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Will the budgetput economic growth

into high gear?

B. K. Khare & Co.Chartered Accountants

BUDGET2016FOR PRIVATE CIRCULATION


BUDGET ANALYSIS 2016

This publication is a service to our clients based on a quick appreciation of the budget proposals and must not be regarded as professional advice, authoritative opinion or the sole basis for your decisions. This publication does not constitute an offer or solicitation. For Private Circulation only.


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Contents

Editorial 03

A Tribute to Mr. B. K. Khare 08

Medley of Budget Poems by Mr. B. K. Khare 09

Bio Sketch by Mr. B. K. Khare 12

If I were the Finance Minister 15

Union Budget 2016 17

Direct Taxes 37

Indirect Taxes 75


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Dear Esteemed Reader,

The economic environment in which the Finance Minister rose to present Budget 2016 is challenging both in terms of domestic and global slowdown. A truant monsoon, stressed balance sheets of Corporates, Banks unable to lend, a moribund infrastructure sector, no growth in jobs, weak global demand and stagnating exports – are some of the factors which negatively impacted the domestic economy. The Economic survey states that a percentage point decrease in the world growth rate impacts domestic growth rate by 0.42 percentage. Despite these constraints, the IMF has hailed India as a ‘bright spot’ and our economy is expected to grow at 7.6% per annum in F16 (F15 7.2%). Someone has rightly likened the current economic situation to that prevailing in the second half of the first NDA government term under Atal Behari Vajpayee – GDP growth slackened, Banks were burdened with bad loans, rural economy was distressed and investments came to a grinding to a halt. There were also two positives then and now in the form of a current account surplus and a reined inflation.

The present Budget furthers the theme of consumption driven growth revival and is focussed on high level of public expenditure to stimulate demand with most of it directed towards the rural economy. This has, of course, invited comments of having a political intent with elections in five agrarian States in the offing. MNREGA, rural infrastructure – particularly irrigation, electrification and roads and supporting the ‘Make in India’ mission with a staggering spend in infrastructure (mainly on roads and highways) are the key priorities addressed in the expenditure outlay. The ` 25,000 crore allocated for Bank recapitalisation has been generally regarded as insufficient with the FM clarifying that there will be more allocations made in this direction in the coming years, if required. At the same time, the FM has walked the path of FRBM and boldly stuck to the target of 3.5% fiscal deficit. The number does seem ambitious given the underlying assumptions made in nominal GDP growth (11%), tax and non-tax revenues (to grow by 11.2%) being optimistic

and the full impact of the Pay Commission recommendations not being reflected in the expenditures. The Economic Survey expects real GDP growth to remain almost unchanged at 7-7.75% (8% being achieved in a few years) and this coupled with low inflation makes the nominal GDP growth at 11% a stiff target. The increase in non-tax revenue by ` 37,000 crores on the back of spectrum auctions and disinvestment also seem difficult to achieve given the actual realisations in 2015-16. The Gross Tax receipts are estimated to increase by ` 1.71 lakh crores despite missing the direct tax target by nearly ` 46,000 crores this fiscal. The Budget therefore allows very little room for slippage in both revenues and expenditure which also presupposes that Gods will be kind blessing us with good rains and soft oil prices.

The FM announced that he would be moving away from the distinction between plan and non-plan expenditure which is in keeping with the recommendation of the Rangarajan committee and that the FRBM will also be reviewed by an expert committee to be set up for this purpose.

The tax collections as a percentage of GDP continue to hover around 10% and this ratio seems unchanged for many decades despite the economic boom in India. Moreover the buoyancy in direct tax collections is missing and the share of direct tax collection in total tax revenues also needs a healthy improvement. The desired scenario of direct tax collections constituting the larger proportion of tax revenues, of which personal income tax would comprise a lion’s share is far removed from the prevailing situation. Direct tax revenues today are 55% of total tax revenues with indirect taxes accounting for the balance 45%. The composition of tax revenue is now thus very similar to that of some OECD countries.

The latest available numbers for AY 2014-15 show the total number of assessees as 2.57 crores as compared to 3.41 crores in the immediate previous year. Of this, the number of assessees who file a taxable income of less than ` 5 lacs is 1.97 crores which is more than 76% of the total number of assessees. There are only


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83,000 tax payers (0.32%) returning an income of more than ` 1 crore who contribute to more than 60% of the personal income tax collection and this is the abysmal statistic in a country which is supposed to have the largest number of millionaires after USA and China. It is an eye-opener on the tax evasion that still prevails in the country and perhaps the reason why the Government has targeted the rich in the tax proposals and why it finds it difficult to raise the exemption limit to ` 5 lakhs which would then leave only a very small number (about 60 lacs) of individual tax payers!

In this background, we can perhaps understand the quandary of the FM and his yielding to the temptation of announcing a special scheme called Income Declaration Scheme, 2016, which he was at pains to clarify is not an amnesty scheme. An opportunity has been given to declare undisclosed income by paying tax and penalty cumulatively of a mere 45% which is less than reasonable to say the least. The presumptive tax net is also proposed to be widened by extending the scheme to professionals and increasing the eligible turnover for business from ` 1 crore to ` 2 crores.

On the individual taxation front, the most debated and controversial proposal is to tax the withdrawal of monies from Provident Fund account for employees, though prospectively, for contributions made after 1 April 2016. This has justifiably raised a furore as this is a fundamental move from EEE to EET without any forewarning. The House Rent deduction has been increased to ` 60,000 from the present ` 24,000 and a small relief to ` 5,000 under section 87A for small tax payers. In the Robin hood spirit, it is proposed to levy an additional surcharge of 3% (taking the surcharge from 12% to 15%) on high tax payers returning income of more than ` 1 crore and tax at a flat rate of 10% on dividend earned in excess of ` 10 lacs.

