Highlights of Union Budget 2010-2011

DNA
Friday, February 26, 2010 11:08 IST
Last updated: Friday, February 26, 2010 13:34 IST

New Delhi: Finance minister Pranab Mukherjee began presenting the Union budget
for 2010-11 in the Lok Sabha today after the Cabinet approved the document. Here
are some of the highlights of his budget speech.

Complete Coverage
Union Budget 2010

• The Indian economy was facing grave uncertainty. Growth had started
decelerating when the interim and full budget for 2009-10 were presented.
• At home there was added uncertainty because of subnormal southwest monsoon.
• Yet, the economy now in a far better position than it was
eight years ago.
• India weathered the economic crisis well and emerged from the global slowdown
faster than any other country.
• First challenge before the government is to quickly revert to
high GDP growth path of 9%.
• Expects 10% economic growth in the near future.
• Second challenge is to harness economic growth to make it more inclusive and
consolidate gains.
• Third challenge is to overcome weakness in government's public delivery
mechanism; a long way to go in this.
• Impressive recovery in the past few months. Can witness
faster recovery in the coming months.
• Food security has been strengthened.
• But bottleneck of the public delivery mechanism can hold us back.
• Fiscal year 2009-10 was challenging for the economy.
• Focus shifted to non-governmental actors and an enabling government.
Government now concentrates on supporting and delivering services to the poorer
sections.
• Economy stabilised in the first quarter of 2009 itself.
• 18.5% manufacturing growth in December was the highest in two decades.
• Figures for merchandise exports for January encouraging
after turnaround in November and December last year.
• Double digit food inflation last year due to bad monsoon
and drought-like conditions.
• Government conscious of the price rise and taking steps to tackle it.
• Erratic monsoon and drought-like conditions forced supply-side bottleneck that
fuelled inflation.
• Need to review stimulus imparted to economy last year to overcome the
recession.
• Need to ensure that the demand-supply imbalance is managed.
• Need to make growth more broad-based.
• Need to review public spending and mobilise resources.
• Status paper on public debt within six months.
• Government hopes to implement direct tax code from April 2011.
• Earnest endeavour to implement general sales tax in April 2011.
• Government will raise Rs25,000 crore from divestment of its stake in state-owned
firms.
• Kirit Parekh report on fuel price deregulation will be taken up by petroleum
minister Murli Deora in due course.
• Nutrient-based fertiliser subsidy scheme to come into force from April 1 this year.
• Nutrient-based fertiliser subsidy will reduce volatility of subsidy and also reduce it.
• Market capitalisation of five public-sector undertakings listed since October
increased by 3.5 times.
• FDI inflows steady during the year. Government has taken
series of steps to simplify FDI regime. Intends to make FDI policy user friendly by
compling all guidelines into one document.
• Government has decided to set up apex-level Financial
Stability and Development Council.
• RBI considering issuing banking licences to private companies. Non-banking
finance companies will also be considered if they meet the criteria.
• Government to provide Rs16,500 crore to public-sector
banks to maintain tier-I capital.
• Government to continue interest subvention of 2% for one more year for exports
covering handicrafts, carpets,
handlooms and small and medium enterprises.
• Government to provide Rs300 crore to organise 60,000 pulse and oilseed villages
and provide integrated intervention of watershed and related programmes.
• Rs200 crore provided for climate-resilient agriculture
initiative.
• Government committed to ensuring continued growth of
special economic zones.
• Need to take firm view on opening up of the retail sector.
• Deficit in foodgrains storage capacity to be met with private-sector participation.
• Period for repayment of loans by farmers extended by six months to June 30,
2010, in view of the drought and floods in some parts of the country.
• Interest subvention for timely repayment of crop loans raised from 1% to 2%,
bringing the effective rate of interest to 5%.
• Road transport allocation raised by 13% to Rs19,894 crore.
• Proposal to maintain thrust of upgrading infrastructure in rural and urban areas.
IIFCL authorised to refinance infrastructure projects.
• Rs1,73,552 crore provided for infrastructure development.
• Allocation for railways fixed at Rs16,752 crore, an increase of Rs950 crore over
the last financial year.
• Government proposes to set up Coal Development Regulatory Authority.
• Mega power plant policy modified to lower cost of generation; allocation to power
sector more than doubled to Rs5,130 crore in 2010-11.
• Government favours competitive bidding for coal blocks for captive power plants.
• Rs500 crore allocated for solar and hydro projects for the Ladakh region in Jammu
& Kashmir.
