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July 2009
2
Foreword
The Finance Minister presented the budget for 2009-10 and simplify the tax structure in the economy and is a
in the backdrop of a global recession and economic welcome announcement. Despite the constraints faced
slowdown. The Indian economy suffered some impact by the Government on various fronts, the extension of
of the global events during the fiscal year 2008-09 with the sun-set clause for deduction in respect of export
its real GDP growth slowing down to 6.7% breaking profits under sections 10A and 10B of the Income tax
the high growth trajectory that was set in place over Act, and the abolishing of the Fringe Benefit Tax, the
the past five years. The past year experienced increasing Commodity Transaction Tax and the additional 10%
and then decreasing inflationary trends, significant surcharge on personal income taxes is supportive of
volatility in the flow of Foreign Institutional Investors’ stimulating consumption in a slowing economy. The
funds with concurrent fluctuations in the stock markets, FM has also provided a much needed boost to the
a burgeoning fiscal deficit that stood at 6.2% of GDP production and refining of natural gas by extending the
by end March 2009 and depressed output from the tax holiday under section 80-IB(9) of the Income Tax Act
manufacturing and agricultural sector. The series of to these activities.
fiscal and administrative measures adopted by the
Government along with the monetary initiatives by The aim to introduce an alternate dispute resolution
the Reserve Bank of India have been able to blunt the mechanism for addressing transfer pricing disputes
impact of the global credit crisis on the Indian economy. through the introduction of a safe harbour regime for
While these measures are indeed commendable, it IT and ITES companies is also a commendable step and
is also important to note that global uncertainties will facilitate a business friendly environment for MNCs
remain and with greater constraints on the use of both doing business in India.
monetary and fiscal policy instruments, the Government
will have to contend with the risks emanating from such On the indirect tax front, lowering or eliminating
uncertainties with bold and innovative policy measures. customs duties to provide a boost to the pharmaceutical
and power sectors will be helpful but the impact is
Not surprisingly, the FM has announced a budget likely to be marginal. The increase in excise duties from
keeping the “Aam Aadmi” in mind. A number of social 4% to 8% (with certain exceptions) will add to the
sector projects have been announced which, while manufacturing cost of several industries. Overall
benefiting employment creation and infrastructure Pranab-babu has delivered a budget that should be
development, will further worsen the state of the fiscal greeted with some cheer but not a thundering applause.
balances. The pronouncement of releasing a new Direct
Taxes Code as well as the introduction of the Goods and 6 July 2009
Services Tax from 1 April 2010, will hopefully streamline
Budget 2009 3
This booklet summarises the important provisions of the Budget 2009 proposals placed before Parliament. Preceding the budget proposals is a
synopsis of the Economic Survey 2008-09 which provides a backdrop to the legal and financial proposals.
The topics presented in the booklet are grouped into Chapters and Sections to facilitate understanding of the proposals. These are not,
however, mutually exclusive.
While all reasonable care has been taken in the preparation of this booklet, we accept no responsibility for any errors it may contain, whether
caused by negligence or otherwise or for any loss, howsoever caused or sustained, by the person who relies on it.
Unless otherwise specified, the various provisions as outlined in this booklet will be effective from the financial year 2009-10. The proposals
are, of course, subject to further amendment as the Finance Bill passes through Parliament.
4
Contents
Budget Highlights 17
Budget Proposals
Corporate Taxation 19
Non-resident Taxation 29
Transfer Pricing 30
Personal Taxation 31
Other Amendments 33
Indirect Taxation 35
Policy Proposals 41
Glossary 43
Budget 2009 5
Indian Economy:
An Objective Analysis
8 7.50
There is an air of hope and anticipation on the 6.70
GDP (%)
Budget 2009 7
Electricity and Construction sectors were down to 3.4% Figure 2: Sectoral contribution to GDP in India
and 7.2%, respectively during 2008-09 from 5.3% and 12.0
10.1% in 2007-08. The slowdown in electricity sector
Another major indicator of slowdown is the increase Figure 3: Unemployment rate (%)
in unemployment rate which increased to 7.2% in the
fiscal 2008-09 compared to 6.80% in the previous year. 9.0% 8.1%
8.0% 7.5% 7.2%
Unemployment rate (%)
8
In order to contain the price levels, the RBI moved Figure 4: Interest rates
to signal a contractionary monetary stance. The repo
14.00% 12.70% 12.80% 13.00%
rate (RR) was increased by 125 basis points in three 11.20%
12.00% 10.80%
tranches from 7.75% at the beginning of April 2008 to 10.00%
Rates (%)
9.0% with effect from August 30, 2008. The reverse- 7.70% 8.00% 8.00%
8.00% 7.00% 7.01%
repo rate (R-RR) was however left unchanged at 6.0%. 6.00% 6.00% 6.00% 6.00% 6.00%
6.00%
The cash reserve ratio (CRR) was increased by 150 basis 4.00%
points in six tranches from 7.50% at the beginning of 2.00%
April 2008 to 9.0% with effect from August 30, 2008. 0.00%
2004-05 2005-06 2006-07 2007-08 2008-09
Bank rate remained at the same level of 6%
Prime lending rate Long term Gov. bond yield (10-Year) Bank rate
(Figure 4). The Prime Lending Rate (PLR) moved up
Source: The Economic Survey 2008-09
marginally from 12.8% to 13% during FY 2008-09.
