THE UNION BUDGET 2004-05

by

Ravi Singhania

The Union Budget 2004-05 has been acclaimed as a good budget making India one of the most attractive destinations to invest in.

Proposals

• Foreign direct investment (FDI) cap in telecom has also been raised to 74 percent from 49 percent and FDI cap in aviation has been raised to 49 percent from 40 percent. FDI limit on insurance has been hiked to 49 percent from 26 percent. Therefore, FDI by a foreign company is permitted under the automatic route for insurance up to 49 percent, for telecom up to 74 percent and aviation up to 49 pervent. The Finance Minister was of the opinion that FDI should be encouraged and actively sought, particularly in the areas of infrastructure, high technology and exports and the above mentioned three sectors of the economy fully meet this description.

• In order to make the capital markets strong and attractive and encourage Foreign Institutional Investors (FIIs) to invest in India, it had been proposed to make the procedure for registration and operations simpler and quicker for FIIs. In addition the investment ceiling for FIIs in debt funds has been raised from US$ 1 billion to US$ 1.75 billion.

• Also importantly, most of the powers of the Foreign Investment Promotion Board (FIPB) are proposed to be put under the automatic route and leave FIPB as a one stop service center and facilitator.

• On July 21, 2004, the Finance Minister rolled back the provisions of the Securities Transaction Tax (STT) proposed in the Union Budget. The position as it stands now is that STT will have differential rates for delivery, day-trades and derivatives transactions and also provides for splitting of the tax incidence equally between the buyers and sellers, as against only on the buy side earlier. The Minister’s proposed multiple STT rates, provide for the lowest tax of 0.01 percent for derivatives (futures and option) and highest of 0.15 percent for delivery based transactions. Further, those who are paying income tax on business profits will also be allowed to take credit for STT against tax on business income. This is a big concession as it lowers the day-traders, business’s and broker’s tax burden, actually making it even less taxing than earlier. Also the new levy will not apply to debt instruments. The long term capital gains tax on sale of listed securities has been abolished and short term capital gains tax on sale of securities has been slashed to 10%.

• The policy proposed is that there should be a uniform rate of tax on goods and services. The India’s tariff structure has to be aligned with that of ASEAN countries.

• The rate of service tax has been enhanced from 8 percent to 10 percent. Fifty eight services were under the service net so far and this budget has proposed to add some more services within its scope. These are business exhibition services, airport services, services provided by transport booking agents, transport of goods by air, survey and explanation services, opinion poll service, intellectual property services other than copyright, brokers of forward contracts etc.

• Implementation of VAT by April 1, 2005 across all states. This will replace the State Sales/Trade Tax Act prevalent in those states.

• The Commerce Minister will soon come out with a Trade Policy and a Bill for regulating Special Economic Zones (SEZs) to boost manufacturing, exports and employment..

Changes affecting Industry in the areas of our specialization

Telecom

• FDI limit raised to 74%
• Extension of Tax Holiday u/s 80-IA by one year
• Reduction in custom duties on fixed wireless terminals, telecom software and telecom infrastructure capital goods
• Abolition of customs duty on equipment and cell phone accessories
Power
• Benefits under section 80IA for renovation and modernization power sector projects undertaken during the period April 1, 2004 to March 31, 2006.
Pharma and Biotech
• 100 % deduction of profits to companies carrying on scientific research and development and approved by the Department of Scientific and Industrial Research before April 1, 2004 to be extended to March 31, 2005.

Housing

• Benefits to housing industry under section 80IB for projects approved before March 31, 2005 to be extended to March 31, 2007.

Automobiles

• Automobiles to be eligible for 150% deduction on in-house R&D.
Textile
• New tax regime introduced. Abolition of mandatory Cenvat chain.
• Every manufacturer whether handloom, powerloom or composite mill will have the option to choose between exemption route or Cenvat route.
• Tariff schedule under Cenvat route is uniform rate of four per cent for pure cotton sector and eight per cent for blended textile sector and pure non-cotton sector
• There will be migration of firms to the organized sector from the unorganised