Accretive SDU communique - Tax Contours of India Budget 2016-17

INDIA BUDGET 2016-17

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PREFACE

“Champions are made from something they have deep inside of them - a

desire, a dream, a vision. We have a desire to provide socio-economic

security to every Indian, especially the farmers, the poor and the vulnerable;

we have a dream to see a more prosperous India; and a vision to ‘Transform

India’”.

We resonate the spirit of the Honourable Finance Minister.

Corporate India is increasingly making a mark in the global economy. It is

important to assess the tax policy direction and the announcements as the

new tax year sets in. In this backdrop, the key tax proposals are discussed

in this Communique.

Tax Contours of India Budget 2016

1. Socio-economic objectives

The Government has announced its tax proposals in the backdrop of

the following objectives:

Balancing the fiscal deficit target of 3.5% of the GDP, with the

growth requirements in a tough global economic outlook

Removing poverty and inequality from the society

Tax certainty and improved administration

2. India’s tax competitiveness globally

The Economic Survey published by the Government emphasizes that the

tax rates in India are lower than several other countries and there is a need

to increase the Tax to GDP ratio which currently is at 16.7% as compared

to China 19.4%, USA 25.4%, Brazil 33.4% and Russia 34.8%.

Comparison of tax rates across Countries

Source: Times of India | 29.02.2016


http://timesofindia.indiatimes.com/budget-2016/Income-tax-rates-moderate-in-India/articleshow/51183585.cms



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3. Key reforms – the pipeline

Taxation of the Digital Economy – Emergence of the ‘Internet Tax’:

The digital economy has increasingly raised fears of income producing

countries not receiving a share of their revenues, since the transactions

are not attributable to any physical presence in their jurisdictions.

India is among the early countries to consider levying a tax on digital

transactions. A new tax called the ‘Equalisation Levy’ is proposed to be

introduced in the Finance Bill.

Goods & Services Tax (GST): There was no reference to GST in the

Budget Speech of the Finance Minister (FM). He has also not

announced any strong rate or procedure rationalisations to align with

the GST model law

Cross-border taxation: With Indian companies increasingly becoming

global, Indian regulations are increasingly aligning with the

international frameworks and India’s commitment to the action plans

of the Base Erosion and Profit Shifting (BEPS) initiative of the G20

countries and OECD is reflected in the proposals. However regulations

pertaining to the foreign tax credits and controlled foreign corporation

which were expected, does not find any mention by the FM.

4. PM’s flagship programme ‘Make in India’ and ‘Start-up India’

The tax proposals carry specific mention of the Prime Minister’s

flagship programmes. There are a few incentives and ease in

administrative procedures proposed to provide impetus to these

programmes.

5. Tax anti-avoidance measures

In order to unearth black money in the domestic market, the

Government has introduced a limited period compliance window for

domestic taxpayers to clear their past transgressions by declaring their

undisclosed income and paying 45% of such income.

A tax collection of 1% at source is proposed on sale of vehicles in excess

of Rs. 10 lacs and on transactions involving cash payments for goods or

services exceeding Rs. 2 lacs.

The Government has reiterated its commitment to implementing the

General Anti-Avoidance Regulations (GAAR) with effect from

01.04.2017. Additionally, in line with its commitment to the BEPS

initiative of the G-20 countries and the OECD, it has introduced the

transfer pricing country by country reporting requirements, applicable

to MNC groups with revenues in excess of Euro 750 million.

6. Missing links in the fine print

In the Budget Speech, the FM has clarified that the period of

holding for shares of an unlisted company, for it to qualify as long-

term capital asset would be reduced from 3 years to 2 years.

However, there are no amendments to effect the same in the

Finance Bill.

The Equalisation Levy, which is intended to be a ‘tax on income’ of

the non-resident entity is proposed to be introduced. This could

pose challenges for the non-resident to claim a credit for the taxes

or a more favourable position (if available) under the Double Tax

Avoidance Agreement.




