Direct tax proposals
Tax incentives for pipeline networks: – Last year’s budget had introduced an investment linked tax incentive for specified business including the business of laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network. One condition for availing this benefit was that not less than one–third of the total pipeline capacity is available for use on common carrier basis. The pipeline policy has been laid by the Petroleum & Natural Gas Regulatory Board wherein common carrier capacity is ‘one-third’ for natural gas pipeline network and ‘one-fourth’ for petroleum product pipeline network. In order to rationalize the condition regarding common carrier capacity in the tax law, the budget 2010 proposes to amend the provisions and link the pipeline capacity available for use on common carrier basis as specified by the Petroleum & Natural Gas Regulatory Board. This amendment is proposed to be made effective from 1 April 2010.
Oilfield service providers: – The budget proposes to amend section 44BB so as to exclude the applicability of this section to income covered under section 44DA. Section 44BB provides a beneficial tax regime for non-residents engaged in providing services or equipments on hire in connection with prospecting, extraction and production of oil and gas. Under this regime, 10 per cent of the gross receipts of the non-resident are deemed as its taxable income and the non-resident is not required to maintain books of accounts in India. Based on the above provisions, non-residents providing services including technical services in connection with prospecting, extraction and production of oil & gas were paying tax in India at the rate of 4.223%.
The proposed amendment seeks to withdraw applicability of section 44BB for companies providing “technical services”, even if services are in connection with prospecting, extraction and production of oil and gas, thus challenging the judicial interpretation and almost settled tax position.
Post this amendment, non-resident service providers providing technical services and having a PE in India would be subject to tax on a net basis (revenue less expenses) at the rate of 42.23%. Where the service providers do not constitute a PE in India, tax will be payable at the rate of 10.56% on gross basis under the Indian domestic law or as per the tax treaty of the service provider, whichever is more beneficial.
This amendment is proposed to take effect from 1 April 2011 and will, accordingly, apply from the assessment year 2011-12.
Budget 2010 proposes to reduce the surcharge on domestic companies with income above INR10 million from 10% to 7.5%. There is no change proposed in the rates for surcharge on foreign companies, general corporate tax rate, and cess.
Rate of MAT is proposed to be increased from current 15% to 18% of book profits. There is no change proposed to the time limit for availing MAT credit.
Weighted deduction on expenditure incurred on in–house R&D is proposed to be increased from 150% to 200%. Weighted deduction on payments made to National Laboratories, research associations, colleges, universities and other institutions, for scientific research is proposed to be increased from 125% to 175%.
TDS threshold limits on payments to residents are proposed to be rationalized:
Indirect tax proposals
In Budget 2010, the territorial jurisdiction of service tax was extended beyond the territorial waters to installations, structures and vessels in the Continental Shelf and Exclusive Economic Zone.
A new notification has been issued, superseding an earlier notification, which stipulates that the service tax provisions would extend to:
Any service provided in the CS and EEZ of India for all activities pertaining to construction of installations, structures and vessels for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof;
Any service provided or to be provided by or to installations, structures and vessels (and supply of goods connected with the said activity) within the CS and EEZ of India which have been constructed for the purpose of prospecting or extraction or production of mineral oil and natural gas and supply thereof.
In general, the overall customs duty structure has remained unchanged at 10%, 7.5% and 5%. The basic excise duty rate for non—petroleum products has been increased to 10% from 8%.
Although the service tax rate has remained unchanged at 10%, the service tax net has been expanded to include new service categories. Further, amendments have also been made in certain existing taxable services.
In the Export of Service Rules, the condition that the ‘services are provided from India and used outside India’ for qualification as exports has been omitted.
HSD – High Speed Diesel
MAT – Minimum Alternate Tax
MS- Motor Spirit
PE – Permanent Establishment
TDS- Tax Deducted at Source