The Hindu Business Line : Scope for more lustre

The Budget has attempted to sustain the growth momentum of the Indian economy. Although the overall outlook on the Budget is positive, there are some areas of concern for industry.

Gems and jewellery

The gems and jewellery industry is the third largest foreign exchange earner with annual exports of over $16 billion. The reduction in the rate of Customs duty on cut and polished diamonds from 5 per cent to 3 per cent would help the industry in promoting India as a trading hub, particularly while competing with other trading centres such as Dubai or Antwerp.

Although the reduction is a welcome measure, total waiver of Customs duty would have substantially strengthened the position of India in the world diamond trade.

The reduction in tax rate for partnership firms and companies having taxable income of up to Rs 1 crore from 33.66 per cent to 30.9 per cent would help small and medium enterprises (SMEs) in this sector.

The Finance Minister has promised to introduce a benign tax regime for diamond manufacturing and trading entities having profits of at least 8 per cent of their sales turnover. Diamonds are a high value commodity business with low margins. The profitability of the diamond industry is generally 2-4 per cent of sales and that of the jewellery industry, 4-8 per cent. The proposed provision does not distinguish between diamond and jewellery businesses and the profitability estimated is not in line with market reality. Thus, the provision effectively does not provide any relief to the industry.

IT, BPO sectors

The industry was expecting extension of income-tax exemption benefits under Section 10A/10B of the Income-Tax Act, 1961, particularly for Software Technology Parks of India (STPI) unit beyond March 31, 2009, when the benefits are scheduled to come to an end. However, this has not been done.

Further, Minimum Alternate Tax (MAT) at 11.33 per cent on book profits has been introduced on profits of STPI units.

In comparison, Special Economic Zone (SEZ) units still continue to be exempted from income-tax. Due to this, the IT industry would be induced to set up new units in SEZs rather than STPs. Such a step would create locational disparity and logistic issues for the workforce and the industry.

The Finance Bill has retrospectively introduced a provision with effect from February 11, 2006, whereby the possibility of STPI units shifting their business to SEZs has been plugged. As a result, STPI units have been put to a significant disadvantage vis-à-vis SEZ units.

Service tax at 12.36 per cent is proposed to levied on "lease rentals" for commercial premises which will be a major damper for this sector, as most of the companies in this sector export their services and, thus, are not subject to service tax.

As no provisions are prescribed for refund, this provision will affect the profitability of the industry.

(The author is Founder of Astute RSM Group.)

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