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Tax Proposals… some perspectives

In the following part of this communique, we have provided our comments

on tax proposals on the following:

1. Snapshot of Tax Rates

2. Emerging taxes - the new levies

3. Providing impetus to growth – New tax reliefs

4. Sector specific reliefs

5. Other rationalisation measures

6. Personal taxes

and moving towards ‘Taxpayer Service’ …

1. Snapshot of Tax Rates

There are not significant changes in the tax rates.

During the last year, the Government had announced that in four years,

the base corporate tax rates would be lowered to 25% and the tax

exemptions, phased out. In this backdrop, the following were proposed:

A reduced corporate tax rate of 29% plus surcharge and cess for

relatively small enterprises i.e. companies with turnover not

exceeding Rs 5 crore (in the financial year ending March 2015).

New manufacturing companies incorporated on or after 01.03.2016 to

be given an option to be taxed at 25% plus surcharge and cess

provided they do not claim profit or investment linked tax reliefs.

Phase-out of the tax reliefs with the following guiding principles:

a. Profit-linked, investment-linked and area-based deductions will be phased out for both, corporate and non-corporate tax payers.

b. Provisions having a sunset date will not be modified to advance the sunset date. Similarly the sunset dates provided in the Act will not be extended.

c. In case of tax incentives with no terminal date, a sunset date of 31.03.2017 will be provided either for commencement of the activity or for claim of benefit depending upon the structure of the relevant provisions.

d. There will be no weighted deduction with effect from 01.04.2017.

Consequently, the tax relief under the Special Economic Zone Scheme,

accelerated depreciation (presently capped at 40%), weighted

deductions for scientific research and development, et al, will be

phased out.




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2. Emerging Taxes - the New Levies

Equalisation Levy – a NEW tax for online advertising payouts

In the digital world, global businesses could earn income from activities in a country without having a physical presence in the consumption or income-producing country (in this case, India). In order to address the leakage of revenues, a new levy is proposed at the rate of 6% of the aggregate amount of consideration receivable by a non-resident for specified services.

This levy would apply on business – to – business (B2B) transactions. For now, the levy is proposed on consideration for online advertising, provision of digital advertising space, or any facility or services for the purpose of online advertising.

The levy is proposed to be introduced as a separate chapter in the Finance Bill, with an administrative mechanism for filing of statements by the payer entities and scrutiny thereof. In order to ensure effective compliance, safeguard provisions, interest, penalty and prosecution in case of defaults are also proposed.

Additional tax on dividend in the hands of shareholder

Presently, shareholders are exempted from income tax on dividend received and Dividend Distribution Tax (DDT, 15%) is charged on the company declaring dividend. Consequently, the dividend paid to rich and the not-so-rich shareholders is subjected to the same rate of tax. To address this inequity, income tax of 10% is proposed to be charged on a shareholder receiving dividend exceeding Rs. 10 lacs per annum, on gross basis. The rates are excluding surcharge and cess.

Infrastructure Cess

Effective, 1 March 2016, a new ‘Infrastructure Cess’ has been introduced

on manufacture of motor vehicles, ad valorem, without CENVAT benefit.

The Cess is levied at 4% on large motor vehicles and at 2.5% on smaller vehicles. Motor vehicles driven by Petrol, LPG and CNG will be liable to this cess at 1%. Krishi Kalyan Cess

A new ‘Krishi Kalyan Cess’ is proposed to be introduced at 0.5% of the value of all taxable services. Consequently, the effective rate of Service tax and cess payable on the value of services would increase to 15% (including Swachh Bharat Cess at 0.5%).

Service tax would be payable on all services received from the Government:

Effective 01.04.2016, all services received from the Government (such as

auctioning of spectrums etc, advertisement services and non-statutory

functions) would be liable to Service tax under reverse charge mechanism.

Hitherto, only specified (‘support’) services were taxable. Suitable

legislative changes have been proposed.




