ESOP to be a fable soon ?

I had written a post yesterday on the financial impact of FBT on ESOP.

The same is re-iterated in Moneycontrol today as follows :

There was a lot of hue and cry about the Budget extending the infamous Fringe Benefit Tax to ESOPs. The exact rules of how they will be taxed isn't clear. But as CNBC-TV18 reports, many companies may dump ESOPs altogether.

The Finance Minister's decision to tax ESOPs as a fringe benefit has raised the hackles of many corporates. Most feel ESOPs may become unviable if they are taxed at the FBT rate of 30%.

"We may have to reconsider giving ESOPs," says Deepak Ghaisas, CEO, i-Flex Solutions.

What worries corporates is that FBT may be levied on the difference between fair market value as on the date of exercise and the ESOP issue price, which could be a fairly large sum. This method of valuation, experts say, does not have precedence elsewhere.

"Globally, no country taxes it as FBT; it is absurd," says Pranav Sayta, Partner, E&Y.

Even so, the Finance Minister says the rules for calculation of FBT will be announced later. "It is a fringe benefit and it will be taxed," said Finance Minister, P Chidambaram.

For lakhs of employees, for whom ESOPs have been a wealth-creation mechanism, it will be an anxious wait as Chidambaram decides how they will be taxed.

No Good Incentives for NRI's

India's latest budget has little to offer to NRI investors. If anything, the tax burden on them has only gone up.

More Indians are paying more taxes, the economy is growing at over nine percent, exports are booming and foreign reserves have touched a new record of $180 billion. So Finance Minister P. Chidambaram focused on the poor to lower prices, provide better education and healthcare, offer selected insurance cover and improve infrastructure.

Now that foreign companies are rushing to India and Indian companies are buying out foreign companies, new investment incentives take a back seat. Thus it is no wonder the budget did not have any special provisions to attract NRI investors. However, NRIs, like all Indians, will pay less income tax but also get lower returns on Indian stocks.

NRIs who file income tax returns in India will benefit marginally as the tax exemption has been raised by Rs.10,000 to Rs.110,000; to Rs 145,000 for women and Rs.195,000 for senior citizens. However, the education cess has increased from two percent to three percent on all direct and indirect taxes to finance higher education.

NRIs will get lower returns from their investments in stocks. The budget raised the dividend distribution tax from 12.5 to 15 percent on dividends paid by a domestic company from April 1, 2007. When the education cess of three percent is added, it amounts to over 18 percent. This means the dividend is reduced by over 18 percent on Indian stocks. Similarly, NRIs investing in a money market mutual fund or a liquid fund would pay 25 percent dividend distribution tax. But not many NRIs invest in these very short-term funds and the return is negligible.

Guru - I am not sure whether the additional education cess is on the Taxable Income or the Tax. So I would keep a disclaimer here.

NRI tenants occupying any property for commercial use will now have to pay service tax of 12.5 percent. This increases their cost of doing business in India. NRI landlords will not be affected, as they will collect this service tax from their tenants.

The budget did not make any provisions for greater individual real estate investment. To attract NRIs to invest in real estate, the stamp duty should be uniform across the country and reduced considerably. NRIs remit funds through legitimate banking channels and so they are at a disadvantage when the seller demands the majority of the price in cash as the sale price is a fraction of the total price paid for a property. This will bring down, if not stop, cash changing hands when buying and selling property that is commanding steep prices in India today. Since this is not strictly a budgetary provision, the finance minister can issue guidelines to the state governments on this matter.

As avid collectors of Indian art, if NRIs sell their art pieces in India, they will have to pay a capital gains tax. An NRI selling any work of art in India including drawings, paintings, sculptures or archaeological collections will now pay capital gains tax of 20 percent on the net gains or 10 percent on the total price.

NRI promoters can enjoy a five-year tax holiday if they invest in economy hotels and convention centres in and around Delhi provided that these facilities are completed before March 2010 in time for the Commonwealth Games in the capital.

NRI financiers of venture capital funds in India enjoyed tax benefits known as Pass Through Status for all knowledge-intensive ventures. Now the NRI promoters of these venture capital funds will get tax exemptions only in "truly deserving" ventures such as in biotechnology, IT relating to hardware and software development, nanotechnology, seed research and development, research and development of new chemical entities in the pharmaceutical sector, dairy industry, poultry industry and production of bio-fuels.

NRI promoters may also be taxed depending on their country of residence and its tax treaties with India. If an NRI takes over an infrastructure company through merger or acquisition, he/she will lose the exemption benefit granted earlier.

In addition to their bank accounts in major cities with major banks, NRIs can now open NRE/FCNR deposit accounts in selected foreign currencies or in rupees with Regional Rural Banks that are making good progress.

NRIs can heave a sigh of relief that their cash withdrawals under Rs.50,000 will not be notified to the authorities. To keep track of cash transactions and 'black money', a banking cash transaction tax was introduced last year for all cash withdrawals above Rs.25,000 and these transactions were reported to the Financial Intelligence Unit. This led the Income Tax Department to many money-laundering and 'hawala' transactions. This year, the limit of withdrawals has been raised to Rs.50,000.

The budget follows the old saying, "If it's working, don't fix it". India is progressing well so the poor should benefit. And NRIs are welcome to contribute - without VIP treatment.

Tax on ESOP

Our beloved Finance Minister, lovingly known as Chidu, has introduced a weird proposal (remember Budget announcements are just proposals and the bill has to be passed by both the houses) to tax on ESOPs.

The proposal says that all the ESOPs which have been granted to Employees in the Past and which would be granted in future would be taxed @ 33 % as Fringe Benefit Tax (FBT). The rate of tax has yet not been decided but FBT as of now has been paid by Corporate @ 30 % plus education cess of 10 % on FBT. Chidambaram has been talking in the media and has been quoted in an interview that the tax rate and the calculation method has yet to be prescribed.

Well, now since I am from IT Sector, I know the impact would be huge in terms of the tax to be paid by the employer. ESOP is a very good incentive to retain employees. The attrition rate has been very high lately and even today ESOPs work to the extent of retaining atleast 50% of the employees considering the growth of over 30% in NP and consequent increase in Stock Price.

Now, the question is not relating to future ESOPs, which obviously companies would try to avoid because of the tax impact. The question arises in case of the ESOPs already granted to the employees.

