Budget Countdown

 FBT set to be cast AWAY

 SEZ export profits likely to get full I-T exemption

The three-year long wait of companies to avail full income tax benefits on export profits from their SEZ units will come to an end in two months.

Official sources said the government has firmed up plans to bring changes in Section 10AA of the Income Tax Act in the forthcoming Union Budget to rectify an anomaly in the wording of the Section that adversely affected SEZ units.

The decision to clear the uncertainty caused by the anomaly is also seen as a stimulus measure to step up investment in SEZ and beat the ongoing slowdown. It will significantly boost the prospects of IT/ITeS sector as it accounts for a majority of the total SEZ projects.

The finance ministry has held discussions with the commerce ministry, industry players and experts in this regard. Senior officials said the Finance Bill 2009-10 would have a view on this. “It would be coming in the Budget,” an official said.

Pramod Bhasin, president and CEO of Genpact, and chairman of Nasscom told FE, “This issue is very important from the point of view of viability of SEZ projects. But I must acknowledge that the government is handling this effectively. Our information tells us that the government is taking care of this (removing the aberration) so that SEZs can function properly.”

In February 2009, the then finance minister Pranab Mukherjee said in the Parliament that the government will look into this issue. Mukherjee, in his speech had then acknowledged the anomaly. Pointing out that it “has resulted in discriminatory treatment of assessee having units located both in SEZ and the Domestic Tariff Area (DTA) vis-à-vis assessee having units located only within the SEZs,” Mukherjee had said, “It has now been decided to remove this anomaly through necessary changes in the Act.”

This anomaly has been in place since February 2006 when the SEZ Act and Rules became operational.

The rectification of the anomaly will be a very big incentive for companies to move into the SEZs as they can keep the tax rebate earned on exports from SEZs separate from similar rebate earned from their units in DTA (or the area outside SEZs in the country where normal taxes and duties apply). As per the Section 10AA, ‘export turnover of the unit’ is divided by the ‘total turnover of the assessee’ for calculation of exemption from income tax on export profit.

Experts said this is currently hurting the units, particularly those of the big IT companies, as in many cases the assessee has units outside the SEZ too. They said the wording of the current provision significantly limits the extent of tax holiday. Due to this Section, big companies with units in the SEZs and outside SEZs, practically do not get any tax holiday.

Export Promotion Council for EOUs and SEZs had proposed that the ‘total export turnover of an SEZ unit’ should be divided only by the ‘total turnover of the SEZ unit’ and not by the ‘total turnover of the assessee company.’ After the aberration is removed, IT companies like TCS, Wipro, Infosys and HCL would not need to set up separate companies for units running in different tax jurisdictions.

For instance, companies in IT sector running units in zones like Software Technology Parks and in SEZs will not need to set up separate shell companies for both areas. Before the year 2000, Section 10A (relating to software technology parks and the erstwhile Export Processing Zones) and Section 10B (relating to Export Oriented Units) of the Income Tax Act were worded as ‘total turnover of the assessee’ regarding calculation of income tax. Later on in Finance Act 2000, the finance ministry issued a clarification that in the context of Section 10A and 10B of the Act, the total turnover of the ‘assessee’ means the turnover of the ‘undertaking’. The ministry said the section shall not have any material relationship with the other business of the assessee outside these zones.

“This issue was debated eight years back and the circular is valid even today. It should be read as total turnover of the ‘undertaking’,” an official said. But wary of revenue losses from tax sops to SEZs, ministry officials were of the view that in the context of SEZs, it was a conscious decision to use ‘assessee’ in Section 10AA of the Income Tax Act.

 FinMin fixes Budget for early July, work starts now

Prime Minister Manmohan Singh may not have announced his next finance minister, but work on the regular 2009-10 Budget begins from tomorrow. Revenue secretary P V Bhide meets the Confederation of Indian Industry (CII) which will present its tax recommendations. Top on the agenda: the fringe benefit tax, one of the biggest complaints of India Inc, which, sources said, is likely to be done away with.

The finance ministry has fixed the first week of July for the Budget’s presentation and officials are working to meet that deadline. According to a senior finance ministry official, who did not wish to be quoted, it usually takes about 55 days to prepare the regular Budget. “This has been the past experience when a new government takes charge post elections,” he said. The UPA’s victory ensures continuity of policies and that makes the process that much more smooth, he added.

The ministry has lined up meetings over the coming weeks with several stakeholders including industry chambers.

The finance ministry official said that the priorities of the Congress-led government are quite clear in the manifesto released ahead of the general elections. “Financial sector reforms are high on the agenda but expectations need to be grounded in reality in the aftermath of the global financial crisis,” he said. The pension Bill will, however, be pushed through in the ensuing session of Parliament, he added.