These policy initiatives coupled with a fall in commodity
prices resulted in the WPI reaching close to 0.8% at
end-March 2009 on a year-on-year basis for all
commodities. Figure 5: Inflation rate (%)
10.00%
The average WPI inflation for 2008-09 was 8.4% as 9.00% 9.10%
8.00% 8.40%
against 4.7% in 2007-08. In a stark contrast to the
7.00% 6.50% 6.70%
movement in the WPI, the Consumer Price Indices 6.00% 6.20%
(CPIs) remained at a fairly elevated level throughout the 5.00% 5.40%
4.40% 4.70%
fiscal year 2008-09. The average inflation on Consumer 4.00%
3.80%
3.00%
Price Index for Rural Labourers (CPI-RL) and CPI for
2.00%
Industrial Workers (CPI-IW) for the year 2008-09 was 1.00%
10.2% and 9.1%, respectively. (Figure 5) 0.00%
2004-05 2005-06 2006-07 2007-08 2008-09
The ongoing economic slowdown has seen the CPI* WPI*
Government take an active role in trying to jumpstart * 52 week average
and revive the Indian economy through a series of Source: The Economic Survey 2008-09
fiscal initiatives to boost Government spending on
infrastructure and other demand and employment
generating projects. The result has been a burgeoning
fiscal deficit which stood at 11.6% of GDP as of Figure 6: Trends in deficits and inflation
March 2009 (Figure 6). Against this backdrop, fear
7.0 10.00%
surrounding its medium term non-sustainability has 6.0 9.00%
Rate as % of GDP
4.0
revised downwards by several international rating 3.0 6.00%
5.00%
agencies. 2.0 4.00%
1.0 3.00%
0.0 2.00%
An additional concern arising from this fiscal deficit -1.0 2004-05 2005-06 2006-07 2007-08 2008-09 1.00%
is the potential inflationary pressure this is likely to -2.0 0.00%
generate within the economy. A high inflation in the Primary deficit Revenue deficit Fiscal deficit WPI CPI
next fiscal will limit the Government’s primary objective Source: The Economic Survey 2008-09
to fuel growth and revive the growth momentum
within the economy.
Budget 2009 9
The supply-demand imbalance in the domestic foreign Figure 7: Exchange rate movement
exchange market, brought about by the widening 55.00
1.1.2008
2.1.2008
3.1.2008
4.1.2008
5.1.2008
6.1.2008
7.1.2008
8.1.2008
9.1.2008
10.1.2008
11.1.2008
12.1.2008
1.1.2009
2.1.2009
3.1.2009
4.1.2009
5.1.2009
6.1.2009
The collapse of the Lehman Brothers in September
2008 brought the currency under further stress. The
Reserve Bank intervention aimed at augmenting supply
in the domestic foreign exchange market in order to Exchange Rate
reduce undue volatility. The rupee thereafter attained a Source: www.oanda.com
measure of stability. The exchange rate was
Rs. 51.2 per US dollar in March 2009, reflecting 21.9%
depreciation during the fiscal 2008-09. (Figure 7)
0
growth of exports and the rising oil import bill has
-1 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09*
led to the worsening of the trade deficit which has
nearly doubled over the past one year. These trends -2
are indicative of the fact that much caution has to be -3
exercised in bringing the state of the external economy -4
to a strong, stable and healthy position. -5
Current account balance
* FY 2008-09 (April to Dec)
Source: The Economic Survey 2008-09
10
Overall export growth during fiscal year 2008-09 was India’s major trading partners have remained the same
3.6% (in US dollar terms) as opposed to 28.9% during over the past two fiscals, though the share in exports
the previous fiscal. Compared to exports, imports and imports for most of the trading partners (with the
registered a growth of 14.4% (in US dollar terms) exception of Europe) have fallen. India’s imports from
resulting in an overall increase in the current account Europe, USA and China have contracted with imports
deficit from 1.5% to 4.1%. The continuous decline in from USA recording the steepest fall (Figure 12). Share
exports since October 2008 has been and continues to of exports have also fallen in the case of USA and
be a source of concern for policy makers. China, but have marginally increased in the case of
Europe. (Figure 13)
Overall growth rate of exports was due to the
improved export performance of the chemicals and
Figure 12: India's major trading partners (Export)
related products, engineering goods and automobiles
(mostly two-wheelers) sectors. The growth was
% Share of total exports
25
somewhat offset by the fall in overall exports in the 20
manufacturing, textiles, steel and petroleum products 15
sectors. On the import side, high domestic demand 10
of edible oils and fertilizers increased imports of 5
these sectors although electronics and petro products 0
Europe USA China
dominated the import basket. (Figures 10 and 11)
2007-08 2008-09
Figure 10: Export of principal commodities Source: The Economic Survey 2008-09
100%
18.9 29.03 23.53
80% 6.04 8.2 4.7 Figure 13: India's major trading partners (Import)
25
% Share in total imports
60%
86.73 104.9 87.01 20
40%
15
20%
10
13.02 18.87 13.89
0% 5
2006-07 2007-08 2008-09*
0
Agriculture & Allied Products Manuf actured Goods Europe USA China
Ores & Minerals Mineral Fuels & Lubricants
2007-08 2008-09
* FY 2008-09 April to Dec
Source: The Economic Survey 2008-09 Source: The Economic Survey 2008-09
120
100
80 37.3 34.3 37.5
60
30.8 31.7 31.6
40
20 15.4 18.7 13.6
7.9 7.1 8.4
0 8.6 8.2 8.9
2006-07 2007-08* 2008-09*
Budget 2009 11
Finally, the description of the external sector can hardly Figure 14: FDI and FII net inflows
be said to be complete without a look at the volume
25
of FDI and FII into India. These inflows have been
20
major drivers of growth in several emerging market
economies, and India is no exception. However, this 15
Investments (USD bn)
fiscal evinced a severe decline in the FII investment, 10
taking it into the negative territory. The net FDI 5
inflow into the country, though not as impressive as 0
the growth in the previous period, has displayed an
-5 2004-05 2005-06 2006-07 2007-08 2008-09*
increase (Figure 14).
-10
12
• The Indian export sector was also addressed. Export • The year saw the launch of Exchange traded currency
credit for labour intensive exports, shipment credit futures in BSE and NSE.
availability, allocation for refund of terminal excise
duty/CST and removal of duty on certain items were What are some of the key sectors in the
also undertaken. Indian economy?