The following was the answer of Mr. Chidambaram in an interview to TOI :

Would it apply to ESOPs given before the Budget and not encashed, Chidambaram was asked.

"Of course, it will. The gain is taxed only when the ESOP is exercised. When the ESOP is not exercised, there is no gain at all," he said in an exclusive interview.

If company has to pay FBT as per last year's rate, the impact would be huge. As per ET, in case of some companies, HDFC Bank has 13 million shares pending to be exercised by the employees. In case of ICICI Bank, it is 23 millions and in case of Infosys, its 11 million.

To give an example, say Satyam has provided the ESOP to employees for Rs. 250. The current price is 412. The differential amount would be charged as FBT for Corporate @ 33 % which would come to around Rs. 48 per share. Now, there are companies who are already telling that they are going to pass on the financial burden of tax to the employees.

Mr. FM should clearly understand that he is trying to burden the IT and Financial Sector Employees where the demand for comsumption is coming in the economy. How would the economy grow without their consumption. Here is the biggest blunder which he is trying to do. How can growth be sustained without the strength of the new economy where employees are provided additional incentives to stay back in India or with the Indian Companies with ESOPs.

Hope the tax rate would be marginally higher than the rate of 10 % and 0 % only which the employee already pays to the Government when the shares are sold in short term and long term respectively after the same is exercised.

Also hope sense previals.

This MAT may cost IT cos up to $1 bn

The government’s decision to extend minimum alternative tax (MAT) to IT services companies could result in companies shelling out $800 million to $1 billion.

“Depending on the extent of offshore and onsite work, the tax implication could be an average of 2-4% for industry-wide revenues. This translates into a tax outgo of at least $800 million to $1 billion on account of MAT for the industry,” says the CFO of one of India’s largest IT services companies. Rajiv Anand, associate director of PWC agrees that the implication of MAT for a single year could well be more than $800 million. “We see MAT as a cash flow issue but not a lost case,” he said.

Since the government allows tax payments on account of minimum alternative tax to be used to offset future tax liabilities (post sunset clause of 2009), it is unlikely to have a major bearing on the earnings of companies, says the chief financial officer of an IT services major.

A Morgan Stanley analysis notes that while minimum alternative tax would increase the effective tax rate by 4-5% for most companies, there will be no P&L impact as these can be recognised as deferred tax assets in the balance sheet. “Since MAT payment can be carried forward to future years, companies can take credit against future tax liabilities that arise after March 2009. For Infosys, the net tax impact will be 1.5% of revenues,” said Infosys chief financial officer V Balakrishnan.

Currently, the companies pay taxes in overseas geographies and therefore minimum alternative tax on onsite income would be completely offset by these tax payments. “The companies pay no or little taxes on offshore income. MAT on such income can be offset partially by the taxes these companies pay on interest income and on profits obtained from clients in India. There will be a net tax liability, however,” said the Morgan Stanley report.

As the government allows tax payments on account of minimum alternative tax to be used to offset future tax liabilities and since the current tax exemptions for IT companies end in FY2009, these IT companies should be able to transfer the current MAT amount to the balance sheet as deferred asset, resulting in zero impact to the P&L. There will be a small cash flow impact, however. Essentially, tax outflows post-2009 will get pulled forward.

“It’s just a cash flow issue. But companies feel deceived as the IT industry was declared tax free till 2009,” Bharat Varadachari, tax partner at Ernst & Young, said. India’s largest software company TCS’ margins will be impacted by 1.6%, says company CFO S Mahalingam. “The overall industry impact should be in that range. But MAT will only be an asset for us rather than an object in the profit and loss statement,” he said.

Hike in Dividend Distribution Tax for money market funds is Positive for Banks

The BSE Bankex hit a three-month low at 6408.01 points on Budget day and though it has rebounded from those levels, it's still at a three-month low of 6584.56 points.

Besides, the index has underperformed the broader market: while the Sensex lost just under 5 per cent between December and February, the Bankex lost around 10 per cent.

That's not surprising because the recent hike in the Cash Reserve Ratio (CRR) by 50 basis points to 6 per cent meant less funds at banks' disposal at a time when liquidity is already tight.

Moreover, deposit rates have been moving up-five-year money now fetches depositors over 9 per cent compared with 6.5 per cent less than a year back.

While banks have increased lending rates, it's not always easy to pass on the increased borrowing costs, especially to retail borrowers.

Thus, the hike in dividend distribution tax for money market mutual funds from an effective 14.025 per cent to 28.325 per cent, comes as a positive for the sector.

Investors have been parking surpluses with liquid funds instead of bank deposits because interest from bank deposits is taxable whereas dividend from a debt mutual fund is not.

As such, the return post-tax was higher from these schemes. With investors likely to receive less as dividend from money market mutual funds, because of higher dividend distribution tax, they may prefer to save through fixed deposits. Besides, the lower fiscal deficit of 3.3 per cent should ease liquidity and bring further relief to banks.

The fringe benefit tax to be levied on employee stock option plans (ESOPs), however, is a negative for the sector especially for private sector banks such as ICICI Bank, UTI Bank and HDFC Bank, which have given their employees stock options.

While the rate at which the tax will be levied has not been specified, the benefits are expected to be taxed at 33.99 per cent.

Long-term financial institutions HDFC, IDFC and LIC Housing Finance (not in the Bankex), will have to pay more tax because the government proposes to reduce the tax benefit available against long-term funding business (loans with a maturity over five years).

At present, these lenders claim an exemption on 40 per cent of their profit from long-term loans; this now stands reduced to 20 per cent. As a result, the effective tax rate will rise to 27 per cent from 20.4 per cent impacting their earnings.

We shall continue taking steps to curb inflation: RBI

The Union Budget is a day old now and reactions are coming in across the board. Discussing the steps taken by the FM to curb inflation, Rakesh Mohan, Deputy Governor of RBI says the RBI will continue taking steps to curb inflation.

Excerpts from CNBC-TV18's interview with Rakesh Mohan:

Q: Are the steps taken in the Budget to cut duties adequate to curb inflation?

A: Reductions in the customs duty is the peak. Coming down from 12.5% to 10% and the various other reductions he has announced in some specific sectors is obviously much more part of the overall customs tariffs, rationalization that is going on.