The ministry had already sent a detailed note to the Cabinet Secretariat earlier this week on the unfinished agenda. The biggest and long-term reform in indirect taxes is the ushering in of the Goods and Services Tax Act by April 1, 2010. The government will reaffirm in the Budget its intention to implement the GSTA, which will put an end to all Central and state-level indirect taxes such as value added tax, excise duty, service tax, entertainment tax and luxury tax.

 ‘Slash I-T rate, but retain peak 10 pc customs duty’

To encourage more consumption and saving in the economy, the Confederation of Indian Industry (CII) will recommend that personal income tax exemption limit should be increased by Rs 50,000 to Rs 2 lakh and the tax rate slashed by 5 per cent. In its meeting with the finance ministry led by revenue secretary PV Bhide on Monday, the CII will also suggest doing away with the fringe benefit tax and the minimum alternative tax.

As far as indirect taxes are concerned, the CII has sought protection from imports in the backdrop of a global slowdown. The industry body recommends that the peak rate of customs duty should remain at 10 per cent. It has called for a cut in central sales tax (CST) and for ushering in the goods and services tax (GST) on schedule.

CII’s pre-budget memorandum suggests that FBT should be levied only on the element of personal benefit to employees and should exclude the portion meant for pure business. It says that the FBT should not be levied on items such as conference expenses, sales promotion, tour and travel, hotel and lodging facilities and other non-employees related expenses.

On MAT, the CII wants the government to abolish the tax or at least bring down its rate to 5 per cent. In the past, MAT had been hiked from 7.5 per cent to 10 per cent of the book profits. The industry chamber argues that the additional burden has affected investment plans of companies.

This apart, the CII is keen the government abolishes the surcharge and cess on individuals and companies. The surcharge on income tax was initially levied at a nominal rate of 2.5 per cent and the same was quadrupled to 10 per cent. “It will be more efficient to have one rate of corporate tax rather than many cesses and surcharges,” says the pre-budget memorandum.

 Give tax sops, log off slump

ExtenD STPI sops, Amend I-T Act.

The information technology sector, one of the industries to have put India on the global map, is hoping that with a clear winner and no involvement of Left parties, the new government will be in a better position to improve matters in a slowing economy.

The sector wants action on many issues. One is extension of Software Technology Parks of India (STPI) benefits, which will allow mid-size firms to maintain their operating margins in the current recession. IT firms have been hit, since almost 80 per cent of their revenues comes from exports to the US and UK, both of which face slowdown. If the IT firms — especially small- and mid-size ones — have to pay taxes in India, their profits would take a further hit and many of them would have to close, fears the industry body, Nasscom.

Other demands include removal of inequities and the multiplicity of taxes (Service tax, FBT) and an overall policy environment to enhance India’s competitiveness and attract foreign investment. Along with a greater investment in e-governance, building a more robust digital network and taking low-cost computing to rural India.

Welcoming the election results, Nasscom said: “We look forward to working with the government to promote inclusive growth and social benefits through the innovative use of IT. We hope specific policy initiatives are taken to sustain industry’s growth through extension of tax benefits, particularly for SMEs, removal of inequities and multiplicity of taxes and developing public-private partnerships to accelerate implementation of the already-approved e-governance programmes.”

Vinnie Mehta, executive director of Manufacturers Association for Information Technology ( MAIT), said: “The new government must use IT for economic thrust and harness IT in the true sense to make all verticals of the economy more efficient. The issue of connectivity — both wired and wireline — needs to be addressed by making the Internet more robust.” Mehta also emphasised the need for e-governance initiatives to go beyond the Mission Mode Projects.

Says former Nasscom head Kiran Karnik, now chairman of Satyam Computers’ board of directors: “As policy indicators, the government should take on the protectionist stand that some countries are taking. Look into the education sector. Though there have been positive initiatives, these are not enough. And most important, the government should focus on human resource issues, for the long-term growth of the knowledge industry.” The industry employees over two million people.

Nasscom also wants the government to increase IT budgets to stimulate the IT-BPO industry and the economy. It wants the states to initiate a time-bound program for extending broadband connections to all villages (as mentioned in the Congress manifesto), so as to provide Internet access to all citizens; and back this with steps to increase computer penetration.

 Economists expect more reforms from Pranab

 Budget in due time: Mukherjee

Finance Minister Pranab Mukherjee today expressed the hope that government would be able to present the budget in due time to avoid uncertainties.

However, he parried questions whether the government would go for a vote-on-account now.