• The economic downturn affected the industrial sector
• The RBI undertook multiple interventions deeply through successive shocks. There was a sharp
(over 20 times) in the cash reserve ratio and the fall in growth rate owing to contraction of demand
statutory liquidity ratio to ease the monetary and rise in prices.
pressures and enhance liquidity. Between
August 2008 and March 2009, successive policy • Amongst all industries, iron and steel was the worst
announcements reduced reverse-repo and repo rates hit by the economic sluggishness. The liquidity crunch
to infuse liquidity in the system. on the supply side and fall in prices emanating from
the inadequate demand side led to 30% fall in both
• To counter the effect of global crisis the External exports and imports.
Commercial Borrowings (ECB) policy has been
liberalized. The limit for FII investment in Government In the wake of this scenario the following section
securities and corporate debt has been enhanced identifies the growth prospects of some key sectors of
to US$ 5 billion and US$15 billion respectively. the Indian economy. (Table 1)
The effect of this policy change has not shown
much effect over the period due to tight liquidity
conditions overseas. The net ECB slowed down to
US$ 7.1 billion against US$ 17.4 billion last year.
Budget 2009 13
How have the major sectors performed? Figure 15: Exchange rate movement
• The industrial sector comprising Manufacturing,
Mining, Electricity and Construction accounted for 120
11 May 2008
20 June 2008
30 July 2008
8 Sept. 2008
18 Oct. 2008
27 Nov. 2008
6 Jan. 2009
15 Feb. 2009
27 Mar. 2009
6 May 2009
15 June 2009
domestic demand and high FDI inflows.
14
What will the future interest rate scenario be? Table 2: Movement in interest rates
• Amidst the global slowdown and recovery, the RBI Date Repo Rate CRR PLR
has made necessary changes in the interest rate
26 Apr. 2008 7.75 7.75 12.25-12.75
scenario. During the early part of the financial year,
it had increased the key interest rates to contain 24 May 2008 7.75 8.25 12.25-12.75
inflation, and later on during the end of the year it 25 June 2008 8.5 8.25 12.25-12.75
had decreased it. 19 July 2008 8.5 8.75 12.75-13.25
30 Aug. 2008 9 9 13.25-14.00
• In the current scenario, it is expected that the
Government along with RBI make necessary reform 25 Oct. 2008 8 6 13.75-14.00
changes and decrease interest rates, with the intent 8 Nov. 2008 7.5 5.5 13.75-14.00
to increase consumer spending. Such a move is 6 Dec. 2008 6.5 5.5 12.50-13.25
expected to be implemented in the short-medium
24 Dec. 2008 6.5 5.5 12.75-13.25
term. Market interest rates are likely to rise marginally
towards the end of the fiscal year. (Table 2) 31 Dec. 2008 6.5 5.5 12.75-13.25
5 Jan. 2009 5.5 5.5 12.00-12.50
How is the banking and financial sector gearing up 17 Jan. 2009 5.5 5 12.00-12.50
to cater to Indian businesses?
31 Jan. 2009 5.5 5 12.00-12.50
• The increasing degree of financial integration of the
Indian economy with global markets had earlier put 5 Mar. 2009 5 5 11.50-12.50
the Indian banking and financial institutions on a 21 Apr. 2009 4.75 5 11.50-12.50
common international platform. The impact of the
economic downturn therefore had an impact on
the liquidity available within the system. Most of • It is expected that these trends are temporary. The
the Indian banks have managed to cope with this Indian banking system has responded well to the
relatively well and the impact of the downturn on external shocks emanating from the economic
the Indian financial sector has been comparatively downturn. If the monetary policy resorts to rate cuts,
moderate as compared to the effect globally. borrowings are expected to increase.
• In most sectors, the significant expansion of credit • Business can also rely on a robust system that will aid
granted by the commercial banks in the first half of in credit and other needs in the medium-long term.
the past fiscal year reduced. There were moderations
in the credit growth overall from a 22.3% to 17.3%.
Budget 2009 15
Stock Market: boom or bust? Figure 16: Stock market movement
• The global slowdown emerging from the turmoil
10000
in the global financial markets had made it difficult
for investors in all markets, including India. The
8000
movements in the Indian capital market were in
tandem with trends in major international stock
6000
markets with a moderate lag.
Index
16
Budget Highlights
• Period allowed for carry forward of MAT credit • Exemption limit for payment of wealth tax increased
extended from seven years to ten years. to Rs. 3,000,000.
Budget 2009 17
• Provision for refund of duty on imported goods Service Tax
which are defective or not in accordance with agreed • Service Tax rate continues at 10%.
specification introduced.
• Three new taxable services introduced.
• CVD on packaged software exempted to the extent
of value representing consideration for transfer • Applicability of service tax extended to installations,
of right to use the software, subject to specified structures and vessels in the Continental Shelf of
conditions. India and Exclusive Economic Zone of India.
18
Budget Proposals
Budget 2009 19
- no deduction for such amount has been allowed Enhancement of limit for allowance of expenditure
or is allowable to the assessee in any earlier in cash made in the case of transporters
previous year. Currently, any expenditure incurred in respect of which
- No deduction in respect of the expenditure in an aggregate payment to a person in a day exceeds
respect of which deduction has been claimed, shall Rs. 20,000 otherwise than by an account payee cheque
be allowed under any other provisions of the ITA. or account payee bank draft, is disallowed.
- No deduction shall be allowed under the provisions
of Chapter VIA in respect of the specified business. Considering special circumstances of the transport
- Any sum received or receivable on account of any operators for incurring expenditure on long haul
capital asset, in respect of which deduction has journeys, the above limit of payment for transporters
been allowed which is being demolished, destroyed, engaged in plying, hiring or leasing goods will be raised
discarded or transferred shall be treated as income to Rs. 35,000.
and chargeable to income tax under the head
‘Profits and gains of business or profession’. The proposed amendment will apply to transactions
- Any loss computed in respect of the specified effected on or after 1 October 2009.
business shall not be set off except against profits
and gains, if any, of another specified business. To Computation of written down value of assets
the extent the loss is unabsorbed the same will be Section 43(6)(b) of the ITA provides that WDV in the
carried forward for set off against profits and gains case of assets acquired before the previous year shall be
from any specified business. computed by taking the actual cost less all depreciation
‘actually allowed’.