We are essentially moving towards international level regime and of course, it helps in inflation management. I wouldn't say just one measure, but it's the collection of measures from the supply side that have been taken by the government and the monetary measures that we have been taking for the last couple of years. It has to be a continuous effort.

Q: The RBI itself has taken a slew of measures and quite a few of them came in the month of February itself. Do you see them as sufficient immediately or do you think the manner in which inflation is raising at 6.6% and above, requires more immediate steps?

A: We have been taking more decisive actions for more than two years and of course we will constantly keep watching. I think we need to put this in context that the overall resource availability for growth has gone up in terms of the savings rate having gone up and the investments having gone up along with better absorption of external savings.

But perhaps the perception is what the government has talked about; perceptions of supply inelasticities and supply management, I think that is what the government has focused on. The Finance Minister has particularly focused on in his Budget speech. If the supply management measures can be taken, the supply elasticities can be improved, then demand management can be smoother.

Q: In the Budget, the government has also announced that it would be or is contemplating using a part of the Forex reserves in a manner that it funds infrastructure externally. Are you concerned, what would be your immediate reaction to this proposal?

A: As the Finance Minister mentioned, this proposal has come from the Deepak Parekh Committee on infrastructure and finance, which we have received recently. As the Finance Minister said in his Budget speech, this will have to be examined with reference to the legal and regulatory requirements and of course we will be doing that consequently.

Q: Coming to the government's borrowing programme, which came in at a lower level than even last year – Rs 1,9000 crore or thereabouts. Will that mean the amount of government securities available to the banks is going to be a little lower? How does that place the RBI's SLR cut programme?

A: The implication of the FRBM is indeed a continuous reduction in the fiscal deficit and therefore the government-borrowing programme will follow accordingly. You also have to remember that the State governments are also in the picture and now they have to borrow directly from the market as opposed to the Central government.

So I think one will have to watch this situation as we go along and we will have to long at the SLR issue dependent on both liquidity conditions, the micro economic conditions, the monetary conditions and also prudential aspects of what the SLR securities do in terms of the portfolio of assets that the banks have.

Q: Regarding inflation, we have seen the number crawl down just a tat bit in the past week and then the fuel price cut impact will also be seen in the current week. Is the RBI satisfied with this movement or do you think that it is a still a matter of grave concern and will require immediate steps?

A: We have given the kind of comfort levels in terms of the range of inflation that we will be comfortable with, as has the government. If you look at the implied GDP growth numbers in the Budget, it is somewhere between 13-14% in normal terms.

So assuming that the government is also assuming a growth rate of perhaps between 8.5% and 9%, that the implied inflation number is within that range and therefore presumably the issue of inflation management resulting in the inflation actually coming down to this kind of a range is very much in the minds of the government as well as ourselves.

We will indeed have to act as the situation demands, while keeping in mind the cumulative effect of all the monetary policy actions that we have taken and the supply management actions that the government has taken.

Interview with Finance Minister - CNBC TV 18

Finance Minister Palaniappan Chidambaram simplifies the Union Budget. Chidambaram informs that fertiliser subsidy has gone Up by Rs 5,000 crore.

He adds that total expenditure has been up due to fertiliser subsidy and interest payments. He says that the Fertiliser Subsidy needs to be delivered directly to the farmer. According to him, cutting customs duty alone is not a price restraining measure.

He further adds that ESOPs will attract FBT but the base has not yet been decided. He says that the government and RBI are not at loggerheads on fiscal policies. In his view, the dharma of the RBI is to ensure financial stability while the dharma of the government is to promote growth.

In an exlusive interview with CNBC-TV18, the Finance Minister clears doubts on FBT, taxation, etc:

Q: Yesterday, people who saw you giving the Budget speech, must have been rubbing their eyes in disbelief. Here was a man ten years ago with a much worse macro-economic situation took bold leap but yesterday he was a man sitting on a dream macro economic situation being virtually status quo?
A: Wrong, the dreams of 1997 and the dreams of 2007 are very different. I am lucky to be part of that dream and I am lucky to be part of this dream. In 1997, what was a dream, India must join the rest of the world, India must take wings, India must accept her share of responsibility to become a key driver of economic growth in the world, those were the dreams in 1997 and the engines that could have driven those dreams obviously was industry and services sector. The dreams of 2007 are very different, the growth today is a given, it is not a cyclical shift, it is a structural shift, given that the growth is a given and industry and services seem to be virtually on auto pilot, they are mature, confident enterprising, willing to take on the rest of the world. This is a time to dream other dreams namely to make growth more inclusive.


Q: I will come to your assertion that growth is a given which maybe a bit too facile and does not quite get reflected in your numbers but your Budget that very morning was born under fear. You ban forward trading in wheat and rice but here is a government, a Prime Minister, a Finance Minister who believes in the efficiency of markets and then you get scared?
A: I think you are drawing very facile conclusions. The economic divisions, which enjoys a large degree of autonomy has got a section on forward markets on the economic survey, which justifies forward market as a price discovery mechanism but there is another view. There is another view that there is too much speculation, there is too much trading in "thin" commodities and I am no expert to say, which view is right. Let me make that very clear, I am no expert to say, which view is right.

One month ago, the FMC restricted forward trading in tur and urad, tur prices have declined, there maybe no cause and effect relation but it has declined. We do not know, which view is right, which view is wrong in the given context, therefore we have appointed an expert committee, for I do not have to take a view now, I have to take a view only when the expert committee report comes to me.

Q: You have just made safe.
A: I have simply reported what the FM cited.

Q: Let me say why I believe that it is a status quo Budget, you had 20%-30%-40% unheard levels of growth in your tax revenues.
A: That is not because some kind God smiled on us, it is because our department worked hard.

Q: You had that much of a flexibility before you and you wanted to rein inflation, what then stopped you from bringing duties down to 7%-8%; in one fell swoop, you would have killed inflationary expectations in the economy?
A: Not correct, I will tell you why. When an economy is firing at near full speed when actual output exceeds potential output, cutting customs duties alone does not act as a price restraining measure because the demand is so high, you can still sell your product at the price that you are able to command.

Q: That’s a strange argument I am hearing from you. You have always said consistently that this inflation is far more supply induced than demanded?
A: You talked about cutting further I am answering that.

Q: You were giving me the reason for not cutting?
A: You must not get into an argument. You said that I should have cut custom duty further it will be in disinflationary.

