Reduction of duty on petrol and diesel, expanding the safety net for rural poor, additional one per cent cess to fund secondary and higher education and expansion of the service tax net are some of the highlights of the Union Budget 2007-08 presented by the Finance Minister Shri P Chidambaram in Lok Sabha.
On excise duty the Finance Minister has brought down the ad valorem component from 8% to 6% on petrol and diesel. The peak rate of customs duty for non-agricultural products has been slashed from 12.5% to 10%. While cigarettes and bidis will cost more, duty on pan masala not containing tobacco has been reduced from 66% to 45%. Duties on most chemicals and plastics have been reduced from 12.5% to 7.5% and customs duty on polyester fibers and yarn has also been reduced from 10% to 7.5%. The Gem and jewellery industry gets relief with duty on cut and polished diamonds reduced from 5% to 3%. Dredgers have been fully exempted from import duty. Duty on drip irrigation systems, agricultural sprinklers and food processing machinery have been reduced by 2.5%. Additional countervailing duty of 4% has been completely lifted from crude and refined edible oils.
On the direct tax front, there is no change in the tax rate. However, the threshold limit for income tax payers has been increased by Rs. 10,000, giving every tax payer a relief of Rs. 1000. The new threshold limit for women will be Rs. 1,45,000 and for senior citizens Rs. 1,95,000. Companies with a taxable income of Rs. 1 crore or less, will not have to pay surcharge on income tax. Companies providing cross country natural gas distribution network, including gas pipeline and storage facilities will be entitled to tax concession. Shri Chidambaram said tax-free bonds will be issued through State Pooled Finance Entities to facilitate creation of urban infrastructure.
Dividend distribution tax has been hiked from 12.5% to 15%. Money market mutual funds and liquid mutual funds will attract 25% Dividend Distribution Tax. The scope of Fringe Benefit Tax has been expanded to include employees stock option plan. Shri Chidambaram also proposed a levy of 1% additional cess on all taxes to fund secondary and higher education and expansion of capacity by 54% for reservation for socially and educationally backward classes.
While the Service Tax rate has been left untouched, new services have been brought into the taxable fold. They include services outsourced for mining of minerals, oil or gas, asset management and design services, development and supply of content for use in telecom and advertising purposes and renting of immovable property for commercial purpose. The Finance Minister also raised the exemption limit for small service providers from Rs. 4 lakh to Rs. 8 lakh. Two lakh assesses will go out of tax net causing a revenue loss of Rs 800 crore. All services provided by technology business incubators and clinical trial of new drugs have been exempted from service tax net.
The 8 flagship programmes of the UPA Government will continue to get high priority. The Finance Minister has allocated Rs. 24,603 crore for Bharat Nirman programme, recording a rise of 31.6% over the last year. While the allocation on education has been increased by 34.2% to Rs.32,352 crore, the allocation for health and family welfare has been increased by 21.9% to Rs. 15,291 crore. Sarva Shiksha Abhiyan gets Rs.10,671 crore and the Mid-Day Meal Scheme will be extended to upper primary classes in 3,427 educationally backward blocks. The Finance Minister also proposed Rs. 750 crore for Means-cum-Merit Scholarships to reduce drop outs after class VIII.
National Rural Employment Guarantee Scheme will be extended to 330 districts from the current level of 200 districts. The Finance Minister has allocated Rs. 12,000 crore for this scheme besides allocating Rs. 2,800 crore for Sampoorna Gramin Rozgar Yojna to augment rural employment. The allocation for Swarnajayanti Gram Swarozgar Yojna has been hiked by 50%, from Rs. 1200 crore to Rs. 1800 crore to promote self-employment among rural poor.
Shri Chidambaram said to increase the economic viability of the agricultural sector, 50 lakh new farmers will be brought into the banking system next year with a target of Rs. 2,25,000 crore as farm credit. He said the Government will act on the Radhakrishnan Committee which is examining all aspects of agricultural indebtedness. The Finance Minister also promised capital grant or concessional financing to double the production of certified seeds for pulses. He also proposed a financial mechanism for coffee, rubber, spices, cashew and coconut in line with a Special Purpose Tea Fund which has already been launched. The allocation under accelerated irrigation benefit programme has been increased from Rs. 7,121 crores to Rs. 11,000 crore. Out of this, the grant component to the State Governments will be Rs. 3,580 crore. Keeping in view the growing demand for rural infrastructure development fund, the Finance Minister proposed to increase the size of this fund to Rs. 12,000 crore.
