Union Budget - Direct Tax Highlights

FM Chidambaram has announced the Union Budget 2007-08. He has increased threshold limit of exemption in the case of all assessees by Rs 10,000 to Rs 1,10,000, thus giving every assessee a relief of Rs 1,000.

Following are the highlights of Direct Tax for Individuals and Corporates:

Individuals

The current slabs and rates of personal income tax were introduced only two years ago. They constitute a moderate tax regime. A comprehensive review will await the proposed Income Tax code which will be introduced in Parliament this year. Nevertheless, there was some relief to tax payers.

- the threshold limit of exemption in the case of all assessees be increased by Rs 10,000 to Rs 1,10,000, thus giving every assessee a relief of Rs 1,000; - consequently, in the case of a woman assessee, the threshold limit will be increased from Rs 135,000 to Rs 145,000, giving her a relief of Rs 1,000- the threshold limit of exemption in the case of a senior citizen be increased from Rs.185,000 to Rs.195,000, giving him or her a relief of Rs 2,000.

There will be exemptions under Sec 80 E for benefit on interest paid toward education loans extended to parents of the borrower. RBI Taxable Bonds will attract 10% TDS. The capital Gains Bond investment limit has been capped at Rs 50 lakh. The corporate investments in liquid/money market funds will take a hit as DDT has been hiked from 20% to 25%. Effective DDT will cross 27% due to additional surcharge for liquid money market funds. Liquid and Money Market Funds will loose their sheen.

Short Term FDs will gain due to hike in DDT for corporate investors in liquid/ money market funds. Mutual Funds have been allowed to invest in infrastructure projects directly through Infrastructure Funds. In another major move, MIN has been scrapped and PAN will be the sole identification number for capital market transactions. PAN with prefix or suffix to replace MIN and other identification numbers for capital market transactions. Over 1.8 lakh MINs have been issued from January 2007 till now.

Tax Exemption under Sec 80 D on Health insurance has been increased to Rs 15,000 from Rs 10,000. Tax Exemption under Sec 80 D on Health Insurance for senior citizens will be upto Rs 20,000. This will result in Health Insurance including Mediclaim to get a boost. Health insurance policies for Senior Citizens will be introduced by the general PSU insurance companies. LIC will get a grant of Rs 1000 cr from central & state Govt for Aam Aadmi Bima Yojna. Aam Aadmi Bima Yojna will cover 1.5 crore rural and landless households against death & disability.

The tax concession under Section 80 IB for construction under 1000 sq.ft built up in Delhi & Mumbai & under 1500 sq. ft built up in Bangalore comes to an end. Rental of immovable property for commercial, retail, IT premises to come under service tax net of 12.5%, which may impact rentals of commercial properties upwards. The pass through for real estate Venture Capital Funds comes to an end.

The FM says that the Banking Cash Transactions Tax continues to be an extremely useful tool to track unaccounted monies and trace their source and destination. He has excluded cash withdrawals by the Central and State Governments from the scope of this tax. Further, the exemption limit for individuals and HUFs have been raised from Rs 25,000 to Rs 50,000. There has been no increase in the rates of Securities Transaction Tax and the Capital Gains.

The budget has also allowed delivery-based short selling and stock lending by institutions. TDS rate on domestic royalty/service payments has been increased from 5% to 10%. TDS rate on comm & brok increased from 5% to 10%.

Corporates

MAT has been extended to IT cos and they will now be required to pay 11.22% MAT. This is unlikely to affect big technology companies like Infosys, TCS and Satyam, since they are already paying an effective tax of 12% average in overseas countries on their onsite income. But smaller tech companies could get impacted. A big hint is that the tax exemption for IT companies will not be extended beyond 2009.

There is no change in corporate tax rates, but 1% additional education cess is imposed to be applciable on all taxes. This in turn makes the effective corproate tax rate increase by around 0.3% to 33.9%. The 10% surcharge has been removed for corporates whose taxable income is less than Rs 1 crore, which is expected to benefit thousands of SMEs.

The budget is also positive on the pharma sector. A 150% weighted deduction benefit for R&D expenditure has been extended till 2012. This was a big pre-budget demand of pharma companies. Also free samples have been removed from the FBT ambit, which is a positive for pharma companies. Gems and jewellery companies are to be given option to pay 8% flat tax on their income, so as to make tax compliance easy. But ESOPs could now get more taxing as the FM has brought ESOPs under FBT ambit.