singrodia goyal & co. booklet 2010.pdfindia budget – 2010 3 the implementation of the goods...

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INDIA BUDGET – 20101

Singrodia Goyal & Co.

INDEX

Foreword...................................................................................... 02

Budget Highlights ........................................................................ 04

Economic Outlook ....................................................................... 08

Direct Tax Proposals ................................................................... 12

Indirect Tax Proposals

Service Tax ........................................................................... 19

Central Excise ...................................................................... 23

Custom Duty ........................................................................ 29

Capital Market ............................................................................. 34

Sector Analysis ............................................................................ 37

�Singrodia Goyal & Co.


FOREWORD

For a man who presented Union Budgets in the early 1980s and who hasdone so now, as the first decade of the current century turns a corner, it wasonly reasonable to expect that our Honourable FM Pranabda espousescontinuity with change. The same ethic has formed the core principle of theUnion Budget for 2010-11. First we saw Sachin Tendulkar in action on thefield and now the FM; this surely is a week for veterans to dazzle with theirdeft footwork.

Given the political constraints and the fledging nature of the economicrecovery, the budget for 2010-11 appears to be imaginatively crafted blendingrealism with rhetoric and modest effort at resource mobilization with selectivetax reliefs.

With only a modicum of additional resource mobilization – a mere Rs. 20,500crore – FM relies heavily on an economic growth of 9% and more – his 3basic objectives being higher growth trajectory, moving towards fiscalconsolidation and inclusive growth and do all this while keeping a keen eyeon inflationary pressures. By the same token, the ratio of revenue deficit toGDP is sought to be pruned to 4% from 5.3% this year and the fiscal deficit-GDP ratio to 5.5% from 6.9%. The FM has managed to limit governmentborrowings to Rs. 3.45 Lakh Crore is also positive as the market wasexpecting this to be somewhere around Rs. 4 Lakh Crore. The reducednumber leaves enough headroom for private sector borrowings.

Disinvestment is to get a boost and spending on infrastructure & energy willaccelerate, both are positive moves and will add further depth to the market.Some of FM’s policy moves were long overdue and are most welcome. Theseinclude the promise of a comprehensive FDI Regulation, rationalizing thesubsidy system, a Coal Regulatory Authority is mooted as also a FinancialSector Legislative Reforms Commission to clean up and rewrite the laws inthis area. Implementing these in a time bound manner would now be the keyto ensuring a sustainable growth rate of over 8%.

The budget has also wisely extended interest sub-vention on pre-shipmentcredit to key export-oriented segments. Greater investment in agriculture asenvisaged in the budget is welcome. Higher allocation to key flagshipprogrammes including National Rural Employment Guarantee Scheme andBharat Nirman components would give a strong boost to the rural economy.

The FM’s announcement of granting Banking licences to additional privateplayers including NBFCs, if they meet the criteria laid down by RBI would goa long way towards financial inclusion and expanding reach of bankingservices.

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The implementation of the Goods & Services Tax (GST) Regime will be inplace only by April 2011 meaning that Excise Duty and Service Tax rates hadto be aligned. The same has been attempted in the Budget through theraising of Excise duty rates to 10% and retaining the service taxes at thesame level.

The budget also carries a tinge of bitter medicine. With the economic recoveryunderway and as part of the fiscal consolidation process, the budget hasrestored the basic duty on crude oil, diesel and petrol and the Central Exciseon diesel and petrol is jacked up by Re. 1 per litre. (effective hike in thehands of consumers is likely to be more than Rs. 2.50 per litre) which willhave cascading effect and may be counter productive to the inflationcountering measures.

Again, the decision to implement the Direct Tax Code by April 2011 will helpin improving the efficiency of the Taxation system and will help boost growth.While formulating the tax proposals FM stated that he is guided by theprinciples of sound tax administration as embodied in the following words ofKautilya “Thus, a wise Collector General shall conduct the work ofrevenue collection…in a manner that production and consumption shouldnot be injuriously affected….financial prosperity depends on publicprosperity, abundance of harvest and prosperity of commerce amongother things.”

In this backdrop there are reliefs galore in regard to Direct Taxes, by broad-basing the Direct Tax slabs and by reducing the surcharge from corporateincome tax, the FM has left higher disposable income in the hands of bothhousehold as well as the corporate sector. This will lead to enhancedspending and investment which can only add to the growth story. However,the MAT rate has been hiked by 3% and may increase tax outgo.

To be fair to the FM, it is true that wish-lists never end and one could go onand on. However, the last year had been a fairly testing time for the generalpublic, with recession looming over the salaried and business classes alike.Prices have spiralled like never before and managing household expenses hasbeen really challenging. Under these circumstances, the FM has performed adeft balancing act – all have something to be happy about and not manyhave serious reservations. To sum up this –

A pragmatic budget will help propel India into next growth orbit while providingfor a more inclusive model of development. And safely we can say, for thetime being, “AAL is well”.

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BUDGET HIGHLIGHTS

General

• Target high GDP growth path of 9% and find the means to cross the“double digit growth barrier”

• Fiscal deficit in 2010-11 is pegged at 5.5% of GDP

• Rolling targets for fiscal deficit are pegged at 4.8% and 4.1% for 2011-12and 2012-13 respectively

• Implement Direct Tax Code and Goods & Service Tax (GST) by01/04/2011.

• Raise Rs. 25,000 crore in Financial Year 2010 from PSU disinvestment

• RBI is considering to provide some additional Banking licences to privatesector including NBFCs

• Number of steps taken to simplify the FDI regime

• Target for agriculture credit flow for the year 2010-11 isRs. 3,75,000 crore

• Extension of farm loan waiver scheme by 6 months up to30/06/2010

• Rs. 1,73,552 Crore allocated for Infrastructure Development

• Road Development allocation hiked to Rs. 19,894 Crore from Rs. 17,520Crore

• Rs. 16,752 Crore provided for Railways, Rs. 950 Crore more than lastyear

• Allocation for power sector doubled from Rs. 2,230 Crore in 2009-10 toRs. 5,130 Crore in 2010-11

• Allocation for school education increased by 16% to Rs. 31,036 Crore

• Appropriate Banking Facilities to be provided to habitations havingpopulation in excess of 2000 by March, 2012

• Rs. 66,100 Crore allocated for rural development, Rs. 40,100 Crore forNational Rural Employment Scheme and Rs. 48,000 Crore for BharatNirman

• National Social Security Fund for unorganized sector worker to be set upwith an initial allocation of Rs. 1,000 Crore

• Government to contribute Rs. 1,000 per year to each National PensionScheme account opened under a new initiative “Swavalamban” byworkers in the unorganized sector

• Extensive skill developments programme in the textile and garment

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sector to be launched to train 30 Lakh persons over 5 years

• Rs. 1,900 Crore allocated to the Unique Identification Authority of India

• Allocation for Defence increased to Rs.1,47,344 Crore includingRs. 60,000 Crore for capital expenditure

• The total expenditure proposed in the Budget Estimates is Rs. 11,08,749Crore which is an increase of 8.6% over the last year.

Direct Tax

• Substantial relief in Tax Slabs for Individual/HUF/AOP/BOI etc.

• Surcharge in case of Domestic Company reduced to 7.5% from 10%

• Hike in MAT rate from 15% to 18%

• Introduction of form Saral - II with a view to simplify return filing

• Additional deduction of Rs. 20,000 u/s. 80CCF for investment in longterm infrastructure bonds

• Investment linked incentive to the hotel sector up to 100% on certaincapital expenditure

• Threshold limit for audit u/s 44AB increased from Rs. 40 Lakhs to Rs. 60Lakhs, in case of business and from Rs. 10 Lakhs to Rs. 15 Lakhs, incase of profession

• Threshold limit for deduction of TDS increased in case of rent, paymentsto contractors etc.

• Allowance of expenses if TDS payment made on or before due date forfiling of return

• Conversion of private company or an unlisted public company into LLPexempted from Capital Gain

• Relaxation in the provision of 80-IB(10) for housing projects havingcommercial construction

• Transfer of shares of unlisted companies to firms or companies forwithout consideration or inadequate consideration is includible in incomeu/s 56

• Scope of Settlement Commission extended to search, seizure,reassessment cases and the time limit for passing order extended from12 months to 18 months.



Indirect Taxes

Service Tax

• Rate of tax on services retained at 10% to pave the way forward forGST.

• Service tax would be levied on 8 new services.

• Renting is now covered under service tax net by modification in thedefinition with retrospective effect.

• Activity of construction would be deemed to be a taxable serviceprovided by the builder/promoter/developer to the prospective buyerunless the entire consideration for the property is paid after completion ofconstruction (i.e., after receipt of completion certificate from thecompetent authority).

• Transport by rail to be covered under the service tax net.

• The transportation by road of grains, cereals and pulses to be exemptedfrom service tax.

• Process of refund of accumulated credit to exporters of services,especially in the area of Information Technology and Business ProcessOutsourcing, made easy by making necessary changes in the definitionof export of services and procedures.

Central Excise

• Central Excise duties partially rolled back and the standard rate on allnon-petroleum products enhanced from 8% to 10% ad valorem.

• Small-scale manufacturers would be permitted to take full credit ofCentral Excise duty paid on capital goods in a single installment in theyear of their receipt. Secondly, they would be permitted to pay CentralExcise duty on a quarterly, rather than monthly, basis.

