On 28 February, India’s finance minister Pranab Mukherjee presented the annual budget for 2011 to parliament.
Key initiatives included a reduction of surcharge on tax from 7.5% to 5% for domestic companies and from 2.5% to 2% for foreign companies. Foreign dividends received by Indian companies from their foreign subsidiaries will be taxed at the rate of 15%. There are no changes to the corporate tax rate. The tax rates applicable to partnership firms and LLPs also remain the same.
To boost infrastructure projects, the government will create special purpose vehicles in the form of infrastructure debt funds to attract foreign capital. Interest payments are subject to withholding tax at 5% instead of 20%. Such income will be exempted from tax.
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Mukherjee expressed confidence that the direct tax code will be introduced in April 2012 as originally planned. In addition, he outlined proposals to enter into 11 new tax information exchange agreements and 13 new double tax avoidance agreements (DTAAs). India will also revise 10 of its existing DTAAs.
The scope of service tax has been widened to include air-conditioned restaurants and services provided in guesthouses, hotels, inns and campsites. According to an analysis by Economic Laws Practice, services at such establishments will be taxed if the published rate is ₹1,000 (US$22) or more per day, irrespective of what a client is actually charged. Therefore, the gross amount paid will be liable to tax.
Some observers have criticized the budget for lacking in boldness. Harsh Mariwala, chairman and managing director at Marico, told CNBC-TV18 that “there is no big-ticket reform agenda which is structural and which will take the economy to a different path. I thought the time was right to take some big-ticket reform … because the government has two years to complete the term.” Others say the budget is a safe and stable one since it hasn’t introduced major changes or delivered any negative news.
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