You are on page 1of 76

THE BDO HARIBHAKTI PHILOSOPHY

• A vibrant client relationship • Total commitment and confidentiality


• Customised quality services • Total client solutions

THE CLIENT MISSION

“To provide client defined, quality


services on a global knowledge base
through trained, motivated and highly
competent personnel.”

THE PEOPLE MISSION

“To provide a challenging environment


and superior rewards to attract, develop
and retain the best people.”
FOREWORD
Inclusive Budget for Bharat Nirman
The Union Budget presented in the Parliament of India on 6th July, 2009 at 11 a.m. by the Finance Minister Shri Pranab
Mukherjee, popularly called Pranab Babu, spells the continuing agenda of the successive UPA II Government.
Shri Pranab Babu has very aptly answered that he does not know why the stock markets, economists and intellectuals
have reacted as “Just Fringe and Not Much Benefit”.
We at BDO Haribhakti, however, are positive based on our in-depth analysis of the budget proposals, macroeconomic
indicators of the economic survey, the Party Manifesto released by the Congress Party and our understanding of real
India and the requirements and expectations of “Young & Restless” Aam Aadmi.
Based on our analysis, the major highlights of the Budget can be summed up through Policy Directions, Revenue Mop
up Measures and Expenditure Plans of the Government as under:
[A] Policy Directions
To achieve GDP Growth of 9% on a sustained basis
Providing continuous stimulus to increasing consumption led growth in India in wake of global financial meltdown
Renewed focus on Infrastructure, acknowledgement of Public-Private Partnership model for growth, Reformed Tax
Collection Measures, Food Security for all, focus on Rural India, restoring Export Growth and International Investor
Confidence.
[B] Revenue Mop up Measures
Increase of MAT from 10% to 15%
Selective Disinvestment Measures and free float Petrol price
Rationalization of Tax Reforms Measures Like Central Processing Centers leading to improved Tax Collections
[C] Expenditure Plans of the Government
Substantial Investments in Infrastructure through India Infrastructure Finance Company Ltd. (IIFCL) to provide
refinance facilities
Interest Subversion Schemes and Increased Agricultural Credit Outflow
Renewed increase in allocation to Weaker Sections, Women Literacy, Pension Schemes for Army Personnel and
reduced marginal tax rates in hands of individual and corporates.
The Budget is thus a stimulus led continuing tool for growth, very bold in its initiatives for “Common Man”. The young
‘Aam Admi’ is now ready for risks, will deliver returns and will enroll every Indian in this task.
BDO Haribhakti requests its readers, clients and employees to support this Initiative of the Finance Minister and submit
fresh ideas: The time has come to “Lead India with One India”.

JAI HO Shri Pranab Babu


Team
BDO Haribhakti
Place: Mumbai
Date: 7th July, 2009

INDIA BUDGET 2009 1


Disclaimer

This document has been prepared by BDO Haribhakti. This Document is subject to changes without prior notice and is intended only for the person or entity to
which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other
use is prohibited. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financial service or as an official
confirmation of any transaction. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time.BDO
Haribhakti will not treat recipients as customers by virtue of their receiving this report. The information contained herein is from publicly available data or other
sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, BDO Haribhakti and associate companies,
their directors and employees are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons
that may prevent BDO Haribhakti and affiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not
be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment
decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems
necessary to arrive at an independent evaluation of any financial decision referred to in this document (including the merits and risks involved), and should
consult its own advisors to determine the merits and risks of such a financial decision. The views expressed may not be suitable for all individuals & corporates.
We do not undertake to advise you as to any change of our views. This report is not directed or intended for distribution to, or use by, any person or entity who is
a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject BDO Haribhakti and affiliates to any registration or licensing requirement within such jurisdiction. Persons in whose
possession this document may come are required to inform themselves of and to observe such restriction. Without limiting any of the foregoing, in no event
shall BDO Haribhakti, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages
of any kind.

2 INDIA BUDGET 2009


BDO Haribhakti
BUDGET ANALYSIS 2009-10

Para Page
Particulars
no. No.
1. INTRODUCTION 5

2. ECONOMIC INDICATORS 7

3. DIRECT TAX PROPOSALS

a) Corporate Tax 10

b) Personal Tax 18

c) Non-Resident Tax 24

d) Withholding Tax 27

e) Other Major Amendments 32

4. INDIRECT TAX PROPOSALS

a) Service Tax 45

b) Central Excise Duty 55

c) Customs Duty 60

5. IMPACT OF BUDGET INDUSTRYWISE 66

6. FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) 67

INDIA BUDGET 2009 3


4 INDIA BUDGET 2009
1. INTRODUCTION

 India is facing the challenge to lead the economy to grow at the rate of 9% at the earliest. Growth
rate of Gross Domestic Product (GDP) dipped from an average of over 9% in the previous three
fiscal years to 6.7% during 2008-09. Per capita GDP grew at 4.6%.
 Wholesale price index (WPI) rose to nearly 13% in August, 2008 and had an equally sharp fall to
zero% in March, 2009. When WPI was zero, Consumer Price Index (CPI) was hovering at more
than 10%.
 To counter the negative fallout of the global slowdown on the Indian economy, Government
responded by providing three focused fiscal stimulus packages in the form of tax relief and
increased expenditure on public projects along with RBI taking a number of monetary easing
and liquidity enhancing measures.
 A major issue that drew attention of Government was a staggering fiscal deficit of 6.2% and
revenue deficit of 4.2%. These figures were way out of the Fiscal Responsibility and Budget
Management (FRBM) target.
 Budget has taken various initiatives in infrastructure and agricultural development and schemes
directed towards developing export markets, education, healthcare, irrigation, employment,
empowerment of weaker sections, welfare of minorities and food security have been started.
 New project for modernisation of Employment Exchange in public private partnership is to be
launched so that a job seeker can register on line from anywhere and approach any employment
exchange.
 With almost three quarters of our oil consumption met through imports, it is important to
recognise that domestic prices of petrol and diesel are broadly in sync with global prices.
Government will set up an expert group to advise on a viable and sustainable system of pricing
petroleum products.
 While retaining at least 51% Government equity in Public Sector Undertakings, people’s
participation in disinvestment programmes is to be encouraged.
 Public Sector Enterprises such as banks and insurance companies to remain in public sector
and will be given full support including capital infusion to grow and remain competitive.
 The threshold for non-promoter public shareholding for all listed companies to be raised in a
phased manner.
 Structural changes in direct taxes to be pursued by releasing the New Tax Code within the next
45 days and in Indirect Taxes by accelerating the process for smooth introduction of the Goods
and Service Tax (GST) with effect from 1st April, 2010.

INDIA BUDGET 2009 5


 Corporate tax rate has been left unchanged. However, there has been a marginal increase in
the slab for individual taxpayers including women and senior citizens. Surcharge on income-tax
has been abolished for all assessees except corporate assessees. This is a welcome measure by
Finance Minister.
 Government has taken major initiative in abolishing Fringe Benefit Tax (FBT). The compliance
and administration cost of collecting tax was more than revenue collection.
 On one hand, Government has abolished FBT and on the other hand, it has increased Minimum
Alternate Tax (MAT) rate from 10% to 15%.
 Exemption from capital gain pursuant to change of regular partnership to Limited Liability
Partnership (LLP).
 Authority for Advance Rulings under Income-tax Act, 1961 will also function as the Authority for
Advance Rulings for Indirect Taxes.
 Three new services have been included in the service tax purview and amendment to four services
has also been proposed.
 The bulletin has attempted to broadly analyse the proposed changes. It is however desirable
to have detailed professional consultation before taking any decisions on the basis of the
analysis.

6 INDIA BUDGET 2009


2. ECONOMIC INDICATORS

GDP Growth Indicators

Despite suggestions about Indian economy being decoupled from the West, India was not
insulated from the global financial crisis. For the first time in four years, the growth in GDP was
substantially lower than the 9% mark. The overall growth of GDP (factor cost at constant prices)
was 6.7% which is lower than 7% projection estimated in the mid year review:

• The global crisis curtailed India’s GDP


growth to 6.7% in 2008-09 which was
GDP growth
substantially lower than 8.8% average
in the previous five years. 9.5 9.7
9.0
7.5
• Share of agriculture in overall GDP 6.7
continued to decline.

• Sharp deceleration in manufacturing


on account of fall in exports and slow
down in domestic consumption. 2004-05 2005-06 2006-07 2007-08 2008-09

The impact of the global crisis is clearly visible by comparing the quarterly growth trends with
the previous year.

Quarterly growth
2007-08 2008-09
trends

Q1 9.2 7.8
Q2 9.0 7.7
Q3 9.3 5.8
Q4 8.6 5.8

As highlighted in the table above, the Indian economy was growing at a healthy pace for the
first two quarters. However there was sharp deceleration in third and fourth quarters which was
spread across all sectors except mining and community & social services.

INDIA BUDGET 2009 7


Performance of select major sectors

Agriculture

The large share of service sector notwithstanding, the Indian economy still depends heavily
on the agriculture sector. The sector generates 52% employment and yet its share in overall
economy has been on a steady decline. The growth in agriculture has not been able to keep
pace with the other sectors thereby reducing its share from 21.7% in 2003-04 to 17.8% of the
GDP in 2007-08. Agricultural growth is still characterised by sharp swings and continues to
remain vulnerable to the vagaries of nature.

Manufacturing

The manufacturing sector which is often considered a barometer of a country’s economy,


contracted from 8.2% in 2007-08 to 2.4% in 2008-09. There was a sharp fall in growth in the
third quarter which was followed by a negative growth of -1.4% in the fourth quarter. The fall
in exports on account of global recession coupled with a decline in domestic consumption
contributed to the slow down.

Construction

The construction sector which consists of various segments such as industrial construction,
housing, and commercial real estate was hit hard by the liquidity crunch. An excessive price build
up was witnessed in certain segments of the industry which drove up land prices to speculative
levels. The rise in interest rates and higher input costs (steel and cement) had a negative effect
on housing demand.

Power

There is a large gap between India’s demand and supply for power. For India to achieve high
levels of growth on a sustainable basis it is imperative that this gap is bridged. Keeping this in
mind the Government had targeted 9.1% growth in electricity generation. However the actual
growth missed this target by a substantial margin. In 2008-09 the electricity sector grew by mere
2.7%. The unavailability of coal which fuels 66% of India’s power plants was the main restrictive
factor for the power sector.

Capital Markets

The secondary markets began the year on a bullish note but lost steam on account of weak
global cues. After continuous rise for over three years, the secondary markets witnessed a fall in
the year 2008. Bearish market sentiments and uncertainties about the US sub-prime mortgage

8 INDIA BUDGET 2009


market & credit market exposure saw major corrections in the valuation of stocks. The fall in
stock market can be co-related with the fall in the market capitalisation to GDP ratio of shares
listed on BSE and NSE from 156.7% in January 08 to 49.7% at the end of March 2009. The
primary market also suffered a setback in the year 2008 with only 37 IPOs mobilising funds of
only Rs. 18,393 crores instead of 100 IPOs mobilizing Rs. 33,000 crores in 2007. However, the
average size of an IPO increased from Rs 339 crores in 2007 to Rs. 497 crores in 2008.

FDI, considered to be the most attractive mode of capital flow in an emerging market, remained
buoyant at USD 27.4 bn during the period April-December 2008. This reflected the relatively
better investment climate in India and efficacy of liberalisation measures to attract FDIs. The
FIIs however witnessed large net outflows of USD 12.4 bn in April-December 2008 as compared
to net inflows of USD 24.5 bn during the same period in 2007. The total foreign investments (FDI
+ Net Portfolio investments) as a proportion of total capital flows thus showed a decline from
41.6% in 2007-08 to 26.4% in 2008-09 (April-December 2008).

30

15
12
9
7 8 7
4 3

2004-05 2005-06 2006-07 2007-08 2008-09 *

FIIs FDI (11)

Forex Reserves
FDI/FII (Net Inflows) USD
Over the last five years India has witnessed 309
large foreign inflows both in terms of portfolio 251
as well as foreign direct investment. However, 199
with recession looming large, there was massive 141 151
pullback of funds especially from the developing
economies. India’s foreign exchange reserves
pegged at USD251 bn in 2008-09 acted as cushion
during these turbulent times and insulated our
2005 2006 2007 2008 2009
country from balance of payment crisis.
Year

INDIA BUDGET 2009 9


3. DIRECT TAX PROPOSALS

Corporate Tax

Investment-linked Tax Incentive

 With a view to creating rural infrastructure and environment friendly alternate means of
transportation for bulk goods, it is proposed to provide investment-linked tax incentive by
inserting a new section 35AD in the Income-tax Act for the following specified businesses:
(a) setting up and operating cold chain facilities for specified products;
(b) setting up and operating warehousing facilities for storage of agricultural produce;
(c) laying and operating a cross-country natural gas or crude or petroleum oil pipeline
network for distribution, including storage facilities being an integral part of such
network.
The deduction will be allowed subject to fulfillment of certain conditions.

 The proposed amendment provides for allowing any expenditure of capital nature incurred,
wholly and exclusively, during the year for the above specified businesses. The proposed section
would, inter-alia, allow one hundred percent deduction in respect of any capital expenditure
incurred, other than expenditure incurred on the acquisition of any land or goodwill or financial
instrument, during the year by the specified business subject to the provisions contained in
that section.

 The benefit will be available –

(a) in a case where the business relates to laying and operating a cross country natural
gas pipeline network for distribution including storage facilities being an integral part
of such network, if such business commences its operations on or after the 1st day of
April, 2007, and
(b) in any other case, if such business commences its operation on or after the 1st day of
April, 2009.
 The assessee shall not be allowed any deduction in respect of the specified business under the
provisions of Chapter VIA.

 Any sum received or receivable on account of any capital asset, in respect of which deduction
has been allowed u/s. 35AD, being demolished, destroyed, discarded or transferred shall be
treated as income of the assessee and chargeable to income-tax under the head “Profits and
gains of business or profession”.

10 INDIA BUDGET 2009


 Any loss computed in respect of the specified business shall not be set off except against
profits and gains, if any, of any other specified business. To the extent the loss is unabsorbed
the same will be carried forward for set off against profits and gains from any specified business
in the following assessment year and so on.

 Further, profit-linked deduction provided u/s. 80-IA will be discontinued. All capital expenditure
(other than on land, goodwill and financial instrument), to the extent capitalised in the books
as on 1st April, 2009 will be fully allowed as a deduction in the computation of total income of
the said business for the Assessment Year 2010-2011.

 This will be available in addition to any other capital expenditure (excluding land, goodwill and
financial instrument) incurred during such previous year.

 There is a consequent amendment in section 43(6) and section 50B that seeks to provide that
the actual cost of any capital asset on which deduction has been allowed or is allowable to the
assessee u/s. 35AD shall be treated as ‘nil’ in the case of such assessee. It is also proposed
that in cases where capital asset is acquired or received by way of gift or will or irrevocable
trust, on any distribution on liquidation of the company, transfer of asset from holding to
subsidiary and vice-versa, transfer in a scheme of amalgamation or demerger, succession
of a proprietary concern or firm by a company; the actual cost shall be taken to be ‘nil’
u/s. 43(6).