• Central Excise duty on petrol and diesel enhanced by Re. 1 per litreeach.

• Clean energy cess on coal produced in India at a nominal rate of Rs. 50per ton to be levied. This cess will also apply on imported coal.

• The specific rates of duty applicable to portland cement and cementclinker adjusted upwards proportionately.

• Duty rate is reduced from 8% to 4% on certain items such as LED lights,corrugated boxes, latex rubber thread, replaceable kit for household typewater filters and certain energy saving goods

• Full exemption given from excise duty to ‘trailers and semi-trailers usedin agriculture’.

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Custom Duty

• Restored basic custom duty of 5% on crude petroleum; 7.5% on diesel /petrol and 10% on other refined products

• Basic customs duty on gold ore and concentrates reduced from 2% advalorem to a specific duty of Rs.140 per 10 grams of gold content withfull exemption from special additional duty

• Outright exemption from special additional duty provided to goodsimported in a pre-packaged form for retail sale including mobile phones,watches and ready-made garments

• Medical equipments and accessories with some exception will attract 5%basic custom duty, 4% CVD/excise duty and Nil special additional duty ofcustoms (i.e., effective duty @ 9.2%)

• In case of importing digital masters of films, music and gaming softwareimported for duplication or distribution loaded on electronic medium,customs duty to be charged only on value of the carrier medium.

• Value limit on duty-free import of commercial samples as personalbaggage enhanced to Rs. 3.00 Lakh p.a.

• Concessional rate of basic custom duty of 5% for machinery for initialsetting up of solar power generation projects.

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ECONOMY OUTLOOK

Economic Survey 2009-10

Overview

The fiscal year 2009-10 began as a difficult one. There was a significantslowdown in the growth rate in the second half of 2008-09, following thefinancial crisis that began in the industrialized nations in 2007 and spread to thereal economy across the world. The growth rate of the gross domestic product(GDP) in 2008-09 was 6.7%, with growth in the last two quarters hoveringaround 6%. There was apprehension that this trend would persist for sometime, as the full impact of the economic slowdown in the developed worldworked through the system. It was also a year of reckoning for thepolicymakers, who had taken a calculated risk in providing substantial fiscalexpansion to counter the negative fallout of the global slowdown. Inevitably,India’s fiscal deficit increased from the end of 2007-08, reaching 6.8% (budgetestimate, BE) of GDP in 2009-10. A delayed and severely subnormal monsoonadded to the overall uncertainty. The continued recession in the developedworld, for the better part of 2009-10, meant a sluggish export recovery and aslowdown in financial flows into the economy. Yet, over the span of the year,the economy posted a remarkable recovery, not only in terms of overall growthfigures but, more importantly, in terms of certain fundamentals, which justifyoptimism for the Indian economy in the medium to long-term.

Prices and Monetary Management

The movements in the rate of inflation reflect changes in demand and supplyconditions in the economy. Inflation management therefore, involves controllingthe demand situation as well as reining in inflationary expectations throughvarious monetary measures. On the supply side it would encompass variousadministrative and fiscal measures.

The subsequent global economic meltdown starting September 2008 reversedthe trend and WPI inflation slipped into negative territory during June to August2009. This was due to the decline in commodity prices globally and the baseeffect. As regards food inflation, the upswing noticed in the first quarter of2008-09, continued during 2009-10 due to unfavourable south-west monsoon,the worst since 1972. Though the current spectre of double-digit inflation in foodarticles is ascribable to supply-side constraints, it is necessary to ensure thatthe monetary policy stance does not lead to pressure on prices.

The RBI has, therefore, initiated calibrated changes in rates to mop up theprevalent excess liquidity in the system through the second and third quarterreviews wherein increases in statutory liquidity ratio (SLR) and cash reserveratio (CRR) respectively were announced. Suitable fiscal and administrative

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measures are also being taken by the Government to contain the food priceinflation and preventing it from spilling over to generalized inflation.

Industry – Manufacturing

Industry, especially manufacturing, was one of the key drivers of thetransformation in the growth trajectory of the Indian economy witnessed duringthe post-2000 period. However, a cyclical slowdown began in the industrialsector in 2007-08 and was compounded by the twin global shocks in 2008-09.The effects lingered on briefly in the current fiscal, but growth rebound is nowamply evident. GDP growth has clearly revived in the second quarter of thecurrent year and the industrial sector has emerged as one of the prime moversof the process.

Energy, Infrastructure and Communication

In tandem with the pick-up in overall industrial growth, core industries andinfrastructure services have also evinced signs of recovery with easing ofsupply bottlenecks in certain sectors and demand recovery in others. Therobust growth momentum in telecommunications, particularly the wirelesssegment, continues with monthly additions exceeding 17.6 million connections.Core industries like power, coal and other infrastructure like ports and roads arealso reviving. Available evidence points to a steady revival of flows of investibleresources. There is need to develop infrastructure to complement and sustainthe economic growth momentum. Efforts – legislative, administrative andexecutive – are on to minimize the infrastructure deficit, ameliorate bottlenecksin completion of projects and nurture core industrial.

Agriculture and Food Management

Good monsoon between 2005-06 and 2008-09 and the efforts of our farmersled to consistent increase in food production during the period and a recordproduction of 233.88 million tons of food grains in 2008-09. Notwithstanding thefact that the south-west monsoon was deficient by 23% compared to the longperiod average (LPA), the overall agricultural GDP is estimated to have fallenby only 0.2% in 2009-10 (advance estimates) as against the previous yearsgrowth rate of 1.6%. Food grain area sown in kharif season declined by 6.5%compared to last year and food production is expected to be short by 16%compared to the fourth advance estimates of 2008-09. Rising food prices,spurred by expectations of shortfall in food production, have brought the issuesof food security, food stocks management and need for improving foodproduction and productivity to the forefront of national strategy.

Micro, Small and Medium Enterprises (MSMEs)

As per the 4th All India Census of MSMEs (2006-07), there were 26 millionMSMEs in the country, which provided employment to about 60 million persons.Of the total, 28% were in the manufacturing sector and 72% in the servicesector.


INDIA BUDGET – 20101 0

MSMEs contribute about 8% of the GDP of the country, about 45% ofmanufactured output and about 40% of exports. This, coupled with a highlabour to capital ratio, high growth and high dispersion makes them crucial forachieving the objective of inclusive growth.

Financial and Credit Markets

The money market remained by and large orderly during 2009-10, due to theprevailing surplus liquidity conditions. During 2009-10, the banking system’scredit to the Government was the major driver of growth in broad money. Alsoduring 2009-10, overall banks credit recorded an increase of 8.4% from theprevious year.

Exports – Merchandise, Service and SEZ Exports

The global recession has jolted the continued upward growth of merchandiseexports with initial estimates showing a growth rate of only 3.6% for 2008-09 asstated in last year’s Economic Survey. However, according to revised figures,export growth in 2008-09 stands at a respectable 13.6%, indicating that Indiahad weathered the crisis better than other countries.

While the export growth rate was a negative 22.3% in April-November 2008-09,in November 2009, it became a positive 18.2% after a 13-month period ofnegative growth.

India, which is moving towards services dominated GDP growth with a 9%CAGR for services, is also moving towards a services-dominated export growthwith a CAGR of 28.7% for services during 2000-01 to 2006-07 which is higherthan the 19% for merchandise exports during the corresponding period.Services exports reached USD 102 billion in 2008-09 with a moderate growth of12.5% over the previous year.

Physical exports from the SEZs have increased by 50% to Rs. 99,689 Crore in2008-09 with a CAGR of 48.4% during 2003-04 to 2008-09 . Exports during thefirst three quarters of the current year have been to the tune of Rs. 1,51,785Crore.

Balance of payments

There has been improvement in the Balance of Payments (BoP) scenarioduring H1FY10 over H1FY09, reflected in higher net capital inflows and lowertrade deficit. However, India’s current account position during H1FY10 continuedto reflect the impact of the global economic downturn and deceleration in worldtrade witnessed since H2FY09. The revival in capital flows witnessed duringQ1FY10 gathered momentum during Q2FY10 and the resilience of FDI inflows(USD 17.5bn in FY09) reflected the growing perception of India as one of thefavourite long-term investment destinations.

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As per the Economic Survey, FY10, three major developments have taken placein the area of foreign exchange reserves management. These are (i) Investmentof foreign exchange reserves in infrastructure projects (ii) IMF’s allocation ofSDRs to member countries including India (of SDR Euro 3 bn equivalent to USD4.8bn) and (iii) the purchase of gold from the IMF by the RBI

Outlook for 2010-11

There are several factors that have emerged from the performance of theeconomy in the last 12 months, which, combined with an analysis ofperformance over the last couple of years, augur well for the Indian economy.In the medium term it is reasonable to expect that the economy will go back tothe robust growth path of around 9% that it was on before the global crisisslowed it down in 2008.

Second, Indian exports have recorded impressive growth in November andDecember 2009 and early indications of the January 2010 data on exports arealso encouraging. Further, infrastructure services, including railway transport,power, telecommunications and, more recently but to a lesser extent, civilaviation, have shown a remarkable turnaround since the second quarter of2009-10.

Hence, going by simple calculations based on the above-mentioned variables,coupled with the fact that agriculture did have a set-back this year and is onlygradually getting back to the projected path, a reasonable forecast for the year2010-11 is that the economy will improve its GDP growth by around 1% fromthat witnessed in 2009-10.