The FM had declared his intention last year of moving to a corporate tax rate of 25% over a period of 5 years but presently, no reduction is proposed in the rate except a reduction of 1% for

small companies (turnover less than ` 5 crores). An incentive to start-ups is also proposed by way of 100% deduction of profits from 3 out of 5 years which are set-up in April 2016 to March 2019. A phasing out of deduction as indicated earlier in moving towards simplication and certainty has also been announced for among others- accelerated depreciation, R&D and SEZs. Notable amongst the proposals for financial companies is the 5% deduction from income for sticky loan to NBFCs as currently available to Banks and the pass through status for securitisation trusts including those of Asset Reconstruction Companies. A first in the world measure proposed in this Budget is the debut of ‘Google tax’. Foreign digital companies such as Google, Twitter etc will now have to pay a 6% tax on their income from online advertisements in India. This new tax has been called the ‘Equalisation Levy’ on e-commerce companies earning revenues on B2B transactions in the country but who do not have a Permanent establishment in India. There has been an exponential growth in online goods and services in India and since these transactions take place in cyberspace, there is difficulty of locating the transaction and the identity of the taxpayer and therefore taxing these transactions seemed logical.

In our view, the measures to reform tax administration that have been announced in this Budget are path breaking and a boon for all taxpayers. There will be more and more reliance on technology to reduce the interface between the tax payer and tax collector which is the root cause of all tax payer woes. Even assessments will not require personal attendance except in exceptional circumstances. The recent trend of levying penalty and collecting taxes on additions made in assessments in quick succession was becoming backbreaking and imposing a great strain on resources and the financial burden placed almost made it impossible to wait for relief at the appellate stage. A slew of measures in this direction including a requirement to pay a mere 15% of the demand before filing and pendency of first appeal, calibrating the penalties imposable and giving an option to settle disputes through


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a new dispute resolution mechanism – The Direct Tax Dispute Resolution Scheme, 2016, are all very welcome and much awaited measures which will restore the faith of the taxpayer in the fairness of administration. The FM also announced that the rules for determining the place of effective management (POEM) and GAAR have both been deferred by a year.

The Modi sarkar is committed to implementation of GAAR from 1 April 2017. It is only hoped that the GAAR proposals are less draconian and carry enough safeguards to prevent undue hardship to the assessee lest this exercise does not suffer the same fate as its earlier avatar.

It was quite surprising to find GST being conspicuously absent in the Budget speech except for a solitary reference as a passing policy intent. For a tax reform which has the potential to be the single-biggest reform India has seen since Independence, it was felt GST was not given its due. To be fair to the FM, he is finding it difficult to push this reform past the last mile i.e. the Rajya Sabha where the Government does not have the numbers.

The FM has identified nine pillars inter-alia agriculture and farmer’s welfare, rural sector with emphasis on rural employment, infrastructure and investment, governance and ease of doing business, that will ‘Transform India’ to the next level. Several proposals on the indirect taxes have been made in the Finance Bill to achieve this objective, few of which are highlighted below:

YY Krishi Kalyan Cess @ 0.5% levied on all taxable services thereby raising the effective rate of tax on services to 15%

YY Service tax exemption for construction of affordable housing up to 60 sq. m. under state and central housing schemes

YY Existing exemption has been removed thereby widening the tax base such as –

Yy Services provided by a senior advocate to an advocate or firm of advocates

Yy A person represented on an arbitral tribunal to an arbitral tribunal

Yy Assignment by the Government of the right to use the radio frequency spectrum and subsequent transfer thereof shall be deemed to be a declared service and hence liable to service tax

YY Indirect Tax Dispute Resolution Scheme proposed whereunder an assessee can put to an end to disputed cases pending before Commissioner (A) by paying disputed tax along with interest and penalty @ 25% of penalty ordered by the adjudicating authority

YY Simplification of provisions relating to reversal of CENVAT credit on inputs/input services used in or in relation to the manufacture of exempted products removed and provision of exempted services

YY Reduction in the rate of interest payable in case of delay in payment of service tax, excise and customs duty

YY Provisions relating to distribution of credit by Input Service Distribution has been extended to outsourced manufacturers also

YY Transactions involving supply of Information Technology Software on a media on which affixing of RSP is obligatory has been exempted from service tax

YY Number of excise returns to be filed by assessee is proposed to be reduced from 27 to 13 (12 monthly returns and an annual return)

YY Infrastructure Cess upto 4% of the assessable value has been levied on specified vehicles

YY Clean Environment Cess (formerly known as Clean Energy Cess) enhanced from ` 200 PMT to ` 400

Two broad areas stand out that failed to receive adequate attention in the budget. The first of these relates to exports. We often forget that the structure of the Indian economy has undergone a metamorphosis in recent times. The economy is no longer insulated as used to be. It is now very much affected by international trends. Unlike


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in the past, foreign trade – that is imports and exports put together – add upto nearly 42% of the GDP. Examined in this context, the decline exports witnessed in the current year, month after month, is a cause of considerable concern, because even the success of the Make in India campaign will at least partly depend upon the buoyancy of our exports. Unfortunately, for January 2016, they stood at $ 21 billion, as compared to $ 24.39 billion a year ago, and $ 26.75 billion, two years ago. The decline is alarming and currently India is being outperformed by countries like Bangladesh and Vietnam. One critical problem which the country currently faces therefore relates to the revival of the demand for Indian exports. The Business Standard has suggested the setting up of a high level inter-ministerial group to suggest how the competitiveness of Indian exports could be improved. The problem, point out many observers, is that Indian exporters are largely small, and thus do not reap economies of scale, like their counterparts in other countries.