 These amendments are proposed to be made effective from the 1st day of April, 2010 and will
accordingly apply in relation to assessment year 2010-2011 and subsequent years.

Amendment in Thirteenth Schedule pertaining to deduction u/s. 80IC

 Part B of the Thirteenth Schedule to the Income-tax Act, 1961 provides for a list of
activities or articles or things, the production or manufacture of which is not permissible
if an undertaking wishes to avail a deduction u/s. 80IC in respect of undertaking located
in the states of Himachal Pradesh and Uttaranchal.

 A Notification No. F.No.3(1)/2003-SPS dated 27.06.2008 was issued by the department


of Industrial Policy and Promotion (DIPP), Ministry of Commerce, expanding the list of
items in respect of the paper industry for which tax holiday cannot be availed by new
units located in Himachal Pradesh and Uttaranchal. In order to align the provisions of
Income-tax Act with the overall industrial policy of DIPP, it is proposed to amend Part B
of thirteenth Schedule and substitute Sr. No. 19 of Part B pertaining to the paper industry
with the list as per the notification of DIPP, which specifies certain new articles or things
and excise classification.

INDIA BUDGET 2009 11


 This amendment will take effect from the 1st day of April, 2010 and will accordingly, apply in
relation to assessment year 2010-11 and subsequent year.

Extension of Sunset clause for Tax Holiday u/s. 80IA

 As per existing provisions, undertaking owned by an Indian company and set-up for
reconstruction or revival of a power generating plant, which begins to generate or transmit or
distribute power before 31st March, 2008 is eligible for deduction.

 It is proposed to extend the date to begin generation, transmission or distribution of power


from 31st March, 2008 to 31st March, 2011.

 This amendment will take effect retrospectively from 1st April, 2008.

 Further, as per the existing provisions, deduction is allowed to an undertaking, which: (a) is
set-up in any part of India for the generation or generation and distribution of power; (b) which
starts transmission or distribution by laying a network of new transmission or distribution
lines; (c) undertakes substantial renovation and modernisation of the existing network of
transmission or distribution lines. For claiming deduction, the above referred activities need
to be commenced on or before 31st March, 2010.

 It is proposed to extend the deadline from 31st March, 2010 to 31st March, 2011 for claiming
the deduction.

 The amendment will be applicable with retrospective effect from 1st April, 2009.

 Under the existing provisions, the deduction u/s 80IA is not allowed to a person who executes
a works contract entered into with the undertaking or enterprise.

 It is proposed to substitute the said provision to provide that deduction u/s. 80IA shall not
be allowed to a business referred to in 80 IA (4) which is in the nature of the works contract
awarded (including Central or State Government) and executed by the undertaking or enterprise
referred to in sub-section (1) of said section.

 This amendment will take effect retrospectively from 1st April, 2000 and will accordingly, apply
in relation to assessment year 2000-01 and subsequent years.

 It is proposed to withdraw the deduction available to any undertaking carrying on the


business of laying and operating a cross-country natural gas distribution network with effect
from assessment year 2010-11 since amendment are proposed in new section 35AD to allow
deduction for such undertaking from assessment year 2010-11.

12 INDIA BUDGET 2009


Minimum Alternate Tax u/s.115 JB

 Under the existing provision a company is liable to pay minimum tax u/s. 115JB on its book profit
@ 10% if the tax payable by such company on the total income under the other provisions of
the Act is less than the tax payable under MAT. The credit of taxes such paid can be carried
forward u/s. 115 JAA for 7 years to be set off against the tax liability arising under the other
provisions of the Act.
 As per the proposed amendment the tax rate u/s. 115JB is proposed to be increased from 10%
to 15% on the book profit. It is also proposed to amend section 115 JAA to allow the credit of
taxes paid u/s. 115JB for 10 years from the existing time limit of 7 years.

Clarification regarding provision for diminution in value of asset


u/s.115JB and 115JA

 Under the existing provisions of sections 115JA and 115JB provision for diminution in value
of asset was allowed as expense while computing the book profit. The Supreme Court in case
of Commissioner of Income-tax-IV vs. HCL Comnet Systems & Services Ltd. (reported in 305
ITR 409) has also held that provision for bad and doubtful debt cannot be added to the “book
profit” for the purpose of section 115JA because it merely represent the diminution in the value
of an assets and not a provision for an unascertained liability as per clause (c) of that section.
 The Finance Bill 2009 propose to overrule the Supreme Court ruling by inserting clause (i) in
Explanation 1 to sub-section (2) to provide that any provision in the value of investment will
also be included in computing the book profit.
 The proposed amendment will have a great impact on the assessee who is in appeal over the
allowability of the said expenses. The above clause also overrules the ruling in case of Apollo
Tyres vs CIT wherein it was held that accounts are being prepared as per the Companies Act, the
Assessing Officer (AO) has no power to alter or temper the books of accounts. This proposed
amendment will have a negative impact on foreign investor coming to India.
 This proposed amendment will take effect retrospectively from 1st April, 2001 and will accordingly,
apply in relation to the assessment year 2001-02 and subsequent assessment years.

Extension of sunset clause for Free Trade Zone (FTZ) and Export
Oriented Unit (EOU)

 Under the existing provision of sections 10A and 10B, profits and gains derived by a newly
established undertaking in any Free Trade Zone or Export Processing Zone or Electronic Hardware
Technology Park or Software Technology Park or 100% Export Oriented Undertaking, is exempt
from tax till assessment year 2010-11.
 It is now proposed to extend this sunset clause for further period of one assessment year,
thereby extending the exemption upto assessment year 2011-12.

INDIA BUDGET 2009 13


Clarification for computation of exempt profits in case of SEZ

 As per the existing provision of section 10AA, the exempted profit of the newly established unit
in SEZ is computed as under:
Profits of the business of the undertaking x Export Turnover
Total turnover of the business carried on by the assessee

 However, to eliminate the hardship of the assessee having business in both SEZ and domestic
tariff area vis-à-vis assessee having unit only in SEZ, it has been proposed that the exemption
to profits of the newly established unit in SEZ is to be computed with reference to the total
turnover of the undertaking.
 The above amendment will be applicable from 1st April, 2010 and will accordingly, apply in
relation to assessment year 2010-11 and subsequent years.

Development of Safe Harbour Rules in Transfer Pricing

 In order to lessen the litigation under transfer pricing regulation, it is proposed to insert section
92CB, whereby, Central Board of Direct Tax (Board) would formulate the safe harbour rule. The rule
provide the circumstances in which the tax authorities would automatically accept the transfer
price declared by the assessee. The said rule would be formulated by Board and the rule could,
for example, require taxpayers to establish transfer price or result as per a specific information-
reporting and record-maintenance provision with regard to controlled transactions.
 The above amendment will take effect retrospectively from 1st April, 2009.

Extension of benefit of weighted deduction:

 Weighted deduction u/s 35(2AB) of 150% is allowed on in-house scientific research and
development expenditure to a companies engaged in the business of biotechnology,
manufacturing or production of drugs etc. It is proposed to extend the benefit of weighted
deduction to company engaged in the business of manufacture or production of an article or
thing excluding those specified in the Eleventh Schedule e.g. tobacco, wine, cosmetics, aerated
water, toothpaste, confectionary etc.
 The proposed amendment will take effect from 1st April, 2010 and will accordingly, apply in
relation to assessment year 2010-11 and subsequent years.

14 INDIA BUDGET 2009


Amendment in Section 80-IB(9) - Deduction in respect of profits and
gains from undertakings engaged in commercial production of mineral
oil and natural gas

 Earlier it was not possible to claim tax benefit for private sector, on refining of mineral oil. It is
proposed to amend the provisions of sub-section (9) w.e.f. from 1st April, 2009, to allow private
sector a further period of three years i.e. upto the 31st March, 2012 to begin refining of mineral
oil.
 For the purposes of claiming deduction under this sub-section, all blocks licensed under a
single contract which is awarded under the New Exploration Licensing Policy (NELP-VIII) shall be
treated as a single “undertaking”. It may be mentioned that the taxpayer have been holding the
view that every well in block licensed constitutes a single undertaking and accordingly, the tax
holiday is available separately for each such well.
 It is also proposed that the benefit of deduction under the said sub-section shall also be available
if the undertaking is engaged in commercial production of natural gas and begins commercial
production of natural gas on or after the 1st day of April, 2009.

Amendment in Section 80-IB(10) - Deduction in respect of profits and


gains from undertakings engaged in developing and building housing
projects

 According to the existing provisions of sub section 10 of section 80IB the amount of deduction
to an undertaking engaged in developing and building housing projects approved by a local
authority before 31st March, 2007, shall be 100% of the profits on fulfillment of certain specified
conditions therein.
 A new clause (e) and (f) is proposed to be inserted with effect from 1st April, 2010 and will
apply in relation to the assessment year 2010-2011 and subsequent years. Accordingly,
not more than one residential unit in a housing project is allotted to any person, other than
individuals, and in case of an individual no other residential unit in the same housing project
shall be allotted to any of the following persons:-
(i) the spouse or minor children of such individual,

(ii) the Hindu Undivided Family in which such individual is the karta,

(iii) any person representing such individual, the spouse or the minor children of such individual
or the Hindu undivided family in which such individual is the karta.

 Further, an explanation is proposed to be inserted after sub-section 10 of section 80-IB with


retrospective effect from 1st day of April, 2001, to provide that the benefit under this section

INDIA BUDGET 2009 15


shall not apply to any undertaking which executes the housing project as a works contract
awarded by any other person (including Central or State Government).
 The reason for such amendment is that even the contractors were claiming tax benefit under this
section, e.g. Radhe Developers [2008] 23 SOT 420 (Ahd), on the ground that since there was no
explicit condition enumerated in section 80-IB(10) as regards to requirement of ownership for the
claim of deduction, and accordingly in the above case assessee, though being a contractor, was
entitled to claim the deduction on the profits derived from the construction and development
of residential housing projects.
 This explanation is proposed to be inserted considering the objective of this section to provide
tax benefit to the person undertaking the investment risk i.e. the actual developer and not any
person undertaking pure contract risk.

Amendment in Chapter VIA to prevent abuse of tax incentives by


amending section 80A

 The existing provision contained in section 80A provides that in computing total income the
deductions specified in sections 80C to 80U shall be allowed from gross total income. The
section further provides that the aggregate amount of deduction shall not exceed gross total
income.
 Since the scope of the deductions under various provisions of Chapter VI-A overlaps, the
taxpayers at times claim multiple deductions for the same profit. With a view to preventing such
misuse, provisions of Section 80A has been amended to include sub-sections (4), (5) and (6).
 The proposed amendment states that no deduction will be allowed under any provision of
chapter VI-A in respect of the amount of profits and gains of an undertaking or unit or enterprises
or eligible business which is claimed and allowed as a deduction u/s 10A, 10AA, 10B and 10BA.
Further, the deduction shall in no case exceed the profits and gains of such undertakings.
 It is further proposed to provide that where the assessee fails to make a claim in his return of
income for any deduction u/s. 10A, 10AA, 10B or 10BA or under any provisions of Chapter VIA,
no deduction shall be allowed thereunder. The amendment is proposed to reverse the effect of
Supreme Court ruling in the case of Goetze (India) Ltd. vs. CIT (284 ITR 323), wherein it was held
that the deduction can be claimed subsequent to original return or revised return. Now, claiming
of deduction in the return of income is inevitable to get the deduction.
 The amendments are proposed to take effect retrospectively from 1st April, 2003 and will
accordingly, apply in relation to assessment year 2003-04 and subsequent years.
 It is further proposed to provide that where goods or services are transferred between the eligible
undertaking (referred to in u/s.10A, 10AA, 10B or 10BA) and other business of the assessee,
such transfer should be done at the market value. The “market value” in relation to any goods
or services sold / acquired means the price that such goods or services would fetch if these were

16 INDIA BUDGET 2009


sold / acquired in the open market, subject to statutory or regulatory regulations, if any. These
provisions are akin to the transfer pricing provisions but applicable between the Indian entities
of the same assessee.
 The amendment will take effect from 1st April, 2009 and will accordingly apply to all cases where
the processing is pending before any authority on or after such date.

Definition of “Manufacture”

 Under the Income-tax Act, various deductions/exemptions are given to assessee to stimulate
some Industrial sectors/ geographical area.
 For the purpose of claiming exemption/deduction under particular sections, it is required
that assessee should have manufacturing operations. Some assessee’s have started claiming
exemptions/deductions on activities which are actually not manufacturing activities.
 In the Income-tax Act, no definition of the term “manufacture” has been provided. In the absence
of any definition of the term manufacture, the matter has gone to litigation for deciding whether
particular business activity constitutes manufacture. It has invoked various litigations in the
past and on which no unanimous resolution is achieved. The assesses have relied on various
judicial pronouncement like M/s. India Cine Agencies vs. Commissioner of Income-tax (Supreme
Court), Commissioner of Income-tax vs. Vijay Ship Breaking Corporation (Gujarat High Court) to
arrive at a definition of term ‘manufacture’
 It is proposed to define the term “manufacture” which means a change in a non-living physical
object or article or thing –
(a) resulting in transformation of the object or article or thing into a new and distinct object
or article or thing having a different name, character and use; or

(b) bringing into existence of a new and distinct object or article or thing with a different
chemical composition or integral structure.

 The above definition is being proposed to be inserted to narrow the meaning of term ‘manufacture’
and whether the above case law still holds good needs to be studied.
 The above amendment is proposed to take effect retrospectively from 1st April 2009 and will
accordingly, apply in relation to assessment year 2009-10 and subsequent years.

INDIA BUDGET 2009 17


Personal Tax

Rates of Income-tax and Surcharge at a glance

 At present, the income upto Rs. 1,50,000/- is exempt in respect of individuals (other than
women below the age of sixty five years and senior citizens), Hindu Undivided Families (HUF),
Association of Persons (AOP), Body of Individuals (BOI) etc. In respect of women below the
age of sixty-five years and senior citizens resident in India, the income upto Rs. 1,80,000/- and
Rs. 2,25,000/- respectively is exempt.
 It is proposed to increase the basic exemption limits for all the above categories of assessees.
The basic rates of income-tax for various income slabs will, however, remain unchanged. The
proposed changes have been tabulated as under:

Individual Assessee (other than women & senior citizen) (Assumed Income –
Rs. 5,00,000/-)

Existing Limit Proposed Limit Tax Rate Marginal Tax Relief


(Rs.) (Rs.) (%) (Rs.)
Upto 1,50,000 Upto 1,60,000 Nil Rs. 1,030/- (Including
Upto 1,50,001- Upto 1,60,001-300,000 10% Education Cess @
3,00,000 3%)
Upto 3,00,001- Upto 3,00,001-500,000 20%
5,00,000
5,00,001 & above 5,00,001 & above 30%

18 INDIA BUDGET 2009


Women Assessee below 65 years of age (Assumed Income – Rs. 5,00,000/-)

Existing Limit Proposed Limit Tax Rate Marginal Tax Relief


(Rs.) (Rs.) (%) (Rs.)
Upto 1,80,000 Upto 1,90,000 Nil Rs. 1,030/- (Including
Upto 1,80,001- Upto 1,90,001- 10% Education Cess @
300,000 3,00,000 3%)
Upto 3,00,001- Upto 3,00,001- 20%
5,00,000 5,00,000
5,00,001 & above 5,00,001 & above 30%

Senior Citizen (Assumed Income – Rs. 5,00,000/-)

Existing Limit Proposed Limit Tax Rate Marginal Tax Relief


(Rs.) (Rs.) (%) (Rs.)
Upto 2,25,000 Upto 2,40,000 Nil Rs. 1,030/- (Including
Upto 2,25,001- Upto 2,40,001-3,00,000 10% Education Cess @
3,00,000 3%)
Upto 3,00,001- Upto 3,00,001-5,00,000 20%
5,00,000
5,00,001 & above 5,00,001 & above 30%

 However, the rates of income-tax for all other assessees will remain the same.
 The surcharge on income-tax is proposed to be abolished in case of individual, HUF, AOP and
BOI, cooperative society, local authority and firms with effect from assessment year 2010-
11. In other words, the surcharge on income-tax is continued to be levied only on corporate
assessees.