It is entirely possible for India to move into the rarefied domain of double-digitgrowth and even attempt to don the mantle of the fastest-growing economy inthe world within the next four years.

Conclusion

The fiscal expansion undertaken by the Central Government as a part of thepolicy response to counter the impact of the global economic slowdown in2008-09 was continued in fiscal 2009-10. The expansion took the form of taxrelief to boost demand and increased expenditure on public projects to createemployment and public assets. The stance of monetary policy for the remainingperiod of 2009-10 would be to: (i) maintain a monetary and interest rate regimeconsistent with price stability and financial stability, and supportive of the growthprocess; (ii) keep a vigil on the trends in inflation and be prepared to respondswiftly and effectively through policy adjustments to stabilize inflationexpectations; and (iii) monitor the liquidity situation closely and manage itactively to ensure that credit demands of productive sectors are adequately metwhile also securing price and financial stability.

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DIRECT TAX PROPOSALS

1. Threshold Limit/Rates of Tax

a. Individual, HUF, Association of Persons or Body of Individuals

– Basic exemption limits and the rates of income tax willcontinue to be the same as those specified for A.Y.2010-11. However taxable income slabs are revised. Nosurcharge shall be levied and Education Cess @ 2% andSecondary & Higher Education Cess @ 1% shall continuedto be charged over and above the tax. Thus, the effectivetax rate on different type of assessees shall be as under :-

Taxable Income Slab Tax Rates as per(Rs.) Assessee’s Category

General Women Senior Citizen

Up to 1,60,000 NIL NIL NIL

1,60,001 – 1,90,000 10.30% NIL NIL

1,90,001 – 2,40,000 10.30% 10.30% NIL

2,40,001 – 5,00,000 10.30% 10.30% 10.30%

5,00,001 – 8,00,000 20.60% 20.60% 20.60%

8,00,001 and Above 30.90% 30.90% 30.90%

b. Firms:

– No change in tax rate.

– No surcharge shall be levied.

– Education Cess @ 2% and Secondary & Higher EducationCess @ 1% shall be continued to be charged over andabove the tax. The effective tax rate shall be 30.90%

c. Corporate:

– No change in tax rate on income of domestic as well asforeign company.

– Surcharge leviable on domestic company is proposed to bereduced to 7.5% from 10%. In the case of foreign company,surcharge @ 2.5% shall be continued to be charged.Education Cess @ 2% and Secondary & Higher Education

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Cess @ 1% shall be continued to be charged over andabove the tax. Thus the effective tax rate shall be as under:

Assessee Category Total Income Total Income<= Rs.1 crore > Rs.1 crore

Domestic Company 30.90% 33.22%

Foreign Company 41.20% 42.23%

– Minimum Alternative Tax (MAT) chargeable on book profit@15% has been increased to 18%. Thus effective taxunder the MAT shall be as under:

Assessee Category Total Income Total Income<= Rs.1 crore > Rs.1 crore

Domestic Company 18.54% 19.93%

Foreign Company 18.54% 19.00%

– No change in Dividend Distribution Tax (DDT). Currenteffective rate of DDT shall be 16.61%

2. Business Incomea. Disallowance of expenditure on account of non compliance

with TDS provisions – Section 40(a) (ia) (w.e.f. A.Y. 2010-11)– It is proposed to provide that no disallowance of

expenditure like interest, commission, brokerage,professional fees etc. will be made if tax on suchexpenditure has been deducted at source during theprevious year and the same has been paid on or before thedue date of filing of return of income.

b. Threshold limit for turnover under sections 44AB and 44AD– It is proposed to increase the threshold limit for mandatory

audit of accounts of an assessee from Rs. 40 Lakh toRs. 60 Lakh in case of business and from Rs.10 Lakh toRs. 15 Lakh in case of profession.

– Similarly, in case of presumptive taxation u/s 44AD forbusiness other than goods carriage, the threshold limit oftotal turnover or gross receipts has been proposed to beincreased from Rs. 40 Lakh to Rs. 60 Lakh.

c. Deduction for developing and building housing projects –Section 80-IB (10) (w.e.f. A.Y. 2010-11)– In respect of the ongoing projects approved on or after

01/04/2005, the following relaxations have been proposed:



i) Time limit for completion of project has beenextended from 4 years to 5 years from the end offinancial year in which approval is granted.

ii) Construction of shop and other commercial area isallowed up to 3% of the total built up area or 5000sq. ft. whichever is more, as against 5% of total builtup area or 2000 sq. ft. whichever is less.

d. Deduction of profits of a hotel or a convention centre in theNational Capital Region– The due date for setting up 2, 3 or 4 star hotels or

convention centre has been proposed to extend from31/03/2010 to 31/07/2010 so as to be eligible for deductionu/s 80-ID.

e. Increase in weighted deduction for scientific research anddevelopment– With a view to promote the corporate sector to invest in in-

house research, it is proposed to increase the weighteddeduction u/s. 35(2AB) from 150% to 200% of theexpenditure incurred on scientific research (other than costof land or building) or in-house research and developmentfacility.

– It is also proposed to increase the weighted deduction u/s.35(1)(ii) from 125% to 175% being contributions to scientificresearch association or university, college or otherinstitution to be used for scientific research.

f. Investment linked incentive to the hotel sector – Section35AD– It is proposed to provide investment linked incentive to the

hotel sector, irrespective of location by way of 100%deduction of capital expenditure (other than on land,goodwill and financial instrument) incurred wholly andexclusively for the purpose of building and operating a newhotel of two-star or above category, anywhere in India,which starts functioning on or after 01/04/2010. Thededuction is proposed to be allowed during the previousyear in which such expenditure is incurred.

3. Other Incomea. Taxation of certain transaction without or for inadequate

consideration – Section 56 (w.e.f. 01/06/2010)– It is proposed to include within the ambit of section 56, the

transfer of shares of a company (not being a company in

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which public is substantially interested) either for inadequateconsideration or without consideration where the recipient /trasferee is a firm or a company (not being a company inwhich public is substantially interested). However, businessreorganization, amalgamation and demergers have beenkept out of the purview of this amendment.

– It is also proposed to exclude the transactions ofimmovable property for inadequate consideration from thepurview of section 56. However, it is proposed to includebullion in the definition of “Property”, hence any transactionof bullion with inadequate consideration or withoutconsideration is liable to be taxed as income in the handsof the recipient.

– It is clarified that the intent is not to tax the transactionentered into normal course of business or trade, the profitsof which are taxable under specific head of income. It istherefore proposed to apply the provisions of section56(2)(vii) to Capital Assets only and thereby to excludestock-in-trade, raw material and consumable stores of anybusiness from the definition of property for the purpose ofsection 56.

4. Tax Deduction at Source (TDS)a. Interest for non-payment of TDS – u/s. 201(1A)

(w.e.f. 01/07/2010)– It is proposed to increase the rate of interest from 1% per

month to 1.5% per month in case of failure to deduct tax ordelay in payment of tax after deduction.

b. Threshold limit for deduction of tax (w.e.f. 01/07/2010)– It is proposed to raise the threshold limit for payments

mentioned in sections 194B, 194BB, 194C, 194D, 194H,194-I and 194J as follows:

Section Nature of Payment Existing ProposedLimit (Rs.) Limit (Rs.)

194B Winning from lottery or crossword puzzle 5,000 10,000194BB Winning from horse race 2,500 5,000194C Payment to Contractor 20,000 30,000

(for a single transaction)194C Payment to Contractor (in aggregate) 50,000 75,000194D Insurance commission 5,000 20,000194H Commission or Brokerage 2,500 5,000194-I Rent 1,20,000 1,80,000

194J Fees for professional or technical services 20,000 30,000



c. Certificate of Tax Deduction at Source (TDS) and TaxCollection at Source (TCS)

– Earlier, it was provided to dispense with the requirement offurnishing TDS and TCS certificates w.e.f. 01/04/2010.Considering the fact that the TDS/TCS certificate constitutesan important document for the deductee/collectee, it isproposed to continue with the requirement to furnish TDS/TCS certificates along with return of income for claimingcredit of taxes paid.

5. Other Proposals:

a. Definition of charitable purpose – Section 2(15)

– With retrospective effect from A.Y. 2009-10, it is proposedto provide that “the advancement of any other object ofgeneral public utility” shall continue to be a “charitablepurpose” if total receipt from such activity do not exceedRs. 10 Lakh.

b. Income deemed to accrue, arise in India – Section 9

– For the purpose of taxability of income by way of Interest,Royalty & Fees for Technical Services, it has been providedto further clarify that such income shall be deemed toaccrue or arise in India and will be included in his totalincome whether or not

i. The Non-Resident has a residence or place ofbusiness or business connection in India or

ii. The Non-Resident has rendered services in India.