The Finance Minister proposed to bring the unorganised landless households under a safety net by providing insurance. The scheme to be called ‘Aam Admi Bima Yojna’ will be launched by the LIC and will provide death and disability insurance. The Central Government will bear 50% of the premium of Rs.200 per year per person.
The National Housing Bank will introduce ‘reverse mortgage’ for senior citizens under which the house owner can avail of a monthly stream of income while remaining owner and occupying the house. Shri Chidambaram said regulations will be put in place to allow the creation of mortgage guarantee companies.
On the capital market the Finance Minister said Indian companies will be permitted to issue exchangeable bonds to unlock a part of their holdings in group companies. PAN will be the sole identification number for all participants in the securities market. Mutual funds will be permitted to launch dedicated infrastructure funds to promote flow of funds into the infrastructure sector.
The Finance Minister said work in the Golden Quadrilateral is nearly complete and there is considerable progress in North-South, East-West corridor project. He also allocated Rs. 10,667 crore for the National Highway development programme for the coming year. The accelerated power development and reform project which has reduced technical and commercial losses in 213 towns is being restructured to cover all district headquarters and towns with a population of over 50000. Shri Chidambaram has allocated Rs. 800 crore for this project during the coming year and another Rs. 3983 crore under Rajiv Gandhi Grameen Vidyutikaran Yojana.
The Finance Minister proposed to give a five-year tax holiday to two, three and four-star hotels in the national capital territory of Delhi, ahead of the 2010 Commonwealth Games. Convention centres with a sitting capacity of not less than 3,000 will also get tax holiday if they are completed and begin operation between April 2007 and March 2010. The Minister has also provided Rs. 150 crore to the Ministry of Youth Affairs and Sports and Rs. 350 crores to the Delhi Government for the Games.
Shri Chidamabaram said the direct tax proposals will yield Rs. 3000 crore more while the indirect tax proposals are revenue neutral. He also allocated Rs. 96,000 crore for defence. The gross budgetary support for 2007-08 has been increased to Rs. 2,05,100 crore, of which the Central Plan will be Rs. 1,54,939 crore. The non-plan expenditure marks a rise of 6.5% to Rs. 435,421 crore. The total revenue receipts of the Central Government is projected to be Rs. 486,422 crore. The revenue deficit has been pegged at 1.5 percent of the GDP at Rs. 71,478crore while the fiscal deficit has been fixed at 3.3 percent of the GDP. Reiterating UPA Government’s commitment to economic reforms, fiscal prudence and monetary stability, Shri Chidambaram said revenues are buoyant for the third year in succession. Additional revenues have been generated and have been used to promote inclusive growth, equity and social justice that are at the core of the National Common Minimum Programme. He expressed the confidence that the current average inflation on 5.2% to 5.4% can be moderated.
On excise duty the Finance Minister has brought down the ad valorem component from 8% to 6% on petrol and diesel. The peak rate of customs duty for non-agricultural products has been slashed from 12.5% to 10%. While cigarettes and bidis will cost more, duty on pan masala not containing tobacco has been reduced from 66% to 45%. Duties on most chemicals and plastics have been reduced from 12.5% to 7.5% and customs duty on polyester fibers and yarn has also been reduced from 10% to 7.5%. The Gem and jewellery industry gets relief with duty on cut and polished diamonds reduced from 5% to 3%. Dredgers have been fully exempted from import duty. Duty on drip irrigation systems, agricultural sprinklers and food processing machinery have been reduced by 2.5%. Additional countervailing duty of 4% has been completely lifted from crude and refined edible oils.
On the direct tax front, there is no change in the tax rate. However, the threshold limit for income tax payers has been increased by Rs. 10,000, giving every tax payer a relief of Rs. 1000. The new threshold limit for women will be Rs. 1,45,000 and for senior citizens Rs. 1,95,000. Companies with a taxable income of Rs. 1 crore or less, will not have to pay surcharge on income tax. Companies providing cross country natural gas distribution network, including gas pipeline and storage facilities will be entitled to tax concession. Shri Chidambaram said tax-free bonds will be issued through State Pooled Finance Entities to facilitate creation of urban infrastructure.