Section 80E – Deduction in respect of interest on loan for higher


education

 Under the existing provisions, the deduction is available only for pursuing full time studies
for any graduate or post-graduate course in engineering, medicine, management or for post-
graduate course in applied sciences including mathematics and statistics.
 It is proposed to extend its scope to cover all fields (including vocational studies) pursued after
passing the Senior Secondary Examination or its equivalent examination from any recognized

INDIA BUDGET 2009 19


school, board or university. This amendment would enable an assessee to avail the deduction
even in case of loan taken for pursuing higher studies in multi-disciplinary fields. E.g. loan taken
for pursuing Chartered Accountancy course will also be eligible for deduction.
 The above amendment is proposed to take effect from April 1, 2010 and will accordingly, apply
in relation to assessment year 2010-11 and subsequent years.

Section 80DD – Deduction for medical treatment of a dependant


suffering from disability

 It is proposed to increase the limit of deduction in respect of maintenance, including medical


treatment of a dependant, who is a person with severe disability, from the present limit of
Rs. 75,000 to Rs. 1,00,000.
 The above amendment is proposed to take effect from 1st April, 2010 and will accordingly, apply
in relation to assessment year 2010-11 and subsequent years.

Abolition of Fringe Benefit Tax (FBT)

 IThe Finance Act, 2005 introduced the levy of fringe benefit tax on the value of certain fringe
benefits. FBT was levied on various expenses like travelling, hotel, conference, telephone etc.
There was no distinction being made for employees and genuine business expenses. As it was
burdensome, both for the revenue as well as assessee to comply and implement FBT provisions,
it is proposed to abolish Fringe Benefit Tax from assessment year 2010-11 onwards (i.e. from
Financial Year 2009-10). Thus, the assessee who have paid first installment of advance tax on
account of fringe benefit will have to claim refund of such tax.
 IBy virtue of the above, the employer will be relieved from payment of FBT. However, the suitable
amendment is proposed to be made in the definition of ‘perquisites’ to burden the employees
with tax on certain fringe benefits as a taxable salary.

Definition of ‘perquisite’ as per Section 17(2) amended

 IThe existing provisions contained in Section 17(2)(vi) provide that perquisite include the value
of any other fringe benefit or amenity which may be prescribed, excluding those fringe benefits
which are chargeable to tax under Chapter XII-H.
 IIt is proposed to substitute the said sub-clause so as to provide that perquisite include the value
of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by
the employer, or former employer, free of cost or at concessional rate to the assessee.
 IIn view of the above amendment, the taxability of ESOPs is re-stored back as ‘perquisite’ as per
its earlier provisions. It is also proposed to provide that perquisite include the amount of any
contribution to an approved superannuation fund by the employer in respect of the assessee,
to the extent it exceeds Rs. 1,00,000.

20 INDIA BUDGET 2009


 IFurther, it is also proposed to provide that perquisite include the value of any other fringe
benefit or amenity as may be prescribed. However, rules of taxing such fringe benefits and its
valuations are yet to be notified.
 IThe above amendment is proposed to take effect from 1st April, 2010 and will accordingly
apply in relation to Assessment Year 2010-11 and subsequent years.

Section 49 – Cost with reference to certain modes of acquisition

 IThe existing provisions contained in Section 49(2AA) relating to capital gain on transfer of a
share, debenture or warrant are proposed to be substituted to provide that where the capital
gain arises from the transfer of specified security or sweat equity shares referred to in Section
17(2)(vi), the cost of acquisition of such security or shares shall be the fair market value, which
has been taken into account for the purposes of that Section.
 IThe above amendment is proposed to take effect from 1st April, 2010 and will accordingly
apply in relation to Assessment Year 2010-11 and subsequent years.

New Section 293C – Power to withdraw the approval

 IIt is proposed to provide that the income-tax authority, who has been conferred upon the
power under any provision of this Act, to grant any approval to any assessee, may withdraw
such approval at any time, although such provision to withdraw such approval has not been
specifically provided for in such provision.
 IHowever, the income-tax authority shall, after giving a reasonable opportunity of showing cause
against the proposed withdrawal to the concerned assessee, at any time, withdraw the approval
and record the reasons for doing so.
 IThe above amendment is proposed to take effect from 1st October, 2009.

Power to issue zero coupon bonds

 IUnder the existing provision of Section 2(48), only infrastructure capital company or infrastructure
capital fund or public sector company are empowered to issue zero coupon bonds when they
are authorised to do so.
 IIt is proposed to amend the section so as to include the scheduled banks as, an eligible person
to issue zero coupon bonds.
 IThe above amendment is proposed to take effect from 1st April, 2009.

INDIA BUDGET 2009 21


Centralised Processing of Returns

 IThe income-tax department is in the process of setting up a Centralised Processing Centre


(CPC) at Bengaluru for centralised processing of income-tax and fringe benefits tax returns. For
this purpose CBDT (‘Board’) had been empowered to relax, modify or adapt any provision of law
relating to processing of returns. It is proposed to allow the Board further period of one year i.e.
upto 31st March, 2010 to relax, modify or adapt any provision of law relating to processing of
returns.
 IThe above amendment is proposed to take effect from 1st April, 2009.

Enhancement of Presumptive Taxation

 As per the existing provision of section 44AE, in the case of an assessee who carried on the
business of plying, hiring or leasing goods carriages and who owns not more than 10 goods
carriage in the previous year, the income is calculated on a presumptive basis. Under this
scheme, a fixed amount of income per month per vehicle is taken as under:

Nature of carrier Deemed Income


For Heavy goods vehicles 3500
Other than Heavy goods vehicles 3150

It is proposed to increase the presumed income per vehicle as under:

Nature of carrier Deemed Income


For Heavy goods vehicles 5000
Other than Heavy goods vehicles 4500

 This amendment will take effect from 1st April, 2010 and will apply accordingly in relation to
assessment year 2010-11 and subsequent years.

Omission of Provision of Section 44AF

 As per the existing provision of section 44AF, in the case of an assessee engaged in retail trade
in any goods or merchandise, a sum of 5% of the total turnover or such higher income as may
be returned by the assessee, shall be deemed to be the profits of such business.
 In view of the expansion of scope of section 44AD to all businesses it is proposed to make the
section 44AF inoperative for the assessment year beginning on or after 1st day April, 2011.

22 INDIA BUDGET 2009


Presumptive Taxation

 Sections 44AD and 44AF, deal with taxation of income of certain assessees, under a presumptive
basis of 8% or 5% respectively, incase where gross receipts or total turnover does not exceed
Rs. 40 lakhs. The assessees covered under the said scheme were restricted to only those who
were either engaged in the business of civil construction business or supply of labour for civil
construction or in retail trade in any goods or merchandise.
 However, in view of the substantial increase in general growth of the economy and small
business sectors including the growth of transport and communication, it has been proposed
to substitute section 44AD.
 In view of the proposed substitution the scope of the presumptive taxation shall be extended
to all businesses. The salient features of the proposed presumptive taxation scheme are as
under:
(a) The presumptive rate of income is prescribed of a sum equal to 8% of total turnover / gross
turnover or a sum higher than the aforesaid sum.

(b) The scheme shall be applicable to individuals, HUFs and partnership firms excluding
Limited liability partnership firms.

(c) It shall also not be applicable to an assessee who is availing deductions u/s.s 10A, 10AA, 10B,
10BA or deduction under any provisions of Chapter VIA under the heading ”C-Deduction
in respect of certain incomes.

(d) The scheme is applicable for any business (excluding a business already covered
u/s. 44AE) which has a maximum gross turnover/gross receipts of 40 lakhs.

(e) An assessee opting for the above scheme shall be exempted from payment of advance tax
in relation to such business.

(f) An assessee opting for such scheme would be exempted from maintenance of books of
accounts related to such business.

 This amendment will take effect from 1st April, 2011 and will apply accordingly in relation to
assessment year 2011-12 and subsequent years.

INDIA BUDGET 2009 23


Non-Resident Tax

Clarification with respect to determination of Arm’s Length Price

 The existing provision of section 92C(2) provides that where more than one price is determined
by the most appropriate method, the arm’s length price shall be the arithmetical mean of such
prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by
an amount not exceeding five percent of such arithmetical mean.
 However, the said provision relating to adjustment of +/- five percent has been interpreted
differently by the revenue and the taxpayer, which has resulted into oodles of litigations. The
contention of the revenue and taxpayer are tabulated as under:

Arithmetic Contention of
Transaction +/- 5% Contention of
Particulars Mean of the revenue
Actual Price variable the taxpayer
comparable
Sales 94 100 95 & 105 6 (100-94) 1 (95-94)

 To resolve the said controversy, the provision is now proposed to be amended to provide that
where more than one price is determined by the most appropriate method, the arm’s length
price shall be taken to be the arithmetical mean of such prices. However, if the arithmetical
mean, so determined, is within five percent of the transfer price, then the transfer price shall be
treated as the arm’s length price and no further adjustment is required to be made.
 In view of the proposed amendment, the interpretation of the revenue in respect of adjustment
of +/- five percent is justified.
 As a result of the above, the following judicial pronouncements now stand overruled:
 Development Consultant [(2008) 23 SOT 455 (Kol)]

 Egain Communication Pvt. Ltd. [2008-TIOL-282-ITAT-Pune]

 Mentor Graphics (Noida) Pvt. Ltd. [109 ITD 101 (Del)]

 Philips Software Centre Pvt. Ltd. [119 TTJ 721]

 Sony India (P) Ltd. [2008-TIOL-439]

 Skoda Auto India Pvt. Ltd. [ITA No. 202/PN/07]

 This amendment will be effective from 1st October, 2009 and shall accordingly apply in
relation to all proceedings pending before the Transfer Pricing Officer on or after such date.

24 INDIA BUDGET 2009


Constitution of the alternate dispute resolution mechanism

 The current dispute resolution mechanism in income-tax is time consuming and further major
litigations are resolved at the court levels. In order to reduce this time frame for resolution of the
disputes, an alternate Dispute Resolution Panel (DSP) is proposed to be set-up vide amendment
u/s.s 131, 246A and 253 of the Act. Further, a new section 144C is also proposed to be inserted
in the Act. The key highlight of the set-up of proposed dispute resolution mechanism is provided
hereunder:
 The scheme is applicable only incase of a person in whose case the variation in the income
or loss arises as a consequence of the order of the Transfer Pricing Officer u/s 92CA(3) and
any foreign company.

 Draft order of assessment would be forwarded to the assessee by the assessing officer
before passing on the assessment order.

 Assessee has discretion of accepting or raise an objection to DSP and assessing officer
against the draft order within thirty days of the receipt of such order.

 Incase of no objection being filed by the assessee within the period specified or on
acceptance by the assessee, the assessing officer shall complete the assessment on the
basis of draft order.

 Every direction issued by the DSP shall be binding on the assessing officer.

 An opportunity of being heard is to be given to the assessee and the assessing officer
before providing the direction by the DSP.

 Every direction of the DSP needs to be issued within 9 months from the month in which
the draft order is forwarded to the assessee.

 The assessment in case of direction issued by DSP needs to be completed within one
month from the end of the month in which the direction is issued.

 The order passed u/s 143(3) in pursuance of directions of DSP can be appealed before the
Income-tax Appellate Tribunal. Such order cannot be appealed before the Commissioner
of Income-tax (Appeals).

 The proposed amendments will take effect from 1st October, 2009.

INDIA BUDGET 2009 25


Section 90 – Agreement with foreign countries

 Under the existing provision, power has been conferred upon the Central Government to enter
into agreement with the Government of any country outside India for granting of relief in respect
of income on which income-tax has been paid both under the said Act and income-tax in that
foreign country.
 It is proposed to confer power upon the Central Government to enter into agreement with the
Government of any specified territory outside India also. The “specified territories” will mean any
area outside India which may be notified as such by the Central Government for the purposes of
said section.
 The above amendment would enable the government to expand the scope by entering into
an agreement with non-sovereign jurisdictions also. E.g. India can now enter into a treaty with
Hong Kong.
 The above amendment is proposed to take effect from 1st October, 2009.

26 INDIA BUDGET 2009


Withholding Tax (TDS)

Tax Deducted at Source (TDS)

The provisions of TDS are proposed to be rationalised as under;

Section Nature of Payment Existing TDS Scenario Proposed TDS Provisions


194-A Interest other than The provisions of clause The said clause is proposed
Interest on Securities (x) of sub-section (3) to be amended so as
of this section state to include “scheduled
that TDS deduction bank” after “public
shall not be applicable sector company”. The
in respect of income proposed amendment is
paid or payable on zero consequential in nature.
coupon bond issued This amendment will take
by an infrastructure effect retrospectively from
capital company or 1st April, 2009.
infrastructure capital
fund or public sector
company on or after 1st
June, 2005.
194-C Payments and TDS with U/s. 194C, tax is It is proposed to exempt
respect to Transporters required to be deducted payments to transport
on payments to operators (as defined in
transport contractors section 44AE) from the
engaged in the business purview of TDS. However,
of plying, hiring or this would only apply in
leasing goods carriages. cases where the operator
However if they furnish furnishes his Permanent
a statement that they do Account Number (PAN) to
not own more than two the deductor.
goods carriages, tax
is not to be deducted at
source.

INDIA BUDGET 2009 27


194-C Clarification regarding There is not enough It is clarified that “work”
“work” u/s. 194C clarity as to whether shall not include
TDS is deductible u/s. manufacturing or supplying
194C on outsourcing according to specification
contracts and whether of customer by using raw
outsourcing constitutes material purchased from
work or not. third party as it is contract
for ‘sale’.
And when material is
purchased from the same
customer, then it is included
within the definition of
‘work’. This upholds the
stand taken in case of
Glenmark Pharmaceuticals
Ltd. vs. ITO (2009)
30 SOT 19 (Mum)
(w.e.f October 1, 2009) Clarification as regards invoice amount:
a. If value is mentioned separately in the invoice : TDS
shall be deducted on the invoice value excluding
the value of material purchased from the customer.
b. If material component has not been separately
mentioned in the invoice : TDS shall be deducted
on the entire invoice value.
Section Nature of Payment Existing TDS Rates Proposed TDS Rates
(w.e.f. October 1, 2009)*
194-C Indivi- Other than Indivi- Other than
dual/ Individual/HUF dual/ Individual/HUF
HUF HUF

a. Payment to 2% 2% 1% 2%
contractor
b. Payment to 1% 1% 1% 2%
subcontractor
c. Payment to 1% 1% 1% 2%
contactor/
subcontractor for
Advertising

28 INDIA BUDGET 2009


* The contractor/subcontractor in transport business can avail of nil rate if the transporter
quotes his PAN. If PAN is not quoted the rate will be 1% for an individual/HUF transporter
and 2% for other transporters upto 31.3.2010.