– The amendment is proposed to be effective retrospectivelyfrom A.Y. 1977-78.

c. Cancellation of Registration of Trusts – Section 12AA (w.e.f.01/06/2010)

– It is proposed to clarify that the Commissioner has power tocancel the registration of the Trust or Institution registeredu/s 12A if its activities are found to be non genuine or notin accordance with the objects under which such trust orinstitution was established.

d. Deduction in respect of long-term infrastructure bonds –Section 80CCF

– It is proposed to allow Individual and HUF, additionaldeduction of Rs. 20,000 on investment in long-terminfrastructure bonds. This additional deduction is over and

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above Rs.1,00,000 available presently u/s 80C for payment/ investment for specified purposes.

e. Medical insurance premium – Section 80D

– It is proposed to allow deduction within the present limits, inrespect of any contribution made to the Central GovernmentHealth Scheme under section 80D.

f. Increase in maximum penalty – Section 271B

– It is proposed to increase maximum penalty leviable undersection 271B for failure to get accounts audited u/s. 44ABfrom Rs.1,00,000 to Rs.1,50,000.

g. Document Identification Number – Section 282B

– The requirement of allotting a unique DocumentIdentification Number to every document, letter or anycorrespondence issued by any income-tax authority to anyother income-tax authority or assessee has been proposedto be postponed from 01/10/2010 to 01/07/2011.

h. Conversion of Companies into Limited Liability Parnership(LLP)

– It is proposed to exempt the transfer of assets onconversion of a private company or an unlisted publiccompany into an LLP for the purposes of capital gains taxunder section 45 subject to following conditions:

i) The total sales, turnover or gross receipts inbusiness do not exceed Rs. 60 Lakhs in any of thethree preceding previous years.

ii) Shareholders of the company become partners inLLP in same proportion of their shareholding in thecompany.

iii) No consideration arises to partners except theirshare of profit and capital contribution.

iv) The erstwhile shareholders continue to be entitled toreceive at least 50% of the profits of the LLP for aperiod of 5 years from date of conversion.

v) All assets and liabilities of the company become theassets and liabilities of LLP.



vi) No amounts are paid out of the accumulated profit ofthe company to any partner either directly orindirectly for a period of 3 years from date ofconversion.

vii) Aggregate depreciation allowable to the predecessorcompany and successor LLP shall not exceed thetotal depreciation had the conversion not taken place.

viii) Actual cost of the block of assets in case of thesuccessor LLP shall be the WDV of the block ofassets as in case of predecessor company on dateof conversion.

ix) Cost of acquisition of the capital asset for thesuccessor LLP shall be the cost for whichpredecessor company acquired it.

x) Tax credit u/s. 115JAA shall not be allowed to thesuccessor LLP

– It is proposed to allow the carry forward and set-off ofbusiness loss and depreciation to the successor LLP.

i. Provisions in relation to Settlement Commission

– With effect from 01/06/2010, the scope of cases which canbe filed before Settlement Commission are proposed toinclude the proceedings for assessment/reassessmentresulting from search or requisition of books of account orother documents/assets.

– It is also proposed to increase the amount of additionalincome tax payable for application before SettlementCommission from Rs. 3 Lakh to Rs.10 Lakh (Rs.50 Lakh incase of proceedings resulting from search.)

– With effect from 01/06/2010, it is proposed to extend thetime limit for passing an order in respect of applicationmade from 12 months to 18 months.

j. Power of the High Court to condone delay in filing of appeals

– It is proposed to clarify that the High Court may admitappeal after the expiry of 120 days, if there is sufficientcause for delay in filing.

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INDIRECT TAX PROPOSALS

1. Service Tax

a. New services included in the Service Tax net

(Applicable from date of notification after enactment of FinanceBill, 2010)

– Service of permitting commercial use or exploitation of anyevent organized by a person or organization.

– The existing taxable service ‘Intellectual Property Right(IPR)’ excludes copyright from its scope. Copyrights on (a)cinematographic films and (b) sound recording are beingbrought under the ambit of service tax. However, copyrighton original literary, dramatic, musical and artistic work wouldcontinue to remain outside the scope of service tax.

– Service tax on the following health services:

a. Health check up undertaken by hospitals or medicalestablishments for the employees of businessentities; and

b. Health services provided under health insuranceschemes offered by insurance companies.

The tax on these health services would be payableonly if the payment for such health check up orpreventive care or treatment etc. is made directly bybusiness entity or insurance company to the hospitalor medical establishment.

– Service provided for maintenance of medical records ofemployees of a business entity.

– Service provided by Electricity Exchanges.

– Certain additional services provided by a builder to theprospective buyers such as providing preferential location orexternal or internal development of complexes on extracharges. However, service of providing vehicle parkingspace would not be subject to tax.

– Service of promoting of a ‘Brand’ of goods, services,events, business entity etc.

– The promotion, marketing or organizing of games ofchance, including lottery, is being introduced as a separate



service. Consequently, the Explanation in provision relatingto Business Auxiliary Service is being deleted.

b. Scope of existing services modified

(Applicable from date of notification after enactment of FinanceBill, 2010)

– The scope of Air Passenger Transport Service is beingexpanded to include domestic journey and internationaljourney in any class.

– At present in case of Information Technology SoftwareService, the levy of tax is limited only to cases where ITsoftware is used for furtherance of business or commerce.The scope of the taxable service is being expanded tocover all cases irrespective of its use.

– In case of ‘Commercial Training or Coaching Service’, anexplanation is being added to clarify that the term‘commercial’ in the context of this service would mean anytraining or coaching, which is provided for a consideration,whether or not for profit. This change is being given withretrospective effect from 01/07/2003.

– In the definition of ‘Sponsorship Service’, the exclusionrelating to sponsorship pertaining to sports is beingremoved.

– In the ‘Construction of Complex Service’, it is beingprovided that unless the entire consideration for theproperty is paid after completion of construction (i.e. afterreceipt of completion certificate from the competentauthority), the activity of construction would be deemed tobe a taxable service provided by the builder/promoter/developer to the prospective buyer and the service taxwould be charged accordingly.

– Amendments are being made in the definition of ‘Renting ofImmovable Property Service’ to-

a. Provide explicitly that the activity of ‘Renting’ itself isa taxable service. The change has been given withretrospective effect from 01/06/2007; and

b. Levy service tax on rent of vacant land where thereis an agreement or contract between the lessor andlessee for undertaking construction of buildings orstructures on such land for furtherance of businessor commerce during the tenure of the lease.

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– Definitions of ‘Airport Services’, ‘Port Services’ and ‘OtherPort Services’ are being amended to provide that –

a. All services provided entirely within the airport/portpremises would be classified under these services;and

b. An authorization from the airport/port authority wouldnot be a pre-condition for taxing these services.

– An explanation is being added in ‘Auctioneer’s Service’ toclarify that the phrase ‘auction by government’ means anauction involving sale of government property and not whenthe government acts as an auctioneer for sale of the privateproperty.

– Definition of ‘Management of Investment under ULIPService’ is being amended to provide that value of thetaxable service for any year of the operation of policy shallbe the actual amount charged by the insurer formanagement of funds under ULIP or the maximum amountof fund management charges fixed by the InsuranceRegulatory and Development Authority (IRDA), whichever ishigher.

c. Exemptions

(Applicable from 27/02/2010)

– Statutory taxes charged by the foreign governments arebeing excluded from taxable value for levy of service taxunder the Air passenger transport service.

– Exemption from service tax is being provided to servicesrelating to ‘Erection, Commissioning or Installation’ of -

a. Mechanized Food Grain Handling Systems etc.,

b. Equipment for setting up or substantial expansion ofcold storage, and

c. Machinery/equipment for initial setting up orsubstantial expansion of units for processing ofagricultural, apiary, horticultural, dairy, poultry,aquatic, marine or meat products.

– Pre-packaged IT software, with the licence for right to itsuse, is being exempted from service tax, subject tospecified conditions.

– At present exemption from service tax is available totransport of fruits, vegetables, eggs or milk by road by a



goods transport agency. The scope of exemption is beingexpanded to include food grains and pulses in the list ofexempted goods.

– Exemption from service tax is being provided to Indiannews agencies under ‘Online Information and DatabaseRetrieval Service’ subject to specified conditions.

– Exemption from service tax is being provided to the‘Technical Testing and Analysis Service’ and ‘TechnicalInspection and Certification Service’ provided by Centraland State seed testing laboratories, and Central and Stateseed certification agencies.

– Exemption from service tax is being provided to thetransmission of electricity.

d. Withdrawal or Amendments of Exemptions


– The exemption from service tax on ‘Commercial training orcoaching service’ is being restricted to vocational trainingcourses in the designated Trades notified under theApprentices Act, 1961.

– Exemption from service tax on ‘Service provided in relationto transport of goods by rail’ is being withdrawn. (Applicablefrom 01/04/2010)

e. Amendment in Act / Rules / Notifications

i. Amendments in Act

Chapter V of the Finance Act, 1994 is being amended to –

– Insert an explanation in sub-section (3) of section 73 toclarify that no penalty shall be imposed where service taxalong with interest has been paid before issuance of noticeby the department under this sub-section. (Applicable fromdate of enactment of Finance Bill 2010)

– Provide definition of the term ‘business entity’ to include anassociation of persons, body of individuals, company or firmbut not an individual. (Applicable from a date to be notifiedafter date of enactment of Finance Bill, 2010)

ii. Amendments in Rules & Notifications


– In the Export of Services Rules, 2005, the condition

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prescribed i.e. ‘such service is provided from India andused outside India’ is being deleted.