The other big opportunity the country appears to have missed out on relates to tapping of non-tax revenues for growth. The sale of spectrum, it is pointed out, could easily be expedited but has not received the attention it deserves, at least so far. However even more than that, in a country where the informal economy is large and more than 50% of the GDP emanates from the cash economy, much more could have been done to tap resources. Attractive bonds of various kinds could still be raised, so as to reduce pressure of raising revenues through taxes. Many people might still be happy to contribute to infrastructure growth, with low rates of interest provided they are not harassed with regard to the source of their earnings. A lot of non–tax revenues could similarly be raised from non-residents and the diaspora settled abroad. The release of the fiscal pressure would enable the Government to do more for its own honest taxpayers, many of whom diligently pay their own share of taxes year after year.

On its part, the Government has devoted significant attention to the social sector and

promote stimulus in the economy by allocating funds for infrastructure. Some of the key initiatives announced in this regard would include:

YY Giving a statutory backing to AADHAR platform to ensure benefits reach the deserving

YY Provide legal framework for dispute resolution and re-negotiations in PPP projects and public utility contracts

YY ‘Pradhan Mantri Krishi Sinchai Yojana’ to be implemented in mission mode. 28.5 lakh hectares will be brought under irrigation

YY To reduce the burden of loan repayment on farmers, a provision of ` 15,000 crore has been made in the BE 2016-17 towards interest Subvention

YY District Level Committees under Chairmanship of senior most Lok Sabha MP from the district for monitoring and implementation of designated Central Sector and Centrally Sponsored Schemes

YY New health protection scheme will provide health cover up to ` 1 lakh per family. For senior citizens an additional top-up package up to ` 30,000 will be provided

YY ‘National Dialysis Services Programme’ to be started under National Health Mission through PPP mode

YY ‘Stand Up India Scheme’ to facilitate at least two projects per bank branch. This will benefit at least 2.5 lakh entrepreneurs

YY 62 new Navodaya Vidyalayas will be opened

YY Regulatory architecture to be provided to ten public and ten private institutions to emerge as world-class Teaching and Research Institutions

YY GoI will pay contribution of 8.33% for of all new employees enrolling in EPFO for the first three years of their employment

YY To approve nearly 10,000 kms of National Highways in 2016-17


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YY Amendments to be made in Motor Vehicles Act to open up the road transport sector in the passenger segment

YY Action plan for revival of unserved and underserved airports to be drawn up in partnership with State Governments

Overall, we feel that it has been a commendable exercise on the part of the FM, doing a tight-rope walk between inclusive growth, public spending, mopping up tax collections, providing stimulus to demand, tax reforms, controlling inflation and reining fiscal discipline. An unenviable job that he has, the FM has shown tremendous teflon-coated resolve to chart the Indian economy on a dynamic growth path and cleanse the system from the scourge of black-money, even if it meant good-riddance of defaulters in the short run. In doing so, he is doing a yeoman service to the current milieu. He is also sparing future generations from a rot that eats India from within. By and large, the reactions to the Budget have been encouraging (especially after the fine print has been combed and recombed). Perhaps, the one from Jim Rogers, the noted Global Investment Guru sums it up succinctly – while welcoming the rightful steps taken to deregulate agriculture and striving to reform the tax bureaucracy, he has exhorted the FM to do more in areas such as ushering land-holding reforms and liberalizing markets further, so as to make India a favoured destination for investments and a better place

to do business in. Firmly placing hope and trust on the Indian story, he says if ever the FM opens the doors to the Indian capital markets fully, he would be the first person to walk in. May the tribe increase!

Mr. B. K. Khare, eminent Chartered Accountant, founder of our firm & my beloved father, left us for the heavenly abode in November 2015, leaving behind a rich legacy and a proud tradition which we dutifully continue as a token of our tribute to the legend, we have collated poems from his erudite & rich collection of Budgetary analysis of yore.

Our detailed analysis of the Direct and Indirect tax proposals is preceded, as in the past, by our analysis of the state of the economy and the economic survey. We trust you will find the publication a useful read.

Sincerely,

Padmini Khare KaickerManaging Partner


Date: 1 March 2016


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A TribuTe To Mr. b. K. KhAre

Mr. B. K. Khare, the founder of our firm made his mark, in his chosen field of taxation, a subject he became passionately fond of.

Mr. B. K. Khare pioneered the practice of commenting on the Budget which he circulated in the form of a cyclostyled booklet, with the tax administrators and teachers as the readers in mind. He was interested in sharing his point of view with the people who mattered, influencing and administering taxation in all its aspects, including teaching, administering and interpreting the income-tax law. Apart from commenting on the taxation laws, he did have many a suggestion, some of them novel, to make to the Finance Minister which he penned under the heading “If I were the Finance Minister....” A blend of imagination, gumption and expertise were applied in coming up with these suggestions which as someone not claiming to be an economist, were unique.

He was a great advocate of the principle of taxing book profits and we are happy to note that the present thinking of simplification, rationalization and doing away with ad-hoc exemptions is in line with his thinking although the ICDS proposed to be enacted detracts from this position.

With a heart which always went out to the underprivileged and the belief that questioned economic inequality, he expressed this sentiment poetically which then became a regular feature in the Budget commentary booklet that was printed.

After leading a fulfilling life of 89 years he passed away peacefully on 15th November. He leaves behind a legacy for us to be proud of and the indelible mark of his personality, style and thinking will be missed by his loyal readers.

“The old order changeth, yielding place to the new” in the inexorable march of time and life but as a tribute to Mr. Khare who eagerly looked forward to pour this thinking in print on paper, we have reproduced snippets from his poems and suggestions and a small bio-sketch which he had penned for a professional journal.