Q: It would have killed inflationary expectations?
A: That is not correct. I will tell you why it’s not correct and that’s what I am trying to explain to you - agree or disagree that’s a different matter.

I have been advised by my economic advisors- you have to cut a customs duties that is disinflationary but the further step that you are suggesting - you cut it deeper is more disinflationary. We do not buy that argument that will apply only when there is industry working at less than full capacity. When industry is producing at full capacity in fact actual output is exceeding potential output and they have got pricing power. Merely cutting customs duties more does not make it more disinflationary.

Q: That’s the sub text of status quo is I am talking about?
A: That is an economic advise I have received and I think it is a sound advice.

Q: Another example - last year and the year before that we all applauded you for the kind of tax reforms and the convergence to the single rate that you talked about. We were all expecting this year that you would cut excise, move service tax up sort of converge to that single rate that you been talking about you didn’t touch it, nothing?
A: I will tell you why - how can I do that only a few days before the Budget we reached an agreement with State Government and given an outline of that agreement you do not know the details of agreement. Under that agreement we have agree to work together on a roadmap for GST. They have accepted in principle the GST, they have not yet agreed on a roadmap. At the end of that roadmap we will have to agree on a rate on which all taxes will converge. We have not agreed on the convergence rate.

Q: What is the Finance Ministry’s view on 16% CENVAT?
A: Well, there are 30 State Governments, there requires a constitution amendments, State Government have to ratify that amendment, I can’t thrust an opinion down the throat of State Government. The consultative process is not even begun; we have just reached an agreement to begin the consultative process. Once I know what the convergence rate will be then I have to move the excise duty, service tax and they have to move the VAT towards that rate. At this stage without knowing what the convergence rate is how do I move the service tax and the excise duty rate?

Q: But that is something you had spoken about last year, you said 24% and 32% rates you would start moving towards the convergence rates, now the convergence rates could be 15,16 and 18?
A: No, Kelkar has recommended 20 therefore there is no agreement yet on a convergence rate and without an agreement we cannot move either service tax or excise duty. If I reach a convergence rate agreement this year then next year we will make the movement.

Q: Surely you could not be thinking of 20%?
A: Kelkar has recommended 20%.

Q: That is a recommendation of an academic committee?
A: I have to consult everyone.

Q: Let me talk about your Budget deficit, what we were applauding or expecting as the big achievement of the Budget.
A: I have reached to fiscal deficit target every year.

Q: Yes you have but the kind of expectations that you had built up or the kind of numbers that the government was releasing, we were all expecting a fiscal deficit of about 3.4 because that is the kind of numbers that were coming. Your revenue expenditure has been out of control; you have got to admit that.
A: Not correct, we have shown Rs 25,000 crore more gross revenue than the BE figure. The numbers that are released month after month is gross revenue. 30.5% of that is mandatorily shared with the states, folks like you do not do that mental adjustment, 30% has to be taken out then what is left is 70% this includes income tax and corporate income tax, we have moved the last stake for assessment to December 31, which means refunds have to be done for the first time by March, so January, February and March is the refund period rather than April, May and June, therefore we adjust for the refund set up to be done therefore what we have projected is absolutely correct.

Q: I am just saying that you have a situation where your tax revenues are running ahead of your projections and clearly therefore if you have not been able to beat your Budget deficit by a huge margin, clearly your revenue expenditure is also going ahead of estimates.
A: My total revenue expenditure from 563 has gone up to 581, which means an increase of 18,000 crore but why is that increase of 18,000 crore. Fertilizer alone has already gone up by 5,000 crore, interest payments have increased by about 7,000 crore, so that explains.

Q: That explains it but that is not a terribly good thing for the government to be putting out because yes, you have met your target but your expenditures are not under control.
A: I cannot control fertilizer under the present system that is why I had revolted a paragraph to say that this system of delivering fertilizer subsidy is wrong, we have to replace it by better system, we have to deliver fertilizer subsidy directly to the farmer because I am aware.

Q: We have been talking about direct subsidies now for five or seven years?

A: But I am pushing the case but I have to carry conviction with every one. Interest is a function of rates.

Q: The kind of growth pessimism that you have built into your numbers?

A: Standard question everybody is asking without look at the numbers

Q: But 40% growth on that basis?

A: 40% growth, where did you get the number.

Q: 30-40% tax buoyancy last year?

A: That is not correct. 30% goes to the States; you have to look at net tax revenue to the Centre.

Q: But yet you are projecting lower than what you achieved last year?

A: I am projecting 20%, let us look at the numbers again - Rs 4,42,000 crore last year and Rs 5,48,000 crore this year. For your information, it took us 48 years to cross the first Rs 100,000 crore mark and here in one year I am going from Rs 4,42,000 crore to Rs 5,48,000 crore - a Rs 106,000 crore increase in gross revenue works out to a 20% increase; then why is 20% a conservative estimate? It is an aggressive estimate. My department of taxes says, every year you ask us to collect 20% more, we have done it for three years and you are asking us to repeat that feat year-after-year.

Q: One issue which may not be large on your agenda, where clearly the Finance Ministry seems to have got it completely wrong and that is Fringe Benefit Tax of Employee Stock Ownership Plans, or ESOPs? ESOPs are a capital asset, they are a wealth-creating assets and you are taxing them like income! Which canon of economic thinking can ever justify that?

A: Let me ask you a simple question, is ESOP a Fringe Benefit or not?

Q: Yes it is a transfer of remuneration from the company via a capital asset.
A: So if it is a fringe benefit it has to be taxed, I have not yet told you how we are going to calculate it, how we are going to tax it. All that will come in the rules. All that we have said is that ESOP is a fringe benefit and I am extending FBT on to it. You will have to wait to see how we determine its value, how we tax it, all that has to be announced once we come up with the detail.

Q: Therefore the media, which seems to be suggesting that 34% is going to be the rate of taxation on the gains realised on the date of exercising of ESOPs has got it wrong categorically?
A: I do not know whether it is wrong or right; all I know is that at the moment it is completely premature because I have not seen the detail calculations yet so how could the media claim to know what it is.

Q: Therefore it is not a given that they will be taxed at the income tax rate?
A: It is a given that it will be taxed at the FBT rate what the base will be, how the base will be calculated, how the tax will apply all that has to be worked out?

