Budget 2006

(1)

PwC

Budget 2006

An Analysis*

*connectedthinking

(2)

• Direct Taxes

• Indirect Taxes

• Economic Indicators

• Policy Changes

Agenda Agenda

2 Budget 2006Budget 2006

An Analysis

PricewaterhouseCoopers

(3)

“We make our own destiny.

Let us believe in our destiny, let us make

our future.”

(4)

Economic Indicators Economic Indicators

Budget 2006 Budget 2006

An analysis An analysis

(5)

Economic Indicators Economic Indicators

Budget 2006 Budget 2006

An analysis An analysis

Tax/ GDP Ratio Foreign Direct Investment Foreign Exchange Reserves Fiscal & Revenue Deficit Inflation GDP Growth

(6)

Fiscal &

Revenue Deficit

GDP

Growth Inflation Foreign

Direct

Investment Foreign

Exchange Reserves

Tax/ GDP

Ratio

(7)

GDP Growth

Fiscal &

Revenue Deficit

Inflation

Foreign Direct

Investment Foreign

Exchange Reserves

Tax/ GDP

Ratio

(8)

8.1%

Fiscal &

Revenue Deficit

Inflation

Foreign Direct

Investment Foreign

Exchange Reserves

Tax/ GDP

Ratio

(9)

An Analysis

GDP Growth GDP Growth

5

8

6.4

0 1 2 3 4 5 6 7 8 9

1993-99 2000-03 2004-06

• 8.1% GDP growth – Agriculture 2.3%

– Industry 8%

– Services 8.8%

• Base year changed to 99-00

• India second fastest growing economy

Source: Economic Survey, 2006

(10)

GDP Growth

Fiscal &

Revenue Deficit

Inflation

Foreign Direct

Investment Foreign

Exchange Reserves

Tax/ GDP

Ratio

(11)

GDP 4.5%

Growth Foreign Exchange

Reserves

Foreign Direct

Investment

Fiscal &

Revenue Deficit

Tax/ GDP

Ratio

(12)

An Analysis

Inflation Inflation

* As on February 4, 2006

3.3

7.2 3.6

3.4

5.5

6.4 4.1*

0 1 2 3 4 5 6 7 8

1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

• Average WPI inflation during April 05 to

Jan 06 - 4.5%

• Lower inflation in manufactured

products

• Oil impact minimal

(13)

GDP Growth

Fiscal &

Revenue Deficit

Inflation

Foreign Direct

Investment Foreign

Exchange Reserves

Tax/ GDP

Ratio

(14)

GDP

Growth Inflation Foreign

Direct

Investment Foreign

Exchange Reserves

Tax/ GDP Ratio

3.8%

&

2.1%

(15)

An Analysis

Fiscal & Revenue Deficits Fiscal & Revenue Deficits

(As per cent of GDP)

P – Provisional; BE – Budget Estimates; RE – Revised Estimates

Central Government

5.3 5.6

6.2 5.9

4.5

4.1 4.1

3.8

2.1 2.5 2.6

3.6 4.4

4 4.4 3.5

0 1 2 3 4 5 6 7

1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 (P) 2005-06 (RE)

2006-07 (BE) Fiscal Deficit Revenue Deficit

(16)

GDP Growth

Fiscal &

Revenue Deficit

Inflation

Foreign Direct

Investment Foreign

Exchange Reserves

Tax/ GDP

Ratio

(17)

GDP Growth

Fiscal &

Revenue Deficit

Inflation

Foreign Direct

Investment

Tax/ GDP Ratio

$139

billion

(18)

An Analysis

Foreign Exchange Reserves Foreign Exchange Reserves

42.3

54.1

75.4

111.7 128.9

139.2*

0 20 40 60 80 100 120 140 160

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

(U.S. $ Billion)

* As on January 27, 2006

(19)

GDP Growth

Fiscal &

Revenue Deficit

Inflation

Foreign Direct

Investment Foreign

Exchange Reserves

Tax/ GDP

Ratio

(20)

GDP Growth

Fiscal &

Revenue Deficit

Inflation

Foreign Exchange

Reserves

Tax/ GDP Ratio

$4

billion

(21)

An Analysis

Foreign Direct Investment Foreign Direct Investment

5.3

34.0

16.0 7.7

60.6

0 5 10 15 20 25 30 35 40 45 50 55 60 65

India China Hongkong Korea Singapore

FDI Inflows during 2004

(U.S. $ Billion)

Source: World Investment Report 2005 (UNCTAD)

(22)

GDP Growth

Fiscal &

Revenue Deficit

Inflation

Foreign Direct

Investment Foreign

Exchange Reserves

Tax/ GDP

Ratio

(23)