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Medley of Budget Poems by Mr. Khare

I am born every year – at times twice a yearLike a phoenix in the whirlwind of time My birthday is on 28th February – 29th February in the leap year Precise timing of my birth depends upon stars Sometimes at 11.00 A.M. sometimes in the evening I represent two sides – receipt and expenditure I am different from family or business budget where expenditure is determined by incomeI do the impossible balancing; I try to reconcile the irreconcilable, Incompatible with compatible and compatible with incompatible My resources are unlimited and the needs and wants are limited I am a mystic and keep everybody guessing except a very few privileged No distinction between capital and revenue I can borrow limitlessly – no matter I borrow even to pay interest and for meeting day to day expenditure I do not worry but at the same time I worry I also do not worry for funding in the name of productive expenditure To create plenty for all Alas! It becomes unproductive What else can happen when my creator has unlimited access to use me as he likes; What with the Mint working overtime.

In my not too distant birthday I will use my powers to destroy the evils and promote goodness and rekindle the man with the right springs to create a just and orderly society.

Sadly, transient parliaments cannot change: the moorings fastened on the constitutionA few wise ones do wade their way through the murk trying their best to do some good. But for all the oppressed and silenced, there is now a chance of better governance. This year, let power of state yield to gandhigiri instead of dadagiri.

What is your vision of India A question I get asked around The Ides of March As histograms and diagnostics of fiscal India Are in the air like pollen In this season A metaphor with another use As there is also heard the buzz of our revenue-gatherers With their sting in proportion to The sweetness of the honey they gather in.

birTh oF A buGDeT

(2002-2003)

GooD GoVerNANCe MAY

hAVe A ChANCe (2009-2010)


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An aside here about visions. Of what use is a vision The more literal minded of my friends might ask. For that I may use a standard rhetorical feint And throw Indian philosophy at my unsuspecting interlocutors.For in philosophe Indienne Reality is a matter of modulation From an idea to a thing is but Six degrees of separation. Each vision has a place in the emporium of reality Contradictions are but subtleties of understanding. Perhaps it is this cultivated ease with antinomies That helps us live with prosperity and object deprivation Cheek by jowl in such close proximity.

What will it be like 20 years hence? Prediction is a dangerous game Although 20 years seems a safe distance away!

To speak less in jest India will grow rapidly The question is if this will benefit The poorer sections. As even plenty does not promise the Well-being of all As the image of mountainous stocks of food grains Locked in warehouses As people go hungry testify.As Amartyada says Even here democratic IndiaHas prevented faminesBetter than ChinaAs the public airing of grievances makes All voices heard sooner or later.

Farmers commit suicidetrapped in debt beyond redemption, modest it may be economy is shining thriving and glittering, scorching sun is burning down on corpses of the farmers on homeless and bare footed on those wandering in the wilderness foraging for work regardless, of rural guarantee scheme,

A ViSioNArY reCKoNiNG (2006-2007)


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the mule of lower middle class harbingers of the unalterable values pride of India bending backwards in their efforts, zealously guarding the values hedged in dollar a day fence witnessing gloom all around’ the cattle like unorganized labour and the forgotten and unemployed the mute sufferers economy is shining.

The Budget is like the libretto of an opera That will be sung on the stage of the unfolding financial year. It will choreograph the dance of money Its ups and downs, full of the Sturm und Drang Of our economic lives. The libretto will be sung into an existence Mellifluous and hectic By the sopranos, the counter tenors – The industrialists, the investors – The prima donnas – The policy-making politicians. The febrile tale of money Will be told through various markers Like the wavering exchange rates, inflation rate Heart stopping news that will then lead We all hope in good Bollywood fashion To the Happy Ending The Holy Grail of low inflation And High Growth. But the economy swaggers and sometimes staggers along Like a scriptless drama quite beyond the control of the Sutradhar. The pundits say the fundamentals are strong There is nothing that can stop in the long term The Great Indian Economic Miracle.

In this Leap Year, Will our Finance Minister take the leap Of the imagination and empathy and financial wizardry That will bottle the genie of inflation And liberate the economic genius of our great Nation? In my long career I have witnessed the coming of age of our economy In the 1950’s there was darkness even at noon. While now even the nights are neon-lit!

DeFiCiTS ShiNiNG

(2007-2008)

ThiS Too WiLL PASS

(2012-2013)


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Reminiscences as a pRofessionalIT was said by someone that unless a man feels he has a good enough memory, he should never venture to lie. I am not quite sure that I have a very fine memory for events, and I should prefer, as I ordinarily do, to stick to the truth, when I get to reminiscing about my days as a professional. I promise you that there shall be no purple patches in what I shall write about my professional life.

My birthday did not begin with the water birds and the birds of the winged trees flying my name. Oliver Goldsmith’s Vicar of Wakefield has this sentence in its preface: ‘I was ever of opinion that the honest man who married and brought up a large family did more service than he who continued single and only talked of population.’ My father was an honest, virtuous man, with immense faith in values that no longer seem to compel respect, with no greed or envy; I mention these facts here since my parents have been an enduring influence on my life.

I and my brothers broke the age-old tradition of vedic and priestly family tradition. Perhaps my father must have realised that the wealthy, material city like Bombay must have brainwashed us and we might not stand up to the test of a Spartan, which is a bye-product of a dedicated vedic scholar. He always impressed on us that if you digested poverty, it was your best friend, but if you fumed and fretted about it, you were the poorest of the poor in the world. What is more, though I had a personal inclination to become a Sanskrit scholar, my father persuaded me to take the career of a Chartered Accountant. I was greatly influenced by my school Sanskrit teacher, who taught me Sitatyagah, a canto of a great epic, Raghuvansh, written by the peerless, inimitable Kalidasa, which impressed me the most and even today the stanzas are ringing in my ears. Of couse, our great Prime Minister also assures us that like Sitamai, he has or he will come unscathed from the ordeal, without actually going through the fires, which Sitamai went through. I do not know even today what

would have been the right thing for me; but, then again, it is futile to speculate as I had immense faith in my father, my Guru.