• Clean Energy Fund to be created for research in new energy sources.
• Allocation for new and renewable energy ministry increased by 61% to Rs1,000
crore.
• One-time grant of Rs200 crore provided to Tirupur textile cluster in Tamil Nadu.
• Allocation for National Ganga River Basin Authority doubled to Rs500 crore.
• Alternative port to be developed at Sagar Island in West Bengal.
• Draft of Food Security Bill ready, to be placed in the public domain soon.
• Outlay for social sectors pegged at Rs1,37,674 crore, accounting for 37% of the
total plan allocation.
• Plan allocation for school education raised from Rs26,800 crore to Rs31,036 crore
in 2010-11.
• 25% of plan outlay earmarked for rural infrastructure development.
• Plan allocation for health and family welfare increased to Rs22,300 crore from
Rs19,534 crore.
• For rural development, Rs66,100 crore have been allocated.
• Allocation for National Rural Employment Guarantee Authority stepped up to
Rs40,100 crore in 2010-11.
• Indira Awas Yojana's unit cost raised to Rs45,000 in the plains and Rs48,500 in
hilly areas.
• Allocation for urban development increased by 75% to Rs5,400 crore in 2010-11.
• 1% interest subvention loan for houses costing up to Rs20 lakh extended to
March 31, 2011; Rs700 crore provided.
• Allocation for development of micro and small-scale sector raised from Rs1,794
crore to Rs2,400 crore.
• Rs1,270 crore provided for slum development programme, marking an increase of
700%.
• Government to set up National Social Security Fund with initial allocation of
Rs1,000 crore to provide social security to workers in the unorganised sector.
• Government to contribute Rs1,000 per annum to each
account holder under the new pension scheme.
• Exclusive skill development programme to be launched for textile and garment-
sector employees.
• Allocation for woman and child development increased by 80%
• Plan outlay for the social justice ministry raised by 80% to Rs4,500 crore.
• Plan allocation for minority affairs ministry raised from Rs1,740 crore to Rs2,600
crore.
• Financial-Sector Legislative Reforms Committee to be set
up.
• Rs1,900 crore allocated for Unique Identification Authority of India.
• A unique identity symbol will be provided to the rupee in line with the US dollar,
British pound sterling, euro and Japanese yen.
• Defence allocation pegged at Rs1,47,344 crore in 2010-11
against Rs1,41,703 crore in the previous year. Of this, capital expenditure would
account for Rs60,000 crore.
• Planning Commission to prepare integrated action plan for
Naxal-affected areas to encourage "misguided elements" to eschew violence and
join the mainstream.
• Gross tax receipts pegged at Rs7,46,656 crore for 2010-11, non-tax revenues at
Rs1,48,118 crore.
• Total expenditure pegged at Rs11.8 lakh crore, an increase of 8.6%.
• Fiscal deficit at 5.5%.
• Fiscal deficit seen at 4.8% and 4.1% in 2011-12 and 2012-13, respectively.
• Non-plan expenditure pegged at Rs37,392 crore and plan expenditure at
Rs7,35,657 crore in budget estimates. Proposed increase of 15% in plan
expenditure and 6% in non-plan expenditure.
• Cash subsidy for fuel and fertiliser instead of previous practice of bonds to
continue.
• Fiscal deficit pegged at 6.9% in 2009-10 as against 7.8% in the previous fiscal.
• Government's net borrowing to be Rs3,45,010 crore for 2010-11.
• Income-tax department ready with two-page Saral-2 returns
form for individual salaried assesses.
• Personal income-ax rates pruned:
Income up to Rs1.6 lakh — nil
Income above Rs1.6 lakh and up to Rs5 lakh — 10%
Income above Rs5 lakh and up to Rs8 lakh — 20%
Income above Rs8 lakh — 30%
• Additional deduction of Rs20,000 allowed on long-term
infrastructure bonds for income-tax payers; this is above Rs1 lakh on savings
instruments allowed already.
• Investment-linked tax deductions to be allowed to two-star hotels anywhere in
the country.
• Weighted deduction of 125% for payments to approved associations doing social
and statistical research.
• One-time interim relief to housing and real-estate sector.
• Businesses with a turnover of up to Rs60 lakh and professionals earning up to
Rs15 lakh to be exempted from the obligation to audit their accounts.
• Housing projects allowed to be completed in five years instead of four to avail of
tax breaks.
• Revenue loss of Rs26,000 crore on direct tax proposals.
• Central excise duty on all non-petroleum products raised to 10% from 8%.
• FM increases customs duty on crude oil to 5%, on diesel and petrol to 7.5%, and
on other petroleum products to 10%.
• Structural changes in excise duties on cigarettes, cigars, and cigarillos.
 • Clean energy cess of Rs50 per ton to be levied on coal produced in India.
• Concessional excise duty of 4% on solar cycle-rickshaws.
• Balloons exempted from central excise duty.
• Customs and central excise proposals to result in a net revenue gain of Rs43,500
crore.
• More services to be brought under the service tax net.
• Certain accredited news agencies exempted from payment of service tax.
• Net revenue gain from tax proposals pegged at Rs20,500 crore.