Q: I think that would come as a major relief because otherwise what seems to have been suggested and wasn’t denied strenuously yesterday by anybody is that you are actually going to tax capital assets at the rate of income tax?
A: Who is in a position to deny it or affirm it except me? You didn’t put the question to me yesterday.

Q: But I am talking to you now?
A: And I am telling you today- we have announced the policy that FBT will include ESOPs. Now what the ESOPs should be, how it will be valued, how it will be taxed all that has to be worked out.

Q: This government was increasingly getting seen to be too anti-urban?
A: No, not at all. Play what the three Presidents of the three chambers said this morning back on your television channel.

Q: I think what you said yesterday in one of your appearances was that ESOPs are largely given to senior managers - that is not correct. ESOPs have lead to an entrepreneurial upsurge in this country.
A: Did you know that many developed countries are moving away from ESOPs?

Q: That is for a variety of other reasons. The fact that ESOPs is a wealth creating measure. I do not think any country in the world taxes ESOPs at income tax rate?
A: There are countries in the world, which tax ESOPs. And all that I have said is, we will tax ESOPs.

Budget Highlights 2007

• Ambit Capital
  
  Agri investment to go up by +2% of GDP
  Irrigation focus to benefit Kirloskar Bros
  Education thrust to benefit paper & stationery cos; +ve for BILT, Navneet , Camlin
  Rural thrust to benefit Infra, Irri, Power;+ve for IVRCL, Jain Irrigation
  Education sector focus to benefit NIIT, Aptech, Educomp & Prithvi Info
  Rural focus will benefit SBI, PNB, BOI for agri advances
  Immunisation prog +ve for Wockhardt, Panacea Biotech
  Farm sector focus +ve for tractor cos - M&M, Punjab tractors, Escorts
  Agri focus +ve for Monsanto, Rallis, Bayer Crop, JK Agritech
  Irrigation thrust to benefit Jain Irri, Finolex pipes
  APDRP +ve for Jyoti, KEC Int'l, Kalptaru
  Ultra Mega Power Projects +ve for BHEL, Alstom, Siemens, ABB
  UMPP also +ve for PFC
  Increased outlay to NHDP +ve for L&T, Gammon, HCC
  CBM projs benefits Shiv Vani, ONGC
  TUF extension to benefit textile sector
  Higher tourism allocation to benefit Hotels, Pvt. Airports
  More branches for RRBs Positive for PSU Banks
  Short selling allowed for inst will improve liquidity in the mkts
  Higher defence exp to benefit BEL, BEML, L&T, Dynamatic Tech, AstraMicro
  Increased focus on PPP to benefit construction cos
  E-governance thrust benefits Vakrangee, 3i Infotech, TCS
  Rural telephony to benefit Rel Com, Bharti Airtel
  Fiscal deficit of 3.3% to ease pressure on interest rates
  Reduction of peak import duties to benefit Capital goods cos
  Customs on man-made fibre reduced from 16 to 8%
  TUF continuation to benefit textiles, +ve for SRF
  RSM: concession rate of 5% to all research units
  CVD on aircrafts incl helicops negative for Global Vectra, Air Deccan, SpiceJet
  RSM: no change in service tax rate
  Excise duty on petrol & diesel reduced, +ve for Oil Mktg Cos & economy in general
  Excise duty on footwear reduced, +ve for Bata, Liberty, Mirza Tanners
  RSM: Excise on cigarettes increased by 5%
  RSM: service tax exemption increased to 8,00,000
  ITC to marginally impacted by excise hike
  Service tax net widened, includes individual PMS services
  RSM Infrastructure status for Gas Pipeline & Storage Facilities & Navigation schemes
  Section 80 IA benefit extended to ppeline cos, very +ve for PSL, JSAW, Man Industries, GAIL, GSPL, IGL
  Diamond Mfg & trd deemed income taxation introduced
  RSM: Benign assessment procedure for gems industry
  Hotel & Conventions centres to get tax benefit
  Tax holiday for new hotels, +ve for Parsvnath, Anant Raj
  MAT introduction negative for software cos
  MAT levy on exempt Dividend & Cap Gain income for corporates
  Cap Gains Exemption for NHAI & REC bonds to continue
  Increase in dividend distribution tax -ve for corporates/MFs
  FBT exemption for Free Samples; to benefit corporates
  ESOP SUBJECT TO FBT
  Corporate Headline Tax Rate 33.99%
  Additional education cess of 1% to hit corporate earnings
  ATF exemption on smaller aircrafts to benefit Air Deccan
  Budget -ve for IT & Cement cos
  RSM: Tax deduction for housing projects not extended
  Housing Companies Exemption lapses
  Budget +ve for pipeline cos, cap goods, oil mktg cos, infra, FMCG & textiles
  Service tax exemption on clinical trials, +ve for DRL, Ranbaxy
  RSM: service tax on commercial rentals
  SEZ benefit restricted to new units; trf of exst bus not eligible
  