I was articled to late K. M. Vartak, a well-known Chartered Accountant of his time and I became a full-fledged professional in the year 1955. I have done not too badly as a professional. When I say this, I am reminded of some words of William Hazlitt, who, no doubt, uttered them in a different context. He said, ‘I make me happy, but wanting that have wanted everything.’ He meant to convey a certain meaning that he intended to, but a great man’s words, like the aphorisms you find in the Gita, are many-splendored things and have several layers of meaning. It seems to me that his words also suggest that man may think that his needs are limited but, when he labours to see that they are satisfied, his needs expand further and he perseveres to fulfil them and a chain reaction sets in and he becomes more and more self-centred. Hazlitt himself says elsewhere, ‘The least pain in our little finger gives us more concern and uneasiness than the destruction of millions of our fellow beings.’

I know that I must avoid the criticism – I mean, your criticism – which Queen Victoria made of the great Gladstone. She said that Gladstone ‘speaks to me as if I was a public meeting.’ My idea is not to suggest that I have a great fund of wisdom to impart to others. On the contrary, I do not pretend that I do not have the failings of the next man. I have no ambition but to share some of my thoughts with you thoughts that cross my mind, when I think of my professional life.

No doubt, when year after year. I was going through the travails of my profession, I had noticed the agonisingly slow pace of wingless, crawling hours. When I started my practice sometime in April 1955, I was on an unchartered sea. Even at the noon, I saw darkness. Opportunities were far and few between and could hardly inform the many who ventured for the first time in the money world. The opportunities grew only with the commencement of industrialisation of India in post sixties. I never lost my courage and with His Grace slowly, steadily but surely I could find


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my foot. I chanted with Shelley, ‘If winter comes, can the spring be far behind.’

What I suddenly find is that nearly four decades of professional life have whizzed past me and they stretch before me like a vista, with their moments of unhappiness, moments of hope, moments of achievement and moments of truth.

The first ever early shock I got from the profession was in connection with the audit of a public limited company quoted on the stock exchange and from this shock I have not recovered even to this day. Good faith sometimes makes all, including perhaps Accountants, almost blind. Having discovered that the accounts were a can of worms, I could not certain myself. I was confused and confounded and was at my wits’ end. The qualified report was inescapable. The earlier report given by me was a clean one and hence the predicament. The type of discrepancies I found must have informed the accounts of even the earlier year/s. All sorts of advices were given to me including ignoring my findings; all sorts of influences were extended on me, however, I stuck to my guns in the belief that I have not consciously signed the unworthy accounts of the earlier year, the initial year of the audit. I gave a thumping qualified report and I sought and got the guidance of late B. N. Pardiwala, a very kind person so as to ensure that I did not get imbalanced and crossed the rubicon of auditor’s discipline. I have learnt one thing that the test checks based upon comparative results over the years is no insurance against the dangerous accounts and there is no substitute for intelligent, though selective, routine audit. This was almost a solitary audit then which came to my lot by quirk of fate.

Entry in the tax field was also difficult. But after all waiting is the name of the game. To begin with, I found tax work satisfying, particularly it gave me immense pleasure to argue before the Income Tax Appellate Tribunal. I did reasonably well. For the first time, I propounded the theory that an assessee could claim 100% deduction in case of capital expenditure on scientific research as also investment allowance and form the following

year he can claim depreciation; in all a total deduction at 225%. It was quite a sensational decision then. However, the Madras Special Bench of the Tribunal poured cold water on my theory in that the Bench came to the contrary conclusion. I could persuade the Bombay Bench, which consisted of A. Krishnamoorthi and Nair, when the Madras Bench decision was cited against me to refer to the larger Special Bench, the Bench asked me to show cause why Madras decision required reconsideration at the hands of the larger Special Bench. There and then I could succeed in persuading the Tribunal that Madras Special Bench was not the last word on the subject. The larger Special Bench was constituted in Bombay which upheld my interpretation of the law. I earned the sobriquet of 225, which I did not mind as long as the profession did not call me 420, though it is not perhaps impossible of being dubbed so by the Tax Official! Of course, the Supreme Court has debunked this theory and it thundered that nobody could claim deduction of any expenditure under more than one Section unless the law clearly laid down so and no on the specious plea that such claim for double deduction was not prohibited by the Act.

I feel that I contributed to the development of law modestly though. For example, I again could persuade the Tribunal that initial contribution to Superannuation Fund is to be allowed in his entirety and not in conformity with the Circular of the CBDT which allows initial contribution being scaled down to 80% and being allowed over a period of five years. Submission was simple that what Section 36(1)(iv) gave, the subordinate rule making authority could not deny it. I need not elongate the list.

However, of late, realisation has come that the tax practice only hovers round the distribution of wealth between the State and the subject, without contributing in the process of creation of wealth. I think success of the profession does not depend upon the attesting work nor by doing other regulatory work. To much emphasis on tax practice for the last 40 years has drained the Accountant of his accounting expertise and his


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tools have become blunted. I sincerely believe that the accountant’s initiative will be hijacked by computer scientists and we will be related to only doing regulatory and statutory work. Given a chance, I will first become an Engineer and then a C.A. This cocktail will go very well as after all the finance and financial figures are reflex of physical inputs and outputs and unless one has the firm grip on these physical factors, one shall not become a good accountant either in the regulatory field or activist in the process of creation of wealth. I am not unware that even without a formal technical background, yet, a trained, experienced and intelligent mind could pick up proper signals.

Our Institute should permit now the mixed conglomeration of Accountants, Engineers, Scientists, actuaries, computer-men and the management experts. Through this synergy, the profession can play a big role and at as a catalyst for creation of wealth. The new economic freedom that has lately dawned on India will tremendously increase the professional opportunities and the limitation, if any, will be our own shortcomings. Despite all these platitudes, it is rather too late for me to play an effective part in this ‘Yagna’ of regenerating Modern India without the vice of prosperous and affluent society. In the meantime, I will continue fiddling with the Department.