GENERAL:

• Economic crisis: "We have withered the global slowdown well," says FM.
• 18.9% growth rate in manufacturing sector in 2009.
• Fiscal deficit pegged at 5.5%
• Hope to breach 10% mark in GDP in near future, says FM.
• Growth to exceed 7.2% in this fiscal, says FM.
• General Sales Tax and Direct Tax Code can be introduced in April 2011
• Gradual phasing out of stimulus, says FM.
• Govt to set up apex level Financial Stability and Development Council
• RBI to release additional licenses to pvt sector banks and non-banking financial
institutions
• Repayment tenure for farmer loans extended by 6 months to June 30th 2011
• Delhi-Mumbai industrial corridor taken up for development
• Govt to raise Rs 25000 cr through Disinvestment
• Technology advisory group to be set up under Nandan Nilekani. UID authority given Rs
1900 cr
• Allocation to Defence over Rs 147,000 crore

DIRECT TAX:

• Direct tax code will be implemented from April 1, 2011

• I-T dept to notify simple two-page Saral 2 form for individuals for current year
• Direct Tax proposals to give loss of Rs 26,000 cr; Indirect Tax to yield gain of Rs
45,000 cr

• No change in Corporate Tax

• Minimum Alternate Tax up from 15% to 18% on book profits
 • Reduced Surcharge of 10% on domestic companies to 7.5%
• Professionals with Rs 15 lakh income need accounts audit

Personal Taxation:

• Income up to Rs 1.60 lakh: NIL tax

• Income between Rs 1.60-5 lakh: Tax at 10%
• Income between 5-8 lakh: Tax at 20%
• Income above Rs 8 lakh: Tax at 30%
• Minimum Tax Exemption limit for Senior Citizens and Women remains unchanged; i.e.
Rs. 2,40,000 and Rs. 1,90,000 respectively.
• Additional Rs 20,000 deduction made available for investment in Infrastructure Bonds.
This is above Rs. 1,00,000 80C exemption

INDIRECT TAX:

• Service Tax rates unchanged at 10%, to bring more

services under service tax
• Duties on smoking and non-smoking tobacco products up
• Peak excise duty hiked from 8% to 10%
• Peak customs duty remains unchanged at 10%
• Rs 1 per litre excise on petrol, diesel
• Full excise cut on electric cars
• Partial rollback of excise duty on cement
• Agricultural seeds exempt from Service Tax
• News agencies exempt from Service Tax
• Service tax to GDP ratio is 1%
• Customs duty on gold, platinum imports raised to Rs 300
from Rs 200
• Import duty on silver raised to Rs 1500 per kg

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Home > Money > Report
New tax code a capital-gains shocker
Sandeep Shanbhag / DNA
Wednesday, September 16, 2009 2:51 IST Email

Mumbai: The direct tax code (DTC), which the government intends to apply Print
from April 2011, contains large-scale changes with respect to capital gain
Share
taxation.

In the new regime, there will be no distinction between long-term and short-term gains
as is practised currently. All capital gain income has to be aggregated with other income
and taxed as per slab rates applicable to the taxpayer.

In other words, the current exemption for long-term capital gains on equity and equity
mutual funds will stand eliminated. Even the concessional rate of 10/ 20% on non-equity
long-term gains will no longer be applicable. On the positive side, the securities
transaction tax will not be payable.

Though there is no distinction between long-term and short-term assets per se, in the
case of a capital asset which is transferred anytime after one year from the end of the
financial year in which it is acquired, the cost of acquisition will be adjusted on the basis
of cost-inflation index.

This holding period of one year from the end of the FY is constant in all cases (even real
estate) and not just for shares and mutual fund units.

The other notable difference in the holding period is that the Income-Tax Act, 1961
(ITA61) allowed indexation depending upon the period of holding on the basis of calendar
dates.

