Pranab to hold pre-Budget talks with industry captains on June 1

 Pranab to hold pre-Budget talks with industry captains on June 1

 Pranab meets senior officials to discuss Budget 2009-10

 Budget likely on July 3

 80C I-T cap could go up by Rs 50,000

 BUDGET MAY OFFER TAX SOPS TO NPS HOLDERS AT ENTRY

With the new pension system attracting lukewarm response from citizens, interim regulator Pension Fund Regulatory and Development Authority (PFRDA) today expressed hope that the Budget would provide tax exemption to individuals at the time of entry to encourage them to opt for the scheme. However, the government might take some more time to provide tax benefits for those opting for NPS at the time of withdrawal, a senior PFRDA official told PTI. “Exit stage may take a longer time for examination, but at entry stage (of NPS) we expect to come in the next Budget,” he said. The regulator has sought tax exemption for individual subscribers at all stages of the pension scheme — contributions, returns and withdrawal — in line with other provident fund schemes. However, there is no notification yet on entry-stage exemption, the official added. PFRDA further said that the tax exemption issue at entry stage is under the active consideration of the government and expects the Budget to come out with some clarifications on the issue and that will give boost to the NPS. The NPS was extended to all citizens from May 1 this year, but evoked lukewarm response with only 400 persons opening pension accounts so far. “Maybe with the Budget certain clarification will come on the nature of investment in this particular scheme. Once those clarifications come, probably we will get more subscriber joining us,” he added. While contribution, returns and withdrawals under Public Provident Fund, Employee Provident Fund and General Provident Fund are exempted from tax, in case of the NPS, these tax benefits are not provided to individual subscribers

 CLARITY ON LLP TAX ISSUE ONLY NEXT YEAR

No time to sort out the issue in Budget: Khursheed Corporate Affairs Minister Salman Khursheed has said, contrary to expectation, the Budget will not address the taxation issue related to limited liability partnerships (LLPs). The issue will be clarified only next year, he added. “It is too short a time for us to sort out the issue, but it is flagged,” Khursheed told Business Standard. The Ministry of Corporate Affairs (MCA) has written to finance ministry to amend the Income Tax (I-T) Act to address the issue. At present, the I-T Act recognises companies, partnership firms, individuals and so on but does not recognise LLPs, although they are now recognised under an Act that was notified on April 1. Under the LLP structure, the liability of the partner is limited to his stake and no partner is liable on account of any independent or unauthorised acts of other partners. In traditional partnership firms, on the other hand, every partner is liable, jointly with all the other partners and also severally, for all acts of the firm while he is a partner, irrespective of his stake. So far, 38 firms have registered as LLPs since the LLP Act was notified and many more are waiting to do so once the tax issue is clarified. Partnership firms wanting to convert to LLPs also want stamp duty and capital gains tax waiver after the conversion.