GDP Growth

Fiscal &

Revenue Deficit

Inflation

Foreign Direct

Investment Foreign

Exchange Reserves

10.4%

(24)

An Analysis

Tax/GDP Ratio Tax/GDP Ratio

9.8 9.3

8.8

8.1

8.8 9.1

9.7

10.4

1.9

2.8 3.2 3 3.4 3.8 4.2

5 7.9

6.5

5.6 5.1 5.4 5.3 5.5 5.4

0 2 4 6 8 10 12

1990-91 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 (P) 2005-06 (BE) Tax/GDP ratio (%) Direct Tax/GDP ratio (%) Indirect Tax/GDP ratio (%)

BE – Budget Estimate; P - Provisional

(25)

Budget 2006 Budget 2006

An analysis An analysis

Policy Changes

(26)

An Analysis

Key Developments Key Developments

• SEZ legislation notified

• Limited Liability

Partnerships proposed as bodies corporate

(27)

An Analysis

Inbound Investment Policy (contd.) Inbound Investment Policy (contd.)

Key Policy changes in FDI

• Attempt to move towards ‘single window clearance’

• 100% FDI under automatic route in various sectors

• 51% FDI in retail for ‘Single Brand products’ with prior approval

• Dispensation of mandatory divestment of 26% foreign equity in B2B e-commerce

• 49% FDI in Asset Reconstruction Companies with FIPB approval

(28)

An Analysis

Inbound Investment Policy Inbound Investment Policy

• General permission for transfer of shares/convertible debentures of companies in financial sector (Banks,

Insurance, NBFCs) and cases attracting SEBI Takeover Regulations involving approvals from SEBI/ RBI/ IRDA

• FDI in Up-Linking of Television Channels with prior

approval and subject to guidelines issued by Ministry of I&B

• FDI hike in telecom from 49% to 74%

Increase in limits for FII investments in debt market instruments

(29)

An Analysis

Outbound Investment Policy Outbound Investment Policy

• Hike in ceiling for overseas investment under

automatic route from 100% to 200% of net worth of Indian investing entity

• Investments in Bhutan permitted in freely convertible currencies in addition to Indian Rupees

(30)

An Analysis

Outbound Investment Policy Outbound Investment Policy

• Increase in ceiling on aggregate investment by

mutual funds in overseas instruments from $ 1 bn to

$ 2 bn

– minimum 10 % reciprocal shareholding in an Indian company not necessary

• Limited number of qualified mutual funds to be allowed to invest cumulatively up to $ 1 bn in overseas exchange traded funds (ETFs)

(31)

An Analysis

ECB Policy ECB Policy

• ECBs by NBFCs to finance import of infrastructure equipment for leasing subject to RBI approval

– minimum average maturity of ECBs to be five years

• FCCBs by housing finance companies satisfying specific criteria subject to RBI approval

• Minimum holding of equity in borrower company

prescribed for “foreign equity holder" to be eligible as

“recognized lender” under the automatic route

• Prepayment of ECB exceeding US$ 200 million with RBI approval

(32)

Budget 2006 Budget 2006

An analysis An analysis

Direct Taxes

(33)

An Analysis

Exemptions/ Deductions Exemptions/ Deductions

• Exemption for Long-term Capital Gains available on investment in bonds issued only by NHAI and RECL with effect from

AY 2006-07

• Tax deduction available for Term Deposits with Scheduled Banks

(34)

An Analysis

Business Deductions Business Deductions

• Method of allocating

expenditure in relation to exempt income to be

prescribed

• Income tax paid in foreign country not eligible for

deduction from AY 2006-07

• Conversion of interest

payable to loan/ advance not eligible for deduction with

retrospective effect

(35)

An Analysis

Tax Holiday Tax Holiday

• New SEZ units not

eligible for tax holiday on transfer pricing

adjustment to profits

• Tax holiday for Power

Sector extended to March 31, 2010

• Tax holiday for

development/operation &

maintenance of Industrial Park extended to

March 31, 2009

(36)

An Analysis

Exemptions Exemptions

• Exemption to Infrastructure Capital Fund/ Company from investments in infrastructure projects

withdrawn

• Tax exemption for aircraft lease rentals extended for agreements entered up to March 31, 2007

• Exemption from grossing up of tax on aircraft lease rentals for agreements entered after March 31, 2007

(37)

An Analysis

Minimum Alternate Tax (MAT) Minimum Alternate Tax (MAT)