• CNBC-TV18
  
  Healthcare allocation increased; +ve Max India, Apollo Hospitals
  More focus on HIV eradication; +ve MNC Pharma, Cipla, Wockhardt
  Education allocation increased; +ve Educomp, NIIT, APTECH
  Healthcare allocation increased; +ve Max India, Apollo Hospitals
  Focus on HIV eradication; +ve for MNC Pharma cos like Novartis
  More allocation to self house groups; +ve ICICI Bank
  Higher Allocation for roads; +ve IVRCL, HCC, Gammon, Nagarjuna
  More agri focus spending; +ve ITC
  Higher Agri Focus; +ve Ruchi Soya, Agro Dutch, Agro Tech
  Higher farm lending; +ve for all PSU banks
  Higher agri focus; + Ve fertiliser & pesticide co
  More Irrigation projects; +ve pipe for cos esp PSL
  IT spending on Food corporation on India; Focus - TCS, CMC
  Seven more UMPP under process; focus: NTPC, Lanco, GMR, REL Ener, Tata Power
  Seven more UMPP under process; Focus - PFC
  Higher outlay under NHDP; +ve IVRCL, HCC, Gammon, Nagarjuna
  Higher Outlay for road infrastructure; + ve cement and CV players
  Seven more UMPP's to be awarded; +ve Electric Eq suppliers
  Higher outlay for TUF; + ve Lakshmi Machine Works
  Higher outlay for TUF; + ve Gokaldas, Arvind Mills
  Higher outlay for TUF; + ve textile cos
  Higher tourism allocation; + ve TFCI
  New mortgage guarantees/instruments to be introduced; + ve HDFC, HDFC Bank, Dewan Housing, LIC
  New mechanism for unlocking value thru exchangeable bonds against subsidiaries by group cos; Focus - Tata Motors, M&M, Bharat Forge, CESC, Bajaj Auto
  Allocation to defence increased; + ve BEL, Nelco, Astra, Avantel, CMC, Zen Technologies
  Higher e-Governance Spend; Focus CMC, ICSA, Wipro, 3i Infotech, TCS, Vakrangee Software
  PHASE OUT OF CST; PREPARE ROADMAP FOR INTRODUCTION OF GST BY 2010; + ve INDIA INC
  ON COURSE TO ACHIEVE FRBM TARGETS, + VE INDIA INC, MKTS
  PEAK CUSTOMS DUTY CUT ( Non Agri); + ve INDIA INC
  Customs duty on PTA, MEG Cut; + ve RIL, IPCL, INDO RAMA
  Cut in customs duty on Gem stones; + ve Vaibhav Gems, Gitanjali Gems
  Custom reduced on medical equipment to 7.5%; + ve Apollo Hospitals, Max India
  Customs duty cut on man-made fibre; + ve RIL, Indo Rama
  NO INCREASE IN SERVICE TAX; + ve INDIA INC, Indian Consumer
  Excise duty cut in Diesel & Petrol from 8% to 6%; + ve HP, BP, IOC
  Duty cut on water carriage pipes; + ve PSL, Ratnamani, Finolex Pipes
  Increase in excise duty for cement prices above Rs.190 per bag; -ve ACC, Guj Amb, Shree Cements
  NO CHANGE IN CORP TAX; - ve India Inc
  Infrastructure status for Gas Pipeline; Positive GAIL, CAIRN, RIL, GSPL
  Cut in service tax on Clinical trials; + ve Biocon
  MAT definition tweaked
  Tax Benefits extended for 5 more years; + ve Pharma & Auto co's
  IT/ITES sector to come under MAT: to pay 11.22% of adjusted Book profits; - ve IT industry - Infosys, TCS, Wipro
  150% weighted deduction extention ;+ve for pharma sector Sun Pharma, Ranbaxy, Dr reddys
  Dividend Distribution Tax hiked; - ve for high dividend payers - ONGC, NTPC, IOC, RIL
  Esops to be brought under FBT; - ve Tech, Media cos
  Dividend Distribution Tax increased; - ve Mf's
  Rent on Commercial properties; - ve Unitech, Mah Gesco
  EFFECTIVE TAX RATE UP FROM 33.66% to 33.99%; Tax rates of 30.90% for SMEs (total income < 10mn)
  Service tax exemption on clinical trials; + Ve Dr Reddy, Ranbaxy, Biocon
  Service tax on commercial property rent; - ve Pantaloon, Shoppers Stop, Trent
  Service tax on commercial property rent; - ve Multiplexes
  MAT not levied on 10 AA - SEZ's spared; marginally positive for SEZ players
  Proposal for Single tax levy on Telecom; directional + ve for telecom's
  Export Duty of Rs 300/tonne on iron ore; Negative for Sesa Goa
  Customs duty cut on coking coal; + ve for steel, power co's
  Measures to contain cement prices; +ve for construction co's

Budget leaves IT Companies on MAT

Shares of IT and BPO companies sank on Wednesday after Finance Minister P. Chidambaram announced that the Minimum Alternate Tax (MAT) will be extended to these companies.

"I propose to extend MAT to income in respect of which deduction is claimed under sections 10A and 10B of the Income Tax Act," Chidambaram said in his budget speech in the Lok Sabha.
The Finance Minister said that he introduced MAT in 1996-97 for companies with book profits, and its purpose was to bring about horizontal equity in taxation. " MAT should therefore apply, as far as possible, to all corporate incomes," he said.

Also hurting the software companies' shares was the proposal to bring Employees' Stock Option Plan (ESOP) under the Fringe Benefit Tax (FBT). " The value of the fringe benefit will be determined, in accordance with a prescribed method, on the date of exercise of the option," the Finance Minister said.

The BSE IT index was down 5.85% to 4869.99. Among the major losers in the IT space were: HCL Tech (9.7%), Satyam (8.4%), Wipro (7.3%), Mphasis (7%), TCS (6%) and Infosys (5%).

"We believe that extension of MAT to companies that had earlier been promised 10A and 10B exemptions is likely to have an adverse impact on certain players," said Ashank Desai, Non-Executive Chairman, Mastek.

"In addition to that, the inclusion of ESOPs under FBT will add to the challenges being faced by employers in knowledge-intensive industries in attracting and retaining world-class talent," he added.

PAN made sole ID number for investors

Permanent Account Number (PAN) issued by the Income Tax Department has been made the sole identification number for all participants in the securities market.

Presenting the Budget, the Union Finance Minister said that an alphanumeric prefix or suffix would be added to PAN to indicate investments in different instruments.

This means along with their PAN, investors have to include some other numbers or alphabets indicating that investments in equity, bonds or mutual funds, said an official with a Mutual fund.
The decision is welcomed by investors, as they were confused by different proposal from SEBI and mutual fund organizations to go in for separate identification numbers.

Capital market regulator SEBI had introduced MAPIN followed by Mutual fund identification number (MIN) by Association of Mutual Funds in India (AMFI).

According to Mr A.P. Kurian, Chairman of AMFI, details of how to go about a single number — PAN - would be finalised soon. He said mutual funds would still have to follow the KYC (know your customer) norms.

Move on cement will be counterproductive

The 50 per cent increase in excise payable on cement retailing at over Rs 190 a bag (50 kg) is likely to push cement prices higher rather than lower, as intended by the Finance Minister.

Cement manufacturers, distributors and even consumers agree on this issue.

The announcement that excise, currently at Rs 400 a tonne, will be reduced to Rs 350 if the retail price is under Rs 190 a bag, or hiked to Rs 600 a tonne otherwise, has not gone down well and raised fears that cement may be sold in the black market.