194-I Rental payments :-


a. Rent of plant, 10% 2%
machinery or
equipment
b. Rent of land, building 15% 10%
or furniture to an
individual and HUF
c. Rent of land, building 20% 10%
or furniture to a
person other than an
individual or HUF
* The rate of TDS will be 20% in all cases, if PAN is not quoted by the deductee w.e.f.
1.04.2010.

 Withdrawal of Surcharge & Cess on TDS towards Non-Salary Payment


 The Finance Bill proposes to remove surcharge and cess on TDS towards non-salary
payments made to resident taxpayers, to facilitate ease in computation of TDS liability.

 PAN significance in the TDS regime


 A deductee whose receipts are subject to TDS, has to mandatorily furnish his PAN to
the deductor, failing which the deductor shall deduct TDS at higher of the following :

(i) the rate prescribed in the Act;

(ii) at the rate in force i.e., the rate mentioned in the Finance Act; or

(iii) at the rate of 20 per cent.

 The same provisions would also apply in cases where the taxpayer files a declaration in
form 15G or 15H (u/s. 197A) but fails to provide his PAN.

 Also it is mandatory to furnish PAN for obtaining certificate(s) u/s. 197 from the assessing
officer.

INDIA BUDGET 2009 29


 These provisions would also apply to non-residents where TDS is deductible on payments
or credits made to them.

 These proposed amendments would be made effective from 1st April, 2010.

 Electronic Processing of TDS Statements


 Electronic processing of TDS Statements is proposed on the same line as processing of
Income–Tax Returns.

 Computerized processing of such statements would be capable of correcting apparent


errors contained therein, such as rates deviating from those specified in the Act.

 Hence, the appropriate liability would be ascertained and communicated to the deductor.

 These proposed amendments would be made effective from 1st April, 2010.

 Time Cap on Initialisation of TDS Assessments


 The existing provisions u/s. 201(1) do not specify a time cap for initiating TDS Assessment
proceedings, hence giving rise to various disputes.

 Hence this Finance Bill aims at provision of express time limits to streamline the
Assessment process. In case of resident assessee having filed the TDS statement, the
order u/s. 201(1) for failure to deduct the whole or any part of tax can be passed within
2 years from the end of the Financial year in which the statement of tax deduction at
source is filed. In case of resident assessee not having filed the TDS statement, the
order u/s. 201(1) can be passed within 4 years from the end of the financial year in which
payment is made or credit is given.

 However, no time-limits have been prescribed for order u/s. 201(1) where—

(a) TDS has been deducted but not deposited;

(b) Employer fails to pay TDS on perquisites of employees;

(c) Incase of a Non-resident deductee.

 This proposed amendment upholds the views of the Mumbai ITAT-Special Bench in case
of Mahindra & Mahindra vs. DCIT and the view of the Delhi High Court in CIT vs. NHK
(305 ITR 137).

 These proposed amendments would be made effective from 1st April, 2010.

30 INDIA BUDGET 2009


 Filing of TDS and TCS statements
 Sections 200(3) and 206C(3) of Income-tax Act provides that any person deducting TDS/
TCS has to furnish, within the prescribed time, quarterly statements for the relevant
periods in each financial year.

 Further section 206A provides furnishing of quarterly return in respect of payment of


interest to residents without deduction of tax.

 This Finance Bill proposes to modify the existing provisions so as to allow the Government
to prescribe periodicity of such TDS statements besides prescribing their form and
manner.

 These provisions will be applicable from 1st October, 2009.

INDIA BUDGET 2009 31


Other Major Amendments

Definition of Written Down Value

 The definition of “written down value” in section 43 (6) is proposed to be amended in view of
Supreme Court decision in case of CIT vs. Doom Dooma India Ltd. reported in 222 CTR 105.

 The Hon’ble Supreme Court has held that in view of the language employed in sub-clause (b) of
clause (6) of section 43 regarding depreciation “actually allowed”, where any income is partially
agricultural and partially chargeable to tax under the head “Profits & Gains of Business”, the
depreciation deducted in arriving at the taxable income alone can be taken into account for
computing the WDV in the subsequent year.

 The above interpretation is not in accordance with the legislative intent. WDV is required to be
computed by deducting the full depreciation attributable to composite income. The ambiguity
in this case has arisen on account of the interpretation of the meaning of the phrase “actually
allowed” in sub-clause (b) of clause (6) of section 43.

 It is, therefore, proposed to provide that in the cases of ‘composite income’, depreciation
shall be computed as if the total composite income of the assessee is chargeable under the
head “Profits and Gains of Business” and depreciation so computed shall be deemed to be the
depreciation “actually allowed” to the assessee.

 This amendment will take effect from the 1st April, 2010 and will accordingly, apply in relation
to assessment year 2010-2011 and subsequent years.

Tax benefits for New Pension System

 With a view to ensure that tax treatment of savings under this system is in synchronised with
the “exempt-exempt-taxed” (EET) method and that there is no incidence of taxation at the
accumulation stage, it is proposed to make the New Pension Scheme (NPS) Trust a complete
pass-through in so far as taxation is concerned. Therefore, it is proposed to–

(i) exempt any income received by any person on behalf of the New Pension System Trust
established on 27th day of February, 2008 under the provisions of the Indian Trust Act
of 1882.
(ii) exempt any dividend paid to the NPS Trust shall be exempt from Dividend Distribution
Tax;
(iii) exempt all purchases and sales of equity and derivatives by the NPS Trust from the
Securities Transaction Tax; and

32 INDIA BUDGET 2009


(iv) to provide that the NPS Trust shall receive all income without any tax deduction at
source.

 The tax benefit u/s. 80CCD was available to “employees” only. However, the NPS now has been
extended also to “self-employed”. Therefore, it is proposed to extend the tax benefit u/s. 80
CCD thereunder also to “self-employed” individuals.

 It is also proposed to provide that the assessee shall not be deemed to have received any
amount in the previous year if such amount is used for purchasing an annuity plan in the same
previous year.

 These amendments will take effect retrospectively from 1st April, 2009 and will accordingly,
apply in relation to assessment year 2009-2010 and subsequent years.

Taxation of non-life insurance business

 The profits and gains of non-life insurance business are computed u/s. 44 read with Rule 5 of
the First Schedule. As per Rule 5, profits and gains of non-life insurance business is taken to
be profits disclosed in the annual account, copies of which are required under the Insurance
Act, 1938 (4 of 1938), to be furnished to the Controller of Insurance, subject to adjustments
for unexpired risk and disallowances u/s. 30 to Section 43B.

 The proposed amendment seeks to amend rule 5 of First Schedule which provides that
adjustment shall also be made by way of deduction in respect of any amount either written
off or provided in the accounts to meet diminution in or loss on realisation of investments or
increase in respect of any amount taken credit for in the accounts on account of appreciation
of or gains on realisation of investments in accordance with the regulations prescribed by
Insurance Regulatory and Development Authority. This is also consistent with international
best practice on taxation of investment income of non-life insurance companies.

 These amendments will take effect from 1st April, 2011 and will accordingly apply in relation
to Assessment Year 2011-12 and subsequent years.

Interest received on delayed compensation or enhanced compensation

 As per the existing provisions of Section 145, the income chargeable under the head “Profits
and Gains of Business or Profession” or “Income from other sources” shall be computed in
accordance with either cash or mercantile system of accounting regularly employed by the
assessee. The Hon’ble Supreme Court in the case of Rama Bai vs. CIT (181 ITR 400) has held
that the arrears of interest computed on delayed or enhanced compensation shall be taxable
on accrual basis.

INDIA BUDGET 2009 33


 With a view to mitigation the hardship, it is proposed that the interest received by an assessee
on compensation or enhanced compensation shall be deemed to be the income for the year
in which it is received, irrespective of the method of accounting followed by the assessee.

 It is further proposed that income by way of interest received on compensation or enhanced


compensation referred to above shall be assessed as “Income from other sources” in the year
in which it is received.

 This amendment will take effect from the 1st day of April 2010 and shall accordingly apply in
relation to assessment year 2010-11 and subsequent assessment years.

Aligning the Definition of “Block of Asset”

 The term “block of assets” has been defined in Section 2 clause (11) and Explanation 3 to
section 32(1).However, these definitions are not identical and therefore they are subject to
misuse.

 Therefore in order to rationalize the confusion, it is proposed to amend Explanation 3 to


Section 32(1) of the Income-tax Act so as to delete the definition of “block of assets” provided
therein. Consequently, “block of assets” will derive its meaning only from section 2 clause (11)
which reads as under;

“Block of assets” means a group of assets falling within a class of assets comprising–

(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises
or any other business or commercial rights of similar nature;

in respect of which the same percentage of depreciation is prescribed.

 It is proposed to make the amendments effective from the April 1, 2010 and will be applicable
to AY 2010-11 and subsequent years.

Recognition to Provident funds – Extension of time limit for obtaining


Exemption from EPFO

 As per rule 3 of Part A of the Fourth Schedule, a Provident fund has to file an application with
the Chief Commissioner or Commissioner for its recognition fulfilling the conditions specified
under the said rule. The funds to whom recognition is already granted on or before 31st March,

34 INDIA BUDGET 2009


2006 were to obtain an exemption u/s. 17 of the Employee Provident Funds & Miscellaneous
Provisions Acts 1952 on or before 31st March, 2009 to continue its recognition.

 The said date for obtaining the exemption has been extended from 31st March 2009 to 31st
December 2010 to provide further time to Employees Provident Fund Organisation for deciding
on the pending application before it for getting exemption u/s. 17 of the Employee Provident
Funds & Miscellaneous Provisions Acts 1952.

Commodity Transaction Tax

 While proposing the Finance Bill, 2008, the erstwhile Minister of Finance, P. Chidambaram,
introduced the Commodities Transaction Tax (CTT) with the view that transactions in
commodities futures had finally come of age, and were required to be brought under the tax
net.

 However, the levy of the same had not been implemented till date since the idea of CTT
was highly opposed by the regulators, exchanges and the industry owing to the complexity it
would create in commodity transactions. The Prime Minister’s Economic Advisory Council has
recommended abolition of the same.

 Therefore, it is proposed to abolish the provision relating to Commodity Transaction tax with
effect from 1st April, 2009.

Enhancement of deduction for Partnership Firms

As per the existing provisions of section 40(b)(v), a partnership firm is allowed a deduction of
an amount paid by way of remuneration (including salary, bonus, etc.) to a working partner of a
firm, which is authorized by a partnership deed subject to the prescribed limits. The prescribed
limits are as follows:

Book Profits Remuneration as a% of


Professional Firms Other Firms Book Profits

On the first Rs. 1 lakh or On the first Rs. 75,000 or in Rs. 50,000 or 90% whichever is
in case of a loss case of a loss higher
On the next Rs. 1 lakh On the next Rs. 75,000 60%
On the balance On the balance 40%

INDIA BUDGET 2009 35


In order to provide parity between the professional and non-professional firms, it is now
proposed to prescribe uniform limits for both types of firms and also make an upward revision
of the limits, as under:

Book Profits Remuneration as a% of Book Profits


On the first Rs. 3 lakh or in case of loss Rs. 1,50,000 or 90% whichever is higher
On the balance 60%

This amendment will take effect from 1st April, 2010 and will apply accordingly in relation to
assessment year 2010-11 and subsequent years.

Inclusion of “Other Public Sector Bank” under explanation to section


10(23D)

 Under the existing provisions of section 10(23D), any income of a Mutual Fund registered
under SEBI Act or regulations and income of any other mutual fund set up by a public sector
bank or a public financial institution authorized by the RBI and subject to such conditions
notified by the Central Government, was exempt from tax.

 It is proposed to extend the benefit of exemption of income of a Mutual Fund set up by any
“other public sector bank” as notified by the Reserve Bank of India.

 This amendment will take effect from 1st April, 2010 and will apply accordindly in relation to
assessment year 2010-11 and subsequent years.

Clarification on reassessment proceeding

 Under the existing provision of section 147, if the assessing officer has reason to believe
that any income chargeable to tax has escaped assessment for any assessment year he may
assess or reassess such income or recompute the loss or depreciation allowance or any other
allowance for that assessment year.

 In the case of CIT vs. Gardhara Singh (2008) 173 TAXMAN 46 (P & H)and in certain other cases, it
was held that the reassessment proceedings have to be restricted only to the issues in respect
of which the reasons have been recorded for reopening the assessment. Any other issues
apart from the issue on which the re-opening is made cannot be touched by the assessing
officer.

36 INDIA BUDGET 2009


 With a view to clarify the legislative intent, it is now proposed to insert an Explanation in
section 147 to provide that the assessing officer may assess or reassess any other issues apart
from the issue covered under the reasons for re-opening.

 This amendment will take effect retrospectively from 1st April, 1989 and will apply necessarily
in relation to assessment year 1989 -90 and subsequent years.

Extension of time-limit for application for grant of exemption


u/s 10(23C)

 Presently for availing exemption u/s 10(23C), an application has to be made at any time during
the financial year for which the exemption is sought. It is proposed to extend the time limit for
application up to 30th September of relevant assessment year. This relaxation will be applicable
for the financial year 2008-09 and subsequent years.

Deduction to Corporations engaged in long term finance

 Section 36(1)(viii) provides special deduction to financial corporations and banking companies
of an amount not exceeding 20% of the profits subject to creation of a reserve. The proposed
amendment seek to provide that corporations like National Housing Bank engaged in providing
long-term finance for industrial, agricultural, infrastructure and housing will be eligible for the
benefit.

 This amendment will take effect from the 1st April 2010 and will accordingly apply in relation
to Assessment Year 2010-11 and subsequent years.

Taxation of Limited Liability Partnership (LLP)

 The Limited Liability Partnership Act and rules have come into effect in 2009. It is proposed
that the taxation of LLP would be on the same footings as the taxation scheme for partnership
firms i.e. tax in the hands of the entity and share of profit from the same is exempted in the
hands of its partners.

 It is proposed that in case of liquidation of an LLP, every partner will be jointly and severally
liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross
neglect, misfeasance or breach of duty on his part.

 The proposed amendment will take effect from 1st April, 2010 and will accordingly, apply in
relation to assessment year 2010-11 and subsequent years.

INDIA BUDGET 2009 37


 As per memorandum explaining the budget, the conversion from a partnership firm to an LLP
will have no tax implications if the rights and obligations of the partners remain the same
after conversion and if there is no transfer of any asset or liability after conversion. If there
is a violation of these conditions, the provisions of section 45 shall apply. However, there is
no corresponding amendment in section 47 specifying the circumstances under which the
transactions are not regarded as transfer.