Dividend distribution tax has been hiked from 12.5% to 15%. Money market mutual funds and liquid mutual funds will attract 25% Dividend Distribution Tax. The scope of Fringe Benefit Tax has been expanded to include employees stock option plan. Shri Chidambaram also proposed a levy of 1% additional cess on all taxes to fund secondary and higher education and expansion of capacity by 54% for reservation for socially and educationally backward classes.
While the Service Tax rate has been left untouched, new services have been brought into the taxable fold. They include services outsourced for mining of minerals, oil or gas, asset management and design services, development and supply of content for use in telecom and advertising purposes and renting of immovable property for commercial purpose. The Finance Minister also raised the exemption limit for small service providers from Rs. 4 lakh to Rs. 8 lakh. Two lakh assesses will go out of tax net causing a revenue loss of Rs 800 crore. All services provided by technology business incubators and clinical trial of new drugs have been exempted from service tax net.
The 8 flagship programmes of the UPA Government will continue to get high priority. The Finance Minister has allocated Rs. 24,603 crore for Bharat Nirman programme, recording a rise of 31.6% over the last year. While the allocation on education has been increased by 34.2% to Rs.32,352 crore, the allocation for health and family welfare has been increased by 21.9% to Rs. 15,291 crore. Sarva Shiksha Abhiyan gets Rs.10,671 crore and the Mid-Day Meal Scheme will be extended to upper primary classes in 3,427 educationally backward blocks. The Finance Minister also proposed Rs. 750 crore for Means-cum-Merit Scholarships to reduce drop outs after class VIII.
National Rural Employment Guarantee Scheme will be extended to 330 districts from the current level of 200 districts. The Finance Minister has allocated Rs. 12,000 crore for this scheme besides allocating Rs. 2,800 crore for Sampoorna Gramin Rozgar Yojna to augment rural employment. The allocation for Swarnajayanti Gram Swarozgar Yojna has been hiked by 50%, from Rs. 1200 crore to Rs. 1800 crore to promote self-employment among rural poor.
Shri Chidambaram said to increase the economic viability of the agricultural sector, 50 lakh new farmers will be brought into the banking system next year with a target of Rs. 2,25,000 crore as farm credit. He said the Government will act on the Radhakrishnan Committee which is examining all aspects of agricultural indebtedness. The Finance Minister also promised capital grant or concessional financing to double the production of certified seeds for pulses. He also proposed a financial mechanism for coffee, rubber, spices, cashew and coconut in line with a Special Purpose Tea Fund which has already been launched. The allocation under accelerated irrigation benefit programme has been increased from Rs. 7,121 crores to Rs. 11,000 crore. Out of this, the grant component to the State Governments will be Rs. 3,580 crore. Keeping in view the growing demand for rural infrastructure development fund, the Finance Minister proposed to increase the size of this fund to Rs. 12,000 crore.
The Finance Minister proposed to bring the unorganised landless households under a safety net by providing insurance. The scheme to be called ‘Aam Admi Bima Yojna’ will be launched by the LIC and will provide death and disability insurance. The Central Government will bear 50% of the premium of Rs.200 per year per person.
The National Housing Bank will introduce ‘reverse mortgage’ for senior citizens under which the house owner can avail of a monthly stream of income while remaining owner and occupying the house. Shri Chidambaram said regulations will be put in place to allow the creation of mortgage guarantee companies.
On the capital market the Finance Minister said Indian companies will be permitted to issue exchangeable bonds to unlock a part of their holdings in group companies. PAN will be the sole identification number for all participants in the securities market. Mutual funds will be permitted to launch dedicated infrastructure funds to promote flow of funds into the infrastructure sector.
The Finance Minister said work in the Golden Quadrilateral is nearly complete and there is considerable progress in North-South, East-West corridor project. He also allocated Rs. 10,667 crore for the National Highway development programme for the coming year. The accelerated power development and reform project which has reduced technical and commercial losses in 213 towns is being restructured to cover all district headquarters and towns with a population of over 50000. Shri Chidambaram has allocated Rs. 800 crore for this project during the coming year and another Rs. 3983 crore under Rajiv Gandhi Grameen Vidyutikaran Yojana.