• Increase from 7.5% to 10% of book profits

• Book profits to include

long term capital gains on sale of listed shares/ units

• Depreciation on account of revaluation of assets to be disregarded

• MAT credit available for 7 years as against 5 years

10.46 7.84

Foreign

11.22 8.42

Domestic

New Old

Company

MAT effective rate

(38)

An Analysis

Tax on distribution of income Tax on distribution of income

• Exemption from tax on distribution of income to extend to ‘close-ended’ equity oriented funds

• ‘Equity oriented funds’ to mean funds where more than 65% (as against 50%) of the investible

amounts are invested in equity shares of Indian companies

• Effective from June 1, 2006

(39)

An Analysis

Tax Payments/ Compliance Tax Payments/ Compliance

• Tax return filing within due date mandatory for claiming certain tax holidays from AY 2006-07

• Credit available for foreign tax and MAT while computing interest for delay in filing return or payment of advance/ self assessment tax

• One by six scheme of filing tax returns abolished from AY 2006-07

• Concept of Tax Return Preparer introduced for preparing/ signing tax returns

(40)

An Analysis

Fringe Benefits Tax (

Fringe Benefits Tax ( ‘ ‘ FBT FBT ’ ’ ) (contd.) ) (contd.)

• Sales Promotion expenses to exclude:

– Expenses on free samples of medicines or medical equipment, distributed to doctors

– Expenses on payment to any person of repute for promoting sale of goods or services

• FBT not payable for contribution to approved superannuation fund up to Rs. 100,000 per employee per annum

(41)

An Analysis

Fringe Benefits Tax (

Fringe Benefits Tax ( ‘ ‘ FBT FBT ’ ’ ) )

• No FBT on free or subsidized transport or any such allowance provided to the employee for journeys

from residence to place of work and back

• Expenses on following Fringe Benefits to be valued at 5% instead of 20%:

– Tour & travel for all employers

– Expenses on provision of hospitality, use of hotel, boarding and lodging facilities provided by

employers engaged in the business of carriage of passengers or goods by aircrafts or ships

(42)

An Analysis

Securities Transaction Tax Securities Transaction Tax

• Hike of 25% from June 1, 2006

0.25%

0.2%

Sale of unit of an equity oriented fund to the Mutual Fund

4.

0.017%

0.0133%

Sale of a derivative (option / futures) 3.

0.025%

0.02%

Non-delivery based sale of an equity share or unit of an equity oriented fund

2.

0.125%

0.1%

Delivery based purchase / sale of an equity share or unit of an equity oriented fund

1.

Proposed rate Existing

rates Taxable securities transaction

Sl. No

(43)

PwC

Budget 2006

Indirect Taxes

*connectedthinking

(44)

An Analysis

Unified GST

Central VAT

CENVAT (16%)

Service Tax (12%) Central Taxes

State VAT

State VAT (RNR -12.5%)

State Service Tax

CST

(4% 2% 0%)

State Taxes

Integration of Central & State VAT April 1, 2010

2008 ? 2009 ?

Roadmap to GST

(45)

An Analysis

Highlights

Highlights – – Indirect Taxes Indirect Taxes

• Reduction in peak customs duty rate

• Rationalisation of excise duty rates

• Trend to broad base service tax continues

• Increase in service tax rate - step towards convergence with CENVAT rate

(46)

An Analysis

Key Proposals

Key Proposals - - Customs Customs

• Peak rate reduced from 15% to 12.5%

• ADC of 4% extended to all products with a few exemptions

– Cenvatable to manufacturers

• Customs Tariff amended to align with amendments in HSN

(47)

An Analysis

Key Proposals

Key Proposals - - Excise Excise

• Reduction in exemptions

• Duty on DTA clearances by EOU modified

• Scope of ‘deemed manufacture’ extended to certain specified activities

• Advance Ruling to cover determination of excise duty liability

• RSP based assessment to be extended to more products

(48)

An Analysis

Key Proposals

Key Proposals – – Service Tax Service Tax (contd.) (contd.)

• Service tax rate increased to 12%

• 15 new services brought under the net

• Scope of existing taxable services extended

• Reverse charge mechanism amendment attempts to resolve ambiguity for services provided from outside India

• New valuation provisions to be introduced

(49)

An Analysis

Key Proposals

Key Proposals – – Service Tax Service Tax

• Specified exemption notifications conditional to non- availment of CENVAT credit for input services

• Provisions introduced for forfeiture of amounts collected as service tax

• Recovery provisions for arrears made more stringent

• Advance Ruling to cover determination of liability to pay service tax

(50)

An Analysis

Pharma

Pharma (contd.) (contd.)