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3. Providing Impetus to Growth – New Tax Reliefs

Taxation of Income from 'Patents' In order to encourage indigenous research and development activities, a concessional tax rate of 10% (plus surcharge and cess) is proposed on income from patents, effective financial year 2016-17. The key highlights are: income should be by way of royalty and not complete transfer of a

capital asset

the patent must be developed and registered in India

the taxpayer must be a resident of India

the taxpayer must be the ‘true and first inventor’ of the invention

no expense deductions would be allowed against the royalty income Minimum Alternative Tax (MAT) will be applicable on such income

Tax incentive for employment generation

With a view to extend employment generation incentive to all sectors, a

deduction of 30% of employee cost on account of additional recruitments,

subject to prescribed conditions, is proposed. Among other conditions, the

amount eligible for relief will be in respect of cost incurred on any

employee whose total emoluments are less than or equal to Rs. 25,000 per

month.

4. Sector Specific Reliefs

Incentives for Promoting Housing for All

A complete deduction of the profits of a taxpayer developing and building

affordable housing projects is proposed, subject to certain conditions:

the housing project is approved by the competent authority between

01.06.2016 and 31.03.2019

the project is completed within a period of three years from the date

of approval

the built-up area for commercial establishments does not exceed 3%

of the aggregate built-up area

the project is on a plot of land measuring 1,000 or more square meters

in a metro, 2,000 square meters in case of other cities

the size of the residential unit is not more than 30 square meters in

case of a metro, 60 square meters in case of other cities

minimum Alternative Tax (MAT) will be applicable on such income

An additional deduction of upto Rs. 50,000 per annum is proposed in

respect of interest on loan from any financial institution taken for

residential house property. This is with a view to incentivise first-home

buyers availing home loans (not exceeding Rs. 35 lacs) and would continue

till the complete repayment of loan. This would be applicable for loans

sanctioned between 01.04.2016 and 31.03.2017.

This deduction will be in addition to the current limit of Rs. 2 lakhs provided

for a self-occupied house property.




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Tax Incentives for Start-ups A 100% deduction of the profits derived from the eligible business

shall be available to a start-up company. This relief can be claimed for

3 consecutive years out of a period of 5 years beginning from the year

of incorporation, at the option of the start-up. The eligible start-up

should satisfy the following conditions, among others:

- be engaged in a business involving innovation development,

deployment or commercialization of new products, processes or

services driven by technology or intellectual property

- the company is incorporated after 01.04.2016 and before

01.04.2019

- total turnover in any of the five years does not exceed Rs. 25

crores

- the company holds a certificate from the prescribed Board

Long term capital gains upto Rs. 50 lacs is proposed to be exempted

from tax if the proceeds from the long term capital gains are invested

in units of specified funds (start-up fund of funds as may be notified

by the Central Government) with a lock-in period of 3 years.

Further, it is proposed that long term capital gains arising on account

of transfer of a residential property shall not be charged to tax if such

capital gains are invested in subscription of more than 50% share-

holding of an eligible start-up company and the company invests the

same in acquisition of new (prescribed) assets.

Relief from DDT paid by SPV in case of Business Trust i.e. Real Estate

Investment Trust or Infrastructure Investment Trust

An exemption from DDT is proposed in respect of dividend declared,

distributed or paid by a downstream Special Purpose Vehicle (SPV) to the

business trust, subject to satisfaction of certain conditions.

Others

Other incentives in the sectors involving International Financial Service

Centres, Storage of crude oil, Diamond trading in special notified zones and

the Power sector are notified.




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5. Other rationalisation measures

POEM: The concept of deeming a foreign company to be a resident in

India if the place of effective management in that year is in India was

introduced in the previous year. This residency test has been deferred

by a year and will not apply from financial year 2016-17.

Further, proposals are made to enable notification of provisions

clarifying the implementation of the POEM rule and transitional

mechanisms (i.e. applicability of various provisions such as set-off of

losses, depreciation, withholding tax, etc.) in the year in which the

foreign company is deemed to be a resident.

Non-compete fee: The tax treatment for non-compete fee earned in

relation to 'not carrying out any profession' would be similar to the

law as applicable for ‘not carrying out a business activity’. Accordingly,

non-compete fee would be taxable as business income or capital gains

depending upon the contractual arrangement.

