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Pursuant to the annual budget, the Government of India (Government) had introduced the Finance Bill 2010 (Finance Bill) in the Parliament on 26 February 2010. The Government has now proposed certain amendments to the Finance Bill (As a reply to the debate on the Finance Bill in the lower house of the Parliament) as initially presented before the Parliament. This Tax Alert summarizes the amendments proposed by the Finance Bill to the Direct Tax Law (DTL) and the Indirect Tax law (ITL).

Direct Tax Law? Amendments proposed

Extension of investment-linked incentive

Section 35AD in the DTL provides for investment-linked tax holiday by providing deduction in respect of whole of the expenditure of capital nature, incurred wholly and exclusively for the purposes of specified business carried on by taxpayers. The specified business presently includes (a) Cold chain facility (b) Warehousing facility for storage of agricultural produce (c) Cross-country natural gas or crude or petroleum oil pipeline network for distribution.

The Finance Bill, at the introductory stage, proposed to extend this benefit to the business of building and operating new hotel of two star or above category, set up on or after 1 April 2010 anywhere in India. The Finance Bill now proposes to further extend this benefit to two new types of businesses (a) Business of building and operating, anywhere in India, a new hospital, with at least one hundred beds for patients, which starts functioning on or after 1 April 2010. (b) Business of developing and building a housing project under the scheme of slum redevelopment or rehabilitation framed by the Central or State Government and notified by the Central Board of Direct Taxes (CBDT).

In terms of the current provisions of the DTL, both these businesses are eligible for profit-linked tax holiday, subject to fulfillment of specified conditions. In particular, the tax holiday for a new hospital is available only if it is located outside the specified urban areas and starts functioning by 31 March 2013. The investment-linked tax holiday will, however, be available if the hospital is located anywhere in India, without limitation of terminal date on the date of functioning.

Though the slum redevelopment business is eligible for profit-linked tax holiday in terms of the current provisions of the DTL, till date, no such scheme has agricultural produce (c) Cross-country natural gas or crude or petroleum oil pipeline network for distribution.

The Finance Bill, at the introductory stage, proposed to extend this benefit to the business of building and operating new hotel of two star or above category, set up on or after 1 April 2010 anywhere in India. The Finance Bill now proposes to further extend this benefit to two new types of businesses (a) Business of building and operating, anywhere in India, a new hospital, with at least one hundred beds for patients, which starts functioning on or after 1 April 2010. (b) Business of developing and building a housing project under the scheme of slum redevelopment or rehabilitation framed by the Central or State Government and notified by the Central Board of Direct Taxes (CBDT).

In terms of the current provisions of the DTL, both these businesses are eligible for profit-linked tax holiday, subject to fulfillment of specified conditions. In particular, the tax holiday for a new hospital is available only if it is located outside the specified urban areas and starts functioning by 31 March 2013. The investment-linked tax holiday will, however, be available if the hospital is located anywhere in India, without limitation of terminal date on the date of functioning.

Though the slum redevelopment business is eligible for profit-linked tax holiday in terms of the current provisions of the DTL, till date, no such scheme has been framed by the Government or notified by the CBDT.

Extension of capital gains exemption on Limited Liability Partnership (LLP) conversion to shareholders

The Finance Bill, at the introductory stage, proposed to insert Section 47(xiiib) in the DTL with effect from tax year 2010-11 to provide for exemption of capital gains arising on conversion of private company or

unlisted public company into LLP, subject to fulfillment of conditions prescribed therein. On a tax compliant conversion, the cost of capital asset in the hands of the company is substituted in the hands of LLP. The exemption provided to LLP is forfeited and LLP is liable to tax if any of the conditions of exemption are breached subsequently.

To make the process tax neutral, it is now proposed to extend the capital gains exemption to shareholders of the company getting converted into LLP in a tax compliant manner. The exemption is in respect of transfer of share or shares held by a shareholder in the company. The cost of the rights of the partner in LLP acquired in lieu of his shareholding in the company is the cost of acquisition of share or shares in the company immediately before its conversion. Also, like in case of LLP, upon subsequent breach of exemption conditions, exemption granted to the shareholders will be forfeited and capital gains will be chargeable to tax in their hands in the year of breach.

Indirect Tax Law?Amendments proposed

The relevant notifications, pursuant to the following proposals made in the lower house of the Parliament, are awaited.

Service lax

  • Maximum service tax of INR 100 per travel for domestic journey by air in any class.
  • Maximum service tax of INR 500 per travel for international journey by air in economy class
  • Domestic air travel to and from north-eastern states exempt from service tax
  • Existing exclusion to in-transit passengers for levy of service tax on international journey by air withdrawn
  • Abatement for construction sector increased from existing 67% to 75% of gross value, where the gross value includes the value of the land constructed upon
  • Simplification of procedures relating to completion certificate proposed
  • Constructions under the Jawaharlal Nehru Urban Renewal Mission and Rajiv Awas Yojna exempt from payment of service tax .
  • Service tax exemption to vocational training institutes extended to ‘Modular Employment Skill Development Courses’ provided by institutes registered under Ministry of Labour

Central Excise

  • Excise duty on waste paper reduced to 4%
  • Small scale excise exemption extended to all types of branded packing material.
  • Excise duty on hand-rolled cheroots priced at INR 3 per stick reduced to 10% ad valorem.
  • Scented supari fully exempt from excise duty.
  • Components, parts of earth-moving machinery such as loaders, excavators brought under MRP­ based valuation.
  • Proportionate reversal of CENVAT credit of inputs used in the manufacture of exempted goods, under proposed Rule 6(7) of the CENVAT Credit Rules with retrospective effect, extended to input services.

Customs

  • Basic Customs Duty (BCD) on stainless steel melting scrap reduced to 2.5%.
  • BCD on 11 specified drugs including anti-cancer and AIDS drugs reduced to 5%.
  • Tunnel boring machines, parts and components fully exempt from BCD.
  • Ostomy appliances used in cancer treatment fully exempt from BCD.
  • Parts and components required for manufacture of optical disk drives fully exempt from BCD.
  • Flax fibre and yarn fully exempt from BCD.
  • Export duty on raw cotton enhanced from INR 2,500 per metric tonne to INR 10,000 per metric tonne.
  • Export duty in iron ore lumps increased from 10% to 15%

Comments :-As a process, the Finance Bill needs to be approved by both houses of the Parliament and, thereafter, receive the approval of the President of India. On receipt of the President’s approval, the Finance Bill becomes law. We understand that one of the houses of Parliament, the lower house, has approved the Bill and it will now need to be approved by the upper house.

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