With the Finance Minister's announcement of tax proposals for the financial year 2007-08, Badrinath NR and Vishnu Bagri discusses the key proposals that will affect the retail sector

Today, vigorous growth with strong macro-economic fundamentals characterises the Indian economy. The only caution factor is the increasing inflation rate. Against this backdrop, the Finance Minister (FM) announced the tax proposals for the financial year 2007-08 on February 28, 2007.
Whilst providing certain measures for small-scale manufacturers and service providers keeping the income tax and service tax rates stable, the minister has proposed certain other measures, which could, besides other consequences, impact the retail businesses significantly. Broadly speaking, these are introduction of service tax on commercial rentals and works contract, increased dividend distribution tax and changes in the method of valuation of toll manufacturing transactions.

Income tax rates
Marginal changes in corporate tax rates: The proposed change in income tax rates for domestic companies. The lower limit of taxable income begins is Rs 10, 000,000 with proposed effective rate of 30.90 per cent against existing rate of 33.66 per cent. For incomes, which are above this limit, proposed effective rate is 33.99% against exiting rate of 33.66 per cent.
Dividend distribution tax increased: The rate of dividend distribution tax has been increased from 14.025 per cent to 16.995 per cent.
Exemption limit for individual enhanced: The basic exemption limit for individuals has been increased to Rs 1,10,000 (Rs 1,45,000 for resident women and Rs 1,95,000 for senior citizens).

Increase in tax cost
Secondary education cess: A secondary and higher education cess @ one per cent of the aggregate duty has been introduced. This is in addition to the education cess @ two per cent currently payable. Accordingly, the effective tax rate of service tax is 12.36 per cent and excise duty is 16.48 per cent.
Service tax on rentals:  The rentals in the tier I and II cities, which, according to certain studies, account for 30 per cent of the operating costs, are set to further increase due to a service tax of 12.36 per cent.  The minister has proposed to tax the renting, letting, licensing or leasing of immovable properties for commercial purposes (such as factories, shops, showrooms, warehouses and offices).