f o r    m a n a g i n g    t o m o r r o w
MARCH, 2007
 Cover Story
 Sector Analysis

The centre is looking at removing the distinction between FDI and FII investments. This will impact sectors like asset reconstruction, real estate and aviation, where separate ceilings apply to FDI and FII investment. However, allowing FDI through the FII route in the realty sector could result in prices shooting through the roof. The Asian financial crisis of the '90s is still fresh in mind, and a method should be devised to moderate possible volatility in key sectors.

S&P And After
For the first time in 14 years, international credit rating agency, Standard and Poor's (S&P), has raised India's credit rating to investment grade. S&P is the last of the three major international rating agencies to do so. Moody's Investors Service did it in January 2004 and Fitch Ratings in August 2006. The upgrade is likely to spur the flow of foreign investment into power, steel and other industries, which receive less than a tenth of the funds going China's way.
More Net Specials
A "Hold The Course" Budget
"The reduction of Central sales tax from 4 per cent to 3 per cent is welcome, but hardly the stuff 'dream budgets' are made of. The Budget does not have any new initiatives but continues the course already charted out"

Contrary to industry expectations, indirect taxes have not seen any significant changes in Budget 2007.

Unlike the previous year's Budget, there has been minor tinkering with service tax. In the interest of the small service providers, the threshold limit has been doubled from Rs 4 lakh to Rs 8 lakh. The ambit of taxable services has been widened with the introduction of seven new services, including renting of immovable property, development and supply of content for use in telecoms and advertising, mining related services, design services like furniture design, aesthetic design, consumer or industrial products, logos etc. The imposition of service tax on property rental is expected to increase the service tax burden of businesses.

Service tax is also proposed to be levied on services involved in execution of works contract such as construction, erection, installation and commissioning services etc., but specifically excludes maintenance and repair from its ambit. The Finance Minister also mentioned providing an option to works contractors to pay service tax under a composition scheme at 2 per cent of the total value of the works contract instead of 12.36 per cent on the service component. Introduction of this service category is, however, likely to overlap with the existing service categories for construction, installation etc and create disputes. Ambiguity with regard to export of service has been considerably cleared by replacing the condition of 'delivered outside India and used outside India' with 'provided from India and used outside India'.

In continuation of the policy of aligning the customs duty rates to the ASEAN level, the peak rate customs duty has been reduced from 12.5 per cent to 10 per cent. The ad valorem component on textile fabrics and garments has been reduced from 12.5 per cent to 10 per cent. Crude and refined edible oils have been exempted from the 4 per cent additional duty of customs. Customs duty on food processing machinery has been reduced to 5 per cent from 7.5 per cent and that on medical equipment from 12.5 per cent to 7.5 per cent. In an apparent attempt to discourage the export of scarce iron ore, export duty at the rate of Rs 300 pmt on iron ore and concentrates has also been imposed.

While no changes have been made to the Cenvat rates, the threshold limit for exemption has been increased from Rs 1 crore to Rs 1.5 crore to encourage the small-scale industries (SSIs). Excise duty exemption has been extended to food mixes, specified water purification devices and household water filters. There has also been a reduction of the ad valorem component of the excise duty on petrol and diesel from 8 per cent to 6 per cent while bio-diesel has been exempted from duty. The fm has proposed to reduce the present rate of excise duty of Rs 400 pmt to Rs 350 pmt on cement sold in retail at not more than Rs 190 per bag. Cement sold at a higher MRP will attract excise duty of Rs 600 pmt.

To boost the man-made fibre and yarn industry, the customs duty on polyester fibres and yarns and inputs used therein, have been reduced from 10 per cent to 7.5 per cent. However, exemption from excise duty to specified textile machinery has been withdrawn with levy of an excise duty of 8 per cent.

The UPA Government's fourth Budget does not hold any surprises. The reduction of Central sales tax from 4 per cent to 3 per cent is welcome, but hardly the stuff "dream budgets" are made of. The Budget does not have any new initiatives but continues the course already charted out, without any signs of accelerating down the road to tax reform and simplification.

Vivek Mishra is Partner (Indirect Tax), Global Tax Advisory Services, Ernst & Young