 There is no provision in the budget addressing conversion of private limited company or public
limited company into LLP or vice versa.

Increase in the threshold limit under Wealth Tax

 Presently, the threshold limit under wealth tax is Rs. 15 lacs and wealth in excess of Rs. 15 lacs
is chargeable to tax @ 1%. It is proposed to increase the threshold limit from Rs. 15 lacs to 30
lacs.

Increase in the limit of payment by cash in the case of transporters

 Presently cash payment in excess of Rs. 20,000/- has to be made by an account payee cheque
or draft as per section 40A(3). It is proposed to increase the limit to Rs. 35,000/- in case of
payment is made to transport operators. The existing limit for other categories of payments
will remain at Rs. 20,000/-.

 The proposed amendment will apply to transactions effected on or after the 1st October,
2009.

Deduction in respect of contribution to political parties –

 Section 80GGB and section 80GGC provide for deduction in respect of contributions given to
political parties by companies and any person respectively. The said sections are proposed to
be amended to provide 100% deduction in respect of contributions made to electoral trusts.
It will be a trust approved by the Board in accordance with the scheme made in this regard by
the Central Government. (section 2(22AAA))

 According to the proposed new section 13B, any contributions received by an electoral trust
though being an income of the trust, would be exempt from tax if the following conditions are
satisfied:

 95% of the aggregate donations received by such trust during the previous year along
with the surplus, if any, brought forward from any earlier previous year, is distributed by
such trust to any political party and

38 INDIA BUDGET 2009


 Such electoral trust functions in accordance with the rules made by the Central
government.

 These amendments will take effect from 1st day of April, 2010 and shall accordingly, apply in
relation to assessment year 2010-11 and subsequent years.

Introduction of Document Identification Number by inserting


Section 282B

 In order to avoid the malpractices of insertion of backdated documents by the income-tax


department and the assessee and with a view to foster efficient tax administration and yield
higher revenue, it is proposed to introduce a Computer Based System of allotment and quoting
of Document Identification Number (DIN) w.e.f. 1st October, 2010.

 Accordingly, a new Section 282B provides that every Income-tax Authority shall allot a computer
generated DIN in respect of every notice, order, letter or any correspondence issued by him
to any other Income-tax Authority or assessee or any other person and such number shall be
quoted thereon. Also any document, letter or any correspondence received by the Income-tax
Authority shall be accepted only after allotting and quoting of a computer generated DIN

 Failure to quote the DIN as aforesaid, on every such document, letter or any correspondence,
the same shall be treated as invalid and shall be deemed never to have been issued.

Section 50C: Full Value of consideration in certain cases

 Under the existing provisions, where the consideration received or accruing as a result of the
transfer of a capital asset, being land or building or both, is less than the value adopted or
assessed by the stamp valuation authorities, the value so adopted or assessed will be deemed
to be the full value of the consideration received or accruing as a result of such transfer for the
purpose of computing capital gain.

 It is proposed to amend the said section so as to substitute the words “or assessed” wherever
they occur in the said section by the words “or assessed or assessable”.

 The expression “assessable” means the price which the stamp valuation authority would have
adopted or assessed, if it were referred to such authority for the payment of stamp duty.

 This amendment will take effect from the 1st October, 2009.

INDIA BUDGET 2009 39


Extension of definition of “charitable purpose” to include activities
pertaining to protection of Environment & Historical Monuments
Activities

 Section 2(15) of the Income Tax Act define “charitable purpose” as relief of the poor, education,
medical relief and the advancement of any other object of general public utility.

 It is proposed in the Finance Bill to include the activities of the preservation of environment
(including watersheds, forests and wildlife) and preservation of monuments or places or objects
of artistic or historic interest along with relief of the poor, education and medical relief in the
definition of “charitable purpose” under section 2(15). It is further provided that restriction on
carrying on business activities will not be applicable on newly added activities.

Relief to the wholly or partly Charitable and partly Religious Entities


from the clutches of taxation from anonymous donation

 Anonymous donations are donation in which the identity of donor is unknown. Under the
existing provisions of Section 115BBC, anonymous donations received by charitable and
religious entities are taxable at the rate of 30% in the hands of entities. The following entities
are out side the preview of anonymous donations:

 Wholly religious entities; or

 Partly religious and partly charitable entities have also been exempted from the taxation
of anonymous donations, except where the anonymous donation is made to an
educational or medical institution run by such entity in which case such donations are
taxed at the rate of 30 per cent. In the case of wholly charitable entities, all anonymous
donations are taxed at the

 In order to mitigate the compliance burden, it is proposed to provide relief to such organisations
by exempting a part of the anonymous donations from being taxed. The proposed amendment
will result in the following:

 Anonymous donations received by wholly religious entities shall remain exempt from
tax.

 In the case of partly religious/partly charitable entities, anonymous donations directed


towards a medical or educational institutions run by such entities shall be taxable only to
the extent such donations exceed 5 per cent of total income of such trust or institution
or a sum of Rs.1 lakh, whichever is more.

40 INDIA BUDGET 2009


 The proposed amendments will be applicable with effect from the 1st day of April, 2010 and
will accordingly apply in relation to assessment year 2010-11 and subsequent years.

One time approval for recognition of the Scheme u/s. 80G (5)

 Section 80G of the Income-tax Act, 1961 provides for a deduction in respect of donations
to certain funds, charitable institutions, etc. subject to, inter alia, the condition that such
institutions and trusts are established for ‘charitable purpose’.

 Consequent to the amendment of sub-section (15) of section 2 by the Finance Act 2008 a
number of organizations have ceased to be charitable for the purposes of the Income-tax Act.
However, such institutions and trusts continued to collect donation during the financial year
2008-2009 for funding relief work for floods in Bihar and other public purposes.

 The donors made these donations under a bonafide belief that they would be entitled to benefit
under section 80-G. With a view to mitigate hardship to the donors, it is proposed to give a
onetime relaxation and amend sub-section (5) of section 80G of the Income-tax Act so as to
provide that where an institution or fund has been approved under clause (vi) of sub-section 5
of section 80G for the previous year beginning on the 1st day of April 2007 and ending on the
31st day of March, 2008, such institution or fund shall, notwithstanding anything contained in
the proviso to clause (15) of section 2, be deemed to have been,-

 Established for charitable purposes for the previous year beginning on the 1st day of April,
2008 and ending on the 31st day of March, 2009;

 Approved under the said clause (vi) for the previous year beginning on the 1st day of April,
2008 and ending on the 31st day of March, 2009.

 This amendment will take effect from 1st day of April, 2009 and shall accordingly, apply in
relation to assessment year 2009-10 only.

 Under the existing provisions of clause (vi) of sub-section (5) of Section 80G of the Income-tax
Act, 1961, the institutions or funds to which the donations are made under Section 80G have
to be approved by the Commissioner of Income-tax in accordance with the rules prescribed in
rule 11AA of the Income-tax Rule, 1962. The proviso to this clause provides that any approval
granted under this clause shall have effect for such assessment year or years, not exceeding
five assessment years, as may be specified in the approval.

 To remove the burdensome for the bonafide institutions or funds from the administration
process in renewing such approvals in a routine manner, it is proposed in the Finance Bill to
omit the proviso to clause (vi) of sub-section (5) of Section 80G to provide that the approval

INDIA BUDGET 2009 41


once granted shall continue to be valid in perpetuity. Further, the Commissioner will also have
the power of withdraw the approval if the Commissioner is satisfied that the activities of such
institution or fund are not genuine or are not being carried out in accordance with the objects
of the institution or fund.

 This amendment will take effect from 1st day of October, 2009. Accordingly, existing approvals
expiring on or after 1st October, 2009 shall be deemed to have been extended in perpetuity
unless specifically withdrawn. However, in case of approvals expiring before 1st October, 2009,
these will have to be renewed and once renewed these shall continue to be valid in perpetuity,
unless specifically withdrawn.

Enlarging the Scope of taxation of Gift including received in Kind

 Under the existing provisions of Section 56(2)(vi), any gift received in cash exceeding Rs.
50,000 is taxable in the hands of the recipient as Income from other sources subject to certain
exceptions.

 The revenue has tried to plug the loopholes of not taxing the gifts received in kind by proposing
to bring the gift in kind within the ambit of taxation.

 The proposed amendment has brought the immovable as well as movable property within the
ambit of taxable gift.

(A) any immovable property–

(i) without consideration, the stamp duty value of which exceeds fifty thousand rupees,
the stamp duty value of such property;
(ii) for a consideration which is less than the stamp duty value of the property by an
amount exceeding fifty thousand rupees, the stamp duty value of such property as
exceeds such consideration;
(B) any property, other than immovable property,—

(i) without consideration, the aggregate fair market value of which exceeds fifty thousand
rupees, the whole of the aggregate fair market value of such property;
(i) for a consideration which is less than the aggregate fair market value of the property
by an amount exceeding fifty thousand rupees, the aggregate fair market value of such
property as exceeds such consideration.

42 INDIA BUDGET 2009


 The Finance Bill provides that if there is any dispute by the assessee on the stamp duty value of
immovable property on the grounds as provided in sub section (2) of section 50C, the assessing
officer may refer the valuation of such property to a Valuation Officer.

 The Finance Bill has not proposed any consequent amendment in Section 49(1)(ii) of the Income
Tax Act, which states that cost of acquisition in hands of the person receiving the gift will be
deemed to be of previous owner.

 In the absence of consequent amendment, the assessee will be liable for double taxation in the
case of gift of immovable property. He will not be able to claim the deemed stamp duty value on
which tax has been levied as the cost of acquisition at the time of subsequent sale.

 Double relief under Section 10(10C) as well as Section 89(1) can not be concurrently claimed

 Under existing provision of Section 10(10C), any amount received under any Voluntary Retirement
Scheme is exempt to the extent of 5 lakhs rupees.

 Section 89, provides relief from taxation in the case of receipt of salary, being paid in arrears or
in advance or receipt in any financial year of salary for more than 12 months and due to which
resulting tax liability is higher than what it would other have been.

 The Madras High Court in the case of CIT vs. GV Venugopal (273 ITR 307) had held that mere fact
that the relief under Section 89 had been spread over several years, did not mean that the relief
was not in respect of a particular assessment year. There was no prohibition to the twin benefits
in respect of the amount received under the Voluntary Retirement Scheme.

 In order to nullify the effect of above decision, it is proposed to insert a proviso to section 89
to provide that no relief shall be granted in respect of amount received under the Voluntary
Retirement Scheme, in accordance with any scheme or schemes of voluntary retirement, if an
exemption has been claimed by the assessee under clause (10C) of Section 10 in respect of
such, or any other assessment year. Correspondingly, it is also proposed to insert a third proviso
to clause (10C) of Section 10 to provide that where any relief has been allowed to any assessee
under section 89 for any assessment year in respect of any amount received under Voluntary
Retirement Scheme, no exemption under clause (10C) of section 10 shall be allowed.

 These amendments will take effect from 1st day of April, 2010 and will, accordingly, apply in
relation to assessment year 2010-11 and subsequent years.

INDIA BUDGET 2009 43


Section 271(1) : Imposition of penalty in case of search & seizure

 Explanation 5A of Section 271(1)(c) provides for the penalty in the case of Search and Seizure
conducted under section 132. Under the existing provisions, penalty is levied on unreported
money, bullion, jewellery or other valuable article and unreported income found credited in the
books of account for any previous year which has ended before the date of the search and due
date for filing the return of income for such year has expired and the assessee has not filed return
of income.

 The law was silent about the return of income filed by the assessee in which such income has
not been disclosed.

 To strengthen the provisions, it is proposed to insert an Explanation so as to clarify that where


the return of income for such previous year has been furnished before the said date but such
income has not been declared therein, in such case the Assessee shall, for the purposes of
imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have
concealed the particulars of his income or furnished inaccurate particulars of such income.

 This amendment will take effect retrospectively from 1st June, 2007.

 Section 281B: Rationalisation of provisions relating to provisional attachment of assets to


protect revenue

 The provisions of Section 281B empower the Assessing Officer to make provisional attachment
of the assets of the assessee during the pendency of any proceedings for assessment or
reassessment. Such provisional attachment shall be effective for a period of six months from
the date of order made for the attachment.

 As per the First Proviso of the said section, the aforesaid period can be extended by the higher
authority after recording the reasons in writing for further period or periods, however, that the
total period of extension can not exceed two years.

 In many cases, the assessees have filed writ petitions in High Court and Supreme Court and
have obtained stay of the assessment proceedings. Often, such stay remains in force for many
years during which the validity of provisional attachment order expires. Therefore, it is proposed
to provide that the period, during which the proceedings for assessment or reassessment are
stayed by an order or injunction from any court, shall be excluded from the period specified in
the First Proviso.

 This amendment will take effect retrospectively from 1st April, 1988.

44 INDIA BUDGET 2009


4. INDIRECT TAX PROPOSALS

Service Tax

New Taxable Services [Section 65(105)]


(Effective on passing of Finance Bill, 2009)

Cosmetic or Plastic Surgery (zzzzk)

 Service Provider – Any Person

 Service Receiver – Any Person

 Taxable Service means any service provided or to be provided to any person, by any other
person,

 in relation to cosmetic surgery or plastic surgery,

 but does not include any surgery undertaken to restore or reconstruct anatomy or
functions of body affected due to congenital defects, developmental abnormalities,
degenerative diseases, injury or trauma.

Comments

 The taxable service of “Beauty Treatment Services” is already covered under the ambit of Service
Tax levy. The Department through Circular No. B11/1/2002 – TRU dated 1-8-2002 clarified
that beauty treatment does not include plastic surgery/cosmetic surgery done to improve the
appearance, as they are not kind of service provided by the beauty parlors. These, are most
appropriately classifiable as medical services.

 The new proposed service intends to bring into the ambit of Service Tax, services in relation
to cosmetic or plastic surgery under a new taxable service of “Cosmetic or Plastic Surgery
services”.

Transport of Coastal Goods and Goods through Inland Waterway (zzzzl)

 Service Provider – Any Person

 Service Receiver – Any Person

 Taxable Service means any service provided or to be provided to any person, by any other
person, in relation to transport of –

INDIA BUDGET 2009 45


 Coastal goods;

 Goods through national waterway; or

 Goods through inland water.

Explanation – For the purposes of this sub-clause, -

“Coastal Goods” has the meaning assigned to it in clause (7) of section 2 of the Customs Act, 1962;

“National Waterway” has the meaning assigned to it in clause (h) of section 2 of the Inland Waterways
Authority of India Act, 1985;

“Inland Water” has the meaning assigned to it in clause (b) of section 2 of the Inland Vessels Act,
1917.

Legal Consultancy Services (zzzzm)

 Service Provider – Business Entity

 Service Receiver – Business Entity

 Taxable Service means any service provided or to be provided to any business entity, by any
business entity:

 in relation to advice, consultancy or assistance in any branch of law, in any manner;

 Further, any service provided by way of appearance before any court, tribunal or authority
shall not amount to taxable service.

 The term “business entity” includes an association of persons, body of individuals, company
or firm, but does not include an individual.

