WITH the hope that the global economy will not slow down, Indian finance minister Pranab Mukherjee unveiled a budget on Feb 26 meant to set the stage for future accelerated reforms.
While the budget for 2010-11 provides for some tax relief for individuals, the effective tax cost of doing business in and with India will rise.

Some of the key budget proposals:

Tax Rates
With the intention to provide the common man with more net disposable income to combat the inflationary trends, the existing income slabs subject to tax have been modified.

While the individual taxpayers in the lower- and middle-income groups will benefit as a result of the widening of the tax slabs, the maximum marginal rate of tax for individuals will continue to remain at 30 per cent.

Corporate tax rates will also remain unchanged at 30 per cent for resident companies and 40 per cent for foreign companies.

However, the finance minister proposes to increase the Minimum Alternate Tax (MAT) rate payable by companies from 15 to 18 per cent of their book profits.

Support For R&D

With a view to further promote R&D in India, the budget has proposed to increase the weighted deduction on expenditure incurred on scientific research in an approved in-house R&D facility from 150 per cent to 200 per cent.

And to encourage corporate contributions to approved institutions engaged in scientific R&D (for example, national laboratories and research institutions), the budget proposes an increase of the weighted deduction on such contributions from 125 to 175 per cent.

Boost For Financial Sector

While recognising the importance of the financial sector for the growth of the economy, the finance minister announced that the Reserve Bank of India may allot new banking licences to private-sector companies and non-banking finance companies.

The proposal to set up a financial sector legislative reforms commission, along with measures for strengthening existing banks, would create a financial sector equipped to cater to the requirements of a fast growing economy.

Introduction of DTC and GST

The finance minister has shown his confidence in implementing the Goods and Services Tax legislation and the Direct Taxes Code (DTC) with effect from April 1, 2011. But as the changes proposed under the draft DTC are quite radical with far-reaching consequences, one can hope for significant revisions before it is enacted.

In line with the intent of the DTC, the finance minister has refrained from extending the tax holiday period currently enjoyed by units set up in software and hardware technology parks, free trade zones and 100 per cent export-oriented units.

This incentive is due to expire on March 31 next year. This may result in related businesses considering the option to either restructure their operations or set up units within Special Economic Zones in India.

Widening The Tax Net Beyond India

The budget has proposed to tax non-residents, on a retrospective basis, on their offshore technical service income earned from their Indian customers even if the services are rendered outside India.

The right of taxation for such services would be based on the place of utilisation of services and not on the place of rendering of services.

As a result, going forward, income earned by foreign service providers may be subject to Indian taxes even though their services are not performed in India.

This proposal is likely to create undue hardship for the foreign service providers and may result in double taxation of the same income if the country where the service provider is tax resident refuses to allow foreign tax credit claims for such Indian taxes in view of the conflicting source rule.

Limited Liability Partnerships

The finance minister introduced the new Limited Liability Partnership (LLP) framework.

The objective is to encourage taxpayers to convert their private limited companies to LLPs by making such conversions tax free, subject to certain conditions.

However, this benefit is restricted as it is available only to companies having a turnover of Rs60 lakhs (approximately S$183,200) in the preceding three years.

Taxation Of Certain Transactions Without Consideration Or For Inadequate Consideration

In order to curb the practice of transferring unlisted shares at prices below their fair market value, the budget proposes to tax transactions involving transfer of unlisted shares to a firm or company, for inadequate consideration or without consideration, with effect from June 1 this year.

The tax would be levied on the recipient, subject to any treaty benefits as may be available to any foreign recipient.

This proposal may lead to application of transfer pricing norms even for transactions between unrelated parties.

Further, it needs to be seen whether unlisted share transactions resulting in capital gains, which are currently exempt from tax, will also be scrutinised to determine the adequacy of their consideration.

In Summary

In his second budget for the current government, the finance minister chose to concentrate on fiscal discipline as he aimed to lower the fiscal deficit over the next three years ? from 5.5 per cent in 2010-11 to 4.1 per cent in 2012-13.
Only time will tell how this budget helps India to return to its growth trajectory and combat future crises.
Abhijit Ghosh is a tax partner and Megha Khandelwal is a senior tax consultant at PricewaterhouseCoopers Services LLP Singapore