The Finance Minister proposed to give a five-year tax holiday to two, three and four-star hotels in the national capital territory of Delhi, ahead of the 2010 Commonwealth Games. Convention centres with a sitting capacity of not less than 3,000 will also get tax holiday if they are completed and begin operation between April 2007 and March 2010. The Minister has also provided Rs. 150 crore to the Ministry of Youth Affairs and Sports and Rs. 350 crores to the Delhi Government for the Games.
Shri Chidamabaram said the direct tax proposals will yield Rs. 3000 crore more while the indirect tax proposals are revenue neutral. He also allocated Rs. 96,000 crore for defence. The gross budgetary support for 2007-08 has been increased to Rs. 2,05,100 crore, of which the Central Plan will be Rs. 1,54,939 crore. The non-plan expenditure marks a rise of 6.5% to Rs. 435,421 crore. The total revenue receipts of the Central Government is projected to be Rs. 486,422 crore. The revenue deficit has been pegged at 1.5 percent of the GDP at Rs. 71,478crore while the fiscal deficit has been fixed at 3.3 percent of the GDP. Reiterating UPA Government’s commitment to economic reforms, fiscal prudence and monetary stability, Shri Chidambaram said revenues are buoyant for the third year in succession. Additional revenues have been generated and have been used to promote inclusive growth, equity and social justice that are at the core of the National Common Minimum Programme. He expressed the confidence that the current average inflation on 5.2% to 5.4% can be moderated.
Check out the changes
Amongst the various provisions of the Budget 2007-08, the following are some of the more significant ones that would directly affect the common man:
Basic Exemption Increase: Flattering to deceive
Yes, the basic exemption has been raised by Rs 10,000 for all categories of taxpayers. However at the same time, the education cess has also been increased. Both these cancel each other and the taxpayer comes back to square one. The cut off, as it were, is Rs 510,000, Rs 520,600 and Rs 893,000 for non-senior males, ladies and senior citizens, respectively.
To put it differently, those earning lower than the above-mentioned income levels would be marginally better off and those earning higher would end up actually paying more tax. Note that the highest tax rate has now climbed to 33.99%.
Stock Options: Expensive on both employer and employee
Stock options, now under Fringe Benefit Tax, will be taxed at 33.99%. The finance minister has gone on record stating that the authorities have yet to give details on how to determine the value of stock options and how to tax the same, yet, a plain reading of the law suggests that the difference between the Fair Maket Value and the Exercise Price will be taxed at 33.99% on the date of exercise.
Simultaneously, when the employee sells his stock option shares, capital gains would be applicable in the normal course.
Dividends become more expensive
Dividend Distribution Tax (DDT) on corporate dividends has been hiked to 15% from 12.5%. After surcharge and cess, the effective tax rate climbs to 16.995%
A couple of issues arise. Taxing corporate dividends does amount to double taxation. Dividends are declared by the company from its post-tax income. Now if the investor is taxed again (DDT is akin to taxing the investor at source), the same stream of income is being subjected to an effective tax rate of 50.98% (33.99% + 16.99%).
Secondly, foreign investors (NRIs, FIIs, etc) have to pay tax in their host country too on such dividends received. As DDT is not a tax envisaged under the Double Taxation Avoidance Agreements (DTAAs), such investors would end up bearing triple tax on the one income.
Liquid Funds: Also become more expensive
DDT for all categories of investors in Money Market Mutual Funds (MMMFs) and liquid funds has been doubled to 25% as against the earlier 12.5%. Again, the effective tax rate is actually 28.325%.
This has apparently been done to cut the arbitrage opportunity between income tax rates and distribution tax. However, here it may be mentioned that even now, arbitrage does exist as the effective tax rate works out to actually just 20%. Let me explain.
I will take a base DDT of 25% (not included surcharge and cess for simplicity) and assume a dividend to be distributed of Rs 100. So the mutual fund concerned will actually pay Rs 80 to the investor and pay Rs 20 as distribution tax. Rs 20 is 25% of Rs 80 (which was the dividend distributed). However, as far as the investor is concerned, he has borne a tax of Rs 20 on a gross income of Rs 100 which works out to just 20%.