 It is proposed to levy Service Tax on advice, consultancy or technical assistance in any discipline
of law. However, the levy is restricted to services provided by a business entity to another
business entity.

 The Department has also clarified that services provided by individual advocate either to an
individual or even to a business entity would be outside the scope of taxable service. Further,
services provided by a corporate legal firm to an individual would be also be outside the
purview of taxable service.

46 INDIA BUDGET 2009


 However, any service of appearance before any court of law or any statutory authority is kept
outside the ambit of Service Tax net.

Amendments in Existing Taxable Services

Business Auxiliary Services

 Section 65(19)

 The definition of “Business Auxiliary Services” has been proposed to amended to provide
that only those processes which will result in the “manufacture” of “excisable goods”
will be excluded from the ambit of “Business Auxiliary Services”.

 Presently, the definition provides for exclusion of activity which amounts to “manufacture”
within the meaning of Section 2(f) of the Central Excise Act, 1944. The amendment in
definition providing exclusion is being proposed to be modified to state that it would
apply only if the activity results in “manufacture” of “excisable goods”.

 The term “manufacture” and “excisable goods” have been inserted under Explanation
(b) and (c) respectively under the definition.

 The resultant changes suggests that even if an activity or process of manufacture is


undertaken for, or on behalf of, the client, but if the resultant product or goods does
not qualify to be an “excisable goods”, the levy of Service Tax would be attracted.

Comments

 The Department had issued a Circular No. 249/1/2006 – CX.4 dated 27-10-2008 in respect of
leviability of Service Tax on job-work charges for production of alcoholic beverages such as
Indian Made Foreign Liquor. The Department vide the said Circular clarified that “manufacture”
and “excisable goods” are two independent concepts and that it is not necessary that a process
amounting to “manufacture” within meaning of Section 2(f) of the Central Excise Act, 1944
should always result in emergence of excisable goods. There may be a case, when a process may
amount to manufacture u/s. 2(f) but it may not result in emergence of an excisable product. If
that be so, then the exclusion clause under Business Auxiliary Service, which refers only to the
activity amounting to manufacture within the meaning of Section 2(f), would still apply to such
processes, whether or not the resultant product are excisable goods. Accordingly, in case of
production of alcoholic beverages qualifies to be a process amounting to manufacture within
the meaning of Section 2(f), when read with the relevant judicial pronouncements, because a
new product, with a distinct name, character or use; and capable of being marketable, emerges
and would be excluded from levy of Service Tax.

INDIA BUDGET 2009 47


The amendment in the definition proposes to make redundant the above Circular issued by the
Department and proposes to exclude only the activity or processes which amounts to “manufacture”
of “excisable goods”. However, the Entry 84 of the Union List of the Seventh Schedule to the
Constitution of India empowers the Central Government to levy Central Excise duty on all goods
except on alcoholic liquors for human consumption, opium, Indian hemp, other narcotic drugs and
narcotics where the State Government has the power to levy excise duty.

Stock Broker Services

 Section 65(101)

 The definition of “Stock Broker Service” is being proposed to be amended to exclude


sub-broker from its ambit. As a result, sub-brokers will be outside the Service Tax net.

Comments

 The suitable amendment in the definition to exclude sub-broker from the Service Tax net
would reduce the burden on compliance amongst large numbers of small sub-brokers. Further,
alongwith the proposed amendment, the Department has clarified that such sub-brokers
should not be charged to Service Tax as commission agents under “Business Auxiliary Services”
as defined u/s. 65(105)(zzb) of the Chapter V of the Finance Act, 1994. A specific exemption
Notification to this effect would be issued by the Government.

Transport of goods in containers by rail service

 Section 65(105)(zzzp)

 The taxable service of transportation of goods in rail containers is proposed to be


substituted to include transport of goods by rail.

Comments

 Presently, the definition of taxable service of transportation of goods in container by rail


provides for exclusion of such transportation of goods by Government Railway as defined u/s.
2(20) of the Railways Act, 1989.

 The Finance Minister through its Budget Speech stated that “In order to provide a level playing
field in the goods transport sector, I propose to extend the levy of Service Tax to these modes
of goods transport. I propose to extend the levy of Service Tax to these modes of goods

48 INDIA BUDGET 2009


transport. The new levy is not to impact the prices of essential commodities or goods for mass
commodities, as suitable. Exemptions would be made available”.

 Thus, the Government has proposed to remove exemptions provided to Government Railway
to bring it into the purview of Service Tax net.

Information Technology Services

 Section 65(105)(zzzze)

 The sub-clause (v) and sub-clause (vi) has been amended to substitute the word
“acquiring” with the word “providing”.

 The amendment is sought to bring correction in the definition of taxable service as the
word “acquiring” rendered distortion in the definition be fixing the liability on the service
receiver. Accordingly, to align the definition where the liability is on “provider” and not
“acquirer” of information technology services, the definition is suitably amended.

 Since, the amendment is clarificatory in nature; it will have retrospective effect from 16th
May, 2008, the date on which the taxable service of “Information Technology Service”
was introduced under sub-clause (zzzze) of Section 65(105) of the Chapter V of the
Finance Act, 1994.

Amendments in the Finance Act, 1994


(Effective on passing of Finance Bill, 2009)

 Section 84: Revision of Orders by the Commissioner of Central Excise

 Presently, the Commissioner of Central Excise has been granted an authority to suo
moto call for any record or a proceeding in which an adjudicating authority subordinate
to him has passed any decision or order. Such an order is termed as Order-in-Original
(“OIO”). The Commissioner may pass such order thereon as he thinks fit and this
procedure is termed as “revision” of order.

 The Section 35E of the Central Excise Act, 1944 stipulates that a departmental appeal
being filed against such order before the Commissioner (Appeals) whereas Section 84
of the Finance Act, 1994 prescribes revision of orders.

 The amendment is proposed to provide a procedure for referring the orders passed
by any authority subordinate to Commissioner of Central Excise (Appeals), within a

INDIA BUDGET 2009 49


prescribed period, where any such direction is made by the Commissioner reviewing
such orders.

 Further, a savings clause is inserted by way of an explanation to provide that the


amended provision shall not apply to any order passed by an authority subordinate to
the Commissioner before the commencement of the Finance Bill, 2009.

 Section 86: Appeals to Appellate Tribunal

 The Section 86 is suitably amended to give effect to substituted Section 84 of the


Finance Act, 1994.

 Section 96A: Definitions – Advance Rulings

 The definition of “Advance Ruling” as defined under sub-clause (d) has been amended.

Amendments by Notifications
(Effective from date of Notification)

Notification No. Summary


16/2009 – ST dated Associations such as trade associations are taxable under the taxable
7th July, 2009 service of “Club and Association service” as defined u/s. 65(105)(zzze) of
the Chapter V of the Finance Act, 1994.

The exemption has been granted to following organisations and Export


Promotion Councils from Service Tax under the said taxable service:

 Federation of Indian Export Organizations (FIEO)

 Specified Export Promotion Councils

However, the exemption is granted with a sunset clause and the


Notification is valid upto 31st March, 2010.

50 INDIA BUDGET 2009


17/2009 – ST dated The Notification provides for changes in the scheme for refund of Service
7th July, 2009 Tax to the exporters of goods. This notification superseded Notification
No. 41/2007 – ST dated 6-10-2007 which provided for a scheme for refund
of Service Tax on taxable services, received and used in connection with
export of goods by merchant/manufacturer-exporter.

The said notification exempts 16 taxable services received by an exporter


of goods and used for export of goods from the whole of the Service
Tax leviable u/s. 66 and 66A of the Chapter V of the Finance Act, 1994
subject to satisfaction of prescribed conditions.

However, the exporter will have to first pay Service Tax and then apply
for refund of such tax paid by him.
18/2009 – ST dated The Notification also provides for exemption from Service Tax for use
7th July, 2009 by exporter of goods. The following two services where the liability on
exporter of goods is established through reverse charge mechanism are
exempted:

 Transport of goods be road – From the place of removal to any


Internal Container Depot (ICD), Container Freight Station (CFS),
Port or Airport; or from any CFS or ICD to the Port or airport.

 Services provided by a foreign commission agent for procuring


orders.

However, the exporter need not pay Service Tax and then file for refund
claim.

An exporter registered with an Export Promotion Council, sponsored


by the Ministry of Commerce or Ministry of Textiles, having an Import-
Export Code Number (IEC) and registered with the Service Tax authorities
for his liability under reverse charge mechanism is eligible to claim the
said exemption.
19/2009 – ST dated The service provided by Scheduled Bank to any other Scheduled Bank,
7th July, 2009 in reation to inter-bank transactions of purchase and sale of foreign
currency is exempted from the whole of levy Service Tax.

The scheduled bank under the said Notification means the banks which
are included in the Second Schedule of Reserve Bank of India Act,
1934.

INDIA BUDGET 2009 51


20/2009 – ST dated The Notification provides exemption from the whole of levy of Service
7th July, 2009 Tax in respect of tour operator providing taxable service under “Tour
Operator services” as defined u/s. 65(105)(n) of the Chapter V of
the Finance Act, 1994 which is provided or to be provided by a tour
operator having a contract carriage permit for inter-state or intra-state
transportation of passengers, excluding tourism, conducted tours,
charter or hire services.
21/2009 – ST dated The scope and ambit of Notification No. 1/2002 – ST dated 1-3-2002 is
7th July, 2009 being expanded by extending the applicability of Service Tax provisions
to installations, structures and vessels in the entire Continental Shelf of
India and Exclusive Economic Zones of India.

Accordingly, services provided from or to Continental Shelf of India and


Exclusive Economic Zones of India would be covered within the purview
of Service Tax.
22/2009 – ST dated The Notification provides effect to amendments as prescribed by
7th July, 2009 Notification No. 21/2009 – ST and thereby amends the definition of term
“India” as defined under Rule 2(e) of the Taxation of Services (Provided
from outside India and received in India) Rules, 2006.

“India” includes the installations, structures and vessels in the continental


shelf of India and exclusive economic zones of India.

52 INDIA BUDGET 2009


23/2009 – ST dated The Notification provides for amendments in Works Contract (Composition
7th July, 2009 Scheme for payment of Service Tax) Rules, 2007.

Explanation to sub-rule (1) of Rule 3 of said Rules has been amended to


determine the gross amount charged for works contract. The explanation
provides that “gross amount” charged for works contract shall be the
sum, -

(a) including –

 the value of all goods used in or in relation to the execution


of works contract, whether supplied under any other
contract for a consideration or otherwise; and

 the value of all services that are required to be provided for


the execution of the works contract;

(b) excluding, -

 the value added tax or sales tax as the case may be paid on
transfer of property in goods involved; and

 the cost of machinery and tools used in the execution of


the said works contract except for the charges for obtaining
them on hire.

It is further provided that nothing contained in this explanation shall


apply to works contract where the execution under the said contract has
commenced or where any payment, except, by way of credit or debit to
any account has been made in relation to the said contract on or before
the date of this Notification.

Further, sub-rule (4) has been added to Rule 3 of the said Rules which
provided that option under sub-rule (3) shall be permissible only where
the declared value of the works contract is not less than the gross
amount charged for such works contract.

INDIA BUDGET 2009 53


16/2009 – CX (N.T.) The Rule 6(3) of the CENVAT Credit Rules, 2004 is being amended to
dated 7th July, prescribe that a provider of both “taxable” and “exempted” services,
2009 who does not maintain separate accounts of inputs or input services,
then in such a case, the provider of output service shall pay an amount
equal to six percent of value of the exempted service instead of erstwhile
eight per cent of value of exempted service.

The Rule 3(5B) of the CENVAT Credit Rules, 2004 is extended to provider
of taxable service in case where any value of input or input services or
capital goods on which CENVAT Credit has been taken, is written off
fully or where provision to write-off has been made in books of accounts
before being out to use, then the provider of such taxable service shall
pay an amount equivalent to the CENVAT Credit taken on such item.

54 INDIA BUDGET 2009


Central Excise Duty

Legislative Proposal (effective after Finance Bill, 2009 is passed)

Amendment in the Central Excise Act, 1944

 Compounding of offences

Comments:

 The Sections 9A & 37(2)(d) are amended to provide for manner of compounding of offences.
The compounding of offences will not be permitted for the following cases:

 Those allowed compounding earlier (either for value of goods exceeding Rs. One Crore
or for those offences under specified sub-sections of Section 9(1) of the Central Excise
Act, 1944.

 Persons accused under Narcotics Drugs and Psychotropic Substances Act, 1995 or
convicted under Central Excise Act, 1944 on or after December 30, 2005.

 Special audit

Comments:

 A “Chartered Accountant” is permitted to conduct Special Audits in respect of value of


taxable goods as per Section 14A and in respect of CENVAT Credit availed or utilised by
the manufacture in pursuance of Section 14AA of the Central Excise Act, 1944.

 As provided in the explanation to the respective Sections, “Chartered Accountant” shall


have the same meaning assigned to it in clause (b) of sub-section (1) of Section 2 of the
Chartered Accountants Act, 1949.

 Advance Ruling Authority

Comments:

 The Authority for Advance Ruling constituted under Customs Act, 1962 shall also deal
with Central Excise cases.

 Appeal to High Court

INDIA BUDGET 2009 55


Comments:

The High Court with effect from July 1, 2003 is empowered to condone (for sufficient cause) delay for
filing of appeals. Further, the High Court with effect from July 1, 1999 is now empowered to condone
(for sufficient cause) delay for filing of appeal/memorandum of cross objections.

 Retrospective validation of certain Notifications

Comments:

The fixation of rate of Central Excise duty for “Compounded Levy Scheme” (covering steel induction
furnaces/re-rolling mills) under erstwhile Rule 96ZO/96ZP is deemed to be valid with effect from
August 1, 1997.

Delegated Legislation (effective from 7 July 2009)

 Changes in Central Excise Rules, 2002

Comments:

The Rule 24A is introduced to provide that if the Central Excise Officer has not relied upon records
seized or otherwise provided to him, for issue of notice, he shall return the records within 30 days of
issue of notice or expiry of period for issue of notice.

 Changes in CENVAT Credit Rules, 2004

Comments:

 An Explanation to Rule 2(k) is amended to clarify that “input” shall not include:

 Cement,
 Angles,
 Channels,
 CTD/TMT bars etc.
used for construction of shed, building or structure for support of capital goods.

 The Rule 6(3)(i) is amended to provide that whereby a manufacturer of excisable does
not maintain separate accounts for goods for “inputs” or “input services” used in
manufacture of excisable goods.

 5% of value of Exempted Goods (earlier 8%)

56 INDIA BUDGET 2009


 Retail Sale Price Abatement

Comments:

 The rate for abatement has been increased by 500 basis points (5 per cent) for some
items to compensate for Central Excise duty hike from 4% to 8%. The rates for abatement
are as under:

 45% for Vitrified/Glazed tiles. Effective duty rate now 4.4% (earlier 2.4%)

 35% for LPG gas stove & MP3/MPEG players. Effective duty rate now 5.2% (earlier
2.8%)

 30% for toothbrush. Effective duty rate now 5.6% (earlier 3%)

Amendment in the Central Excise Tariff Act, 1985

Swing in Rate composition- Downward

 100% Exemption on:

 Tops manufactured from duty paid tow (conditional)

 Goods manufactured at site for use in construction work (Chapter 68)

 Branded jewellery

 Packaged/Canned software (to the extent of value -”transfer of right to use software”)

 Duty paid high speed diesel (blended with upto 20% duty paid bio diesel)

 EVA compound manufactured on job work for further use in manufacture of footwear

 Two medical devices (Patent Ductus Arteriosus/Atrial Septal defect occlusion device)

 Reduced from 20% to 8%

 Petrol driven trucks/lorries

INDIA BUDGET 2009 57


 Reduction in specific duty

 Duty reduced by Rs. 5,000 per unit on large cars and utility vehicles having engine
capacity exceeding 1999 cc.

