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Apr, 01 2008

Tax proposals 2008-09 - Impact on small entrepreneur

The Finance Minister, P.Chidambaram, presented the last budget of this term on February 29, 2008. The tax collections during 2007-08 have shown an excellent growth at 24 per cent and the budget estimates for the year 2008-09 target a 17.5 per cent year on

In recent years, the Government`s tax policy has been governed by the overarching objective of increasing the tax-GDP ratio for achieving fiscal consolidation. This is sought to be achieved through appropriate policy interventions and a steadfast improvement in the quality and effectiveness of tax administration.

One of the striking features of tax collections has been the buoyancy in the direct tax collections vis-à-vis the indirect taxes. Experience of the developed economies suggests that a higher proportion of direct taxes to indirect taxes is indicative of a move towards a mature economy. A relatively higher direct tax revenue ratio indicates a tax collection system which is based on the wealth distributed in the society and thus avoids burden on the low income group of the society.

Direct tax proposals

Increase in individual`s tax savings:

The basic tax exemption limit is proposed to be enhanced from Rs 1,10,000 to Rs 1,50,000 for the financial year 2008-09. Simultaneously, the chargeable income brackets have also been enhanced.

Income (Rs.) Proposed Rates Existing Rates


1. A surcharge of 10 per cent would be applicable for individuals with taxable income in excess of Rs 1,000,000.
2. Cess of 3 per cent is leviable in addition to the tax and surcharge indicated supra.
0 – 110,000 Nil Nil
110,001 to 150,000 Nil 10%
150,001 to 250,000 10% 20%
250,001 to 300,000 10% 30%
300,001 to 500,000 20% 30%
500,001 and above 30% 30%

Further, in case of resident women below the age of 65 years the basic exempt limit has been increased to Rs 1,80,000 from Rs 1,45,000 and in case of senior citizens the basic exemption limit is increased to Rs 2,25,000.

The changes in taxable slabs would result in savings of Rs 4,120 to Rs 45,320 depending upon the individual`s income bracket.

Use of investment holding cos. for multiple ventures:

In respect of domestic holding-subsidiary relationships, the holding company could avail a relief on the dividends distribution tax paid by its subsidiary company subject to conditions. This could provide opportunities for tax efficient structures to the investor community and thus additional investment avenues for the smaller entrepreneurs.

Other key direct tax proposals

A Commodity Transaction Tax is proposed to be introduced which would work on the lines of the Securities Transaction Tax (STT). This would be levied with effect from financial year (FY) 2008-09 on transactions involving purchase or sale of options in goods or options in commodity derivatives traded in recognised associations.

Short term capital gains tax rate in case of listed securities is proposed to be increased to 15 per cent from 10 per cent.

Expenses such as prepaid electronic meal cards, crèche facilities for children, sponsorship of sportsmen/sports events and maintenance of guest houses removed from the purview of Fringe Benefit Tax. Further, the effective fringe benefit tax on festival celebration expenses is reduced to 6.8 per cent from 17 per cent.

The Banking Cash Transaction Tax payable on the cash withdrawals from the bank is proposed to be abolished from April 1, 2008.

The due date for filing of income tax return is advanced by a month. Consequently, companies and persons where accounts are required to be audited shall file the income tax return for the FY 2007-08 on or before 30.09.2008.

Indirect tax proposals

Indigenous products to cost less:

The normal rate of central excise duty is reduced from 16 per cent to 14 per cent. With the inclusion of education cess and secondary or higher education cess, the effective rate would be at 14.42 per cent. Consequential amendments are also made with respect to abatement for goods which are liable to duty based on MRP. The retail segment, which, to a large extent, works on the concept of maximum retail price, which typically is inclusive of all taxes and duties, would stand benefited by the reduction in the rate of central excise duty. From the entrepreneur`s perspective, this calls for an effective pricing policy to ensure that not only the margins are healthier but also competitive to ensure market share.

In addition to the above, the rate of central excise duty on certain specified goods is reduced further. These include:

  • Description WEF 01.03.2008 Upto 29.02.2008
  • Coffee and tea pre-mixes Nil 16%
  • Packed tender coconut water Nil 16%
  • Small cars 12% 16%
  • Hybrid cars 14% 24%
  • Battery powered cars nil 8%
  • Motor cycles 12% 16%
  • Three wheeled motor vehicles (for not more than 7 persons) 12% 16%
  • Wireless data modem cards with PCMCIA / USB/PCI Nil 16%
  • Writing, printing & packing paper 8% 12%
  • Imported goods to be cheaper:

While the peak rate of customs duty is retained at 10 per cent, the reduction in CENVAT rate to 14 per cent from 16 per cent would reduce the effective rate of customs duty from 34.10 per cent to 31.67 per cent. However, the manufacturing or service sectors availing CENVAT benefit would not really see any benefit in this cut since the reduction is purely on account of reduction in CENVAT rate, which would otherwise be availed as credit.

Inter-state procurements to be cheaper:

The phasing out of Central Sales Tax (CST) which began in 2006 continues. The CST is now reduced to 2 per cent from the current 3 per cent with effect from 01.04.2008. This would make inter-State procurements less expensive by 1 per cent.

Service tax net widened

The Finance Minister has increased the ambit of services liable to service tax. The following would now attract service tax:

  • Services involving acquiring of right to use any goods without transfer of possession;
  • Information technology services and computer software engineering services;
  • Processing and clearing services in relation to goods, securities and forward contracts;
  • Services provided by commodity exchanges;
  • Services in relation to management of unit linked insurance plans;
  • Services in relation to purchase and sale of foreign currency;
  • Services in the form of allowing or permitting the use of space in an immovable property, whether or not the possession or control of the said immovable property is transferred.

Small service providers to benefit

The basic exemption threshold for payment of service tax is now enhanced to Rs 1,000,000 from Rs 800,000. Consequentially, small service providers would have to obtain registration only if the amounts received towards value of taxable services exceed Rs 900,000 and pay service tax only when the amounts exceed Rs 1,000,000.

A scheme for resolution of disputes under service tax has been introduced for disputes pending as on 01.03.2008. Any dispute relating to service tax arrears involving an amount not exceeding Rs 25,000 would be eligible for resolution under this proposed scheme. The applicant may opt for resolution by discharging 50 per cent of the arrears of tax and 20 per cent of arrears of interest or penalty, if any.

No specific benefits for SME

While the Finance Minister assured that micro, small and medium enterprises will continue to receive support from the government, no tangible tax benefits or concessions have been provided for the SME sector in specific. Most incentives or reliefs discussed above are across the board and would impact both, the large players and the small entrepreneurs, equally.

Most demands of the SME have gone unnoticed. The wish list included an increase in the Small Scale Industry (SSI) limit under central excise provisions to Rs 5 Crores, an extension of the income tax holiday under the software technology park scheme for small and medium units, waiver of taxation of ESOPs during the initial years of establishment and reduced documentation and compliance requirements for the small players.

Nevertheless, the personal income tax savings and the reduction in excise duties should assist the business growth. From an entrepreneur`s perspective, it would be critical to plan the pricing policy and marketing strategy to tap the increased disposable income and strike the right competitive balance in sharing the duty benefits.

Last but not the least, it would be worthwhile to note that the Finance Minister, during his speech reaffirmed that considerable progress had been made in drawing out a roadmap for implementation of Goods & Service Tax (GST) by 2010. However, there was no mention on the status of the new direct tax code and its timeliness. It would be appropriate to close with his words, “The four years to 2007-08 have been the best years so far but, may I say with humility, that the best is yet to come.”

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