Consequential amendment has been made where a
tax holiday earlier provided in respect of the business The Apex Court in case of CIT vs. Doom Dooma India
of laying and operating a cross country natural gas Ltd (310 ITR 392) has held that where any income
distribution network will be discontinued so as to avail is partially agricultural and partially from business
the benefit of the above deduction. chargeable to tax, depreciation deducted in arriving at
the taxable income alone can be taken into account for
Further, consequential amendment has been made to computing the WDV in the subsequent year.
provide that ‘actual cost’ of any capital asset on which
the above deduction has been allowed or allowable will In view of the above decision, an explanation has been
be treated as ‘nil’. inserted under section 43(6) which provides that where
income of assessee in partly from agriculture and partly
For computing networth in the case of a slump sale, the from business chargeable to tax, while computing WDV,
cost of assets in respect of which deduction has been depreciation ‘actually allowed’ will be computed as if
claimed under section 35AD will be ‘nil’. the entire income is chargeable to tax.
Special deduction to entities engaged in long-term Special provisions for computation of full value of
financing of specified infrastructure facilities consideration
Section 36(1)(viii) provides special deduction to specified Currently, the value as adopted or assessed by the stamp
financial corporations, banking companies and housing valuation authority is to be considered for the purpose
finance company of an amount not exceeding 20% of of computing the capital gains in the case of sale of a
the profits subject to creation of a special reserve. capital asset being land or building.
As per the proposed amendment, specified entities It is proposed to include in the above computation,
engaged in providing long-term finance (including capital gains as if the transaction were referred to the
re-financing) for development of housing in India stamp duty authority.
will be eligible for this benefit.
This proposed amendment will take effect from
1 October 2009.
20
Computation of tax holiday under Chapter VI-A Tax holiday for housing projects
A number of profit linked deductions are available under Under the existing provision, sub-section (10) of section
Chapter VI-A. 80-IB provides for 100% deduction of the profits
derived by an undertaking from developing and building
It is proposed to amend section 80A to prevent claim of housing projects.
multiple deduction, of the same profits.
It is proposed that the tax holiday benefit will not be
The proposed amendment will take effect retrospectively available to any undertaking which executes the housing
from financial year 2002-03. project as a works contract.
Further, it is also proposed that the transfer price of This amendment will take effect retrospectively from the
goods and services between the qualifying business and financial year 2000-01.
any other business will be determined at market value of
the goods and services as on the date of transfer. Further, the objective of the tax benefit for housing
projects is to build housing stock for low and middle
This amendment will take effect retrospectively from income households. This has been ensured by limiting
the financial year 2008-09 and is intended to be applied the size of the residential unit.
to all cases where proceedings are pending before
authorities. In this context, it is proposed that deduction will be
available to the undertaking which develops and builds
Tax holiday for oil & gas the housing project however, it will not be allowed
Currently, deduction is available in respect of profits and to allot more than one residential unit in the housing
gains derived from commercial production or refining of project to the same person, not being an individual,
mineral oil. and in case of individual, no other residential unit in
such housing project is allotted to any of the prescribed
It is proposed that all blocks licensed under a single persons.
contract which is awarded under the New Exploration
Licensing Policy announced by the Government of India Computation of book profit for MAT
dated 10 February 1999 or has been awarded by the Currently, under MAT there is no adjustment towards
Central or State Government in any other manner shall provision for diminution in the value of assets while
be treated as a single ‘undertaking’. computing book profits.
The proposed amendment will take effect retrospectively It has been clarified that, provision for diminution in the
from financial year 1999-2000. value of any asset will not be allowed while computing
book profits for the purposes of computing MAT.
It is proposed that the benefit of deduction is available
to the undertaking which is engaged in refining of The proposed amendment will take effect from financial
mineral oil and which begins such refining on or after year 1997-98 in respect of section 115JA and from
the 1 October 1998 but not later than the 31 March financial year 2000-01 in respect of section 115JB.
2012.
Extension of MAT credit
The proposed amendment will take effect retrospectively The period allowed for carry forward of MAT credit will
from the financial year 2008-09. be extended from seven years to ten years.
Budget 2009 21
It is proposed to amend section 115-O to provide that In order to mitigate the hardship, it is proposed to
any dividend paid to the New Pension Scheme Trust will amend section 145A to provide that the interest
be exempt from DDT. received by an assessee on compensation or enhanced
compensation will be deemed to be his income for the
The proposed amendment will take effect retrospectively year in which it is received, irrespective of the method of
from financial year 2008-09. accounting followed by the assessee.
22
Table 2: Tax Holidays
Undertakings (i) Set-up in any part of India for generation, or, 1-4-1993 to 31-3-2011 10 out of initial 15 100
generation and distribution of power
(ii) Transmission or distribution of power by laying a 1-4-1999 to 31-3-2011 10 out of initial 15 100
network of new transmission or distribution lines
(iii) Transmission or distribution of power by 1-4-2004 to 31-3-2011 10 out of initial 15 100
undertaking substantial renovation and
modernisation of the existing network of
transmission or distribution lines
(iv) Set-up by a notified Indian Company for On or before 31-3-2011* 10 out of initial 15 100
reconstruction or revival of a power generating
plant
Infrastructure (i) Development; or; operation and maintenance; On or after 1-4-1995 10 out of initial 20 100
Undertakings or or; development, operation and maintenance
Enterprises of infrastructure facility other than port, airport,
inland waterway or inland port or navigational
channel in the sea
(ii) Development; or; maintenance and operation; On or after 1-4-1995 10 out of initial 15 100
or; development, maintenance and operation of
any other infrastructure facility viz. a port, airport,
inland waterway or inland port or navigational
channel in the sea
(iii) Basic or cellular telecommunication services 1-4-1995 to 31-3-2005 10 out of initial 15 100 for the
including radio paging, domestic satellite services, first five years;
network of trunking, broadband network and thereafter 30.
