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 Contents 

* Short Term Capital Gains increased from 10 to 15 per cent

* Tax deductions on Non-resident ordinary (NRO) deposit from 30 to 20 per cent

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                                                                        (Highlights)

   (Presented on 29th Feb 2008 in the Parliament. Contact us for details on budget).

·         Short-term capital gains tax hiked from 10% to 15%

·         Securities Transactions Tax unchanged

·         Central Sales Tax up from 2% to 5%

·         Dividend of subsidiary company will be released from DDT

·         Banking transaction tax to be exempted

·         5-yr tax holiday for building hospitals in tier-II, tier III regions

·         Introduction of Commodities Transactions Tax

·         FBT exempted on creche, employee sports, guest houses facilities

·         Tax-GDP ratio higher at 12.5%

·         General CENVAT rate: dipped from 16% to 14%

·         Fiscal Deficit & Revenue Deficit: pegged at 3.1% & 1.4%.

·         Peak rate of customs duties unchanged

·         PAN requirement extended to all securities transactions

·         Corporate Tax/Corporate Surcharge Tax - Unchanged

·         Service Tax -   Unchanged

·         Tax slab for Rs 3-5 lakh would be 20 pc

·         TAX: exemption raised from Rs 1,10,000 to Rs 1,50,000

·         TAX: Women exemption threshold stretched from Rs 1,45,000 to 1,80,000

·         TAX: Senior citizens' exemption raised from Rs 1,95,000 to 2,25,000

·         Excise duty of Rs 1.35/litre applied on unbranded petrol

·         Excise duty of Rs 4.6/litre applicable on unbranded diesel

·         Star hotels: 2,3,4 star hotels to get 5-yr tax holiday in UNESCO's heritage sites

·         Duty on two wheelers slashed from 16 to 12 pc

·         Hike of duty on non filter cigarettes

·         Excise duty reduced to 8% on water purification items

·         Duty taken off on naphtha for production of polymers

·         Refrigeration components to get less expensive

·         Reduction of excise duties on anti-AIDS drugs

·         Reduction of excise on paper and its products

·         Reduction of excise duties on buses, chassis

·         Excise on small cars stepped to 14%

·         Excise on pharma goods reduced to 14% 

·         5% cut of customs duty on some bulk drugs

·         Crude sulphur: duties stepped down to 5%

·         Duties on convergence products dipped to 5%

·         Set top boxes: 100% exemption

·         Steel melting & aluminum scrap: duties reduced

·         Risk Capital Fund to be established in SIDBI

·         Hospital sector likely to gain Interest, subvention has been increased in the year 2007-08     TOP

Rate of tax on short term capital gains under Section 111A & Section 115AD increased from 10% to 15%. This may impact Private Equity (PE) and Venture Capital (VC) industry. Though generally VC or PE does not look at Short Term Capital Gains, however, if some VC or PE holding listed securities, want to exit in short term (may be because share market is not doing well) then they have to pay 15% Short Term Capital Gain Tax instead of 10% earlier. In any case funds from Mauritius or like tax heavens will not be affected due to DTAA.

Interest on NRO deposit may be taxed at the rate of 20%, instead of the prevailing practice of levying 30%, according to an order from the Authority for Advance Ruling (AAR), a quasi judicial body for tax disputes.

NRO deposits are rupee account of NRIs from the money they earn and save in India. The earnings could be in the form of salary drawn in India, rent received from properties here, dividend or transfer from resident account. The interest on this account is repatriable after payment of applicable taxes in India.

At present banks consider such income as interest income or income from other sources and deduct tax at the rate of 30%. NRIs have been asking for years that this should be lowered to 20%, the rate at which interest from foreign currency accounts are taxed. AAR observed that since NRO deposits are in the nature of convertible foreign exchange, these deposits are similar to foreign exchange assets. AAR also held that such deposits can be considered as investment under section 115 C of the Income-Tax.  TOP

Currently banks in India have been issuing Letters of Comfort (LoCs) to meet the requirements of the overseas regulators while seeking their approval for establishing subsidiaries / opening branches in their countries. Such LoCs are intended to provide the comfort to: (i) the overseas and domestic regulators that the parent bank would support its foreign / domestic subsidiaries in case they face any financial problems in future; and (ii) the rating agencies in India, which might be rating the issuances / products of the bank’s Indian subsidiaries, in regard to availability of the parental support to the subsidiary. Such LoCs could entail an element of contingent liability on the part of the issuing banks which, at present, is not adequately captured under the extant regulatory dispensation.