Nil 5%

Specified Diagnostic Kits

Nil 5%

Specified Formulations

& Life Saving Drugs

- 10%

Specified Bulk Drugs

Excise Customs

Product

• Duty Reduction

(51)

An Analysis

Pharma Pharma

• Amendment in Technical

Testing and Analysis Service to:

– Cover clinical testing of drugs & formulations

– Exclude diagnostic testing and analysis

• No FBT on distribution of free samples or equipment to doctors

(52)

An Analysis

FMCG (contd.) FMCG (contd.)

• Reduction in Excise

Duty/Exemptions for soft drink

& food processing industry:

– Aerated water from 24% to 16%

– Ready to eat packaged food from 16% to 8%

– Condensed milk from 16%

to Nil

– Ice cream from 16% to Nil – Processed meat, fish and

poultry products from 8% to Nil

(53)

An Analysis

FMCG FMCG

• Consequent reduction in abatement from RSP for above products

• RSP based taxation to be extended to Tooth brush

• Increase in excise duty on tobacco products

(54)

An Analysis

Auto (contd.) Auto (contd.)

• India to be global hub for small cars

• Rate of excise duty reduced

from 24% to 16 % for small cars not exceeding length of 4000

mm fitted with :

– Petrol engine not exceeding 1200 cc or

– Diesel engine not exceeding 1500 cc

(55)

An Analysis

Auto Auto

• RSP based assessment to be extended to parts, components and assemblies for automobiles

• Exemption from service tax provided to financial leasing services on taxable value comprising of 90 percent of an amount representing as interest

(56)

An Analysis

Oil & Gas Oil & Gas

• Customs duty on naphtha and

petroleum coke reduced from 10 % to 5 %

• Cess on domestic petroleum crude oil increased from Rs.1,800 PMT to Rs.2,500 PMT

• LPG for domestic use included in the list of declared goods under CST Act

• Concessional project import rate of 10% for pipeline projects involving transportation of natural gas, crude petroleum and petroleum products

(57)

An Analysis

Financial Services

Financial Services - - Banking Banking

• Service Tax extended to several new categories of services

• Definition of “Banking and other Financial services”

expanded to include :

– Money transfer services – Services as Bankers to

an issue

• Impetus to leasing and hire purchase industry

(58)

An Analysis

Financial Services

Financial Services – – Insurance Insurance (contd.)

(contd.)

• Comprehensive Bill on

insurance to be introduced

• Service tax exemption to re- insurance premium

withdrawn

• Service tax exemption, in

respect of business for which premium is booked outside India, withdrawn

(59)

An Analysis

Financial Services

Financial Services - - Insurance Insurance

• Deduction of premiums paid by employer on health insurance scheme of private insurance players

• Premium paid or reimbursed by the employers, in IRDA

approved health insurance schemes of private insurers, not perquisites

(60)

An Analysis

Media and Entertainment Media and Entertainment

• Customs and Excise duty

rationalization on set top boxes

• Additional duty not chargeable on newsprint inputs

• Service tax levied on

– Sale of space or time for advertisement, except print media

– Sponsorship services other than sports events

• Public relations services

(61)

An Analysis

Technology Technology

• Excise duty imposed on computers and packaged software:

– customised software and software downloaded from the internet not liable to excise duty

• Management consultancy services in respect of ERP services now taxable

• Service tax exemption for call

centres and medical transcription centres withdrawn

(62)

of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent

legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).

PwC

Budget 2006

Budget 2006

An analysis An analysis

Economic Indicators Economic Indicators

An analysis An analysis

Fiscal &

Revenue Deficit

GDP Growth

Inflation Inflation

Growth Inflation Foreign

Revenue Deficit

GDP Growth

Foreign Direct Investment Foreign Direct Investment

Revenue Deficit

An analysis An analysis

Policy Changes

Inbound Investment Policy Inbound Investment Policy

Increase in limits for FII investments in debt market instruments

Outbound Investment Policy Outbound Investment Policy

ECB Policy ECB Policy

An analysis An analysis

Direct Taxes

Business Deductions Business Deductions

Tax Holiday Tax Holiday

Exemptions Exemptions

Minimum Alternate Tax (MAT) Minimum Alternate Tax (MAT)

Tax on distribution of income Tax on distribution of income

Tax Payments/ Compliance Tax Payments/ Compliance

Fringe Benefits Tax (

Fringe Benefits Tax (

Securities Transaction Tax Securities Transaction Tax

Budget 2006

Roadmap to GST

Key Proposals

Key Proposals

Key Proposals

Pharma

Excise Customs

Pharma Pharma

FMCG FMCG

Auto Auto

Financial Services

Financial Services

Media and Entertainment Media and Entertainment

Technology Technology

Thank you.