In the DTC, indexation can be applied only if the holding period is one year from the end
of the FY during which it was purchased. For example, for an equity share purchased in
say, May 2011, for indexation to apply, it needs to be sold after March 2013 and not May
2012.

This also means that the advantage of double indexation where mutual fund schemes
were launched -- such that the actual holding period was marginally over one year but
overlapped two financial years -- will be history.

The base date for determining cost of acquisition under the DTC has been shifted to April
1, 2000, from April 1, 1981 under ITA61. The cost of acquisition is generally with
reference to the value of the asset on the base date or, if the asset is acquired after such
date, the cost at which the asset is acquired. As a result, all capital gains between April 1,
1981 and March 31, 2000 will not be liable to tax.

An example will illustrate this point better. For ease of understanding, indexation has
been ignored. Suppose you have bought some shares on March 20, 1995 for Rs 60,000
and their value as on April 1, 2000 was Rs 1 lakh. Now if you sell these shares anytime
on or after April 1, 2011 for say, Rs 2.5 lakh, your cost of acquisition for the purpose of
indexation will be taken as Rs 1 lakh and not Rs 60,000.

Consequently, the gain of Rs 40,000 (Rs 1,00,000 - 60,000) from 1995 till 2000 escapes
the tax net.

In the above example, the amount that will be taxable will be Rs 1.5 lakh (Rs 2.50 lakh
sale price less Rs 1 lakh which is the value on the base date). It is possible to legally
avoid even this tax by selling these shares a little before a April 1, 2011 (say, on March
25, 2011). Since the sale on March 25, 2011 will be governed by the provisions of ITA61,
the entire long-term capital gains will be tax-free.

In fact, one can say with more than reasonable certainty that this is what exactly will
happen -- when investors wake up to the reality that the blanket exemption on long-term
capital gains tax is to be withdrawn, shares are going to be sold en masse. Such a fire
sale is bound to eventually lead to a stock market crash. And since the change of law
affects not only domestic retail investors but even FIIs, NRIs etc alike, this crash could
well go on to be the mother of all crashes. Since such a situation is undesirable for
investors and the government, preventive measures need to be thought of from now.

Possibly applying the new regime prospectively for new purchases on or after April 1,
2011 could be a solution.

Moving on, capital losses are to be ring-fenced under the DTC. This means capital losses
will be allowed to be set-off only against capital gains. The unabsorbed capital loss can be
carried forward for future set-off for any number of years as against a maximum period
of eight years under ITA61.

Coming to deductions from capital gains, the current deduction under Section 54EC,
where the capital gain amount may be invested in bonds for claiming tax exemption
stands cancelled under the DTC.
The only tax deduction allowed is if the net sale proceeds of an asset held for over one
year from the end of the FY in which it was purchased is:
a) reinvested for purchase or construction of a residential property either within one year
before the beginning of the FY or during the FY in which the transfer of original
investment asset is effected;

b) deposited in an account in any post office in accordance with the capital gains deposit
scheme (CGDS) framed by the central government in this behalf within 60 days of the
sale;

c) If the amount reinvested is less than the capital gains, proportional deduction will be
available. If it is more, only the amount of capital gain is deductible.
The amount deposited in the CGDS has to be utilised for the purposes of purchase or
construction of the new asset within three years from the end of the FY in which the
transfer of the original asset is affected. This deduction is somewhat on the lines of the
Section 54F deduction in ITA61.

However, under DTC, the deduction shall be allowed only if the taxpayer does not own
any residential house, other than the new asset, on the date of transfer of the original
asset. This means home owners will not be able save their capital gain tax.

This stipulation is extremely harsh and basically punishes someone for owning a roof over
his head. It is hoped that before the draft becomes law, ownership of one house on the
lines of Section 54F is allowed.

To sum
All considered, the harshest blow of the DTC seems to be the taxation of hitherto exempt
long-term capital gains. In most cases, the jump would be from a zero tax regime to
paying tax @ 30%.

Currently, one of the key attractions of our country is a tax-friendly capital market
system. If this is taken away, there is no saying the extent of collateral damage that will
take place.

Possibly reinstating the STT and taxing short-term gains at a flat rate of 30% while
exempting gains for holding over one year would not only encourage long-term investing
but would also augur well for the health of our market and economy.
The writer is director, Wonderland Consultants a tax and financial planning firm. He may
be contacted at sandeep.shanbhag@gmail.com

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