The matter of issuance of LoCs by the banks was, therefore, examined by the RBI recently in view of the possible liabilities / obligations that may have to be met by the issuing banks in future and it has been decided to lay down the following prudential norms in this regard:

i) Every issuance of an LoC should be subject to the prior approval by the Board of Directors of the bank. The bank should lay down a well defined policy for issuance of LoCs, including the indicative cumulative ceilings up to which LoCs could be issued by the banks for various purposes. The policy must, inter alia, provide that the banks will obtain and keep on record a legal opinion in regard to the legally binding nature of the LoC issued.  An appropriate system for keeping record of all the LoCs issued should also be put in place.

ii) The bank should make an assessment, at least one a year, of the likely financial impact that might arise from the LoCs issued by it and outstanding, in case it is called upon to support its subsidiary in India or abroad, as per the obligations assumed under the LoCs issued. Such an assessment should be made qualitatively on judgmental basis and the amount so assessed should be reported to the Board, at least once a year. As a first time exercise, such an assessment should be undertaken in respect of all the outstanding LoCs issued and outstanding as on March 31, 2008 and the results placed before the Board in the ensuing meeting. Such an assessment should form a part of the bank’s liquidity planning exercise as well.

iii) Any LoC that is assessed to be a contingent liability of the bank by a rating agency / internal or external auditors/ internal inspectors or the RBI inspection team, shall be treated, for all prudential regulatory purposes, on the same footing as a financial guarantee issued by the bank.

iv) The banks should disclose full particulars of all the LoCs issued by them during the year, including their assessed financial impact, as also their assessed cumulative financial obligations under the LoCs issued by them in the past and outstanding, in its published financial statements, as part of the ‘Notes to Accounts”. TOP

1.     The Reserve Bank of India (RBI) may now allow trusts and societies to make investment abroad. RBI felt that trusts and societies can invest abroad through special purpose vehicles (SPVs) so there’s no harm in allowing them to acquire overseas assets through the automatic route. This would open the gates for Indian educational institutions like Indian Institute of Technology and Indian Institute of Management, besides religious bodies and charities, to invest in or acquire overseas assets and allow trusts and societies to set up subsidiaries and joint ventures. Although the RBI have not formally notify it. Trusts and societies would have to abide by the same rules as Corporates while investing abroad, and must also ensure that these are consistent with their trust deed or memorandum.

The question of allowing trusts and societies to remit foreign exchange to acquire overseas assets came up when the JSS Mahavidyapeetha (a society established by the Suttur Mutt that runs 257 educational institutions in Karnataka, Tamil Nadu, Kerala and UP) wanted to buy land in Maryland, USA to set up a spiritual centre.

The Government of India recently passed the Warehousing (Development and Regulation) Act, 2007, which proposes to regulate the warehousing business. However, till the government issues a notification to bring the provisions of the Act into force, the existing law will be operative. The new law fills these gaps and provides a new regulatory regime for warehousing business. It facilitates the issue of negotiable warehouse receipts by any person carrying on the business of warehousing. The salient features of the new law are:

• The object of the Act is to make provisions for the development and regulation of warehouses, negotiability of warehouse receipts and establishment of a Warehousing Development and Regulatory Authority.
• The law applies to any person who is registered as a warehouseman with the authority for carrying on the business of warehousing i.e. maintaining warehouses for storage of goods and issuing negotiable warehouse receipts
• The law recognizes a warehouse receipt in electronic form issued by a warehouseman or by his duly authorized representative (including a depository by whatever name called)
• Any person desirous of undertaking business of maintaining warehouse issuing negotiable warehouse receipts has to obtain registration. Any person, firm, cooperative society or any association of persons whether incorporated or not can be a warehouseman
• Existing warehouse business has to apply for registration within 30 days from the date of commencement of the Act (yet to be announced by the government)
• The law makes detailed provisions about particulars to be included in the warehouse receipts, their negotiability by endorsement and delivery, warranties on negotiation of warehouse receipt and issue of duplicate receipts.
• The law also provides for registration of accreditation agencies for issue of certificate of accreditation to warehouses issuing negotiable warehouse receipts
• Any existing or future warehouseman not intending to issue negotiable warehouse receipts is not governed by the law. Such a person can continue his business activity without obtaining registration.

This law has distinct advantages for the agriculturists as well as commodity traders. Negotiable warehouse receipts will facilitate trade in commodities without physical handling of the stocks of commodities and other goods. Warehouse receipts being documents of title to goods can be easily offered as security for any loan. TOP

The Government of India notified the revised ceilings of foreign direct investment (FDI) in six sectors. However, there is no mention in the norms of the proposal to relax the mandatory three-year lock-in period for foreign institutional investors in real estate as stated in the announcement made by the Department of industrial policy & promotion (DIPP).The notification contains liberalized FDI norms for six sectors:

• Press note 1 says apart from allowing 74% FDI in charters and cargo services, the government has allowed 100% FDI in helicopters, flight training institutes, ground handling and technical training through the automatic route. No foreign airline will be allowed to pick up equity, even indirectly, in air transport services, which will be defined for the first time.
• Press note 2 waives the 26% divestment clause in the petroleum market and hikes FDI ceiling in PSU refineries to 49%.
• Press note 3 allows 49% foreign investment in commodity exchanges. Here, a single foreign investor cannot own more than 5%.
• Press note 4 deals with clearance of 49% FDI in credit information companies and scrapping of credit reference agencies from the list of non-banking finance company activities permitted for FDI.
• Press note 5 allows 100% FDI in titanium mining, apart from specifying that no FDI is permitted in atomic minerals.
• Press note 6.mentions the conditions for 100% FDI in industrial parts.

TOP