– Notification No. 1/2002-ST dated 01/02/2002 is beingsuperseded by another notification to provide that theconstruction and operation of installations, structures andvessels for the purposes of prospecting or extraction orproduction of mineral oils and natural gas in the ‘ExclusiveEconomic Zone’ & the Continental Shelf of India and forsupply of any goods connected with these activities wouldbe within the purview of the provisions of Chapter V ofFinance Act, 1994. Suitable changes are being made in theExport of Services Rules, 2005 and Taxation of Services(Provided from Outside India and Received in India)Rules, 2006.

– Notification No. 5/2006-CE (NT) is being amended andgiven partial retrospective effect to remove the bottlenecksin refund of accumulated credit to the exporters.

2. Excise Duty

(Note: Changes comes into effect immediately unless otherwisespecified)

– The standard rate of excise duty of 8% on non-petroleum products isbeing increased to 10% with a few exceptions where exemptions/concessions have been given.

– Consequent to enhancement of the standard rate of duty from 8% to10%, the specific rates of duty on Cement and Cement Clinker,Automobile, Petroleum Products and Tobacco Products is also beingrevised upwards as follows:

Description Basic Excise Duty Rates

Mini Cement Plant Present rate Proposed rate

1. Cleared in packaged form,-

(i) of retail sale price not exceeding Rs.190 Rs. 145 per tonne Rs. 185 per tonneper 50 kg bag or of per tonne equivalentretail sale price not exceeding Rs.3,800;

(ii) of retail sale price exceeding Rs.190 per Rs. 250 per tonne Rs. 315 per tonne50 kg bag or of per tonne equivalentretail sale price exceeding Rs.3,800;

2. Cleared other than in packaged form Rs. 170 per tonne Rs. 215 per tonne



Other than Mini Cement Plant:

1. Cleared in packaged form:-

(i) of retail sale price not exceeding Rs.190 Rs. 230 per tonne Rs. 290 per tonneper 50 kg bag or of per tonne equivalentretail sale price not exceeding Rs.3,800;

(ii) of retail sale price exceeding Rs.190 per 8% of 10% of50 kg bag of per tonne equivalent retail retail sale price retail sale pricesale price exceeding Rs.3,800

2. Cleared other than in packaged form 8% or 10% orRs. 230 per tonne, Rs. 290 per tonnewhichever is higher whichever is higher

Cement Clinker Rs. 300 per tonne Rs. 375 per tonne

Automobile Sector

Ad valorem component of excise duty on Large 20% 22%Cars, Multi Utility and Sports Utility Vehiclesand Chassis

Petroleum Products Without Brand Name With Brand Name

Motor Spirit *Rs. 14.35 per litre *Rs. 15.50 per litre

HSD **Rs. 4.60 per litre **Rs. 5.75 per litre

Note: * Includes Rs.2 Additional Excise Duty and Rs. 6 Special Additional Excise Duty.** Includes Rs.2 Additional Excise Duty.

LEVY OF NEW CLEAN ENERGY CESS

– Clean Energy Cess (CEC) is being imposed on coal, lignite and peatproduced in India. This cess would be levied and collected as a duty ofexcise with effect from a date to be notified after the enactment of theFinance Bill, 2010.

SECTOR SPECIFIC RELIEF MEASURES

I. Food/Agro Processing and Agriculture Sector

– Full exemption from excise duty presently available to 20 specifiedequipments for preservation, storage or transport of agriculturalproduce is being extended to apiary, horticultural, dairy, poultry,aquatic and marine produce and meat as well as processingthereof.

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– Full exemption from excise duty is being extended to self-loading/self-unloading trailers & semi trailers for Agricultural Purposes.

II. Environment Friendly and Energy Saving Goods

– A uniform concessional rate of duty of 4% is being prescribed forparts, namely batteries including battery chargers, electric motorsand AC or DC motor controllers required for manufacture of allcategories of electrical vehicles including cars, two wheelers andthree wheelers (like ‘Soleckshaw’) subject to actual user condition.This concession will be available till 31/03/2013. Such vehicles willalso be charged to excise duty @4%.

– Excise duty is being reduced from 8% to 4% on LED lights /lighting fixtures.

– Full exemption from excise duty is being provided to additionalspecified raw materials for the manufacture of rotor blades forwind operated electricity generators.

III. Capital Goods

– Full exemption from Central Excise duty presently available togoods supplied against International Competitive Bidding is nowbeing extended to goods supplied to mega power projects fromwhich power supply has been tied up through tariff-basedcompetitive bidding. The exemption would also be available wherethe mega power project has been awarded through tariff basedcompetitive bidding.

IV. MSME / Small Scale Sector

– Changes are being made in the relevant provisions to providecertain facilities to Small Scale Industrial (SSI) units eligible foravailing benefit under Notification No. 8/2003-CE as under:

a. Full CENVAT credit on capital goods in one instalment inthe year of receipt of such goods.

b. Facility of payment of excise duty on quarterly basis.

(Above changes come into effect from 01/04/2010 and will beapplicable even if an eligible unit opts not to avail of the SSIexemption)

– While retaining the system of filing quarterly returns, the due datefor filing of Central Excise returns by SSI units is being advancedto the 10th of the month following the quarter.

– The relaxation from brand name restriction under the general SSIexemption scheme is being extended to plastic bottles and plasticcontainers used as packing material.



V. Precious Metal

– Refined serially numbered gold bars made from the ore/concentrate stage will now attract excise duty of Rs. 280 per 10grams (instead of 8% ad valorem) with CENVAT credit facility oninputs and capital goods.

– Excise duty on DTA clearances of plain gold and silver jewellerymanufactured by a 100% EOU is being increased from:

a. Rs.500 per 10 gram to Rs.750 per 10 gram for goldjewellery; and

b. Rs.1,000 per kg to Rs.1,500 per kg. for silver jewellery.

OTHER RELIEF MEASURES

– Following items are being fully exempted from excise duty:

a. Articles of bedding wholly made of quilted textile materials;

b. Toy balloons made of natural rubber;

c. Betel nut product known as “Supari”;

d. Dementholized oil, Deterpenated Mentha oil, Spearmint/ MenthaPiperita oils and all intermediates and by-products of Menthol.

– Excise duty is being reduced from 8% to 4% on:

a. Replaceable kits for all household type water filters (except thoseoperating on RO technology)

b. Corrugated Boxes/Cartons manufactured by stand-alonemanufacturers

c. Latex rubber thread.

– Excise duty on goods covered under the Medicinal and ToiletPreparations Act is being reduced from 16% to 10% to bring it at parwith standard CENVAT rate.

RATIONALIZATION MEASURES

– Presently, maize and tapioca starch are exempted from excise duty whilepotato starch attracts 8% duty. Excise duty on all these starches is nowbeing unified at 4%.

– In the last budget, concessional rate of 4% excise duty applicable to theceramic tiles manufactured in kilns not using electricity was enhanced to8% without CENVAT credit facility. Since, ceramic tiles in general attracts8% excise duty (standard rate) with CENVAT credit, this entry hadbecome redundant. The rate of duty on all ceramic tiles, regardless ofthe fuel used for firing the kiln is now being unified at 10% with CENVATcredit facility.

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– Umbrellas currently attract 4% excise duty while umbrella parts attract8% excise duty and umbrella cloth panels are fully exempt. The rate ofexcise duty on umbrellas and all umbrella parts is being unified at 4%.

– Presently, rough ophthalmic blanks attracts two different rates of exciseduty (NIL and 4%) under two different notifications. Redundant entryprescribing 4% duty is now omitted.

WITHDRAWAL OF EXEMPTIONS/CONCESSIONS

– Full exemption from excise duty on following items is being withdrawn.They now attracts 4% excise duty

a. Mosquito nets impregnated with insecticides;

b. AV gas;

c. Microprocessor for computers (other than motherboard), Floppydisk drive, Hard disk drive, flash drive, CD/DVD and Combo Drivemeant for external use.

– Full exemption from excise duty on baby & clinical diapers and sanitarynapkins is being withdrawn. These items will now attract duty at 10%.

– Concessional rate of excise duty on open tin sanitary (OTS) cans isbeing withdrawn. OTS cans will now attract excise duty at 10%.

– Concessional rate of excise duty on goggles is being withdrawn exceptthose used for correcting vision. These items will now attract duty at10%.

AMENDMENTS IN CENTRAL EXCISE ACT, 1944

(Changes will come into effect on enactment of the Finance Bill 2010)

– In section 11A (2B), an Explanation is being inserted to clarify that nopenalty shall be imposed where duty along with interest has been paidbefore the issuance of a demand notice by the Department.

– Section 32 dealing with Settlement Commission is being amended so asto restore certain provisions as they obtained prior to the enactment ofthe Finance Bill, 2007. Accordingly, the prohibition on filing of applicationsfor the settlement of cases where an assessee admits short-levy forgoods in respect of which he has not maintained proper records (i.e.,cases of mis-declaration, clandestine removal etc.) is being removed.Similarly, the restriction that an assessee may seek only onetimesettlement is also being relaxed. The Commission is being empowered toextend the time limit of nine months for disposal of applications byanother three months, for reasons to be recorded in writing.

– A new clause is being inserted in section 37 to provide rule-makingpowers to the Central Government for withdrawal of facilities or



imposition of restrictions including restrictions on utilization of CENVATcredit on a manufacturer or exporter or suspension of registration of adealer for dealing with evasion of duty or misuse of CENVAT credit.

AMENDMENTS IN CENTRAL EXCISE RULES AND CENVAT CREDITRULES

– Rule 11(5) of the Central Excise Rules, 2002 is being deleted so as todispense with the requirement of pre-authentication of the invoice.

