This article summarises major direct tax proposals relevant to certain key sectors.

Tax rates

Inflationary concerns seem to have prevailed over the finance minister as he presented Budget 2007.

Given the comparatively strong fiscal position riding on the back of buoyant tax collections, it was widely expected that the government will pare tax rates, especially the surcharge of 10 per cent.

However, the direct tax proposals seem to echo the conscious effort by the government to control “demand side” pressures by ensuring that tax rates are not cut so as to leave the industry and the public with higher disposable incomes.

The increase in dividend distribution tax (DDT) rate will ensue another bout of corporate restructuring for elimination of cross holdings and multi-layer corporate structures.

IT/ITeS

The darling sector of the Indian economy is all set to ‘log in’ into the exchequer with the finance minister announcing extension of minimum alternate tax (at the rate of 11.33 per cent) to companies availing STP and EOU income-tax holidays.

While the demand of the IT/ITeS sector for extension of the sunset clause beyond March 31, 2009, has not been met, the levy of MAT is, in a way, a rollback by the government of its assurance that such companies will not be taxed till March 31, 2009.

While some could argue that there is an economic justification for the IT/ITeS sector to contribute to the government treasury, the levy of MAT does not augur well for further foreign investment into the IT/ITeS sector which has been facing stiff competition from Asean and Eastern Europe countries.

IT/ITeS companies also stand adversely affected by the introduction of the fringe benefit tax (FBT) on employee stock option plans (Esop)/ sweat equity.

Till now, Esop plans which complied with guidelines and were registered offered benefits to employees in terms of deferring taxation till the disposal of shares.

When the levy of FBT was introduced, it was clarified that Esops could not be covered in the absence of a specific enabling provision.

Now the finance minister has said the fair market value (to be determined in accordance with the method as may be prescribed by the CBDT) of the options as on the date of exercise will be regarded as a fringe benefit and subjected to FBT at the full rate of 30 per cent (plus applicable surcharge and educa-tion cess).