internet services
(iv) Development of a notified: 10 out of initial 15 100
Budget 2009 23
Table 2 (Contd.): Tax Holidays
25 for others
(iii) Located in industrially backward State of the 1-10-1993 to 31-3-2004 10 10 100
North Eastern Region as notified by the Central
Government (**)
(iv) Located in an industrially backward district notified 1-10-1994 to 31-3-2004 12 10 100 for the
by the Central Government as Category A first five years;
thereafter,
30 for
companies,
25 for others
(v) Located in an industrially backward district notified 1-10-1994 to 31-3-2004 12 8 100 for the first
by the Central Government as Category B three years;
thereafter,
30 for
companies,
25 for others
(vi) Operating a cold chain facility for agricultural 1-4-1999 to 31-3-2004 12 10 100 for first five
produce years;
thereafter, 30 for
companies, 25
for others
** Deduction to be claimed under section 81C/80IE for industrial undertakings located in Sikkim, Himachal Pradesh, Uttaranchal and North-Eastern State from
1 April 2003 (see Table 3 - III)
24
Table 2 (Contd.): Tax Holidays
Undertakings (i) Construction and development of housing On or after 1-10-1998 and construction 100
projects approved before is completed within four years from the
end of the financial year in which the
31-3-2007
housing project is approved
(ii) Engaged in the commercial production of On or after 1-4-1997 7 100
mineral oil in any part of India
(iii) Engaged in refining of mineral oil 1-10-1998 to 31-3-2012 7 100
(iv) Engaged in the commercial production On or after 1-4-2009 7 100
of natural gas in block licensed under
NELP VIII
(v) Engaged in the business of processing, On or after 1-4-2001 10 100 for first five
preservation and packaging of fruits and years; thereafter,
vegetables, integrated business of handling
30 for companies,
storage and transportation of foodgrains
25 for others
(vi) Engaged in operating and maintaining a Constructed on or after 5 100
hospital in a rural area
1-10-2004 but before 31-3-2008
(vii) Engaged in operating and maintaining a Constructed and starts functioning on 5 100
hospital located anywhere in India, other or after 1-4-2008 but before 31-3-
than in an excluded area 2013
Companies (i) Scientific and industrial research and Approved after 31-3-2000 10 100
development
but before 1-4-2007
Hotels (i) Located in hilly area or rural area or place 1-4-1997 to 31-3-2001 10 50
of pilgrimage not within Kolkata, Chennai,
Delhi and Mumbai
(ii) Located in any other area not within 1-4-1997 to 31-3-2001 10 30
Kolkata, Chennai, Delhi and Mumbai
(iii) (a) Located in the National Capital 1-4-2007 to 31-3-2010 5 100
Territory of Delhi and in the districts
of Faridabad, Gurgaon, Gautam Budh
Nagar and Ghaziabad
Budget 2009 25
Table 2 (Contd.): Tax Holidays
III: Tax holiday available to new or existing undertakings or enterprises in certain special category States
Business Activity State Period for Commence-ment Tax Holiday Rate of
of Operation (Years) Deduction (%)
New undertakings and enterprises,
or substantial expansion of existing Sikkim 23-12-2002 to 31-3-2012 10 100
undertakings and enterprises, which are
engaged in manufacture or production
of articles or things, not specified in
the Thirteenth Schedule, in any notified Himachal Pradesh or 7-1-2003 to 31-3-2012 10 100 for the first five
Export Processing Zone or Integrated Uttaranchal years; thereafter 30
Infrastructure Development Centre or for companies, 25 for
Industrial Growth Centre or Industrial others
Estate or Industrial Park or Software
Technology Park or Industrial Area or
Theme Park/Manufacture or production North-Eastern States 24-12-1997 to 31-3-2007 10 100
of article or thing specified in Fourteenth
Schedule
26
Table 3: Withholding Tax Rates (%)
Status of Recipient
Company Individuals Others
Nature of Payment
Foreign Domestic Non-resident Resident Non-resident Resident
(f) (k) (n) (n) (f) (n) (n) (f) (n) (n)
1. Salaries N.A. N.A. Slab rates Slab rates N.A. N.A.
2. Interest on securities 40 (d) 10 (a) 30 (d) / 20 (b) 10 (a) 30 (d) 10 (a)
3. Interest paid to non-resident on 20 N.A. 20 N.A. 20 N.A.
foreign currency loan
4. Other interest 40 (d) 10 30 (d) / 20 (b) 10 30 (d) 10
5. Winnings from lottery / 30 30 30 30 30 30
crossword puzzle/ horse race /
card game and any other game
6. Payment to contractors / sub- 40 (d) 2/1 30 (d) 2/1 30 (d) 2/1
contractors upto
30 September 2009
7. Payment to contractors / 40 (d) 2 30 (d) 1 30 (d) 2 / 1 (h)
sub-contractors (including
advertisement contracts)
w.e.f. 1 October 2009
8. Payment under advertisement 40 (d) 1 30 (d) 1 30 (d) 1
contract upto
30 September 2009
9. Insurance commission 40 (d) 20 30 (d) 10 30 (d) 10
10. Commission / brokerage 40 (d) 10 30 (d) 10 30 (d) 10
11. Rent for use of land or building 40 (d) 20 30 (d) 15 30 (d) 20 (g)
or furniture or fittings upto
30 September 2009
12. Rent for use of land or building 40 (d) 10 30 (d) 10 30 (d) 10
or furniture or fittings w.e.f.
1 October 2009
13. Rent for use of machinery or 10 (c) / 10 10 (c) / 30 (d) 10 10 (c) / 30 (d) 10
plant or equipment upto 40 (d)
30 September 2009
14. Rent for use of machinery or 10 (c) / 2 10 (c) / 30 (d) 2 10 (c) / 30 (d) 2
plant or equipment w.e.f. 40 (d)
1 October 2009
15. Royalty 10 (c) 10 10 (c) 10 10 (c) 10
16. Technical fee 10 (c) 10 (l) 10 (c) 10 (l) 10 (c) 10 (l)
17. Compensation on acquisition of 40 (d) 10 20 (o) / 30 (d) 10 30 (d) 10
certain immovable property
18. Long-term capital gains (m) 20 (e) (i) Nil 10 (b) / 20 (e) Nil 20 (e) (i) Nil
19. Short-term capital gains (p) 15 (i) Nil 15 Nil 15 (i) Nil
20. Any other sum chargeable to tax 40 (d) Nil 30 (d) Nil 30 (d) Nil
Budget 2009 27
Notes: (k) Rates to be increased by surcharge of 2.5% where
the payment exceeds Rs.10 mn.
