THE INDIAN BUDGET

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THE INDIAN BUDGET Insights for the
International Business Community
NISHITH DESAI ASSOCIATES MARCH 02,2007
NISHITH DESAI ASSOCIATES www.nishithdesai.com nis
hith_at_nishithdesai.com

• Legal and Tax Counseling Worldwide

Mumbai Silicon Valley Bangalore
Singapore
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Agenda
Agenda

• Overview of Economy
• Indian Tax Regime
• Direct Tax Proposals
• Indirect Tax Proposals

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India Calling
INDIA ADVANTAGE

• GDP growth rate for 2006-07 9.2
• Inflation rate for 2006-07 5.5
• Rising young population
• Parliamentary form of Government
• Worlds largest democracy
• Worlds 4th largest economy
• Global recognition in IT and bio-
  technology
• Services sector contributing about 54 to
• GDP
• Largest English speaking nation in the
  world
• India-China, rising powers in Asia
• India could emerge as the world's fastest
  growing economy by 2020
• Bold and independent judiciary
• 70 of foreign companies make profit in
  India

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Indian Tax Regime

• Domestic company 33.66
• Foreign company (branch) 41.82
• Dividend distribution tax 14.025
• Capital gains tax 0 to
  41.82
• Withholding taxes 10.46 to
  41.82
• Minimum Alternate Tax 10.46 on book
  profits
• Fringe Benefits Tax 33.66 on
  specified value of certain fringe benefits

Some of the above tax rates could be reduced by
the tax treaties that India has entered into with
various countries
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Tax Structure

• Basic Tax Rate
• 
  
• Surcharge on basic tax rate
• Education Cess on basic tax rate and Surcharge

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Budget 07 Snapshots

• Changes in tax rates
• Fringe benefits tax (FBT) on ESOP
• Venture Capital Funds (VCF) tax pass through
  status
• Minimum Alternate Tax on STPs / EOUs
• RD incentives

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Personal Tax Rates

Inclusive of surcharge of 10 on income above
INR 1,000,000 and education cess of 3 (on tax
and surcharge) INR 145,000 for resident women
and INR 195,000 for resident senior citizens
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Corporate Tax Rates

• BASIC RATES
• Corporate tax
• continues at 30 on domestic companies
• continues at 40 on foreign companies
• Dividend Distribution Tax increased from 12.5 to
  15
• Minimum Alternate Tax continues at 10

BASIC RATES
EFFECTIVE RATES (inclusive of surcharge and
education cess)

• Corporate Tax
• 33.99 as against earlier 33.66 on domestic
  companies
• 42.23 as against earlier 41.82 on foreign
  companies
• Dividend Distribution Tax - 16.995
• Minimum Alternate Tax
• 11.33 for domestic companies
• 10.557 for foreign companies

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Flow of Dividends from India
TAX TREATMENT IN THE U.S.


Provided underlying tax credit is not available
in the US
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Fringe Benefits Tax

• Fringe benefits tax levied on certain specified
  value of fringe benefits provided to employees,
  payable by the employer such as for
• Entertainment
• Conference
• Sales promotion including publicity
• Tax payable by employer at 30 (plus surcharge
  and education cess) on value (as prescribed) of
  such benefits
• Tax not allowable as deduction to employer

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ESOP Sweat Equity

• Pre-Budget
• ESOP
• Single point taxation
• Employees taxable on capital gains on sale of
  shares
• Employees not taxable on perquisite at the time
  of exercise of options
• Sweat Equity
• Taxed in the hands of the employees at the time
  of issuance
• Post-Budget
• ESOP
• Employer subject to FBT on the difference between
  fair market value and exercise price
• Employee continues to be taxed on the sale of
  shares

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Capital Markets

• Domestic Financial Institutions permitted to
  short sell in securities provided transactions
  are settled by delivery
• Permanent Account Number made the sole
  identification number for all operations in
  capital markets
• Indian individuals permitted to invest in
  overseas securities through an Indian mutual fund
  