– The Central Excise Rules, 1944, the CENVAT Credit Rules, 2000, theCENVAT Credit Rules 2001, the CENVAT Credit Rules 2002 and theCENVAT Credit Rules, 2004 are being amended retrospectively w.e.f.01/09/1996 to 31/03/2008 (for periods as applicable to respective rules)to provide that where a manufacturer avails MODVAT/CENVAT credit inrespect of any inputs, other than fuel, to manufacture both dutiable andexempted goods, he can opt to reverse credit or pay an amountequivalent to credit attributable to inputs used for manufacture ofexempted goods. It is being further provided that such manufacturer shallpay interest @ 24% p.a. from the date of clearance till date of reversalof the said credit or payment of equivalent amount. Such option will,however, be available only in such cases where disputes in this regardare pending on the date of enactment. This change will come into effecton the enactment of Finance Bill, 2010.

– Rule 3(5) of the CENVAT Credit Rules, 2004 is being amended toprovide accelerated depreciation in the case of computers and computerperipherals cleared after use at the same rates as applicable for similarcapital goods of EOU/EHTP/STP units under Notification No. 52/2003-Customs.

– Rule 4(5) (b) of the CENVAT Credit Rules, 2004 is being amended topermit sending of jigs, fixtures, moulds and dies to a vendor forproduction of goods according to the specifications of the principalmanufacturer without reversal of credit.

– Rule 6 (6) (vii) of the Central Credit Rules, 2004 is being amended so asto allow CENVAT credit on inputs used in the manufacture of goodssupplied to such mega power projects from which power has been tiedup through tariff-based competitive bidding or the projects awardedthrough tariff-based competitive bidding. Similar facility available to goodssupplied against International Competitive Bidding available at present isalso being continued.

– Rule 15 of the CENVAT Credit Rules, 2004 is being amended toharmonize the penal provisions for incorrect availment of CENVAT creditof duty paid on inputs or capital goods or input services.

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3. Custom Duty

(Note: Changes comes into effect immediately unless otherwisespecified)

– Changes in basic rate of Customs Duty on some key items are:

Description Basic Customs Duty Rates

Petroleum Present Rate Revised Rate

Crude petroleum Nil 5%

Motor Spirit (petrol) 2.5% 7.5%

HSD (diesel) 2.5% 7.5%

Other specified Petroleum Products 5% 10%

Precious Metals

Serially numbered gold bars Rs.200 Rs.300 (other than tola bars) / gold coin per 10 gram per 10 gram

Other forms of Gold Rs.500 Rs.750per 10 gram per 10 gram

Silver Rs.1,000 per kg Rs.1,500 per kg

Platinum Rs.200 Rs.300per 10 gram per 10 gram

ADDITIONAL DUTY OF CUSTOMS @ 4% (SPECIAL CVD)

– Goods imported in pre-packaged form and intended for retail sale andcertain specified goods namely, ready-made garments, mobile phonesand watches are being provided an outright exemption from additionalduty of customs of 4%. In addition, outright exemption from this duty isalso being provided to Carbon Black Feedstock, waste paper and paperscrap.

– The existing exemption by way of refund would continue on otheritems.

SECTOR SPECIFIC MEASURES

Food/Agro Processing

– Project imports status is being granted to the initial setting up orsubstantial expansion of a cold storage, cold room (including farm pre-coolers) for preservation or storage or an industrial unit for processing ofagricultural, apiary, horticultural, dairy, poultry, aquatic and marineproduce and meat. These projects would attract concessional rate ofbasic customs duty of 5%.



– Project imports status is being granted to installation of MechanizedHandling Systems & Pallet Racking Systems, in mandis or warehousesfor food grains and sugar, with concessional rate of basic customs dutyof 5%. Such systems are also being exempted from additional duty ofcustoms (CVD) and special additional duty of customs.

– Truck Refrigeration unit for manufacture of refrigerated vans / trucks arebeing fully exempted from basic customs duty. Such units are alreadyexempt from excise duty.

– Basic customs duty is being reduced from 7.5% to 5% on specifiedagricultural machinery such as paddy transplanter, laser land leveller,cotton picker, reaper-cum-binder, straw or fodder balers, sugarcaneharvesters, track used for manufacture of track-type combine harvesteretc.

Agriculture/Horticulture

– Basic customs duty on long pepper is being reduced from 70% to 30%.

– Basic customs duty on ‘asafoetida’ (heeng) is being reduced from 30% to20%.

– Full exemption from basic customs duty is being provided to bio-polymer/bio-plastics (HS Code 39139090) used for manufacture of bio-degradableagro mulching films, nursery plantation and flower pots.

Capital Goods

– Mono Rail Projects for urban transport are being granted project importsstatus and would accordingly attract concessional rate of 5% basiccustoms duty.

– Tunnel Boring machine for hydro-electric power projects is being fullyexempted from basic customs duty with Nil CVD.

– Concessional rate of customs duty of 5% presently available up to06/07/2010 on specified machinery for tea, coffee and rubber plantationis being extended up to 31/03/2011

– Specified road construction machinery items are presently fully exemptfrom customs duty subject to specified conditions. Sale or disposal ofsuch machinery items at depreciated value is being allowed on paymentof customs duties on depreciated value at the rates applicable at thetime of import subject to specified conditions.

Concessions to Environment – Friendly Items

– Full exemption from basic customs duty and special additional duty ofcustoms is being extended to specified parts namely, batteries including

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battery chargers, electric motors and AC or DC motor controllersimported for manufacturing all categories of electrical vehicles includingcars, two wheelers and three wheelers (like Soleckshaw). These partswill attract CVD of 4%.

– The concession is subject to actual user condition. This concession willbe available till 31/03/2013.

– A concessional rate of basic customs duty of 5% is being provided tomachinery items, instruments, appliances required for initial setting up ofsolar power generation projects or facilities. These items have beenexempted from CVD also by way of excise duty exemption provided tothem.

– Ground source heat pump (for geo-thermal energy applications) is beingfully exempted from basic customs duty and special additional duty ofcustoms.

Healthcare

– At present, medical equipments attract varying rates of customs duty andare spread over many lists. This multiplicity of rates is being done awaywith and now all medical equipments (with some exceptions) will attract5% basic customs duty, 4% CVD/excise duty and Nil special additionalduty of customs [i.e., effective duty of 9.2%].

– Parts required for the manufacture and accessories of medical equipmentwill also attract 5% concessional basic customs duty with Nil specialCVD.

– Concessional customs duty available to spares for the maintenance ofmedical equipment is being withdrawn except in specified cases.

– Full exemption from basic customs duty and CVD/excise duty is beingretained for specified medical devices (exempt by description) as well asfor assistive devices, rehabilitation aids and other goods for disabled(List 41).

– Cobalt-chrome alloys, special grade stainless steel etc. for themanufacture of orthopaedic implants are being exempted from basiccustoms duty subject to actual user condition.

Electronics hardware

– Battery chargers and hands-free headphones are the basic accessoriesof mobile phones. Full exemption from basic customs duty and CVDpresently available for parts, components, accessories for manufacturingof mobile handsets including cellular phones and parts thereof is beingextended to parts for the manufacture of battery chargers and hands-freeheadphones also.



– Full exemption from 4% special additional duty of customs presentlyavailable up to 06/07/2010 on parts, components and accessories formanufacture of mobile handsets including cellular phones, parts thereof(except accessories) is being extended to parts of two specifiedaccessories also upto 31/03/2011.

– Basic customs duty is being reduced from 10% to 5% on magnetrons ofup to 1,000 KW for the manufacture of microwave ovens.

– Full exemption from customs duty is being extended to additionalspecified capital goods and raw materials for the manufacture ofelectronic hardware.

Entertainment / Media

– Films for exhibition are imported on cinematographic films or digitalmedia. Digital masters/Stampers of films are also imported for duplicationand distribution of CD/DVDs. It is being provided that customs dutywould now be charged only on the value of the carrier medium and thecustoms duty on the balance value will be exempt.

– Similar tax treatment, as provided to films above, is being extended tomusic and gaming software (other than pre-packaged form) for retail saleimported on digital media for duplication. Pre-packaged Movies, Musicand Games (meant for use with gaming consoles) will continue to becharged to import duties on value determined in terms of the provisionsof the Customs Act.

– Promotional material like trailers, making of films etc. imported free ofcost in the form of electronic promotion kits (EPK)/ Betacams are beingfully exempted from basic customs duty and CVD.

– Project imports status is being accorded to ‘Setting up of Digital HeadEnd’ with 5% concessional basic customs duty and Nil special additionalduty of customs.

Gold refining

– Gold ore and concentrate are being fully exempted from basic customsduty and special additional duty of customs. They will, however, bechargeable to CVD @ Rs. 140 per 10 gram of gold content. This dutystructure is subject to actual user condition.

Export promotion

– Basic customs duty on Rhodium is being reduced from 10% to 2%.

– The current limit of Rs. 1 lakh per annum for duty free import of samplesis being enhanced to Rs.3 lakh per annum

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– At present specified components, raw materials and accessories for themanufacture of sports goods are exempt from basic customs duty. Someadditional items are being added to the list of exemption.