Cement retails at an average of Rs 200 a bag across the country, said Mr D.D. Rathi, CFO of Grasim Industries. In high-demand markets such as Mumbai, the price range is Rs 225-250.

"The Government move will only push up cement prices as none of the cement companies, except for a few small ones in South India, sell at Rs 190. The cement manufacturers will only pass on the additional burden to customers, thus pushing up prices further," said Mr Hitesh Agrawal, Senior Research Analyst, Angel Broking.

In an effort to reduce duty by a marginal amount, the Government will in fact increase prices by Rs 12 a bag, because cement sells in retail at more than Rs 190, said Mr Rathi.

"How can you price your product based on what kind of excise duty it will attract? Price is a measure of manufacturing cost and distance, and freight rates have only been increasing. How can I sell at the same price at a place close to my factory and also at a location far away from it," he asked. Excise duty is a pass-through and will anyway end up being stacked on the ultimate consumer.

"Basic economics of demand and supply will overrule everything else," said Mr Krishna Kumar Karwa, Managing Director of Emkay Share & Stock Brokers Ltd.

"Tracking prices at the retail level for calculating excise duty is going to be a tough task," said Mr V.R. Datta, a Mumbai-based wholesale cement dealer.

"If I mark my cement bags to retail at Rs 190, how do I monitor the price at which it is sold," asked Mr Rathi.

In a high demand situation, there is also a risk that cement meant to be sold at an MRP of Rs 190 could be sold at a premium by retailers, leading to blackmarketing, said analysts. This would result in raids on retailers.

"Increased excise duty on cement would eventually be passed on to the consumer. For Indian construction, the costs would be higher and unpredictable," said Mr Y.M. Deosthalee, CFO of L&T, which is a large consumer of cement.

Cement stocks witnessed nervous selling by funds and retail investors. Shares of ACC, the country's biggest cement maker, tumbled by Rs 61 or 6.35 per cent to Rs 900.05, while Ultratech Cement fell Rs 55.30 or 5.84 per cent to Rs 891.10. Grasim Industries lost Rs 119.60 or 5.13 per cent to Rs 2,212.60, Gujarat Ambuja Cements plunged Rs 9.75 at Rs 115.95.

Tax disadvantage after Rs 5.10 lakh

Budget 2007 provides for increase in basic exemption limit of Rs 10,000 for personal income tax. The basic limit for women assessees has been enhanced to Rs 1.45 lakh and for senior citizens the limit has been pegged up at Rs 1.95 lakh. For regular taxpayers, individuals or HUFs, the basic income limit has been enhanced to Rs 1.1 lakh.

A new cess called "secondary and higher education cess" at 1 per cent of the tax (which means tax plus surcharge) has been introduced in this Budget. For individual taxpayers with income above Rs 10 lakh the maximum marginal rate of tax would be 33.99 per cent. Tax disadvantage sets in after the taxable income exceeds Rs 5,10,000.

In the case of taxpayers with income above Rs 10 lakh, the increase in basic limit has no impact owing to the `senior and higher education cess'.

The saving for taxpayers is not even Rs 1,000, and in respect of senior citizens the tax benefit is not really Rs 2,000 but much less.

Small and medium enterprises: In Budget 2007 surcharge has been withdrawn in the case of small partnership firms and corporates with income less than Rs 1 crore. For these companies, the effective tax rate has been reduced from 33.66 per cent to 30.90 per cent, resulting in tax relief of 2.76 per cent.

Tax on ESOPs: Shares allotted by companies to employees as sweat equity is not chargeable to tax as salary income at the time of allotment. The employer too would not have paid any tax on such allotment. Budget 2007 seeks to adopt the fair market value of the shares allotted to employees as chargeable to fringe benefit tax. However, when an employee transfers such shares the value subjected to fringe benefit tax earlier will be adopted as the cost of acquisition. Both Section 49 and Section 115-WB have been subjected to consequential amendments.

Educational loan repayment: Section 80-E relating to repayment of education loan has been extended for repayment of loan taken by the assessee for higher education of his relative (spouse and children). Currently onlyloan taken for higher education of self is eligible for deduction upon repayment. The Budget 2007 has extended the tax incentive in respect of loan repayment relating to education of relative. The term `relative' covers spouse and children of the taxpayer.

This is a welcome amendment as, in most cases, the borrower may not have an income and can start repayment only after completion of education. Now parents may opt to pay the education loan of children and thereby gain reduction in tax liability. Taxpayers now have some scope for tax planning in view of this change.

Telecom tariffs to fall with single levy regime

Telecom consumers got a mixed bag from the Budget, which on one hand proposed a single tax regime for telecom service providers and on the other brought mobile content service providers under the service tax net.

While the move to simplify the multi-farious levies paid by the service providers to a single slab could lower the overall tariffs for telephone services, the decision to bring content providers under the service tax net could make mobile value-added services such as ringtones, downloads and other entertainment-based applications dearer.

Currently, telecom operators pay up to 30 per cent of their annual revenues in the form of various levies, which include 10 per cent licence fee, 12 per cent service tax, 4 per cent spectrum charges and other State specific levies such as octroi and sales tax.

Panel to be formed

The Finance Minister, Mr P. Chidambaram, has asked the Department of Telecom to set up a committee to study the present structure of levies and make suitable recommendations to Government.

The Cellular Operators Association of India said that if the total levy is brought down by 5-6 per cent, it could result in much lower tariffs. However, the industry expressed concerns that no time frame has been set for the committee to make its recommendations.

Government's receipts from licence fee have been projected to increase from Rs 8,799 crore (Revised Estimates 2006-07) to Rs 9,902 crore (Budget Estimates 2007-08). There is also some cheer for more than 24 lakh PCO booth owners of State-owned Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd who have been exempt from paying income-tax on the commission they earn.

The Budget also sought to underline Government's thrust on improving rural telephony by increasing the outlay for Universal Service Obligation fund from Rs 1,500 crore (RE 2006-07) to Rs 1,800 crore (BE 2007-08).

There's good news for telecom companies engaged in research and development. They will be allowed to deduct amount equivalent of one-and-a-half times of their investments for another five years. This provision was scheduled to end on March 31, 2007.