"Indian economy is resilient, strong and we shall have to build up and come back to the growth track as early as possible. We will be able to, I hope, present the budget in due time so that uncertainties can be avoided and time of spending can be renewed," he told reporters shortly after Prime Minister Manmohan Singh retained him in the finance ministry.

After being given the charge of finance ministry earlier this year, Mukherjee had presented the vote-on-account in view of the elections.

To a question whether the government would present a vote-on-account now, he said he would not answer these questions now. "Don't create problems for me and the people".

 Pranab's first priority to present budget for 2009-10

Veteran politician Pranab Mukherjee, hailed as one of the five best finance ministers in the world in 1984, will re-enter the North Block as finance minister of the new Congress-led UPA government.

Often described as a man for all seasons and seen by his party as a trusted trouble shooter, Mukherjee's first task would be to present the budget for 2009-10 and continue the measures to boost the economy reeling under the impact of global financial crisis.

As author of the interim budget for the current fiscal, it would be easier for him to prepare the full budget for the fiscal and ensure continuity in the economic policies and programmes.

The government is required to get the budget passed by Parliament by July 31 as the vote-on-account (which allows government to withdraw money from Consolidated Fund) sought in the interim budget comes to end on July 31.

Mukherjee is a veritable encyclopedia on Congress movement and has been a minister in all the party governments since the mid-1970s, save the Rajiv Gandhi government between 1984 and 1989.

The eternal 'number two', Mukherjee was a trusted lieutenant of late Indira Gandhi under whom he was the powerful minister of State for Revenue during the emergency and later became a full-fledged finance minister between 1982 and 1984.

Mukherjee, who after a gap of 25 years became the finance minister in the previous UPA government, had little opportunity to excel. It was an additional charge for the external affairs minister after the then finance minister P Chidambaram was shifted to Home Ministry.

The only significant thing he did as the finance minister was to present an interim budget for the outgoing government.

As finance minister in the 80s, he was the boss of the present prime minister Manmohan Singh, who was then the governor of Reserve Bank of India. Although many thought he would become prime minister in 2004, Congress president Sonia Gandhi nominated Manmohan Singh for the responsibility.

Again the top constitutional post is said to have eluded him during the presidential election in 2007 when Left parties reportedly favoured him but the Congress chose Pratibha Patil.

The 73-year-old leader from West Bengal, who took to politics under the tutelage of late Ajoy Mukherjee of the Bangla Congress, had briefly gone out of the Congress in the mid-1980s in the aftermath of Indira Gandhi's assassination.

After his reported brush with Rajiv Gandhi, who took over from his mother in 1984, Mukherjee made an exit from Congress and started his own party -- Rashtriya Samajwadi Congress -- only to merge it with the parent party again in the last years of the former prime minister.

From an obscure village in West Bengal's Birbhum district, Mukherjee has risen to become the number two in the corridors of power in Delhi shaping government policies and programmes.

He played an important role in Congress allying with the Trinamool Congress to inflict a humiliating defeat on the CPI(M)-led Left Front in West Bengal.

Mukherjee, who mostly made it to the upper house since 1969 when he first became a Rajya Sabha member, was elected to the Lok Sabha for the first time from Jangipur constituency in Murshidabad district in 2004. He repeated the feat in this elections widening the victory margin to over 1.26 lakhs, from 34,360 in 2004.

He became the deputy minister of Industrial Development at the Centre for the first time in 1973 and went on to serve as minister of State and Cabinet minister.

Mukherjee was rated as one of the best finance ministers of the world in 1984 and was adjudged the best parliamentarian in 1997.

As Union commerce minister, Mukherjee contributed significantly to the negotiations leading to the establishment of the World Trade Organisation. For some time, during the 1990s he had held the dual charge of external affairs minister and deputy chairman of the Planning Commission.

During the previous stint of the UPA government, as external affairs minister Mukherjee played a crucial role in negotiating the nuclear deal with the US and improving India's ties with it, besides mobilising world opinion against Pakistan after the terrorist strike in Mumbai.

He also functioned as the leader of the 14th Lok Sabha.

Apart from his assignments in the government, he played a significant role in the Congress as a member of CWC, the highest policy-making body of the party, as treasurer, general secretary, member of central election committee and the central parliamentary board of the party.

He was appointed president of West Bengal Pradesh Congress in 1985, 2000 and again last year when the PCC chief fell ill.

Widely travelled, he led several delegations to important conferences abroad and in the UN General Assembly.

Educated at Vidyasagar College, he began his career as a teacher and a journalist and was associated with publications like Desher Dak (Call of Motherland).