Electrical energy

– At present, Electrical energy is fully exempt from customs duty. Electricalenergy supplied from a Special Economic Zone to the Domestic TariffArea and non-processing areas of SEZ would now attract duty of 16%ad valorem + Nil Special CVD. This change is being made withretrospectively w.e.f. 26/06/2009. Exemption on supplies or imports ofelectrical energy, other than the above, would continue.

AMENDMENTS IN CUSTOMS ACT, 1962

– Section 127 dealing with Settlement Commission is being amended soas to restore certain provisions as they obtained prior to the enactmentof the Finance Bill, 2007. Accordingly, the prohibition on filing ofapplications for the settlement of cases where an assessee admits short-levy in respect of goods not included in the entry made under the saidAct (i.e., cases of misdeclaration, suppression etc.) is being removed.Similarly, the restriction that an assessee may seek only one-timesettlement is also being relaxed. The Commission is being empowered toextend the time limit of nine months for disposal of applications byanother three months, for reasons to be recorded in writing.

AMENDMENTS IN CUSTOMS TARIFF ACT, 1975

– Section 3 of the Customs Tariff Act is being amended to provide that thevalue of the imported goods for the purpose of charging CVD in respectof goods chargeable to excise duty on the basis of Maximum Retail SalePrice under Medicinal and Toilet Preparations (Excise Duties) Act, 1955shall be the retail sale price declared on such imported goods less theamount of abatement, if any. This change will come into effect onenactment of the Finance Bill.

– Consequent upon insertion of a new tariff item covering filter cigarettes oflength not exceeding 60 mm and other changes in the schedule to theCentral Excise Tariff Act, similar change is being carried out in heading2402 with the new tariff item attracting customs duty of 30% ad valorem.

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CAPITAL MARKET

Equity Capital Markets

Back on good economic indicators India Inc continued to tap the capital marketdespite poor response from retail investors and lacklustre debut on bourses.Though the IPO market has appeared to stage a comeback, the retailparticipation is muted. The subscription levels in these IPOs are heavily skewedtowards qualified institutional buyers (QIBs) and the response from HNI’s ismoderate. Besides IPOs, several follow-on public offers (FPOs) are alsoexpected from public sector units (PSUs), on the backdrop of disinvestmentplans of the Government.

QIP was the flavour of the season. Indian companies garnered more thanUSD 8.6 bn through 54 QIPs in 2009, over 10 times the fund raised than thatof 2008. The depository receipt (DR) market were back in favour with Indiancompanies having raised a record USD 3.5 billion through 11 issues via thisroute, up to December, 2009.

Private equity transactions in India fell by a significant 68% in 2009 as investorsresorted to a wait and watch approach amid the slowdown. There were 206deals in 2009 with a total announced value of USD 3.44 billion, a fall of 68%from the year ago period in 2008 when as many as 312 deals worthUSD 10.59 billion were announced.

As per the Securities and Exchange Board of India (SEBI), number ofregistered FIIs as on January 29, 2010 was 1697 and the cumulativeinvestments in equity since November 1992 to January 29, 2010, was USD72.51 billion.

M&A Transactions

During 2009, Indian companies were involved in a total of 356 M&A deals,down 34% from 2008; However, deal activity in the second half of the year wasup by 34% when compared to the first six months.

The median deal value in 2009 (for the 151 deals which had announcedtransaction values) was USD 22.3 million, an increase from the USD 16.06million in 2008. In the largest M&A deal by announced value, UltraTech Cementmerged Samruddhi Cement with itself to form India’s largest Cement Company.This was followed by ONGC Videsh acquiring UK-listed Imperial Energy forUSD 1.9 billion and Sanofi-Aventis’ acquisition of Hyderabad based ShanthaBiotechnics. Tech Mahindra’s acquisition of Satyam Computers for USD 605million and Hospira’s acquisition of Orchid’s injectable assets for USD 400million were the other major deals during the year.

Over 56% of the deals in 2009 were domestic acquisitions, as against the 43%in 2008. The acquirers in 28 of the 70 inbound deals were

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US-based companies, followed by German firms with ten deals and Frenchfirms with eight deals. The IT & ITES and Manufacturing industries accountedfor most number of acquisitions during 2009 contributing 22% and 18%respectively.

Resource Mobilisation through primary market

Rs. in Crs

Sr. Mode Calendar YearNo. 2006 2007 2008 2009(P)

1 Debt 389 594 0 3,500

2 Equity 32,672 58,722 49,485 23,098

of which – IPOs 24,779 33,912 18,393 19,296

No. of IPOs 75 100 37 20

Mean of IPO size 330 339 497 965

3 Private Placement 1,17,407 184,885 1,55,743 2,38,226

4 Euro Issue ( ADR/ GDR) 11,301 33,136 6,271 15,266

Total ( 1 to 4 ) 1,61,769 2,77,307 2,11,499 2,80,090

Source: SEBI & RBI. (P) – Provisional

Resource mobilization by mutual funds

The average assets under management of the mutual fund industry stood atUSD 173.16 billion for the month of December 2009, an increase of nearly 88%from USD 91.79 billion in December 2008, according to the data released byAssociation of Mutual Funds in India (AMFI).

Rs. in Crs.

Calendar Year

2006 2007 2008 2009

1. UTI 6,426 9,245 -2,704 12,056

2. Public Sector 12,229 8,259 14,587 17,624

3. Private Sector 86,295 1,20,766 -12,506 1,14,095

4. Total (1 to 3) 1,04,950 1,38,270 -624 1,43,775

Source: SEBI



Secondary Market Performance

Indian equity markets witnessed a revival in the secondary market segment,which had recorded a sharp decline in the wake of the global financial crisisduring the later half of 2008. The secondary market staged a handsomerecovery in 2009 following stimulus measures implemented by the Governmentand resurgence of foreign portfolio flows displaying renewed interest by foreigninvestors. The subdued global commodity prices in the beginning of 2009 alsolifted the sentiments in the Indian capital market. Furthermore, election resultsannounced in May 2009 removed uncertainty on economic policies and as suchboosted Indian equity markets as a result both benchmark and sectoral indicesrallied. The equity markets gained further till September 2009 on positive cuesfrom the global markets, before declining during October 2009. Sentimentsimproved during November–December 2009, leading to gains in equity pricesand an uptrend in equity market indices.

Post Budget Market reactions

Market indices rallied across the board giving thumbs up to the budget. Variousmeasures announced by the Finance Minister, such as reduction in fiscal deficitto 5.5% in F.Y. 2011 from 6.9% in F.Y. 2010 with a three year clear roadmap toconsolidation of fiscal deficit to 4.1% by F.Y. 2013 is a clear signal to achievefiscal prudence. Other measures such as cut in corporate surcharge to 7.5%from 10%, Rs.1.73 Lakh Crore allocation for infrastructure development,increase in F.Y. 2011 disinvestment target to Rs. 25,000 Crore and raising taxexemption limit for individuals thereby boosting consumption power.

The market which had already factored in a rollback in excise duties wasrelieved as no major negatives except hike in MAT to 18% from the present15% and levy on oil prices was announced while partially rolling back the ratereduction in Central Excise duties and enhance the standard rate on all non-petroleum products from 8% to 10%.

The Government borrowing programme for 2010-11 is also well under control atRs.3.45 Lakh Crore which was less than Rs. 3.90 Lakh Crore. estimated bymarkets, allaying fears of crowding out of bank credit for private sector. Thebenchmark BSE Sensex rallied 400 points and ended 175 points or 1.08 %higher to close at 16429.55 while the NSE’s S&P CNX Nifty closed at 4926 or1.37% higher than the previous close.

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SECTOR ANALYSIS

Banking and Financial Services PositiveBudget Proposals– Public Sector Bank (PSB) Capitalisation: Following the infusion of Rs.1,900

crore in 2008-09, an additional sum of Rs.1,200 Crore is being infused now.For the year 2010-11, an additional infusion of Rs.16,500 crore is proposed toensure that the PSBs are able to attain a minimum 8% Tier-I capital by31/02/2011.

– Additional Banking Licences proposed to be issued to private sector players.NBFCs may also be considered, if they meet RBI’s eligibility criteria.

– Extension of existing interest subvention of 2% for one more year for exportscovering handicrafts, carpets, handlooms and small and medium enterprises.

– Incentive of additional 1% interest subvention to farmers who repay short-term crop loans as per schedule, increased to 2% for 2010-11.

Impact– Continued commitment of the Government towards supporting public sector

banks is a clear positive for the PSBs as well as the stability of the bankingsector.

– The possibility of NBFCs getting banking licence is a positive for the NBFCsector, however the final impact can only be assessed after considering thestructure of specific NBFCs that get banking licence.

– Interest subvention in the farm sector will provide an incentive for timelyrepayment and help in improving asset quality of this portfolio.

Infrastructure PositiveBudget Proposals– Infrastructure being the backbone of the economy, GoI has provided about

46% (Rs.1.73 Lakh Crore) of the planned allocation towards rural and urbaninfrastructure development. This includes about 25% of planned allocationstowards rural infrastructure development.

– GoI expects to raise about Rs. 25,000 Crore through the divestment route in2010-11 and the proceeds are expected to be utilized towards social sectorschemes for creating new assets. GoI has also attempted to attractinvestments in infrastructure by allowing an additional Rs. 20,000 deductionto individuals investing in long-term infrastructure bonds.

Impact– GoI has put strong impetus on infrastructure development in the current

budget by allocating significant portion of the planned allocation towardsinfrastructure development.

