.

Excise Duty: On Course to GST

The move of reducing Cenvat rate from 16 per cent to 14 per cent seems to be consistent with government’s road-map of a unified Goods and Services Tax (GST).

Service Tax: Widening the Net

Although service tax rate was not tinkered with, the ambit was widened to include four services, namely asset management service provided under ULIP, services provided by stock / commodity exchanges and clearing houses, right to use goods in cases where VAT is not payable and customized software. The move to increase exemption for small traders from Rs 8 lakh to Rs 10 lakh is going to benefit about 65,000 traders.

On the indirect tax front, reducing rates on certain line items such as project imports will aid infrastructure related companies. The IT hardware industry might have to brace itself for tougher times as imports on certain classes of products have been exempted
from duty.