 EXCISE CUTS MAY BE SELECTIVELY WITHDRAWN TO BOOST REVENUES

The Union finance ministry is considering an increase in the central excise duty for some of the products that had benefited from the two rounds of reductions announced by the government as part of its fiscal stimulus measures last year. In December 2008, the government had reduced the general rate of central excise duty for all products, except petroleum goods, from 14 to 10 per cent. In February, Finance Minister Pranab Mukherjee cut the general rate of central excise duty further to 8 per cent and the service tax rate from 12 to 10 per cent. The annual impact of the duty cuts on the government’s tax revenues was estimated at over Rs 75,000 crore. With the government’s revenues in the first two months of this year showing no signs of buoyancy (direct tax collections grew only 5.5 per cent), the finance ministry is now identifying products belonging to those sectors that are doing relatively better than those severely affected by the economic downturn. The objective is to shore up revenues for the current fiscal year by selectively raising the central excise duty on products doing well, instead of an across-the-board increase in the duty. The ministry is studying the latest trends in the industrial growth figures for different product categories to formulate a list of such goods for which general excise rate can be increased to either 10 per cent, the level that prevailed before the Interim Budget announcement, or 14 per cent, the level before December 2008. Sectors that are likely to be exempted from any increase in the excise duty under this proposal include commercial vehicles and textiles, said government officials. On the other hand, the latest infrastructure and industrial output data for April 2009 indicate a pick-up in demand for certain sectors like cement. Eleven out of 17 industry groups, accounting for nearly 60 per cent weight in Index of Industrial Production (IIP) have shown growth on an annual basis in April 2009. Many of the items in these sectors could be considered for an excise duty increase. The ministry’s proposal stems from the realisation that the Interim Budget had accounted for the revenue loss from the duty cuts only for the first four months of the current fiscal. Thus, if the general rate of excise duty is allowed to remain at the level outlined in the Interim Budget, the government’s fiscal deficit would go up by about a percentage point of GDP in the normal course. A selective increase in excise duty is also under consideration because the finance ministry is already under pressure to spend more on various social sector schemes. At the same time, it is trying hard to contain the increase in the fiscal deficit for the current financial year, over and above the target of 5.5 per cent of GDP already projected in the Interim Budget. At the level of deficit projected in the Interim Budget, the Union government will borrow around Rs 3,60,000 crore from the market in the current financial year. A higher fiscal deficit level is likely to crowd out private sector investments, especially at a time when firms resume their investment plans. The fiscal deficit in the year ended March 2009 exceeded the revised estimates by 0.2 percentage points to reach 6.2 per cent of GDP. The need to increase the general rate of excise duty and mobilise more revenue has also arisen because the ministry realises that the scope for mobilising substantial resources through disinvestment of government equity in public sector undertakings (PSUs) is limited because of the political opposition to the idea from two of the government’s political allies. Even if disinvestment of a few PSUs is cleared, the earlier estimates of mobilising Rs 25,000 crore from equity sales during the year now appear unrealistic, said government officials. Similarly, the ministry is now of the view that it cannot achieve the earlier target of mobilising Rs 40,000 crore from the auction of 3-G licences for the telecommunications sector. A more realistic estimate of collections from this route has been put at Rs 12,000 crore for the year. The ministry is also conscious of the fresh challenges a selective increase in excise duty would pose for the government’s plan to introduce a goods and services tax (GST) from April 2010. But its view is also influenced by the need to raise more resources during the current financial year and the realisation that the plan for the GST regime may need some revision in view of the political opposition to the idea and the unpreparedness of many states to opt for a GST system from the next financial year.

 MINISTRY FOR TAX HOLIDAY, INFRA STATUS FOR FOOD PROCESSING COS

Food processing industries minister Subodh Kant Sahai on Friday advocated for a tax holiday and infrastructure status for the sector, besides setting up a venture capital fund or a sector-specific bank, to ensure easier availability of credit at competitive rates. According to Mr Sahai, the food processing sector is one of the top 10 sectors of the Indian economy, currently growing at 15% per annum. “The future growth, however, would depend on adherence to safety and quality standards, infrastructure, capacity building, skilled manpower and rationalisation of tax structure,” he added. At present, the food processing industry in India is at $85 billion. The food & grocery retailing accounts for 62% of the total retail market and is estimated to be worth $150 billion by 2025. The food processing ministry has also prepared a vision document for 2015 to make the country globally competitive in the sector. Mr Sahai said he will make budget recommendations to the finance minister in the coming days. “Indian food processing industry would also need the right branding in the global market. We should ensure that our processed food is recognised globally in terms of safety and quality,” he said. The minister also suggested that mid-day meals should include processed foods, in order to ensure hygienic and nutritious food for children. Speaking on laws against adulteration, he said that since the Food Safety and Standards Authority of India falls under the ministry of health and family welfare, the food processing ministry has not been able to actively address the issues of adulteration. Rasna chairman and MD Piruz Khambatta said that India has the potential to become food factory of the world. “The government should not only strengthen infrastructure in the sector, but also rationalise the tax structure, set up R&D bases and quality labs across the nation. We need to have budget allocations for branding and marketing India’s food processing industry globally.”