– As GoI has laid high focus on urban development and roads, companiesinvolved in these areas are to gain a higher benefit.



Education PositiveBudget Proposals– The plan allocation for school education has been increased from Rs. 26,800

Crore in 2009- 10 to Rs. 31,036 Crore in 2010-11. In addition, States willhave access to Rs. 3,675 Crore for elementary education under theThirteenth Finance Commission grants for 2010-11.

– To improve female literacy rate, the Government has recast the earlierNational Literacy Mission launched in September 2009 as a new programme“Saakshar Bharat”. This programme will focus specifically on reducingilliteracy amongst women.

– The plan allocation to the Ministry of Social Justice and Empowerment hasbeen enhanced to Rs. 4,500 Crore. The weighted deductions on paymentsmade to National Laboratories, research associations, colleges, universitiesand other institutions for scientific research has been enhanced from 125%to 175%.

Impact– The school education expenditure is proposed to be increased by 16% in the

coming F.Y. This will positively impact the education sector and will enablethe Government to provide education to a greater number of children asproposed under the Right of Children to Free and Compulsory EducationAct, 2009.

– Despite several measures taken by the Government, India lags behind theother emerging nations in terms of GER. Thus additional outlay of funds asproposed in the Budget 2010-11 is required to improve both the infrastructureas well as the quality of education provided by the schools across the countryand also to increase the number of schools so that education can reach alarger number of children.

Gems and Jewellery PositiveBudget Proposals– Basic customs duty on Gold Bars and Coins to be increased from Rs. 200/10

grams to Rs. 300/10 grams, while duty for all other forms of gold to beincreased from Rs. 500/10 grams to Rs. 750/10 grams. Custom duty onplatinum to be increased from Rs. 200/10 grams to Rs. 300/10 grams.

– Basic customs duty on Silver to be increased from Rs. 1,000/kg toRs. 1,500/kg.

– Basic customs duty on Rhodium – a precious metal used in polishingjewellery to be reduced from 10% to 2%.

– Basic customs duty on gold ore and concentrate to be reduced from 2% advalorem to a specific duty of Rs. 140/10 grams while excise duty on refinedgold made from such ore or concentrate is to be reduced from 8% to aspecific duty of Rs. 280/10 grams.

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Impact– Increase in customs duty on gold and silver when compared to the price of

the metal is marginal and will not have any impact on consumer demand inthe long run.

– The Government is trying to give a fresh impetus to gold refining in thecountry with the proposed custom duty reduction in gold ore and concentrateand has also proposed a reduction in excise duty on refined gold made fromsuch ore or concentrates.

Pharmaceuticals PositiveBudget Proposals– Increase in the weighted deduction on expenditure incurred on in-house

Research & Development activities from 150% to 200%. Also increase in theweighted deduction on payments made to national laboratories, researchassociations, colleges, universities and other institutions, for scientificresearch from 125% to 175%.

– Increase in peak rate of excise duty from 8% to 10%.– Increase in rate of Minimum Alternate Tax (MAT) from 15% to 18%.

Impact– Increased weighted deduction on in-house R & D expenditure will further

encourage spending by pharmaceutical and biotech companies on researchcarried out in-house or outsourced to third parties. Expenditure of capitalnature and cost incurred on clinical trials conducted domestically will also beeligible for enhanced rate of weighted deduction

– Impact of increase in peak rate of excise duty would increase the cost of bulkdrugs & drug intermediates for the formulation companies.

Real Estate NeutralBudget Proposals– One per cent interest subvention on housing loans up to Rs. 10 Lakh (where

the cost of the house does not exceed Rs. 20 Lakh) to be extended till31/03/2011.

– Under section 80-IB(10), pending projects to be completed within a period offive years instead of four years for claiming a deduction on their profits.

– Increase in tax slabs for personal income tax.– Increase in excise duty structure for cement and steel.

Impact– Extension of one per cent interest subvention indicates continued support to

the lower and middle income housing.– Extension of tax holiday under 80-IB (10), would provide a breather to the



industry affected by the downturn. It will have a positive impact on themargins of the real estate players.

– Increased disposable income due to reduced tax burden would spurspending for the housing sector.

– Increase in excise duty of cement as well as steel would increase the inputcost for the developers. These costs would mostly be passed on to theconsumers.

Hotels PositiveBudget Proposals– Section 35AD of the Income-tax Act, which provides for deduction in respect

of expenditure of capital nature has been amended to include building andoperating a new hotel of two-star or above category as classified by theCentral Government should commence its operation on or after 01/04/2010.The capital expenditure above does not include cost of land, goodwill andfinancial instruments.

– The time line for commencing operation under section 80-ID of the Income-tax Act relating to deduction in respect of profits and gains from business ofhotels and convention centres in specified areas has been extended from 31/03/2010 to 31/07/2010.

Impact– The inclusion of hotel business under specified business under section 35AD

is a boon for the hospitality industry and will help them to reduce their directtax liability, hence, improve margins.

– The extension of time line under section 80-ID will help operators whoseprojects have been delayed to take benefit exemption.

IT/ITES NegativeBudget Proposals– Minimum Alternate Tax (MAT) has been increased from 15% to 18%.– The standard rate of excise duty has been enhanced from 8% to 10%.– Exemption of custom and excise duty is provided to packaged software or

canned software whether or not for commercial exploitation.

Impact– The increase in MAT and non-extension of Software Technology Parks of

India (STPI) would adversely impact the industry, which has already beenhurt by the economic slowdown.

– As most of the IT-ITES companies are export oriented, their tax liability isusually under MAT. The increase in MAT rate will impact the tax expenses ofIT-ITES companies.

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Media and Entertainment PositiveBudget Proposals– Initial setting up of “Digital Head End” equipment by multi-service operators is

being provided project import status. These projects will attract a custom dutyof 5% compared to 10% charged earlier as well as complete waiver ofspecial additional duty.

– Accredited news agencies which provide news feed online that meet certaincriteria are exempted from service tax.

– To address the difficulties experienced by film industry in importing digitalmasters of films for duplication or distribution loaded on electronic mediumvis-a-vis those imported on cinematographic film, owing to a differentialcustoms duty structure, customs duty to be charged only on the value of thecarrier medium. The same dispensation would apply to music and gamingsoftware imported for duplication.

Impact– Reduction of customs duty on Digital Head End would lead to reduction in

input cost for the multi service operators positively contributing to their profitmargin.

– Users of the news content from accredited news agencies would bebenefited with the exemption of service tax.

– Rationalisation of customs duty by limiting it on to value of the carrier mediumused for importing the film content, gaming software and music therebyhaving positive impact on M&E industry.

Retail PositiveBudget Proposals– Foreign Direct Investment (FDI) norms to be relaxed– Implementation of GST in April 2011– Rise in income tax slabs for individual taxpayers

Impact– The relaxation of FDI norms either in single-brand retailing (currently capped

at 51%) or multi-brand retailing (currently not permitted) would result incapital infusion in the Indian retailing context.

– The roll-out of GST is expected to lower the operating expenses of theretailers owing to the easier movement of retail products across the stateborders irrespective of the location of the retailers’ warehouses.

– The increase in disposable income of the taxpayers would result in increasedspending thereby boosting the retailers’ topline.



Steel NeutralBudget Proposals– Excise duty increased from current 8% to 10% for all ferrous products.– Surcharge on customs duty for domestic companies reduced from 10%

to 7.5%.– Proposed completion by the Railways of 1,000 route-kilometres of new lines

in 2010-11.– Wagon procurement target set at 18,000 by the Railways for 2010-11.– Allocation of 46% of total funds to infrastructural developments and increase

in allocation to power sector from Rs. 2,230 crore to Rs. 5,130 crore.

Impact– The increase in excise duty is expected to be negative for steel

manufacturers; the overall impact is likely to depend upon their ability to passon to their customers. For steel-made consumer goods, like automobiles, theoverall cascading of the excise duties may be offset by the increase inpersonal disposable income, subsequent to the fiscal concessions proposedon personal income tax.

– Reduction in surcharge on customs duty is likely to have marginally negativeimpact on domestic manufacturers of the steel products.

– Proposed addition of 1,000 route-kilometres by the Railways bodes well forrail manufacturers like SAIL and JSPL which are into manufacturing of railroutes. Similarly, the procurement target of 18,000 wagons is expected totrigger additional steel demand in the country.

Textiles NeutralBudget Proposals– Interest subvention of 2% on pre shipment credit extended up to 31/03/2011

from the existing deadline of 31/03/2010.– Allocation of Rs. 2,400 Crore for Technology Upgradation Fund Scheme

(TUFS), Rs. 400 Crore for integrated textile parks, Rs. 426 Crore forhandlooms, Rs. 286 Crore for handicrafts and Rs. 320 Crore for sericulture.

– Excise duty on man made fibre and yarn increased to 10% from 8%.

Impact– There were not many measures announced in the Budget pertaining to the

industry; however, higher allocation for TUFS will help in clearing the backlogof interest subsidy as well as provide further fillip to expansion andmodernisation initiatives.

– Continuation of interest subvention of 2% to provide relief to the exportersreeling under the pressure of Rupee appreciation.

– Allocation towards handloom and handicrafts sectors will facilitate furtherinvestments and modernisation initiatives in these sectors leading to theiroverall development.

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