(a) No TDS on interest on specified securities.
(l) Also in respect of professional service fee.
(b) On specified assets purchased by an NRI in
convertible foreign exchange. (m) No TDS on income arising on sale of equity shares
or a unit of an equity oriented fund which is
(c) 20% in the case where the agreement is made on chargeable to STT.
or after 1 June 1997 but before 1 June 2005.
(n) Rates (inclusive of surcharge referred to at (k)
(d) On net income. above) to be further increased by an additional
surcharge (Education Cess) of 2% and additional
(e) No TDS on income arising from the transfer of surcharge (Secondary and Higher Education Cess)
a unit of the Unit Scheme, 1964 and long-term of 1%.
capital gains on quoted equity shares acquired on
or after 1 March 2003 but before 1 March 2004. (o) In case taxable as long-term capital gains.
(f) Rates are subject to treaty provisions. (p) Applicable in respect of income arising on the sale
of equity shares or a unit of an equity oriented
(g) 15% for HUF. fund which is chargeable to STT.
(h) In the case of an HUF. (q) With effect from financial year beginning 1 April
2010, the deductee is required to furnish its PAN to
(i) No TDS in respect of FIIs. the deductor failing which tax shall be deducted at
the rate mentioned in the relevant provisions of the
(j) No TDS in case of contract for transport of goods Act or at the rate in force or at the rate of 20 %,
in case the deductee furnishes his PAN to the whichever is higher.
deductor.
28
Non-resident Taxation Agreement with specified non-sovereign territories
Rate of tax The power of the Central Government to enter
There will be no change in the rate of tax for foreign into Double Taxation Avoidance Agreement or Tax
companies except for the change in the MAT rate. Information Exchange Agreement with the Government
of any country outside India has been expanded. The
The effective rate of tax for foreign companies will Central Government will now be empowered to enter
therefore be as shown in Table 4. into similar agreements with non-sovereign territories
outside India which may be notified by the Central
Table 4: Tax Rates for Foreign Companies Government.
Budget 2009 29
Transfer Pricing Alternative Dispute Resolution Mechanism
Safe Harbour With a view to encourage the growth of foreign
• CBDT empowered to formulate safe harbour rules. investment in India, a dispute resolution mechanism
is proposed to facilitate expeditious resolution of
• Safe harbour rules to prescribe circumstances under disputes on a fast track basis. The salient features of the
which the income tax authorities shall accept the proposed ADRM are:
transfer price declared by the tax payer. • DRP to consist of three CITs.
The proposed amendment will take effect retrospectively • Foreign companies and cases involving transfer pricing
from 1 April 2009. disputes eligible for ADRM.
30
Personal Taxation included within the scope of ‘perquisites’ as defined in
Rate of tax section 17. As FBT will now be abolished, ‘perquisites’
The rates of personal tax will be revised as shown in will include the following:
Table 5.
• Value of any specified security or sweat equity shares
Table 5: Tax Rates for Individuals allotted or transferred, directly or indirectly, by the
Slab of Income Rate of Tax employer, or former employer, free of cost or at
(Rs.) (%) concessional rate. The value will be determined in
accordance with the prescribed method on the date
0 - 160,000 Nil
on which the option is exercised by the assessee as
160,001 - 300,000 10
reduced by the amount actually paid by, or recovered
300,001 - 500,000 20
from the assessee in respect of such security or shares.
500,001 and above 30
Notes: • The amount of any contribution to an approved
i. In respect of women residents below the age of 65 years, the basic exemption limit will be
increased to Rs. 190,000 from Rs. 180,000.
superannuation fund by the employer in respect of the
ii. In respect of senior citizens resident in India, the basic exemption limit will be increased to assessee, to the extent it exceeds Rs. 100,000.
Rs. 240,000 from Rs. 225,000.
iii. Surcharge of 10% of Income Tax will be withdrawn.
iv. Education Cess will be levied at the rate of 2% of Income Tax.
• Value of any other fringe benefit or amenity as may be
v. Secondary and Higher Education Cess will be levied at the rate of 1% of Income Tax (not including prescribed.
Education Cess).
Expanding the scope of ‘perquisites’ in view of Deduction of interest on loan taken for higher
abolition of FBT education
Currently, certain prescribed fringe benefits provided by Deduction under section 80E, currently allowed in
an employer to his employees are liable to FBT in the respect interest on loans taken from any financial
hands of the employer. Such fringe benefits are not institution or any approved charitable institution for
Budget 2009 31
pursuing higher education in the specified fields of It is proposed that the value of any property received
study, will be extended to cover any course of study without consideration or for inadequate consideration
pursued after passing the Senior Secondary Examination will be ‘income’. Such properties will include immovable
or its equivalent from any school, board or university property being land or building or both, shares
recognised by the Central or State Government or local and securities, jewellery, archaeological collections,
authority or by any other Authority as authorised. drawings, paintings, sculptures or any work of art.
Expansion of scope of Income from Other Sources The scope of said provisions will be extended to include
Presently, any sum of money exceeding in aggregate receipt of any immovable property or any other property
of Rs. 50,000 received without consideration by an without consideration or for inadequate consideration
individual or HUF from persons other than relatives, where stamp duty value or fair market value of such
subject to specified exceptions, is ‘income’. Hence, property exceeds Rs. 50,000.
anything which is received in kind having ‘money’s
worth’ i.e. property is outside the purview of the The proposed amendment will take effect from
existing provisions. 1 October 2009.
