By SP Singh
It may be only India-Pakistan one-day cricket match which may rival Budget presentation by the government, which takes place on the last day of February every year. When the finance minister (FM) presents the Budget, everyone listens to him with anticipation and apprehension. This is primarily because Budget contains not only the financial statement of the year going-by and proposals for the coming year, but the Finance Bill which seeks to amend the personal, corporate (jointly called direct taxes) and indirect taxes. This year, however, Pranab Mukherjee, Finance Minister of India, must be credited for demystifying this day. He has realised that by amending tax laws every year is subjected to bouts of uncertainty, which is not good for the economy. Consequently, he has proposed minimum changes in the tax laws. This is also driven by the fact that soon he will be changing the whole contour of the tax laws by introducing the Direct Taxes Code and the Goods and Services Tax (GST) Act, which he proposes to bring into effect from April 1, 2011.
The fiscal year 2009-10 was a difficult one. The continued recession in the developed world, for the better part of the year, meant a sluggish export recovery and a slowdown in financial flows into the economy. In spite of all these, the Indian economy posted a remarkable recovery.
Electronics industry and pre-budget expectations
This sector consists of many sub-sectors like software, computers, consumer electronics, communication and broadcasting equipment, strategic electronics and components. This sector has been hardest hit due to the global economic recession. Electronics hardware production in India, which constituted around 1.5 per cent of global electronics production in 2008, registered a growth of 12.1 per cent in 2008-09, compared to a growth of 27.8 per cent in 2007-08. Similarly, the IT sector experienced a growth of 35.3 per cent during the first six months of 2008-09, followed by decline of 1.9 per cent in the next six month, leading to overall growth of only 14.6 per cent during the year. The first half of 2009-10, too, registered decline.
Income tax proposals in Finance Bill 2010
It needs to be appreciated that electronics industry is not yet a matured sector. Though it has been doing reasonably well, globally, it is yet become a major player in this sector. It still needs support from the government. In respect of direct taxes, the industry was expecting certain benefits from Budget 2010. It was looking for higher tax deduction for R&D efforts, roll back of Minimum Alternate Tax (MAT) for Export Oriented Units (EOU), Electronic Hardware Technology Park (EHTP) units, extension of tax holiday for EOU/EHTP units and accelerated depreciation for information and telecommunication equipment due to high rate of obsolescence. Unfortunately, only a few expectations got fulfilled.
On the personal tax front, though the threshold limit (Rs 160,000) and the rates (10 per cent, 20 per cent and 30 per cent) were retained, the tax slabs were widened significantly, resulting into increase in take home income for all income groups.
Thus, anyone having more than Rs 800,000 as taxable income can have savings of Rs 50,000. Apart from this, additional deduction of Rs 20,000 has been provided for investment in infrastructure bonds. This has brought cheers to the people across all the industries. More money in the pocket of people can help boost demand for electronic goods.
However, there is a mixed bag for the corporate sector. While the rate of surcharge is proposed to be reduced from 10 per cent to 7.5 per cent, bringing down the effective corporate tax rate from 33.99 per cent to 33.22 per cent and effective dividend distribution tax rate from 17 per cent to 16.61 per cent, Minimum Alternative Tax (MAT) is proposed to be increased from 15 per cent to 18 per cent (effectively MAT would be 19.93 per cent). This will add to the financial burden even to those who are enjoying tax exempt status. Another bad news is that the government does not propose to extend time limit for tax holiday.
The FM has put a lot of emphasis on scientific development—both inhouse, as well as through approved institutions like Indian Institutes of Technology (IIT). So far as approved inhouse scientific research facilities are concerned, the weighted deduction on expenditure incurred on all expenditure except the cost of land or building, is satisfactory. It is proposed to be increased from 150 per cent to 200 per cent. Further, it is proposed to increase weighted deduction from 125 per cent to 175 per cent for payments made to an approved research association, university, college or other institution, national laboratory, university, IIT or specified person. The electronics industry should make use of these beneficial provisions and India as a hub for original research rather than a minor contributor to the actual research.
Finance Act (No. 2) 2009 sought to remove the anomaly in computing tax holiday profits for SEZs by referring to the turnover of “undertaking” rather than of that of the “assessee”. Now, benefits available to a unit in SEZ is independent of other activities being carried out by the concerned assessee. The Finance Bill 2010 seeks to make it retrospective from inception, that is, from tax year 2005-06.
On the tax deduction at source (TDS) front, the changes proposed are welcome and are minor. The most important thing that the industry should keep in mind is that from April 1, 2010, companies should insist for Permanent Account Number (PAN) whenever any payment is made. If it is not available then TDS would be required to be made at 20 per cent or at any other rate higher as per law. This will be more relevant when payments are for royalty and fees for technical services to non-residents, as the tax rates under the Income Tax Act, 1961 as well as tax treaties that India has, are much lower than 20 per cent; normally the rates are 10 per cent. A default in complying with this requirement may lead to disallowance of expenses and other actions by the tax department.
To provide relief to small businesses and professions, threshold turnover limit for compulsory audit of accounts is proposed to be increased from Rs 4 million to Rs 6 million. At the same time, penalty for non-compliance with tax audit requirement enhanced from Rs 100,000 to Rs 150,000.
Message for electronics industry
From the speech delivered by the FM, it can be inferred that he is trying to take the country towards a regime where tax laws are easy to understand and implement; industry becomes less dependent on tax benefits; tax administration becomes efficient; occasions of interactions between taxpayers and tax administration is minimised; and there is certainty in tax laws. All these are welcome propositions. The electronics industry will have to look at its business plan and reorganise in such a way that it emerges out as strong industry, depending less and less on tax benefits and more and more on its inherent strength.
The author is senior director Deloitte Haskins & Sells