The purpose of this post is to highlight some of the key items in the Budget that impact the corporate sector and matters that are of general interest considering the areas covered on this Blog (in no discernible sequence):
While there was much anticipation about concrete announcements on this count, particularly in the absence of Left parties in the current Government, the Budget only suggests a general indication to undertake disinvestments. The Government, however, intends to retain control (51%) of public sector enterprises. As far as the banking and insurance industries are concerned, the Government proposes to continue to support public sector investment.
Also absent is any indication of liberalisation of foreign direct investment (FDI) rules, relaxation of sectoral caps (e.g. insurance, retail) or even any overhaul of the indirect investment guidelines represented by Press Notes 2, 3 and 4 of 2009.
At a general level, the Finance Minister’s speech waxes eloquent about
On a more concrete note, the Budget proposes to increase the public float available in stock markets in a phased manner. This issue has perplexed regulators for a while now. There has been no uniformity on this count because securities regulations were modified over a period of time thereby permitting companies to list on the stock exchanges by offering varying amounts of shares to the public (from as high as 40% to as low as 10%). This has resulted in a disparity in public shareholding in Indian listed companies. The current proposal will introduce some parity in public float among companies, but there are bound to be several practical difficulties before that can be achieved. This has also been the subject matter of previous efforts by the Ministry of Finance as discussed here on the Blog.
1. There are no changes to the corporate tax rates.
2. The sun-set clauses for tax holidays available to the IT sector under sections 10A and 10B of the Income Tax Act have been extended for the financial year 2010-2011.
3. The fringe benefit tax (FBT) introduced in 2005 has been abolished due to the high administrative costs involved. While this is a matter to rejoice, it has been countered by the imposition of a tax on employees upon exercise of stock option and upon receipt of certain other perquisites through amendments to Section 17 of the Income Tax Act.
4. The minimum alternate tax (MAT) has been raised from 10% to 15%.
5. The commodities transaction tax (CTT), introduced last year but yet to be implemented, has now been abolished. This would enable commodities transactions to be conducted on recognised exchanges. At the same time, the securities transaction tax (STT) that was introduced earlier on transactions in stock markets would continue. Note that STT was introduced simultaneously with considerable relaxations on capital gains tax for shares.
6. A new dispute resolution mechanism will be created within the income tax department for resolution of transfer pricing disputes. Furthermore, the authorities for advance rulings on direct and indirect taxes will be merged into one in order to enhance efficiency in tax administration.
7. The Finance Minister has also proposed structural changes in direct taxes by “releasing the new Direct Taxes Code within 45 days and in indirect taxes by accelerating the process for the smooth introduction of the Goods and Services Tax (GST) with effect from 1st April, 2010”.
The Budget presents a mixed bag to the legal profession too. One the one hand, it has clarified the tax position regarding limited liability partnerships (LLPs). Although the LLP Act came into effect from April 1 this year, not many LLPs were in fact registered due to uncertainties in the tax regime. The Finance Bill, through some minor tweaks to the definitions of the terms “firm”, “partner” and “partnership” (by including an LLP within them), makes the tax position of an LLP similar to that of a general partnership. In that sense, there is no tax adversity if a person were to structure the firm as an LLP instead of a general partnership. This would possibly accelerate the process of conversion of various general partnerships, such as legal practices, to LLPs that enjoy the benefit of limited liability of the partners.
While clarification on LLP taxation would encourage lawyers to come together to combine their practices to take advantage of limited liability, another change in the tax law creates disincentives to such combinations of individual legal practices. The legal profession has hitherto successfully stayed outside the ambit of service tax. This is purportedly on the basis that lawyers do not perform a “service”. But, that has now changed with the Budget, as Mr. Mukherjee states by making reference to the previous Finance Minister Mr. P. Chidambaram: “Although there is a school of thought that legal consultants do not provide any service to their client, I hold my distinguished predecessor in high esteem and disagree! As such, I propose to extend service tax on advice, consultancy or technical assistance provided in the field of law.”
The fine-print in the Finance Bill reveals two exceptions to service tax on legal practices: (i) the tax is not applicable to “any service provided by way of appearance before any court, tribunal or authority”; and (ii) the tax is not applicable when the service-provider or recipient is an individual. In other words, service tax is not applicable litigation work. Even here, it seems that the exception does not cover all litigation work, but only that which relates to appearance before the court, tribunal or authority. On the face of it, while fees levied towards drafting, conferences, pleadings are likely to be within the service tax ambit, this is likely to be the subject-matter of greater interpretation and possible litigation. This would increase the burden on lawyers to maintain details of fees charged towards specific parts of work performed. Moreover, individual lawyers seem to be outside the purview of service tax. In that sense, this may incentivize lawyers to stay as solo practitioners rather than to form LLPs to avail of the benefits of limited liability. Having said that, service tax is usually passed on to the recipients of services, in this case the clients, which does not directly affect lawyers but only goes to increase the cost of obtaining legal services.
Overall, it seems that the Budget has not received overwhelming support by commentators, perhaps due to the high expectations that the Government would announce greater measures.