 GJEPC WANTS TURNOVER TAX TO REPLACE ALL DIRECT TAXES

Gem and Jewellery Export Promotion Council (GJEPC), the all-India apex body of the industry representing 5,500 members, has proposed to replace all forms of direct taxes with a levy of one per cent turnover tax. In its pre-budget memorandum to the Government, Mr Vasant Mehta, Chairman, GJEPC, said the peculiar nature of the industry, characterised by daily price fluctuations, as a major cause for taxation dispute. “The proposed levy of a flat one per cent turnover tax in place of all forms of current direct taxes, will do away with arbitration, confusion and delays in finalisation of tax returns,” he said. GJEPC has also proposed the Government to consider releasing about $2-3 billion from the forex reserves to banks for lending exclusively to the gem and jewellery exporters. Besides, the Council has also sought increase in the flow of dollar financing. “The industry should get finance at Libor (London Interbank Offered Rate) plus one per cent as the additional charges levied by banks pushes up the cost of finance,” he said. The industry requires at least $3-4 billion in the coming year. Urging the Government should consider the demand sympathetically, Mr Mehta said, of the 1.5 million people employed in the industry, about three to four lakh workers have lost job since November due to the recessionary trend. The industry can survive only if it is cost-competitive in the global market, he said. The lack of duty-free gold in many parts of the country has hit small exporters who find it difficult to procure their primary raw material and are unable to compete in the international markets. The Government should allow exporters to import gold directly duty-free and the duty should be charged only if they fail to meet the export obligation, he said. Mr Mehta listed the threat from the growing influence of a highly-competitive China, a world-wide fall in demand, increasing unemployment of highly-skilled workforce and volatility in gold prices as the key challenges faced by the industry. The industry has presented a plan to the Union Finance Minister, Mr Pranab Mukherjee, that would not just help the industry sustain its leadership position but also enable it to grow, said Mr Mehta.

 MARAN LOOKS AT TAX CUTS FOR TEXTILE SECTOR

Union Minister for Textiles, Mr Dayanidhi Maran, has said that the Government will strive for service tax exemption for the textile industry. According to Mr Maran, the Government will work towards reducing interest rates on pre- and post-shipment credit and facilitate faster clearance of arrears of terminal excise duties and Central Sales Tax. He was speaking at an event organised by textile industry bodies on Friday, to release a study report “Impact of Economic Slowdown on Textile and Clothing Industry” compiled by ICRA Management and Consulting Services Ltd.

NATIONAL FIBRE POLICY

Work on formulating a national fibre policy will begin immediately, according to the Textile Minister.

MORE JOBS

Also present at the event, Ms Rita Menon, Secretary, Ministry of Textiles, said that the Ministry would work towards creating 10 million more jobs in the textile sector, which already employs 33 million people, by the end of the 11th Five-Year Plan. Mr Maran said as a medium term strategy, the Government will look to quicken the implementation of the Technology Upgradation Fund Scheme, Scheme for Integrated Textile Parks and Technology Mission on Cotton, during the 11th Plan period. Textile exports make up for 12 per cent of India’s exports, the US and the European Union (EU) together account for 55 per cent of the textile export market for India.

EXPORTS

However, as a result of the economic slowdown, textile exports to the US fell by almost 20 per cent by February 2009. Mr Maran said, “We have to look for other markets and not just get bogged down to the EU and the US.” In addition to this, almost six lakh jobs have been lost since the economic slowdown late last year. Also, India’s exports are at a big cost disadvantage to China and even Bangladesh, Vietnam and Sri Lanka.

MEASURES TO BE TAKEN

The report has asked for certain steps to be taken by the Government to help rejuvenate the textile industry. These include permitting contract labour, relaxation of norms in the Industrial Dispute Act, 1947 and an extension of working hours for labour. The report has also asked the industry to explore new markets and reduce dependence on EU and the US.

 LLPs MAY BE TREATED ON PAR WITH PARTNERSHIPS FOR TAXATION

The Union budget is expected to provide clarity on taxation of limited liability partnerships (LLPs) by treating them like partnership firms for tax purposes. A corporate tax is likely to be levied on the income of an LLP, with the partners being exempted from taxation, as in the case of partnership firms. The idea is to keep the taxation structure of LLPs simple and similar to partnership firms, as is the global practice, said a government official who did not wish to be identified. The Income-Tax Act does not have any provision for taxation of LLPs, which are a hybrid between companies and partnership firms. It only provides for taxation of companies, partnerships or association of persons. The government is likely to amend the Act, paving the way for creation of LLPs, where a partner’s liability is limited to the extent of his stake in the entity, the official said. LLPs are a relatively new concept in India. The LLP Act was notified only on April 1, 2009, but lack of clarity on its taxation has held up the formation of several such entities. Clarity on taxation of LLPs will particularly benefit the services sector, allowing professionals such as chartered accountants and company secretaries to come together to form an LLP. In a regular partnership, each partner is jointly and severally liable for any liability arising out of or in respect of the partnership, putting every partner’s personal assets at risk if the partnership faces any claim. The liability of individual partners in an LLP is limited to the extent of their respective contribution, and an LLP partner’s personal assets are not at risk, except when he is himself responsible for the claim. LLPs would, therefore, allow professionals to come together in a partnership arrangement. Globally, partnership firms enjoy pass-though status for tax purposes, which implies that profits are taxed only at the hands of partners while the firm is not taxed. Thus, LLPs are also treated as a pass-through entities. “Worldover, LLP entities are treated on a par with partnership firms as far as taxation is concerned. However, unlike countries like the US or UK where partnership firms are transparent entities for tax purposes, it is not so in India,” says Amitabh Singh, partner, Ernst & Young. “I expect LLPs in India to be taxed in the same manner with profit distributions being tax-free in the hands of the beneficiaries. Any additional taxation would make LLPs unattractive,” he added. A parliamentary standing committee that examined the LLP bill before it was passed by Parliament had recommended that these entities should be allowed to choose between taxation at the level of the firm or partners.