Mukherjee has authored several books including Midterm Poll, Beyond Survival, Emerging dimensions of Indian Economy, Off the Track, Saga of Struggle and Sacrifice and Challenge before the Nation.

He was a trustee of Bangiya Sahitya Parishad and president of Nikhil Bharat Banga Sahitya Sammelan. He also served as the chairman of the Planning Board of the Asiatic Society, from 1984-1986 and during 1992-96.

 New Govt plans budget by end-July

The new coalition Government hopes to win Parliament approval for the union budget for 2009/10 by the end of July, Cabinet minister Palaniappan Chidambaram said on Saturday.

The date for the presentation of the budget has not yet been decided, Chidambaram told reporters.

"We hope that we will be able to pass the full budget by July 31," he said after the first cabinet meeting of the new Government following a General Election.

"If not, we will have to take another vote-on-account for a very short period," he said referring to a temporary measure to allow government spending.

The central Government had presented an interim budget in February to get parliament approval for necessary expenditure until July 31, and left it to the new government to present a formal budget.

Chidambaram said the decision on whether the government would present a vote-on-account or a full budget would be taken later by the ruling coalition government of Prime Minister Manmohan Singh.

Financial markets are waiting to get a sense of the new government spending plans and steps to repair public finances. The government had said in February that expenditure may jump later this year to shield the economy from a global slump.

The government faces a widening deficit, slowing growth and huge expectations for fresh stimulus to protect growth and jobs.

 Fiscal consolidation should be budget priority: RBI

Reserve Bank today said the new UPA government, which is slated present the Budget some time in July, should resist pressure for another stimulus as sustained economic recovery would require fiscal consolidation in medium term.

"Given the still soft economy, the pressure to provide more stimulus will persist. While this may help in the near term, the sustainability of recovery requires returning to responsible fiscal consolidation," Reserve Bank Governor D Subbarao said.

The fiscal stimulus packages and other measures initiated by the government to mitigate the impact of global financial crisis on the country have led to a sharp rise in expenditure and fiscal deficit, he said.

"The challenge for fiscal policy is to balance immediate support for the economy with a need to get back on track on the medium-term fiscal consolidation process," Subbarao told a seminar here.

With every percentage point increase in the fiscal deficit, maintaining adequate liquidity in the system becomes that much more difficult, Subbarao said.

"Managing this trade off between our short term compulsions and long term sustainability will be one of the big challenges," he said.

 Pranab meets senior officials to discuss Budget 2009-10

 Finmin plans FBT softening

The contours of the Budget plan are becoming clear. Finance minister Pranab Mukherjee’s team at North Block has already prepared to take on the most controversial direct tax of recent years, the fringe benefit tax (FBT).

The ministry is working on two alternatives—the withdrawal of the tax, or its partial roll back. The formulations that will be carefully considered by the minister in the next few weeks are the revenue implication of discontinuing the tax.

In a year when direct tax receipts grew at a mediocre 8.3% rate, FBT collections registered the highest growth at 12.38% to Rs 7,997 crore in 2008-09, against Rs 7,116 crore in the previous fiscal.

This incidentally is being seen as the regressive nature of the tax as it has not responded to the downturn in the profits of the companies.

As per the Budget estimate for 2009-10, the Centre’s direct tax receipts are estimated at Rs 3,79,576 crore, a mere 10% rise over the revised estimate of Rs 3,44,601 crore for 2008-09. Significantly, direct tax collections for the last fiscal were short of target by Rs 6,000 crore. The tax is regressive, as in an effort to soak up perquisites earned by employees of companies, levies it on a large range of business expenditure incurred by companies to run their operations.

Industry chambers have, therefore, been repeatedly asking for a rollback of the tax, introduced by former finance minister P Chidambaram in 2005. The industry demand is gaining momentum on account of the global financial crisis, which has significantly eroded corporate profitability because of the demand downturn.

“Ideally, the government should think of removing the whole scheme of FBT. But if that is not possible, then at least diluting it for certain industrial categories like exporting units would be a good move,”said Amitabh Singh, tax partner Ernst and Young.

Commerce and industry ministry in its Budget 2009-10 wishlist too has asked for withdrawal of FBT for exporters. Mukherjee, who is keen to simply the country’s tax regime would find the FBT as a major irritant in the tax system.

Another tax analyst however argued that tweaking the corporate tax rate may help fulfil the government’s motive of achieving its collection targets.

“FBT should be withdrawn as it is not only a tax on genuine business expenditure, but it also involves a lot of additional paperwork,” he said on conditions of anonymity.

 Budget in 1st week of July; focus on sectors hit by crisis: FM

 Budget to keep UPA promises