Look at it the other way. Had the investor actually received Rs 100 in hand, he would have been asked to pay Rs 25 (25% of Rs 100) as tax. Just on account of the mutual fund paying the tax on the investor's behalf, the effective rate works out lower.
In any case, these amendments will take effect from April 1, 2007.
TDS limit for interest hiked
Amongst good news for the small investor, Bank and Post Office interest was subject to TDS over Rs 5,000. This limit has been doubled to Rs 10,000.
Extra deduction for medical insurance
Deduction in respect of medical insurance premium under Section 80D has been increased to Rs 15,000 from Rs 10,000 for non-senior taxpayers. For senior citizens, the limit has been enhanced from Rs 15,000 to Rs 20,000. Also, premium payments made by electronic mode, credit card, etc. will be allowed.
Education gets cheaper
This is indeed a salutary move. Deduction of interest payable on loan taken for higher education under Section 80E was available only to the individual taking the loan. This was a problem since the student taking the loan hardly had any taxable income and if the parent takes the loan for his or her child, the deduction was not available.
However, now, the deduction has been made applicable even in case the loan is taken for one's spouse or children.
Note that this deduction is available only for loans taken form a financial or charitable institution. Loans from employer or from other private sources aren't eligible for the tax deduction.
54EC Bonds: Elusive at best
The limit of Rs 50 lakh on capital gains bonds stays. However, it is not the limit that one is worried about -- the worry is the fact that these issues are capped. So when you sell your property, forget the limit, the bonds may just not be available --- so what was needed was to make the bonds available on tap, throughout the year --- which has not been done.
RBI Bonds: Now subject to TDS
Interest on the immensely popular RBI 8% Savings Bonds was taxable but free from TDS. Effective 1.7.2007, any interest over Rs 10,000 from such bonds would be subject to a TDS of 10%. Similarly, professional fees were subject to a TDS of 5% which has now been increased to 10%.
Service Tax: Marginal Increase
The service tax rate has actually increased from 12.36% from 12.24% on account of the additional cess. It is the declared intent of the government to increase the service tax rate eventually to 16%, however, the inflation sword has precluded an increase this time.
The basic exemption has increased from Rs 400,000 to Rs 800,000, however, this essentially benefits the small service provider but not the common man who is the receiver of the service.
Making commercial rentals subject to service tax would only make office space still more expensive.
IT companies put on the MAT
MAT, or Minimum Alternate Tax, is 10% of 'book profits.' Which means this is the least amount a company has to pay as tax. The Income Tax Act lays down the way to compute such 'book profits.' Till last year, the book profit could be adjusted for incomes and expenses related to Section 10A and 10B.
However, Budget 2007-08 intends to take Section10A and 10B out of the purview of MAT benefit thereby increasing the computed book profit to that extent.
The impact, including surcharge and cess, would be 11.33%. Therefore, those companies (especially the SMEs in the IT sector) whose effective tax rate was less than 11.33% would be directly affected.
Section 80-IA controversy
There was some confusion in the markets related to the Budget treatment of Section 80-IA. The Section 80-IA provides for a ten-year tax benefit to a company (enterprise or undertaking as it is called in the tax law) engaged in infrastructure development, Industrial Parks, SEZs, etc.
The government has clarified that Section 80-IA was a tax break intended for the original enterprise which was engaged in infrastructure development and not for companies who were merely executing the civil construction work or any other works contract on its behalf.
Thus, in a case where a company itself makes the investment and executes the development work it will be eligible for the 80-IA deduction. However, a company or a developer who merely enters into a works contract will not be eligible for the tax benefit under section 80-IA.
An immediate fall out of this measure has been a free fall in the share prices of constructors and developers who essentially were works contractors and were never intended to be benefited by this deduction.
The other news that has taken industry by surprise was that this amendment is retrospective in nature and is being made effective from 1st April, 2000
The other news that has taken industry by surprise was that this amendment is retrospective in nature and is being made effective from 1st April, 2000
Other announcements
There are other miscellaneous announcements like the issue of tax-free bonds, dedicated infrastructure funds to be launched by mutual funds, etc. However, the details haven't yet been announced. Watch this space for further details.
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