32
Other Amendments It is proposed to have uniform limits for both
Meaning of the term ‘charitable purpose’ expanded professional firms and non-professional firms as follows:
The definition of the term ‘charitable purpose’ is
expanded to include preservation of environment Table 6: Limit for deduction of remuneration
(including watersheds, forests and wildlife) and
Book Profit Maximum deductible remuneration
preservation of monuments or places or objects of
artistic or historic interest. On the first Rs. 300,000 of the Rs. 150,000 or at the rate of 90% of the
book-profit or in case of a loss book-profit, whichever is more
The proposed amendment will take effect retrospectively
On the balance of the book-profit At the rate of 60%
from financial year 2008-2009.
Budget 2009 33
Under the proposed amendment: TDS on payments to contractor
• 8% of the total turnover or gross receipts or a higher Any Government of a foreign State or a foreign
sum claimed to have been earned by the eligible enterprise or any association or body established outside
assessee is deemed to be the profits of eligible India is also required to deduct tax on payment to
business chargeable to tax. contractor under the proposed provision which was not
specifically covered under the existing provision.
• no further deduction is allowable (except salary and
interest deduction in case of a partnership firm subject The proposed amendment will take effect from
to the limits specified under the ITA) 1 October 2009.
34
Indirect Taxation Withdrawal of Exemptions / Increase in Rate
Customs Duty • Customs duty exemption on set top box withdrawn.
Rate Changes Set top boxes to attract duty of 5%.
Peak rate of Basic Customs duty retained at 10%.
• CVD exemption on Aerial Passenger Ropeway Project
Full Exemptions / Reduction in Rate items withdrawn.
• Exemption from SAD on parts required for
manufacture of mobile phones and accessories • Customs duty exemption on concrete batching plants
extended for a period of one year upto 6 July 2010. of capacity 50 cum per hour withdrawn. These will
now attract a duty of 7.5%.
• Exemption from Customs duty provided to:
– inflatable rafts, snow skis, water skis, surf boats, Table 8: Increase in the rate
sail boards, and other water sport equipments Description of Upto Effective
– items such as synthetic rubber bladder, table tennis goods 6 July 2009 7 July 2009
rubber, etc. required by manufacturer-exporters of
Precious Metals
sports goods
Gold bars having Rs 100 per Rs 200 per
– items such as knitted ribs, metal fittings, etc. used
manufacturer’s 10 gram 10 gram
by manufacturer-exporters of leather, textile and
or refiners serial
footwear industry.
number engraved
on the gold bar
Table 7: Decrease in the rate Gold in any Rs 250 per Rs 500 per
Description of goods Upto Effective other form 10 grams 10 grams
6 July 2009 7 July 2009 Silver Rs 500 per kg Rs 1000 per kg
Pharma
Specified life saving drugs and vaccine and 10% 5% Other Relevant Changes in Rate
their bulk drugs • Exemption from CVD provided to packaged software
Specified heart devices 7.5% 5% and canned software on the portion of value
representing the consideration for transfer of right to
Textile
use such software subject to specified conditions.
Cotton Waste 15% 10%
Wool Waste 15% 10% • Concessional Customs duty of 5% on specified
Electronic Hardware machinery for use in tea, coffee and rubber
LCD Panels for manufacture of LCD 10% 5% plantation extended upto 6 July 2010.
televisions
Renewable Energy The above exemptions and rate changes will be
effective from 7 July 2009.
Permanent magnets for manufacture of 7.5% 5%
PM synchronous generators for use in wind
Changes in Acts
operated electricity generators
Changes in the Customs Act, 1962
Bio Diesel 7.5% 2.5%
• Refund of import duty paid at the time of clearance
Others of imported goods to be allowed in case the goods
Rock Phosphate 5% 2% imported:
Unworked Corals 5% Nil – are found to be defective;
– do not conform to the specifications agreed
between the importer and the supplier.
The above refund is subject to the following
conditions:
Budget 2009 35
– the goods have not been worked, repaired or used transfer of right to use such software, subject to
after importation; specified conditions
– the goods are identified;
– no drawback is claimed by the importer in respect • High Speed Diesel oil blended with upto 20%
of such goods; bio-diesel
– the goods are exported or the importer relinquishes
his title to the goods or the goods are destroyed or • Specified goods manufactured at the site of
rendered commercially valueless. construction for use in construction work at such
site.
• High Courts have been empowered to condone delay
in filing of appeals beyond the prescribed period with Decrease in CENVAT Rate
retrospective effect from 1 July 2003.
Table 9: Decrease in the rate
• High Courts have also been empowered to condone Description of goods Upto Effective
the delay in filing of applications or memorandum of 6 July 2009 7 July 2009
cross objections beyond the prescribed period with
Automobiles
retrospective effect from 1 July 1999.
Large cars / utility vehicles of engine 20%+Rs. 20,000 20%+Rs. 15,000
capacity 2000cc and above
• Amendment introduced to provide manner of
compounding of offences; certain offences as Petrol driven trucks / lorries 20% 8%
provided will not be compoundable. (except dumpers)
Chassis of petrol driven trucks / lorries 20%+Rs. 10,000 8%+Rs. 10,000
Changes in the Customs Tariff Act, 1975 Petroleum Products
• In case of goods where tariff value has been fixed for Naptha 16% 14%
the purpose of collection of central Excise Duty, such
tariff value to be adopted for calculation of CVD on Increase in CENVAT Rate from 4% to 8%
import of like articles. The Excise Duty on goods currently attracting 4%
CENVAT Rate has now been increased to 8% CENVAT
• Facility of rebate allowed in respect of goods Rate except for the following:
procured locally and used in manufacture of goods • Specified food items including biscuits, sherbats,
exported under the DFIA Scheme. cakes and pastries
The above changes will be effective from the date • Drugs and pharmaceutical products covered under
of enactment of the Finance (No.2) Bill 2009 unless Chapter 30
otherwise stated above.
• Medical equipment
Central Excise Duty
Rate Changes • Certain varieties of paper, paperboard and articles
General CENVAT rate reduced from 14% to 8% as part thereof
of stimulus measures during Financial Year 2008-09 has
been maintained. • Paraxylene
36
• Vacuum and gas filled bulbs of RSP not exceeding Changes in Rate Structure for Petroleum Products
Rs. 20 per bulb
Table 10: Excise Duty Rate Structure for Petroleum Products
• Compact Fluorescent Lamps Description of goods Upto Effective
6 July 2009 7 July 2009
• Cars for physically handicapped persons.
