Budget 2009: Key Features and Some Thoughts

India’s Finance Minister, Mr. Pranab Mukherjee, presented the Government’s annual Budget in Parliament yesterday. While commentators brand it a mixed bag, the stock markets do not seem to have received the Budget favourably as the stock indices experienced their largest Budget-day fall in history.

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.

Financial Sector

At a general level, the Finance Minister’s speech waxes eloquent about India’s existing policies of robust oversight and regulation of the financial industry that may have resulted in the Indian markets escaping some of the turbulence faced in other economies due to the global financial crisis.

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.

Direct Taxes

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”.

Legal Profession

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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • John, while the taxability would depend on the specific services provided by the LPO, the provision that levies service tax itself is quite wide: "advice, consultancy
    or assistance in any branch of law, in any manner". The use of expressions such as "assistance" and "in any manner" make it quite expansive.

  • Hi Umakanth,

    Thanks for your penetrating insights. I however had a few questions on the imposition of service tax on certain legal services of my own:

    1. Taking into consideration your possible exception ("fees levied towards drafting, conferences, pleadings") to the exemption provided to litigation services vis-a-vis “any service provided by way of appearance before any court, tribunal or authority”, could it be possible that such law firms will restructure the manner in which they currently accept fees in so much as a client could be persuaded to expend the entire sum due from him under the head of "appearance before any Court, Tribunal or Authority"(the client might be incentivized to do so in order to prevent the 'passing-on' of the tax on such fees to it)? This, of course, rests on the assumption that the law firm will be able to inject the client in a token proceeding of a legal nature. In view of this point, would it be acceptable under the new service tax regime for the authorities to inquire into the particulars/components of fees charged?

    2.Again, not very clear on this, but would appearances by members of a law firm(partnership) in a Court, Tribunal or Authority be viewed as appearances by an individual or by a non-individual entity and therefore be taxed accordingly. Because if they would be taken as solo practitioners (individuals) then couldn't law firms doing predominantly non-litigation matters also escape from the tax net altogether by rendering those services as individuals as compared to the firm being the service provider?

    3. Couldn't the definition of 'individual' be played/tinkered with respect to an individual service-recipient where one can consult an individual service provider and then 'pass-on' the consolidated advice received, to the company or entity that is concerned with the matters consulted on. Also, would the 'passing-on' of such advice received during consultation be viewed as providing service in itself notwithstanding that the 'passer-on' is not a qualified legal practitioner?

  • Reply to Anonymous:

    The questions raised are indeed valid. However, since the provision in the Bill is quite skeletal, the true position will be clear only after detailed discussion and debate, and it is probably not prudent to hazard any definitive conclusions. Challenges to the constitutionality of such a provision also cannot be ruled out. Having said that, here are only some general thoughts that deal with your questions (in the same order):

    1. While there could be some level of flexibility as to the fees charged for court appearance and other activities, there is also another plausible interpretation of the “appearance” exemption. Others have argued elsewhere that under the provision all activity related to litigation should be exempted. In other words, the effort that goes into preparation, filing of documents, etc. that precede the actual appearance should also not be taxable. To that extent, the real distinction is between litigation work and transactional work, whereby the former is exempt while the latter is taxable. See press report (http://timesofindia.indiatimes.com/India/Law-firms-upset-about-discrimination/articleshow/4751058.cms).

    2. On the face of it, the “appearance” exemption is absolute. It does not matter whether it is a solo practitioner or a law firm; all are exempt for that type of work.

    3. Even though this complex scheme of things may address (if at all) the service tax issue, it would not be possible for a person without legal qualifications to provide legal advice and hence it may not be workable.

  • According to me Fringe Benefit Tax has been abolished so it will help all companies and the luxury bus operators who transported passengers either interstate or intra state will now be tax free.

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