 PRANAB ASKS STATES TO QUICKLY RESOLVE PENDING ISSUES ON GST

The Union Finance Minister, Mr Pranab Mukherjee, on Thursday urged all the Chief Ministers and Finance Ministers of States to “expeditiously” resolve the pending issues concerning goods and services tax (GST) implementation, stating that this proposed new tax system was a critical part of the economic reforms. Addressing a conference of Finance Ministers of States as part of pre-budget discussions, Mr Mukherjee asked them to focus on the introduction of GST from April 1, 2010. This statement is seen as a reaffirmation of Centre’s intent to help usher in GST from that date. However, there are still various issues that need to be tied up at the level of States. Many States including some BJP-ruled ones have today expressed reservations on the proposed new system. Some of them have raised issues on compensation for revenue loss, design, etc.

MISSING CONSENSUS

The current thinking in the Empowered Committee of State Finance Ministers, which had been tasked to design the GST framework in consultation with the Centre, is to have a system of dual GST— a Central-level GST (subsuming central taxes such as excise and service tax) and a State-level GST (subsuming VAT, octroi, entry taxes, etc). Both the Centre and the States are yet to arrive at a consensus on how the dual GST should be administered and assessed — whether it would be a single authority (Central or State) or would it be multiple authorities, that is a Central authority looking after Central GST administration and a State authority (existing VAT department) administering and assessing the State GST. On their part, some industry associations are pushing for a single unified national level GST that would be administered by a single authority. Only then, feel industry captains, the GST benefits could be well harnessed.

INDUSTRY VIEW

At today’s meeting, Assam has submitted to the Centre that any loss arising to the State on account of adoption of GST should be fully compensated on a permanent basis. Currently, the Centre is willing to provide compensation for revenue losses for GST implementation only up to five years. “We do agree that GST should be implemented. Its implementation would lead to permanent revenue loss for us. They said they will give compensation but only for five years. We have pointed out that revenue loss would be a permanent one. So, there should be full compensation and on a permanent basis,” Mr Tarun Gogoi, Assam’s Chief Minister, told reporters here. 

 GST RATE MAY BE SET AT 16%, PANEL TO MEET PRANAB TODAY

The unified goods and service tax rate may be pegged at 16%. The empowered committee of state finance ministers on Wednesday examined the possible rate structure for the new tax regime that is set to replace all indirect taxes at the central and state level from April 1, 2010. An official who attended the meeting said the deliberations were held on the rate structure, though a final view will be taken by August. State finance ministers are scheduled to meet Union finance minister Pranab Mukherjee on Thursday for discussions on the budget and new GST regime. Empowered committee chairman and West Bengal finance minister Asim Dasgupta said: “We had a fairly detailed discussion with the ministers on the structure of GST. We are setting a target date of August-end for tying the loose ends.” Mr Dasgupta, however, declined to comment on the proposed rate. Currently, the cenvat rate is 8%, service tax rate 10% and value added tax rate 12.5%, taking the total incidence of indirect taxes to 30.5%. Another state finance ministry official who attended the meeting said states and the Centre will have to work out a rate structure that would be revenue-neutral and not cause any loss to the exchequer. But some BJP-ruled states such as Madhya Pradesh have expressed reservation on the implementation of the GST regime from 2010. Mr Dasgupta, however, exuded confidence that introduction of GST would meet the deadline of April 1, 2010. He said the committee would be meeting frequently now to finalise the nitty-gritty of the GST structure. After finalising the structure, discussions will be held with the trading community, industry, agricultural sector and public. “We want a rapid and widespread discussion before launching GST from April 1, 2010,” Mr Dasgupta said.