Budget 2008 Analysis: Ernst & Young
Indirect tax:
General CENVAT rate reduced from 16 to 14 per cent and CST rate reduction announced, step in the right direction for introduction of GST by the year 2010. Mixed reaction expected from the software industry with increase in excise duty from 8 to 12 per cent on packaged software and similar announcement of levy of service tax at 12 per cent on customized software, silver lining of neutralizing input CENVAT and possible refund to exporters. Key focus appears to be on service tax, with several changes proposed. Threshold limit of exemption increased from Rs 8 to 10 lacs per year, likely to be a welcome move for small and medium service providers.
Adoption of PAN as uniform identification:
Adopting PAN as a uniform identification document in all financial markets will remove the unnecessary bother that different KYC identification documents created for constituents. However, it is essential that issuance and post-issue monitoring of PAN cards be strengthened to ensure identification of persons carrying multiple PANs.
waiver of loans to farmers:
The aggregate profits of all scheduled commercial banks in
Oil & Gas:
Removal of tax holiday for refining activities would adversely impact downstream activities although reduction in customs duty on project imports will encourage infrastructure development in the oil and gas sector e.g. pipelines, LNG terminals etc. As regards upstream, service tax continues to apply on exploration services in spite of the widespread need to boost exploration for oil and gas. Lastly, there is a positive step forward as regards transparency on oil bonds.
▪ FM accelerates the growth in Auto Industry by further reduction and rationalization of duties
▪ Small cars, two/three-wheelers & buses become cheaper due to reduction of excise duty from 16% to 12%
▪ A strong boost to Hybrid & Electric car segment by reduction (24% to 14%) & elimination of excise duty (8% to nil) respectively
▪ Weighted deduction of 125% to significantly benefit the outsourcing of R&D in the automobile sector
Pharmaceuticals and Biotechnology Industry:
Impetus provided to the industry by reducing excise duty to 8% on all drugs, customs duty concession on life saving drugs and tax holiday for new hospitals.
Budget 2008 has not brought much cheer to the aviation industry, except exempting import of helicopter simulators from basic customs duty. On the other hand, leasing of aircraft could be liable to service tax where VAT is not applicable.
Telecom Industry:
The telecom industry would surely be disappointed with the budget proposals. Non of their demands have been met. There is neither any reduction/rationalization in the tax incidence nor has the demand for tax holiday for new entrants and facilitation of tax neutral reorganization/consolidation by permitting tax holiday on transfer of a telecom undertaking through mergers/demergers, been met. Instead the cost of owning a mobile phone may marginally go up with the levy of 1 percent NCCD on mobile phones.
Power Sector:
▪ Sector to benefit from National Fund proposed for transmission and distribution reform projects
▪ 4th UMPP to be awarded shortly and bidding urged for 5 more UMPPs is a positive
▪ Withdrawal of exemption of special CVD of 4% on imports for non-mega power projects and high voltage transmission projects would increase project costs
▪ Enhanced outlay on following initiatives is a positive
▪ Rs 800 crores for Accelerated Power Development and Reforms projects
▪ Rs 5500 crores for Rajiv Gandhi Gramin Vidyutikaran Yojana
▪ Increase in the composition scheme service tax rate from 2 percent to 4 percent likely would increase construction costs
Retail Sector:
Supply Chain: Excise duty has been proposed to be fully exempted on specified refrigeration equipment for the installation of cold storage, cold room, or refrigerated vehicle on end use basis.
Packaging: Excise duty reduced from 16% to 8% on packaging material in open top sanitary (OTS) cans, aseptic packaging paper and aseptic bags
Food industry: Excise duty on specified prepared food items reduced from 16% to 8%
Shop in Shop - Service tax: Clarification on permitting use of space in any immovable property to qualify as renting of property liable to service tax
General:
1. General rate of excise duty has been reduced from 16% to 14%
2. Proposed amendment in section 35D seeks to extend the benefit of amortization of preliminary expenses to players in FMCG
3. Proposed amendment in section 115O seeks to abolish double taxation of dividend. However, this is beneficial only for companies having one tier structure.
4. Fringe Benefit tax provisions relaxed for certain expenses
5. New service category under service tax - Information Technology Software Services - this will have an impact on customized software
Mining:
Appointment of coal regulator is a welcome step. Custom duty has been reduced from 5% to 0% for iron, steel and aluminum scrap. Further, increase in export duty on chrome ore (from Rs 2000 per mt to Rs 3000 per mt) will increase its availability for domestic users.
Hospitality Industry:
▪ 100% tax holiday for five years provided in respect of new hotels (2, 3 & 4* category) located in specified district with a world heritage site (total 22 district to benefit) during 5 year period between April 1, 2008 and March31, 2013.
▪ Avoidance of double taxation of dividend income, though limited to only one tier structure only.
▪ Service tax hiked from 2% to 4% in respect of Works Contract under the Composition Scheme.
▪ Services of a travel agent, located outside
▪ The use of gensets, cars, dumpers, any other equipment taken hire and not attracting VAT would now attract service tax.
Real Estate:
Overall, the Budget is positive for real estate industry with measures such as tax exemption on reverse mortgage income, tax incentives to hospitals and hotels, elimination of double dividend taxation in case of holding companies. The much awaited REIT taxation seems to have escaped the radar of the Finance Minister.
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