 Duty on chassis of petrol driven trucks/lorries reduced by 1200 basis points (12 per
cent)

 Duty on branded petrol/diesel reduced to Rs. 14.5/litre (earlier 6% + Rs. 13/litre) and Rs.
4.75 (6%+ Rs 3.25/litre) respectively.

 Other reductions/exemptions

 The rate is reduced to 14% for naphtha/special boiling point spirits

 Suitable adjustments to be made for DTA clearances (made by EOU) using indigenous
raw materials/inputs

 SSI exemption extended to packaging material & printed laminated rolls bearing others
brand name

 Naphtha is exempt from excise duty only if used to manufacture

 Fertilizer cleared as such or to manufacture

 Ammonia used to manufacture fertilizer cleared as such

Swings in Rate composition- Upward

Optional Basis (only for those manufacturers taking CENVAT Credit)

 From 0% to 4%

 All goods of cotton not containing other textile material

 From 0% to 8%

 Recorded smart cards/ proximity cards & tags

58 INDIA BUDGET 2009


 From 4% to 8%

 Non-cotton textile items of natural fibres

Mandatory

 From 4% to 8%

 Textiles (Manmade fibre/yarn, -Polyester chips/dimethyl terephthalate MT/pure


terephthalic acid/Acrylonitrile)

 Non textiles: (Slide fasteners & parts, brushes under 9603 (except specified brooms),
playing cards, parts of drawing/mathematical instruments, contact lenses, MP3/MPEG,
electronic milk fat/non solid tester, LPG gas stoves, ceramic tiles(made in non-electric
kiln factory), solid/hollow building blocks, articles of mica, goods where weight of flash/
phosphor gypsum atleast 25%, paper & paperboard labels, stationery articles(except
notebooks/exercise books), non-densified wood articles, flush doors, plywood etc. fibre
board, fur skins, heat resistant rubber tape/thread, polyester chips, writing ink.

 Deemed manufacture

 Note 5 to Chapter 21 clarifies that in relation to tariff item 21069030, the process of
mixing or adding ingredients such as cardamom, copra, menthol, spices, sweetening
agents (other than lime, katha & tobacco) to betel nut shall amount to manufacture.

INDIA BUDGET 2009 59


Customs Duty

Legislative proposal

The Finance Bill, 2009 was introduced in Lok Sabha on July 6, 2009. The following changes are
proposed by the Finance Bill in respect of Customs Act, 1962 and Customs Tariff Act, 1975.

Amendments in the Customs Act, 1962

 Section 26Aof the Customs Act, 1962 – Insertion of a new Section

Comments:

Import duty on goods cleared for home consumption shall be refunded, if goods are found to be
defective or commercially not viable. However, the grant of refund will be subject to the following
conditions as prescribed:

 Importer should not have availed any benefits of duty drawbacks; and

 The subject goods are exported or the Importer has relinquished title to the said goods
or the said goods are destroyed or rendered commercially valueless.

 Section 28F of the Customs Act – Insertion of a new sub-section (2A)

Comments:

The Authority for Advance Ruling (“AAR”) constituted u/s. 245-O of the Income-tax Act, 1961 will act
as an Authority for advance rulings for the purpose of Customs, Central Excise and Service Tax.

 Section 130 and – Insertion of a new sub-section (2A)

Comments:

The High Court has been empowered to admit an appeal beyond the specified period of 180 days
provided the aggrieved party shows sufficient cause thereto. This law is effective retrospectively from
1st July, 2003.

 Section 130A – Insertion of a new sub-section (3A)

60 INDIA BUDGET 2009


Comments:

The High Court may permit the filing of applications/memorandum of cross-objections after expiry
of 180 days [as given in sub-section (1)] or within 45 days [as given in sub-section (3)]. This law is
effective retrospectively from 1st July, 1999.

 Section 137 – Amendment of sub-section (3)

Comments:

The Central Government is empowered to make rules determining the manner of compounding of
offences and provides for exclusion of compounding of certain serious offences from compounding
offences.

 Section 156 – Amendment in sub-section 2(h)

Comments:

The Central Government is empowered to make rules regarding the manner of compounding of
offences.

 Section 157 – Insertion in sub-section (2), clause (ai) & (aii)

Comments:

To give effect to new Section 26A, the Board is empowered to make Regulations to determine:

 export of goods,

 relinquishment of title,

 destruction or rendering goods commercially valueless, and

 form and filing application for refund of duty

 Section 4(1) read with Section 5(1)

INDIA BUDGET 2009 61


Comments:

The Notification published vide G.S.R No. 173(E) dated 17th March, 2009 was brought into effect
retrospectively from 9th May, 2000. Accordingly, the jurisdiction and actions of officers of DGCEI
taken during period on and from 9th May, 2000 to 16th March, 2009 will be validated.

 Section 25(1)

Comments:

The Notification published vide G.S.R No. 260(E) dated 1st May, 2006 is given effect from the date of
Notification.

 It is provided to allow the facility under Rule 18 which provides rebate of duty paid on
materials used in the manufacture of resultant product or under sub-rule (2) of Rule 19
of the Central Excise Rules, 2002 or CENVAT Credit under CENVAT Credit Rules, 2004,
in respect of materials which have been locally procured and have been used in the
manufacture of goods exported under the Duty Free Import Authorization Scheme.

 It is provided that where the duty free replenishment in respect of facilities stated in (a)
above have been availed, the same shall be used for the manufacture of dutiable goods
in the factory of the exporter or in the factory of his supporting manufacture even after
the discharge of the exporter obligation.

 The above facilities are subject to payment of an amount equal to the additional duty of
Customs together with interest at the rate of 15% per annum from the date of clearance
of the said materials.

It is provided that such amount shall not be payable in respect of authorisations issued from
1st May 2006 till 31st March, 2007.

Amendments in the Customs Tariff Act, 1975

 Section 3

Comments:

The “Tariff Value” as fixed for an article produced or manufactured in India by the Central Government
under Central Excise Act, 1944 shall be deemed to be tariff value for such article if imported.

62 INDIA BUDGET 2009


 Sections 8B, 8C and 9

Comments:

The specified machinery provision of the Customs Act, 1962 will extend to specific Safeguard duty
and regulations made therein are applied retrospectively.

 Section 9A

Comments:

The “Margin of dumping” by an exporter or producer shall be determined on basis of information


maintained or available. This is extended retrospectively to anti-dumping duties levied under this
section.

Key Changes in Duty Structure effective from 07-07-2009:

 Introduction/ Re-introduction of Full Exemption

 Exemption of 4% CVD on parts for manufacture of mobile phones and accessories for 1
year up to 6th July, 2010.

 Full exemption on Inflatable rafts, snow-skis, water skis, surf-boards, sail-boards and
other water sports equipment.

 Full exemption is granted on specified raw material and equipment imported by


manufacturer-exporters of leather goods, textile products and footwear industry.

 Removal of Exemption

 The basic Customs Duty of 5% is imposed on Set-Top Box for television broadcasting.

 CVD on Aerial Passenger Ropeway Projects.

 The basic Customs Duty of 7.5% is imposed on concrete batching plants of capacity 50
cum per hour or more.

 CVD on packaged or canned software provided on portion of value which represents


right to use such software, subject to specified conditions.

INDIA BUDGET 2009 63


 Rate Composition – Constant

 Concessional Customs Duty of 5% on specified machinery for tea, coffee and rubber
plantations is restored for 1 more year up to 6th July, 2010.

Swing in Rate composition – Upward

 From Rs. 100 per 10 gm to Rs. 200 per 10 gm

 Gold Bars, other than tola bars bearing manufacturer’s or refiner’s engraved serial
number and weight expressed in metric units, and gold coins including ornaments.

 From Rs. 250 per 10 gm to Rs. 500 per 10 gm

 Gold in any form other than those specified above including ornaments.

 From Rs. 500 per kg to Rs. 1000 per kg

 Silver in any form including ornaments.

Swing in Rate composition- Downward

 Reduced from 15% to 10%

 Cotton waste [5202]

 Wool waste [5103]

 Reduced from 10% to 5%

 LCD Panels for manufacture of LCD televisions [8529]

 Specified life-saving drugs/vaccines and their bulk drugs viz. Abatacept, Daptomycin,
Entacevir, Fondaparinux Sodium, Influenza Vaccine, Ixabepilone, Lapatinib, Pegaptanib
Sodium injection, Suntinib Malate, Tocilizumab [Also, CVD shall be Nil]

 Reduced from 7.5% to 5%

 Specified heart devices namely artificial heart and PDA/ASD occlusion device [Also, CVD
shall be Nil]

64 INDIA BUDGET 2009


 Permanent magnets for PM synchronous generator above 500 KW used in wind operated
electricity generators.

 Mechanical harvester for coffee plantation [CVD reduced from 8% to NIL]

 Reduced from 7.5% to 2.5%

 Bio-diesel

 Reduced from 5% to 2%

 Rock Phosphate [2510]

 Reduced from 5% to 0%

 Unworked corals [05080010]

Goods and Service Tax (GST) Road Map

The empowered committee of state finance Ministers has made progress in preparing Road Map and
design of GST. The Finance Minister has given a clear idea about GST Model that it will be a “Dual
GST” comprising of a “Central GST” and “State GST”. The centre and the states will each legislate,
levy and administer the central GST and State GST and again reinforce the Central Government’s
catalytic role to facilitate the introduction of GST by 1st April, 2010 after due consultations with all
stakeholders.

INDIA BUDGET 2009 65


5. IMPACT OF BUDGET INDUSTRYWISE
Industry Direct Tax Indirect Tax Major Policies Overall rating
ALUMINIUM No major direct impact on account of direct tax Increase in duties on inputs such fuel No major direct impact on ac- Negative
changes except abolition of FBT and increase in will impact the output cost count of major policy changes
MAT by 5%
AUTOMOBILES No major direct impact on account of direct tax No major direct impact on account of No major direct impact on ac- Neutral
changes except abolition of FBT and increase in indirect tax changes count of major policy changes
MAT by 5%
BANKS No major direct impact on account of direct tax Exemption of service tax on interbank The thrust on financial inclusion Neutral
changes except abolition of FBT and increase in transactions is a positive development would in the long term margin-
MAT by 5% ally reduce the net interest
margin
CEMENT AND CEMENT No major direct impact on account of direct tax Increase in duties on inputs such as ash Thrust on infrastructure devel- Negative
PRODUCTS changes except abolition of FBT and increase in and fuel will impact the output cost opment would have an impact
MAT by 5% on demand for its output
CIGARETTES No major direct impact on account of direct tax No major direct impact on account of No major direct impact on ac- Neutral
changes except abolition of FBT and increase in indirect tax changes count of major policy changes
MAT by 5%
COMPUTERS - SOFTWARE Extention of tax holidays / exemptions and Aboli- No major direct impact on account of No major direct impact on ac- Positive
tion of FBT is a postive development and increase indirect tax changes count of major policy changes
in VAT by 5% is negative
CONSTRUCTION No major direct impact on account of direct tax The exemption on duty on value add on Increased allocation towards Positive
changes except abolition of FBT and increase in construction site is a positive develop- urban poor can result into a
MAT by 5% ment positive development
DIVERSIFIED No major direct impact on account of direct tax No major direct impact on account of Increased thrust on financial Positive
changes except abolition of FBT and increase in indirect tax changes inclusion could result into
MAT by 5% increase in market size
ELECTRICAL EQUIPMENT No major direct impact on account of direct tax No major direct impact on account of Thrust on APDRP would result in Positive
changes except abolition of FBT and increase in indirect tax changes higher demand
MAT by 5%
ENGINEERING No major direct impact on account of direct tax The exemption on duty on value add on Thrust on infrastructure devel- Positive
changes except abolition of FBT and increase in construction site is a positive develop- opment would have an impact
MAT by 5% ment on demand for its output
FINANCE No major direct impact on account of direct tax No major direct impact on account of No major direct impact on ac- Neutral
changes except abolition of FBT and increase in indirect tax changes count of major policy changes
MAT by 5%

FINANCE - HOUSING No major direct impact on account of direct tax No major direct impact on account of No major direct impact on ac- Neutral
changes except abolition of FBT and increase in indirect tax changes count of major policy changes
MAT by 5%
GAS No major direct impact on account of direct tax No major direct impact on account of Initiative to set up national gas Positive
changes except abolition of FBT and increase in indirect tax changes grid would positively impact the
MAT by 5% gas distribution business
METALS No major direct impact on account of direct tax Increase in duties on inputs such as Thrust on infrastructure devel- Positive
changes except abolition of FBT and increase in fuel will impact the output cost opment would have an impact
MAT by 5% on demand for its output
OIL EXPLORATION/PRODUC- Increase in MAT rates is negative however exten- No major direct impact on account of Initiative to set up national gas Marginally negative
TION tion of setoff period minimizes the overall impact indirect tax changes grid would positively impact the
gas distribution business
PHARMACEUTICALS No major direct impact on account of direct tax Decrease in Custom duties on specified No major direct impact on ac- Marginally negative
changes except abolition of FBT and increase in drugs would impact margins of Cipla count of major policy changes
MAT by 5%
POWER No major direct impact on account of direct tax No major direct impact on account of Thrust on APDRP* would result Positive
changes except abolition of FBT and increase in indirect tax changes in higher demand
MAT by 5%
REFINERIES Increase in MAT rates is negative however exten- impact of changes in duties will result in Initiative to set up national gas Marginally negative
tion of setoff period minimizes the overall impact marginal decrease in fuel prices grid would positively impact the
gas distribution business
STEEL AND STEEL PROD- No major direct impact on account of direct tax No major direct impact on account of Thrust on infrastructure devel- Positive
UCTS changes except abolition of FBT and increase in indirect tax changes opment would have an impact
MAT by 5% on demand for its output

TELECOMMUNICATION - No major direct impact on account of direct tax ‘- Introduction of GST next year ‘- Focus on Inclusive develop- Positive
SERVICES changes except abolition of FBT and increase in expected to streamline the double taxa- ment and rural reforms might
MAT by 5% tion of sim cards include a specific allocation for
telecommunication and access
in rural sectors i.e. improved
penetration but will indirectly
lead to higher telecom spend
* APDRP : Accelerated Power Development and Reform Programme

66 INDIA BUDGET 2009


6. FOREIGN EXCHANGE MANAGEMENT ACT (FEMA)

ECB – Policy Liberalisation and Revisions

All in cost ceilings

The requirement of all-in-cost ceilings on ECB has been dispensed with under the approval
route until December 31, 2009.