As I look back at the past, I find myriad men and isms, ideas and philosophies crowing in on me and I’ll admit to having been influenced by some of them and a shade affected by some others. But I have never held radical views. I believe, with

Franklin D. Roosevelt, that a radical is a man with both feet firmly planted in the air. I have always admired men, who have contributed to the growth of our national wealth. I also believe that our national wealth should be used for promotion of the welfare of our countrymen. I pay homage to the Mahatma, who, unconditionally, thought that the trusteeship principle should apply to the holding and use of our national wealth.

What a miracle if you give more, you get more! My wife is trying to teach me, though I am not sufficiently learning, that wants are limited and resources are unlimited, debunking the whole premises of economic theory and practice. Similarly, she is trying to impress on me that every investment is an expenditure and every expenditure is an investment. Ultimately, it is an attitude of mind. Sometimes, I wonder why there should be want in the world. Has not science and technology advanced enough to unleash the productive forces which will generate unlimited wealth on this Planet which will go round more than needed? But, then, life from life may disappear! The material but the value-based Society perhaps may be the answer.

I will end this write-up, harking back to my father’s remark, ‘My son, still he died’, when I peevishly told him that the neighbour who died yesterday was a millionaire. I think that sums up the philosophy of life.

B. K. KhareChartered Accountant


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if i weRe the finance ministeR…For a long time, Mr. B. K. Khare, the visionary that he was, used to run a column titled ‘If I were the Finance Minister’ as part of our Budget Analysis & Presentations. In fact, the origins could be traced, based on material available in our library, from Union Budget 1992-93 and perhaps even before. A man of razor sharp wit, he used to remark of his subjunctive stumper, in a humorous way, saying “My prescription for raising additional revenue will continue to be more or less the same as hitherto as long as I have no opportunity to give it a concrete shape. It will continue to be in the wilderness in the meantime crying for notice”. Some of his ahead-of-the-times thoughts do still ‘cry for notice’, radical yet relevant to this time.

On MiniMuM AlternAte tAxAtiOnMr. Khare’s words were: “I have a dream that one day meaning of income, profits and gains will be the same both for the businessman and for the taxman.” We suggested that the Accounting Standards, unanimously evolved, should be made as part of the Companies Act so that the Accounting standards are as much binding on the corporates as on the auditor, not excluding revenue authorities. It was high time for convergence for evolving uniform principles which will inform all the legislation so that income, profits and gains will not mean different things to different authorities who are entrusted with administering relevant enactments. We are entitled to believe that if what is suggested in the matter of corporate taxation is accepted, statute book will become lean and trim, and therefore, healthy. Several man-hours in the form of human energy could be saved, which could be utilized for productive purposes. A situation like zero tax company will never arise.

That Proposal, This Day

In the recent past, we see some effort towards convergence in the form of ICDS being brought in by the CBDT. However, as Mr. Khare put it, by not

resorting to two different sets of accounts, one for audit and one for tax, we could save precious man-hours and litigation too.

On rAtiOnAlizAtiOn Of tAx exeMptiOnsMr. Khare had, way back in 2005-06, suggested ‘wholesale abolition’ of Chapter VI-A (deductions), various tax concessions bestowed on profits derived from new industrial undertaking and infra projects and the likes. He felt that economic growth of the society was not brought about only through tax breaks, especially in the era of rational and reasonable levels of taxation coupled with congenial atmosphere and business friendly environment of the tax administration. On the contrary, more often than not, such provisions for such incentive deductions brought about distortions, he passionately argued.


As if paying heed to the departed legend, the present Government has embarked on the phased withdrawal of deductions and exemptions in a phased manner. And this Budget 2016 carries the noble effort forward.

On tAxing AgriculturAl incOMeMr. Khare was particularly sympathetic to the plight of the poor farmer. However, he felt strongly that the story was different in case of farmers who have become agricultural lords and there was no reason why their income was not taxed. He used to lament that the farm lobby of capitalistic farmers was taking advantage of the unfortunate farmers at large who for generations craved for a better life.


Income-tax continues to be in the Union List, which excludes agricultural income, which falls under the State List and States don’t (read can’t) tax agricultural income. The fact is that the rural rich, wherever they exist, are extremely powerful,


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much beyond the collective might of political will. So on this count, status quo continues and agricultural income continues to be exempt, as it has been since independence.

On cArry fOrwArd Of Business lOss in cAse Of discOntinued BusinessIf, for any reason, a loss-spewing business is discontinued or abandoned, such loss is not to be allowed for being set-off in the next year against the assessee’s income from other business. Mr. Khare was an ardent believer that there was no sense in this prescription. It should not be the legislative intention that loss-making business should be continued to be carried on by incurring further losses only for being set-off against the profit from any other business. He further felt that the carried forward business loss ought to be set-off against any taxable income (barring speculation one) and not necessarily restricted to business income, of the following year. For that matter, loss under any head other than business ought to be eligible for setting off against any taxable income (speculation excluded) of the following year. He was convinced that the basic tenet was that income, profits and gains are made only when the capital is kept intact.


Section 72 continues to prohibit carry forward of business loss in case of discontinued business, notwithstanding the counter logic which has been so lucidly expounded by Mr. Khare. Perhaps with changed business scenarios likely to emerge in the immediate future (esp. given the fancied and rampant proliferation of start-ups and volatile economic headwinds), the Government of that day might be forced to rethink on this issue - soon.

On the ‘tOBin’ tAxDrawing inspiration from the Nobel Laureate, Prof. James Tobin, Mr. Khare had suggested that in order to blunt the pernicious effect of flow of

funds world over, some fee could be levied on the spot and speculative forex transactions, in concert with the international community. Another unconventional measure to widen the tax base suggested by Mr. Khare was to impose a moderate levy on the amount of cheques cleared through the Clearing Houses.