Investment allowance: Investment allowance at the rate of 15% is

available to a company on investments made in new assets (plant and

machinery) exceeding Rs. 25 crores in a year subject to the condition

that the acquisition and installation has to be done in the same

previous year. The dual condition of acquisition and installation is

proposed to be relaxed. The allowance would be available even if the

new plant or machinery is acquired and installed in different previous

years, provided installation happens before 31.03.2017. This

amendment would be applicable retrospectively from the financial

year 2015-16.

MAT: It is clarified, that foreign companies who are not required to be

registered in India or do not have a permanent establishment in India

are excluded from the purview of MAT. This amendment is proposed

with retrospective effect from financial year 2000-01.

Make in India: Various changes to the duty rates have been effected.

We believe that these changes are with a view to give a boost to the

manufacturing sector and curb imports:

- import duties on industrial solar water heaters, primary

aluminium products is increased, making imports more

expensive

- import of PCBs and PPCBs, which were hitherto exempt from

duty are now liable to SAD

- import duties on machinery for manufacture of various electrical

equipment and instruments is reduced, to promote import for

machinery and boost domestic manufacture

- complete exemption is provided for import of parts and

components for manufacture of mobile phones, routers,

broadband modems, set top boxes and various other products to

promote domestic manufacture

Interest on delay in payment of Service tax: The rate of interest on

delay in payment of Service tax is proposed to be rationalised at a

uniform rate of 15%. A higher rate of 24% is proposed to be applied

on Service tax collected but not remitted.

The period-based slab rate of interest at 18%, 24% and 30% as currently applied is proposed to be done away with.




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Enhancement of normal period of limitation under Service tax and

Central Excise: Currently, the normal period of limitation for

verification of records by the Service tax and Central Excise authorities

is 18 and 12 months, respectively. This period is proposed to be

increased to 30 months and 24 months, respectively.

We believe, this is a step towards GST. We anticipate that, under GST

law, the normal period of limitation would be between 36 and 60

months.

Prosecution under Service tax: Currently, for certain offences where

the amount involved exceeds Rs. 100 lacs, prosecution may be

launched against specified directors or other officers of the company.

Acceding to the demand of the trade and industry and with a view to

reduce harassment in genuine cases, the threshold is proposed to be

increased to Rs. 200 lacs.

Further, it is proposed to restrict the initiation of prosecution only to

cases where the tax is collected but not remitted. In case of disputes

over maintenance of books of accounts or absence of prescribed

documentation for claim of CENVAT credits, initiation of prosecution

is proposed to be restricted.

6. Personal Taxes

There is no proposal for change in the base tax rates and slabs.

Surcharge is proposed to be increased to 15% from 12% for taxpayers with income over Rs. 1 Crore.

An additional tax rebate of Rs. 3000 is proposed for taxpayers with

income equal to or less than Rs. 5 lacs

Individual taxpayers proposed to be granted Rs. 60,000 (currently, Rs.

24,000) per annum towards ‘Payment of house rent’. This would be

applicable for employees who do not receive HRA.

Registered Provident Fund, Superannuation Fund and National

Pension Scheme: In order to encourage taxpayers to invest in annuity

schemes and bring the tax treatment of the various social security

schemes at par, the following are proposed:

- Currently, the terminal benefits from registered provident or

superannuation funds is exempt from tax subject to certain

conditions. Now, the withdrawal of accumulated balance from

these funds, attributable to contributions made on or after

01.04.2016, by an employee would be exempt in the hands of the

employee only up to 40% of such accumulated balance.




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The Finance Ministry through a press release subsequent to the

Budget Speech, has clarified that all contributions and interest

accrued to employee provident fund (EPF) before 01.04.2016,

will not attract any tax on withdrawal. Withdrawal of principal

amount contributed to EPF after 01.04.2016 would also remain

exempt from any tax. It is only the interest on contributions made

after 01.04.2016 which will be taxed. The new tax regime would

not apply to employees who are with the statutory wage limit of

Rs. 15000 per month.