Petroleum Products
Illustrative list of goods on which CENVAT Rate has Branded Petrol 6%+Rs. 13 per litre Rs. 14.50 per litre
been increased from 4% to 8% is as under: Branded High Speed Diesel Oil 6%+Rs. 3.25per litre Rs. 4.75 per litre
• Manmade fibre and filament yarn Special Boiling Point Spirits 14%+Rs. 15 per litre 14%
• Ink used in writing instruments • Permission / intimation is not required for availing full
exemption or payment of duty by availing credit for
• Polyester chips textile related products.
Budget 2009 37
Changes in RSP Based Assessment laying of foundation or making of structures for
The following changes are made in the rate of support of capital goods.
abatement in respect of goods subject to RSP based
assessment: • Manufacturer of dutiable and exempted goods
who do not maintain separate records, shall pay
an amount equal to 5% of total value of exempted
Table 11: Increase in the rate of abatement
goods instead of 10% prevailing earlier.
Description of goods Upto Effective
6 July 2009 7 July 2009
Service Tax
Vitrified tiles, whether polished or not 40% 45% Rate of Service Tax
Glazed tiles 40% 45% The rate of Service Tax which was reduced from 12%
Liquified Petroleum Gas stoves 30% 35% to 10% effective 24 February 2009 remains unchanged.
MP3 Player or MPEG 4 Player 30% 35%
Toothbrush 25% 30% New Taxable Services
The following categories of services have been brought
within the purview of Service Tax:
The above changes will be effective from 7 July 2009. • Cosmetic and Plastic Surgery Services
38
• Retrospective amendment from 16 May 2008 in • A simplified refund mechanism for exporters of goods
the category of ‘Information Technology Software – List of eligible services for refund of service tax now
Services’ so as to substitute the word ‘acquiring’ with amended to include terminal handling charges
the word ‘providing’ the right to use Information – Refund claim to be filed within one year from the
Technology Software. date of export of goods.
– Specified conditions to be fulfilled in respect of all
Exemptions /Abatements under Service Tax services on which refund is to be claimed.
• Exemption provided to interbank transactions of – Refund to be filed on certification basis; self
purchase and sale of foreign currency between certification in case the value of refund is upto
Scheduled Banks from the categories of ‘Banking 0.25% of FOB value of exports and certification by
and Other Financial Services’ and ‘Foreign Exchange Chartered Accountant in case the value of refund
Broker’s Services’. exceeds this amount.
– Refund to be granted within one month from the
• Transport of passengers by a tour operator having a receipt of claim without any pre-audits irrespective
contract carriage permit exempted from Service Tax of the amount of the claim, subject to certain
except in specified cases. conditions.
• ‘Club or Association Services’ provided by Federation The above changes will be effective from 7 July 2009.
of Indian Export Organisations, Engineering Export
Promotion Council and other specified Councils Composition scheme under the category of Works
exempted from Service Tax upto 31 March 2010. Contract Services
• The meaning of the term ‘gross amount charged’
The above changes will be effective from 7 July 2009. under the Works Contract (Composition Scheme
• Sub-brokers have been excluded from the purview of for Payment of Service Tax) Rules, 2007 has been
Service Tax. This change will be effective from a date expanded to include value of all goods used in or
to be notified after the enactment of Finance Bill (No. in relation to the contract whether supplied free of
2), 2009. cost or for consideration under any other contract
excluding VAT or sales tax paid on goods and cost
• Service Tax exemption on specified services availed by of machinery and tools used in the contract except
Goods Transport Agencies to be given retrospective hire charges. The option can be claimed only in
effect from 1 January 2005. cases where the declared value of works contract is
not less than gross amount charged for such works
Refund mechanism for exporters of goods contract.
• Exemption granted to exporters of goods from
payment of Service Tax under reverse charge The above change will be effective from 7 July 2009.
mechanism in respect of following services:
– Transport of goods by road directly from the place Changes in CENVAT Credit Rules, 2004 relevant to
of removal or from any container freight station or service providers
inland container depot to the port or airport. • Service providers providing both taxable and
– ‘Business Auxiliary Services’ provided by foreign exempted services who do not maintain separate
commission agents. The exemption limit in respect records, will now need to pay an amount equal to
of services provided by foreign commission agents 6% of total value of exempted services instead of
has been restricted to 1% of the FOB value of 8% prevailing earlier.
exports.
• Service providers need to reverse the CENVAT credit
The above exemption is subject to fulfilment of taken on inputs or capital goods which have been
certain conditions including filing of half-yearly return written off before being put to use.
along with specified documents.
These changes will be effective from 7 July 2009.
Budget 2009 39
Policy Proposals
Budget 2009 41
Other Policy Proposals • The Swarna Jayanti Gram Swarozgar Yojna
• An expert group to be set up to advise on a restructured as the ‘National Rural Livelihood Mission’
viable and sustainable system of pricing petroleum wherein interest subsidy will be provided to poor
products. households for loans upto Rs. 100,000 from banks,
in addition to capital subsidy.
• Public sector enterprises such as banks and insurance
companies will remain in the public sector. • All services under Integrated Child Development
Services to be extended to every child under the age
of six by March 2012.
42
Glossary
Budget 2009 43
NSE – National Stock Exchange
PAN – Permanent Account Number
PPP – Public Private Partnership
RBI – Reserve Bank of India
RIDF – Rural Infrastructure Development Fund
RSP – Retail Sale Price
SAD – Special Additional Duty
SEZ – Special Economic Zone
SIDBI – Small Industries Development Bank of India
SLBC – State Level Bankers’ Committee
STP – Software Technology Park
TDS – Tax Deducted at Source
UIDAI – Unique Identification Authority of India
VAT – Value Added Tax
WDV – Written Down Value
44
Notes
Notes
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