An attempt in this direction has already been made through the levy of securities transaction tax w.e.f. 2004. A simple yet powerful tool for raising significant tax revenue, raising tax based on the amount of cheques cleared has not yet been attempted by the Finance Minister, albeit the banking cash transaction tax was briefly toyed with. However, considering that the BCTT created more problems than solving some, this tax was withdrawn in 2009.

On levy Of ecO tAxMuch before the Governments felt compelled to act (such as the recent odd-even rule in Delhi or shut down of a city as in Beijing), Mr. Khare mooted the idea of an ‘Eco levy’ on those who pollute the atmosphere on some criteria.


An Eco-tax is an attempt (in the right direction) to make the private parties feel the social burden of their actions. We feel that it is simply a matter of time before the Government is compelled to take drastic step such as the Eco-tax so passionately put forth by Mr. Khare. Other countries have already done so, in some form or other. For instance, the Netherlands, Portugal, Canada, Spain and Finland have introduced differentiations into their car registration taxes to encourage car buyers to opt for the cleanest car models.


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Please check thoroughly. Vakils will not be responsible for errors not noted on this proof. Please check thoroughly. Vakils will not be responsible for errors not noted on this proof.Shailesh Shailesh

UNION BUDGET 2016

1. THE INDIAN MY’ST(O)RY’ - WORK-IN-PROGRESS

And Miles to go before I sleep,

And Miles to go before I sleep

The present Government was elected in May 2014 on the promise of ushering in achche din. Nearly two years have gone by, but the nation still waits for those happy days to arrive. As we shall see in the next section, it is not as if this government is without any achievement to its credit. Very briefly, nearly 3 years ago, the twin deficits relating to the fiscal and the current account, had almost spun out of control. Since then the consolidation of the fiscal deficit is according to plan and the current account deficit stands at a healthy 1.4%. Inflation both measured either by WPI or CPI is under control, with the former being in negative territory. Overall, the economy is said to be growing at about 7.6%. Much has been done to rationalize subsidies, and foreign exchange reserves stand at a figure of about US$ 350 billion.

Even so, large sections of the population are disenchanted. Two successive droughts have impoverished farmers; as a consequence, large sections of the rural population are in distress. Corporates balance-sheets reveal heavy indebtedness and idle capacity. Public sector banks cannot lend because they carry too many stressed assets. As a result the gross capital formation as percentage of the GDP has declined and because of slowing down of the world economy, India’s exports have declined throughout the current year. The rupee has declined to ` 68 to the dollar as the country finds itself out performed in export markets, by much smaller countries like Bangladesh and Vietnam. 10 lakh people join the workforce every month and when they find all avenues for employment blocked, they launch agitations to seek reservations for their communities in government jobs.

Last year this time the Economic Survey pointed out that the economy was close to hitting a sweet spot with a long term growth potential ranging from 8% to 10% per annum. Clearly, this is unlikely to be realized till some of the current challenges are surmounted.

Some of these are fiscal in nature: Funds of the order of about .07% of GDP, for example, are required to implement the recommendations of the Seventh Pay Commission and OROP. Likewise, large funds are required again to recapitalize banks so that they can start lending again. Clearly, ` 25,000 indicated in Finance Budget speech is not going to be enough. Overall, all these requirements are bound to affect the fiscal deficit sooner or later, unless the Government finds innovative ways of generating non- tax revenues, perhaps through sale of spectrum or disinvestment of shares in public sector undertakings.

The political and social challenges the Government faces are even greater: a hostile opposition has stymied attempts to make land acquisition for projects easier. The Government is also facing a nightmare in getting the GST bill through the Rajya Sabha. Ironically, as a columnist in the Business Standard pointed out recently, every reform the economy requires is opposed by some powerful vested interest. Labour reforms at the Centre cannot be considered because they do not go down well with a small but well-entrenched labour aristocracy to be found in the formal manufacturing sector of the economy. They will not allow an exit policy, so that a new manufacturer, finds himself in the middle of a chakravyuh, a military formation that allows the enemy to enter a certain area, but not leave it. Agricultural reform that will free farmers to sell their produce wherever they get the best price is obstructed by traders who block the amendment of the laws relating to the marketing of agricultural produce. Divestment of government ownership of banks and other loss-making PSUs is opposed by trade unions who have vested interest in governmental ownership.

So, the list goes on and on. And yet the sweet spot the Finance Minister talked about last year is


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so beckoningly close, if only the Government can master the skills required to forge a wide ranging coalition that supports its reforms agenda.

Clearly, a lot hard work lies ahead in finding support for these reforms which the country badly needs: for the millions of our young countrymen who deserve a better future, the Government must not lose focus when other controversies rage. These are generated essentially to make the Government lose focus on its economic policies. One is reminded of Robert Frost’s lovely lines:

The woods are lovely, dark and deep,But I have promises to keep,

And miles to go before I sleep,And miles to go before I sleep.

The present budget therefore comes at a very critical juncture: we look at the economy in three parts. In the first instance, we analyze the year that was. We move then to bring out the highlights of this year’s Economic Survey and then finally we see how far the Government has gone in tackling the problems that confront it.

2. THE YEAR THAT WAS – BUDGET TO BUDGET - A QUICK RECAP

Despite the doubts raised by many observers, India today is the fastest growing economy in the world. During FY 16, it is expected to grow at 7.6% per annum in real terms, estimates the Central Statistical Organisation (CSSO). The corresponding figure for the earlier year is 7.2%. Considering that the country has suffered successive droughts during the last two years, the overall economic growth has been impressive.