• Tax on income distributed by money market mutual
  funds and liquid funds increased to 25
• Income distributed by mutual funds (other than an
  equity oriented fund and money market or liquid
  fund)
• subject to income distribution tax at 12.5 in
  the case of individuals and HUFs
• subject to income distribution tax at 20 in all
  other cases

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Venture Capital Funds

• Pass through status accorded to SEBI registered
  VCFs restricted to only certain sectors
• nano-technology
• information technology relating to hardware and
  software development
• seed research and development
• bio-technology
• research and development of new chemical entities
  in the pharmaceutical sector
• production of bio-fuels
• building and operating composite
  hotel-cum-convention centres with seating
  capacity of more than three thousand
• dairy or poultry industry

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Fund Structure
Investors
MAURITIUS
Offshore Fund
INDIA
VCF
Portfolio Company
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STP / EOU / SEZ

• STPs / EOUs
• MAT to be levied on STPs/EOUs enjoying tax
  holiday under Section 10A and 10B
• SEZs
• 15 year tax holiday available to units set up in
  SEZs restricted to "new" units set up in the SEZs
• Only fresh investments envisaged in SEZs
• Conversion of existing STP units to SEZ units may
  not be possible

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Pharmaceuticals

• Extension of weighted deduction to March 31, 2012
  for expenditure incurred on approved in-house
  research and development facility
• Clinical trials on new drugs excluded from the
  purview of service tax
• No extension of 10 year tax holiday available to
  Research and Development companies under Section
  80IB(8A), in case approval not obtained before
  March 31, 2007

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Real Estate Infrastructure

• Real Estate
• No extension of tax holiday to real estate
  developers on income derived from housing
  projects approved on or after April 1, 2007
• Rentals from immovable property let for
  commercial use subject to service tax
• Infrastructure
• Mutual Funds allowed to launch dedicated
  infrastructure funds
• 10 year tax holiday under Section 80-IA extended
  to cross country natural gas distribution
  network, and storage facilities integrated to the
  network and to navigation channel in the sea
• Tax holiday available to infrastructure units,
  which undergo merger or demerger after March 31,
  2007 withdrawn

Sector Specific
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Hotels Airlines

• Hotels
• New 5-year tax holiday introduced for convention
  centers and hotels
• Hotels must be 2, 3 or 4 star hotels as
  classified by the Central Government
• Must be constructed in Delhi and specified
  adjacent districts
• Must become operational between April 1, 2007 and
  March 31, 2010
• Airlines
• Withholding tax exemption on lease rentals paid
  on lease of aircrafts not extended beyond March
  31, 2007

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Customs Duty

• Peak rate of customs duty on non agricultural
  products reduced to 10 from the existing 12.5,
  with a few exceptions
• Aircraft Industry Customs duty of 3 along with
  countervailing duty of 16 special additional
  duty of customs of 4 imposed on import of
  aircraft
• Gems Jewellery Customs duty on cut polished
  diamonds - reduced to 3 from 5
• Dredging Import of dredgers exempted from
  customs duty
• Petrol diesel Ad valorem customs duty on
  petrol diesel reduced from 8 to 6

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Service Tax

• Rate Increased from 12.24 to 12.36
• Exemptions
• The threshold exemption from service tax to small
  service providers increased from INR 400,000 to
  INR 800,000
• Services relating to clinical trials on new drugs
• Following new services have been included
• Design Services in relation to the Commercial
  Sector
• Content Development for Mobile
  Telecommunication Industries
• Telecom Industry
• Management Services
• Asset Management services provided by Individuals
• Commercial Leasing Services
• Works Contracts (Turnkey projects etc)
• Services relating to the mining of mineral, oil
  or gas

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Road Ahead

• New comprehensive tax code
• Limited Liability Partnership Act
• FII taxation
• Anti-abuse provisions
• Renegotiation of India-Mauritius tax treaty
• Introduction of Goods and Service Tax regime in
  April 2010

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