Integrated Township

Corporates engaged in the development of integrated township have been allowed to avail ECB
under the approval route. The minimum area to be developed should be 100 acres for which
norms and standards are to be followed as per local bye-laws / rules. In the absence of such
bye-laws/rules, a minimum of two thousand dwelling units for about ten thousand population
will need to be developed.

NBFC’s Financing Infrastructure Sector

NBFC’s exclusively involved in financing infrastructure sector have been allowed to avail ECBs
from multilateral / regional financial institutions and Government owned development financial
institutions for on-lending to the borrowers in the infrastructure sector.

Infrastructure sector redefined

The definition of Infrastructure sector for the purpose of availing of ECB has been expanded to
include the following: (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges,
(v) seaport and airport (vi) industrial parks (vii) urban infrastructure (water supply, sanitation and
sewage projects) and (viii) mining, exploration and refining.

Hike in ECB Limit in Infrastructure

The existing limit of USD 100 million has been raised to USD 500 million per financial year for
the borrowers in the infrastructure sector for Rupee expenditure under the Approval Route.

Other liberalisations

ECB up to USD 500 million per borrower per financial year would be permitted for Rupee
expenditure and / or foreign currency expenditure for permissible end - uses under the Automatic
Route. It has been liberalised in a way that the requirement of minimum average maturity period

INDIA BUDGET 2009 67


of seven years for ECB more than USD 100 million for Rupee capital expenditure by the borrowers
in the infrastructure sector has been dispensed with.

Service sector

Companies operating in the services sector viz. Hotels, Hospitals and Software can avail of ECB
upto USD 100 mn per financial year under the automatic route for foreign currency and / or
Rupee capital expenditure for permissible end-use. The proceeds of the ECBs cannot be used
for acquisition of land.

Telecom

Payment for obtaining license/permit for 3G Spectrum has been considered an eligible end-use
for the purpose of ECB.

Parking of ECB proceeds

The borrowers of ECBs now have the added flexibility of parking the funds raised with the overseas
branches / subsidiaries of Indian banks abroad or remitting these funds to India for credit to
their Rupee accounts with AD Category I banks in India as pending utilisation for permissible
end-uses. This is in addition to park them in the specified liquid assets allowed earlier. However,
the abovementioned rupee funds will not be permitted to be used for investment in capital
markets, real estate or for inter-corporate lending.

Buy-back / Prepayment of Foreign Currency Convertible Bonds (FCCBS)

The existing policy on the premature buy-back of FCCBs has been liberalised to allow buy-back
of FCCBs by Indian companies, both under the automatic and approval routes, as given below.

Buy-Back under Automatic route Buy-Back under Approval route


− Minimum discount of 15% on B.V. − Minimum discount of
− Funds to be used out of existing foreign o 25% of B.V. if Buy-back is upto
currency held in India or abroad or from USD 50 mn
fresh ECB o 35% of B.V if Buy-back is upto
− If fresh ECB period and outstanding ma- USD 75 mn
turity period of original FCCB is less than o 50% of B.V. if Buy-back is upto
3 years then cost should not exceed 6 USD 100 mn
months libor + 200 bps − Funds to be used from internal accru-
als to be evident by statutory auditor
and AD certificate
− Ceiling upto USD 100 mn each
company

68 INDIA BUDGET 2009


The time limit for completion of the entire procedure of buy-back has been extended by 9
months (from March 31, 2009 to December 31, 2009).

Foreign Direct Investment (FDI)–Redefined

Under Automatic Route:

Press Note No 2 (2009 series) Guidelines for calculation of total foreign investment i.e.
direct and indirect foreign investment in Indian companies

Any non-resident investment in an Indian company is direct foreign investment.

An Indian entity is considered to be “owned” or “controlled” by resident Indian citizens


and Indian companies, which are owned and controlled by resident Indian citizens, if
more than 50% of the equity interest in it is beneficially owned by resident Indian citizens and
Indian companies, which are owned and controlled ultimately by resident Indian citizens; or
the resident Indian citizens and Indian companies, which are owned and controlled by resident
Indian citizens, have the power to appoint a majority of its directors.

An Indian company is considered as being “owned” or “controlled” by “non resident entities”,


if more than 50% of the equity interest in it is beneficially owned by non-residents or if non-
residents have the power to appoint a majority of its directors, respectively.

In case of indirect foreign investment, the computation will be as follows:

Case A Case B Case C

Foreign Investment Foreign Investment Foreign Investment

Owned and Controlled by Owned or Controlled by non-


x% resident Indian entity resident Indian entity

Investment in Indian Companies

Co B Co B Co B

Co A is a WOS of x % and Co A is not x % and Co A is not


Co B a WOS of Co B a WOS of Co B

Co A Co A Co A

INDIA BUDGET 2009 69


Case A:
Indirect Foreign Investment in Co A = x% i.e. the same proportion that has been invested in Co
B since Co A is a WOS of Co B.

Case B:
Indirect Foreign Investment in Co A = NIL, since Co B is considered to be owned and controlled
by resident Indian citizens and Indian companies, which are owned and controlled by resident
Indian citizens.

Case C:
Indirect Foreign Investment in Co A = x% since it will be considered that either the beneficial
equity interest or the control i.e. the right to appoint/composition of majority of the Board of
Directors will be with non-resident entity.

Press Note No. 3 (2009 Series) Guidelines for Transfer of Ownership or Control from
Resident Indian Citizens to Non-Resident Entities in Sectors with Caps

This press note is only applicable to sectors / activities where 100% foreign investment is not
permitted under the Automatic Route.

In case of transfer of ownership or control from resident Indian citizens to non-resident entities
in sectors with caps, Government approval/FIPB approval would be required in all cases where:

The Indian company being established with foreign investment and is owned or controlled by a
non-resident entity, or

The ownership or control of an existing Indian company, currently owned or controlled by


resident Indian citizens and Indian companies, which are owned or controlled by resident Indian
citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of
transfer of shares to non-resident entities through amalgamation, merger, acquisition etc.

Press Note No. 4 (2009 Series) Clarificatory Guidelines on Downstream Investment by


Indian Companies

It provides the clarificatory guidelines on downstream investment by Indian Companies:

 Foreign investment in all operating companies and operating-cum-investing companies


will have to comply with sectoral conditions and caps and only notify the FIPB and DIPP
within 30 days of such investments.
 Additionally downstream investments by operating-cum-investing companies would
also have to comply with relevant sectoral caps and conditions.

70 INDIA BUDGET 2009


 However two categories of company’s viz. investing companies and companies that
neither operates nor invest will require prior Government/FIPB approval for making
downstream Investments.

FOREIGN DIRECT INVESTMENT (FDI)

Approval from Foreign Investment Promotion Board (FIPB)


No. Sector/Activity FDI Cap
1 Asset Reconstruction Companies 49% FDI
Credit Information Companies 49% (FDI+ FII) (Maximum FII - 24%)
2 Broadcasting
a FM Radio 20% (FDI+ FII)
b Cable Network 49% (FDI+ FII)
c Direct-To-Home 49% (FDI+ FII) (Maximum FDI - 20%)
d Setting up of Hardware Facilities such as uplinking, HUB 49% (FDI+ FII)
e Up-Linking a News & Current Affairs TV Channel 26% (FDI+ FII)
f Up-Linking a Non-News & Current Affairs TV Channel 100%
3 Defence Production 26%
4 Commodity Exchanges 49% (FDI+ FII), FDI-26%,FII-23%
5 Investing Companies in Infrastructure/Service Sector (Except Telecom 100%
Sector)
6 Infrastructure Companies in Securities Market (Stock Exchanges, 49% (FDI+ FII) (Maximum FDI - 26%, FII only
Depositories & Clearing Corporations) through secondary market purchases)
7 Petroleum & Natural Gas Sector (Refining) 49% in Case of PSUs
8 Print Media
a Publishing of Newspapers & Periodicals - News & Current Affairs 26%
b Publishing of Facsimile edition of foreign newspapers 100%
c Publishing of Scientific Magazines/Speciality Journals/Periodicals 100%
9 Trading
a Trading of items sourced from Small Scale Sector and Test Marketing of 100%
such items fo which a company has approval for manufacture
b Single Brand Product Retailing 51%
10 Satelites Establishment & operations 74%
11 Mining and Mineral separation of Titanium bearing, minerals 100%
ores, its value addition and integrated activities
12 Tea Sector (including Tea Plantations)
13 Cigars & Cigarettes (Manufacture) 100%
14 Credit Information Companies 49% (FDI+ FII) (Maximum FII - 24%)
15 Courier Services

INDIA BUDGET 2009 71


UNDER AUTOMATIC ROUTE
No. Sector/ Activity FDI cap
1 Airports
A Greenfield projects 100%
B Existing projects 100% (FIPB approval required beyond 74%)
2 Air transport services
A Scheduled Air Transport services/ Domestic scheduled passenger airline 49% - FDI route, 100% - NRI investment
B Non-scheduled air transport service / non-scheduled airlines, chartered airlines, and 74% - FDI route, 100% - NRI investment
cargo airlines
C Helicopter Services / seaplane services requiring dgca approval 100%
3 Banking - Private sector 74% (FDI+FII), (Maximum FII 49%)
4 Other services under Civil Aviation Sector
A Ground Handling Services 74%- FDI 100%- for NRIs investment
B Maintenance and repair organizations; flying training institutes; and technical training 100%
institutions
5 Insurance 26%
6 Refining( in case of private companies) 100%
7 Telecommunication
A Basic & cellular, unified access services & other value added services 74% *
B ISP with gateways, radio- paging, end-end bandwidth 74% *
C (i) ISP without gateway 100% *
(ii) Infrastructure provider providing dark fibre, right of way, duct space tower (category I) 100% *
(iii) Electronic mail & voice mail 100% *
D Manufacture of telecom equipments 100%
8 Alcohol distillation & brewing
9 Coal & lignite mining for captive consumption by power projects, and iron &
steel, cement production and eligible activities permitted under the Coal Mines
(Nationalisation) Act, 1973
10 Coffee & Rubber Processing & Warehousing
11 Construction development projects including housing, commercial premises, resorts,
educational institutions, recreational facilities, city and regional level infrastructure,
townships
12 Drugs and pharmaceuticals including those involving use of recombinant DNA
technology
13 Floriculture, Horticulture, Development of Seeds, Animal Husbandary, Pisciculture, Aqua- 100%
culture, Cultivation of vegetables, Mushrooms, under contolled conditions & sevices
related to agro & allied sectors
14 Hazardous chemicals
15 Industrial Explosive (Manufacture)
16 Mining (exploration & mining of diamonds & precious stones; gold, silver & minerals)
17 Industrial parks both setting up and in established industrial parks
18 Mining and mineral separation of titanium bearing minerals and ores, its value addition
and integrated activities.
19 NBFC
20 Petroleum & natural gas sector (other than refining)
21 Power including generation (except atOmic energy), transmission, distribution and power
trading
22 Trading (wholesale/cash & carry, trading for export)
23 Sez & free trade warehousing zones covering set up of these zones & setting up units in
the zones
* FIPB approval required beyond 49%

72 INDIA BUDGET 2009


Eastern &
Central Europe
North America
& The Caribbean Western Europe
& Mediterranean

Bulgaria
Czech Republic Middle
Bahamas East Asia Pacific
Estonia
British Virgin Islands
Hungary
Canada
Kazakhstan
The Caribbean
Latvia Sub-Saharan
Cayman Islands
Lithuania Africa
Jamaica Austria
Poland Belgium
Mexico
Romania Cape Verde
Antilles
Russia Cyprus
Trinidad & Tobago Latin & South
America Serbia Denmark
USA
Slovakia Finland
Slovenia France
Turkmenistan Germany Angola Bahrain
Argentina Ukraine Gibralta Egypt
Botswana Australia
Bolivia Greece Jordan
Comoros China
Brazil Guernsey Kuwait
Mauritius Affiliates
Fiji
Chile Ireland Lebanon
Madagascar Branch Offices Hong Kong
Colombia Isle of Man Oman
Mozambique India
Dominican Republic Israel
Namibia Qatar Indonesia
Ecuador Italy
Nigeria Saudi Arabia Japan
EL Salvador Jersey
Reunion Islands UAE Korea
Guatemala Liechtenstein
Senegal Malaysia
Panama Luxembourg
Malta Seychelles New Zealand
Paraguay
Morocco South Africa Pakistan
Peru
Netherlands Zambia Philippines
Suriname
Norway Zimbabwe Singapore
Uruguay
Portugal Graphical Representation. Not to scale.Updated as on December 2008 Sri Lanka
Venezuela
Spain Taiwan
Sweden Thailand
Switzerland Vanuatu
Turkey Vietnam
Tunisia
United Kingdom
Registered Office
42, Free Press House, 215, Nariman Point, Mumbai - 400 021
Tel: +91 22 6639 1101-04 Fax: +91 22 2285 6237

Corporate Office
Plot No. 56, Road No. 17, MIDC Marol, Andheri (E), Mumbai – 400 093.
Tel: +91 22 6672 9999 Fax: +91 22 6672 9777

For further information, do visit us at:


www.bdoharibhakti.co.in

You can email us at:


crg@bdoharibhakti.co.in

Other Locations:

Ahmedabad Chennai Kolkata (Calcutta)


511-512, Span Trade Centre Opp. Aishwarya, 12B/177, Kumaran Colony, Geetanjali Apartments, Flat No. 6A,
Kocharab Ashram Paldi 6th street, Vadapalani, Chennai, 6th Floor, 8B, Middleton Street, Suite 7G,
Ahmedabad - 380007. Tamil Nadu - 600026. Kolkata – 700 071.

T: +91 79 26578900 / 26578323 T: +91 44 42048335 T: +91 33 2229 8936 / 2229 6758
F: +91 79 26581906 F: +91 44 42048235 F: +91 33 2226 4140

Ajmer Hyderabad New Delhi


Hanuman Market, Agra Gate, Room No. 417 & 418, 4th Floor, Model House, 3rd Floor, 52- B,
Ajmer. Dwarkapuri Colony, Panjagutta, Okhla Industrial Area, Phase III,
Hyderabad – 500 082. New Delhi – 110020.
T: +91 145 2426744 / 5100869
F: +91 145 5100882 T: +91 40 30621888 T: +91 11-4711 9999
F: +91 40 6620277 F: +91 11-4711 9998
Bengaluru (Bangalore)
1st Floor, ‘Park Plaza', (Off Infantry Rd.), Jaipur Pune
Tasker Town, Manish Mansion, Plot No. 247, Frontier Colony, 'Samanvaya', C.T.S. No. 425/36,
Bengaluru – 560 051. Adarsh Nagar, Raja Park, Tilak Vidyapeeth Colony, Gultekdi,
Jaipur - 302 003. Pune – 411 037.
T: +91 080 41242545 / 46
F: +91 80 41242547 T: +91 141 2604743 / 5148099 T: +91 20 24262372
F: +91 141 5148099
Vadodara
301, 302, 303, 3rd Floor, Vidhi Complex,
Opp. BPC, 68 Sampatrao Colony, Alkapuri,
Vadodara – 390 005.

T: +91 265 6455152 / 3


F: +91 265 2343233