- Currently, employer provident fund contribution up to 12% of

employee’s salary is exempt in the hands of the employee. Now,

contribution made by the employer to RPF in excess of 12% of

employee’s salary or in excess of Rs 1.5 lac, whichever is less

would be liable to tax in the hands of the employee.

- The exemption threshold limits for the contribution made by the

employer to the superannuation fund has been increased from

Rs. 1 lac to Rs. 1.5 lac.

- Any fund transferred from the provident / superannuation fund

to the National Pension Scheme will be exempt from tax.

MOVING TOWARDS ‘TAXPAYER SERVICE’ …

Efficiency in administration

Presumptive tax to minimise compliance requirements for small taxpayers The threshold for applicability of presumptive taxation for small

businesses is proposed to be raised to Rs. 2 Crores from the current

Rs. 1 Crore. However, certain additional conditions are prescribed.

Among others, such taxpayers would be required to pay advance tax

(in a single payment) on or before the 15th March of the relevant

financial year.

A simplified presumptive taxation is proposed to be introduced for

non-corporate tax payers (excluding LLPs) earning professional

income. The taxable income (presumptive) would be at 50% of the

gross receipts and would be subject to the condition that the gross

receipts do not exceed Rs. 50 lacs in the previous year.

Rationalisation of withholding tax provisions Under the existing provisions, where a person received any sum or

income on which tax was liable to be deducted, and such person did

not furnish a PAN, tax was liable to be deducted at the higher rate.

Acknowledging the compliance burden it is proposed that the

requirement would not apply to a non-resident in respect of any

payment other than interest on bonds, subject to such conditions as

may be prescribed.




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In order to rationalise the withholding tax rates and base for

withholding tax provisions, the existing threshold limit for deduction

of tax at source and the rates of deduction of tax at source for various

transactions are proposed to be revised with effect from 01.06.2016.

Rationalisation in administrative provisions Various measures are proposed to expeditiously finalize the income

tax proceedings.

Interest on refunds is proposed to be granted on self-assessed income

tax. Further, additional interest is also proposed at the rate of 3% in

case of delay beyond the prescribed time limit.

Time limits have been proposed for disposing the applications seeking

reduction / waiver of interest / penalty / immunity from penalty

proceedings under the income tax provisions.

Penalty provisions have been rationalised to reduce the discretionary

powers of the tax officers. The penalty range has also been

rationalised as 50% to 200% vis-à-vis the erstwhile 100% -300% of the

tax amount.

A complete immunity from penalty and prosecution is proposed in

certain situations, under the Income tax provisions.

Benefit of payment of service tax on receipt basis and quarterly

remittance, currently applicable only to partnership firms and

individuals, is proposed to be extended to One Person Companies.

Extensive use of technology

The digitisation of processes within the Department has further

increased. Scrutiny of Income Tax returns in the 7 metros is proposed

to be done in an e-environment.

The Customs Department proposes to shift physical control

mechanisms at a customs bonded warehouse to record based control.

This would be supported by enabling technology.

Various rationalisation measures are proposed for moving to an e-

environment.

Reduction in Litigation and dispute resolutions

Under the Transfer Pricing regulations, it is proposed that no appeal

shall be filed by the Assessing Officer against the directions issued by

the Dispute Resolution Panel.

Direct Tax Dispute Resolution Scheme, 2016 and an Indirect Tax

Dispute Resolution Scheme, 2016 are proposed to be introduced. It is

expected to bring down litigations pending at the first appellate

authority (Commissioner (Appeals)). The Direct Tax Dispute

Resolution Scheme is additionally expected to cover disputes arising

from retrospective amendments.

With a view to clear the backlog of cases pending before the Tribunal,

11 new benches of Customs, Excise and Service Tax Appellate Tribunal

(CESTAT) are proposed to be set-up. The location and the jurisdiction

of such benches is awaited.




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Document date: 02.03.2016

The views expressed and the information provided in this newsletter are of general nature and are not intended to address the circumstances of any particular

individual or entity. Further, the above content should neither be regarded as comprehensive nor sufficient for making decisions. Although we endeavour to

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based on this publication.

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Accretive SDU communique - Tax Contours of India Budget 2016-17