The use of bio fuels also got a leg up with the Government abolishing excise duty on such fuels. Cellular operators are increasingly deploying bio fuels to power their base stations and the waiver would reduce costs. However, the decision to bring renting of commercial property under service tax net will make it expensive for telcos to deploy their switches and base stations.

Mixed bag

Ringtones, downloads could get dearer as mobile content is brought under service tax

BSNL and MTNL PCO booth owners get income-tax relief on commission

Use of bio-fuels to power mobile base station gets a boost with excise duty waiver

Rural telephony gets more funding

Tax benefits for telecom R&D companies extended by 5 more years

Union Budget 2007: Experts give their views

PH Ravikumar says that India cannot sustain a growth rate of 9-10% unless agriculture grows at 4%. He feels that not much is done to improve investments in agriculture. "There has to be facilitation of private investments in agriculture, nothing has been heard on it" he says.

He feels that lot of positive steps by the FM has been taken but the problem of wheat and edible oils were not addressed because India is commodity inflation. "I believe short selling, setting up of mortgage guarantee companies which should also benefit the rural side housing build up as well as exchangeable bond are very positive for markets" he adds.

Jairaj Purandare welcomes the customs duty peak rates being dropped. "It appears that there is no change to the basic structure of capital gains tax other than one particular change in the context of gains limited to 15 lakh," he says. Though it was a relief to have no change in the service tax the fringe benefit tax on ESOPs (Employees Stock Options) clearly was not quite expected, " I think that the dividend distribution tax going up to 15% is going to be a cause for concern specially because this is effectively a multilayer tax" he adds.

Nimesh Kampani, Chairman, JM Morgan Stanley gives his perspective on the capital gain tax, "On the positive side, I think he (P Chidambaram) has brought in short sales to be allowed which can stabilize the market when the market is in a high gear and people selling it and then they can be natural buyer at lower prices, lending and borrowing of the stock is also allowed now. So I think that the institutional investors will be able to do that very clearly. Hence, for the corporate sector, specially for the large institutions like LIC or institutions like mutual funds and also one of the promoters, the Finance Minister has agreed to do a exchangeable bond."

In his view, this is a fine instrument where the promoters will be able to take a greater risk and put a lot of further money into newer project. So this as a signal for a growth where the funding by the promoter is done simpler because today, Indian promoters are not able to raise resources except outside of India against their shares. So the legitimate way of raising money from capital market through the funding of the promoters’ holding.

On the health front, especially on R&D, the Budget has proposed an exemption for 5 more years. Dr Swati Piramal of Nicholas Piramal responds to this, " It's sunrise for the pharma sector because we are the torchbearers of the innovative economy. India is really becoming the leader in the biopharma sector so that is exempt from service tax, we are delighted with that. Its increased healthcare spending, which is long time coming, we wanted to increase from 1% to 2% and it’s a small beginning, even though it’s a large number, but its still small compare to rest of the GDP. So healthcare spending has increased and we are very happy with that, and clarifications of free samples to doctors in the FBT (fringe benefit tax) that’s the other area where he has clarified things. So thank you Mr. Finance Minister for R&D."

Naseer Munjee, Chairman of the Development Credit Bank gives his view on the infrastructure sector. He says, "As far as the critical element for the future, in my view is public-private partnership and not in the way the government interprets. India needs to privatize, commercialize as well as to look at output-based contracts, those areas in which revenues, user charges cannot be used. I don’t see that strategy at all, it as even emerged while most countries in the world are moving headlock in that direction. We need to be leveraging public money with private. I do not see that happening in the Budget, I was hoping that we would see that. The way government spends money has to change."

Union Budget - Indirect Tax Highlights

FM Chidambaram has announced the Union Budget 2007-08. He has increased the excise duty on cement from Rs 400 to Rs 600 for retail price of over Rs 190/bag. This is likely to affect all the companies as majority of the cement prices are above Rs 190. Excise Duty on petrol and diesel has been reduced from 8% to 6%.

Following are the highlights of Indirect Tax for Service Tax, Excise and Custom Duty:

Indirect Tax

There has been an excise duty hit for cement companies. Excise duty is down from Rs 400 to Rs 300 for threshold Rs 190 retail price and the excise duty has been increased from Rs 400 to Rs 600 for retail price of over Rs 190. This is likely to affect all the companies as majority of the cement prices are above Rs 190. Excise Duty on petrol and diesel has been reduced from 8% to 6%, so petrol and diesel prices can be expected to come down, though the oil minister has ruled out any such move.

Service tax exemption limit has been raised to Rs 8 lakhs. Over 2 lakh small service providers to go out of service tax net. But there is no change in service tax rate, which stays at 12%. 5. Peak customs duty rate brought down to 10% from 12.5. Customs duty on polyster yarns, plastics, medical equipments reduced to 7.5%, gems and jewellery reduced to 3%. But 3% import duty has been imposed on private imported aircrafts.

Cuts central sales tax to 3% from 4%

Service Tax


Service tax exemption for tech business incubators
Drug testing clinical trials exempt from service tax
Service tax on rental of property for commercial use
Service tax on works' contract service

Excise

Excise duty on pan masala without tobacco cut to 40%
Excise duty on pan masals without tobacco cut to 40%
Non-electric water filters fully exempt from excise
To reward cement makers who hold prices of cement
Umbrella, footwear excise duty cut to 8% vs 16%
Bio diesel, food processing exempted from excise duty.
SSI excise exemption raised to 15 mln rupees vs 10 mln.
Excise on plywood cut to 8% from 16%.
Petrol, diesel ad valorem excise duty cut to 6% vs 8%.


Customs duty

General customs duty on medical equipment 5%
Customs duty on animal feed cut to 20% vs 30%.
Customs duty on watch dials, umbrella cut to 5% vs 12.5%
Coking coal exempt from customs duty.
Customs duty on cut, polished gems cut to 3% from 5%
Customs duty on PFY cut to 7.5% from 10%
Crude, refined edible oils to be exempt from customs duty
Customs duty on steel cut to 12% vs 20%
General customs rate on medical equipent 5%
Cut customs duty on DMT/PTA to 7.5%
Customs duty on drip irrigation cut to 5% vs 7.5%
Cut custom on cut and polished gems to 3% from 5%
Customs duty on polyester fibre yarn cut to 7.5% vs 10%
Fully exempts coking coal from customs duty
To cut peak rate for non-farm pdts to 10% vs 12.5%

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.