This is despite the many legacy problems which this Government inherited:

YY By the time, it came to power, investor confidence in the economy had eroded because of retrospective taxation.

YY With the fiscal deficit (4.4% of GDP) and the current account deficit (4.8% in 2012-13) almost spinning out of control, public finances were in a mess.

YY In tandem, NPAs of public sector banks were growing at an alarming pace; and inflation (WPI at 7.4% in 2012-13; 6% in 2013-14), and particularly food inflation (CPI at 9.5% in 2013-14), refused to be tamed.

YY To cap this depressing scenario were the problems of policy paralysis which afflicted large parts of the bureaucracy and stalled projects which brought further investment to a grinding halt.

Now the situation is very different: Thanks to the crash in oil and commodity prices and restraint exercised by the Government in its spending programmes, the situation has changed. The gross fiscal deficit has come down to 3.9% and is slated to reduce further. CAD is healthy at 1.4%. Inflation as measured by WPI, is currently in negative territory, and, in CPI terms, stands at 5.61% (as on December 2015).

Even so, the country’s most sympathetic supporters, admit that there are some facts which are worrying and there is something that is not quite right: the economy just does not pass the small test of an economy that is doing well. Although the CSSO estimates a YOY manufacturing growth of 9.5%, top lines of many corporates do not reflect this trend. The share of gross capital formation (GCFC) which is a proxy for investment, continues to languish at 29.4%, whereas just five years ago in 2011-12 this figure stood at 33.6%. During FY 2014-15, because of a drought, agricultural output shrank by 0.2%; currently, it is expected to grow by 1.1% YOY. The question to be asked is if we are in the midst of a recovery, how far is it really sustainable when current investment continues to be so depressed?

Truth to speak, of the four Keynesian engines- private consumption(C), private investment (I), Government spending (G) and net exports (X) that comprise the GDP of a modern economy, only two are firing- private consumption and government spending.

Private investment refuses to pick up because public sector banks, saddled with stressed assets of over ` 7 lakh crores, are unable to lend;


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corporates, on the other hand suffer, from heavy indebtedness.

Exports in the first half of the current fiscal year declined by 1.1% YOY, because of slack global demand. For January 2016 they stood at US$ 21 billion, as compared to US$ 24.39 billion a year ago, and US$ 26.75 billion two years ago. The decline is alarming and currently India is being outperformed by countries like Bangladesh and Vietnam. The fall in exports is likely to result in a negative impact on the ‘Make in India’ campaign of the present government; in turn, this would lead to a failure to generate new employment.

Some real out of the box thinking will thus be needed to spur both exports as well as investments. To boost exports, suggests the Business Standard, the Ministry itself should play a more proactive role in solving problems, particularly in speeding shipments at our ports. A high level inter-ministerial group could also be set-up to suggest how the competitiveness of Indian exports could be improved.

Increasing private investment, however is an altogether different proposition. Public sector banks (PSBs) will have to clean up their balance sheets. They may have to depend upon public issues to raise funds required by them for their recapitalization needs. Government may not be able to help much because it may be constrained by its requirement to meet stiff fiscal targets during the next few years. It also has a huge responsibility to implement OROP as well the recommendations of the Seventh Pay Commission. But which investor would like to risk investing his hard earned money in PSBs when their recent performance has been so poor?

An alternative way to spur investments may be to give taxpayers further tax breaks when they make long term investments needed by the economy. Reducing and rationalizing tax rates so as to leave more money with taxpayers, a measure already being contemplated by the FM, may also help.

There really is no option for the Government except to find ways of making all the four engines of the economy fire. Let us not forget that 10 lakh persons are joining the work force every month. The economy has to grow rapidly to absorb them. In fact as the Red Queen warned Alice in Alice Through the Looking Glass and What Alice Found There, in our country, “... it takes all the running you can do, to keep in the same place.” Demands of reservations in the private sector and all manner of social unrest we witness today are ominous warnings of times to come unless the country can get its act together.

A list of important macro-economic initiatives taken by the Government in the current year and their current status may be seen in the Annexure 1. In Annexure 2, we have listed out key tax policy initiatives announced since the last Budget. Annexure 3 offers a statistical glimpse of certain interesting aspects relating to the tax base, based on data published by the CBDT. A gist of Key Circulars & Notifications issued by CBDT since last Budget has been collated for the reader’s ready reference, in Annexure 4.

3. ECONOMIC SURVEY 2016 – HIGHLIGHTS

The Survey does recognize the reality that global macro-economic landscape is currently chartering a rough and uncertain terrain characterized by weak growth of world output. The situation has been exacerbated by; (i) declining prices of a number of commodities, with reduction in crude oil prices being the most visible of them, (ii) turbulent financial markets (more so equity markets), and (iii) volatile exchange rates. The Survey notes that despite global headwinds and a truant monsoon, India registered robust growth of 7.2% in 2014-15 and 7.6% in 2015-16, thus becoming the fastest growing major economy in the world.


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Key Indicators – At a Glance

Parameter Unit 2012-13 2013-14 2014-15 2015-16

GDP Growth % 5.6 6.6 7.2 7.6

Savings rate % of GDP 33.8 33.0 33.0 na

Capital Formation rate % of GDP 38.6 34.7 34.2 na

Gross Tax Revenue % of GDP 10.4 10.1 10.0 10.3

Per Capita Income ` 71,050 79,412 86,879 93,231

Wholesale Inflation % 7.4 6.0 2.0 -2.8

CPI Inflation % 10.2 9.5 5.9 4.9

Export Growth % -1.8 4.7 -1.3 -17.6

Import Growth % 0.3 -8.3 -0.5 -15.5

Current Account Balance/GDP % -4.8 -1.7 -1.3 -1.4

Forex Reserves USD Billion 292.0 304.2 341.6 349.6

Average Exchange rate `/USD 54.40 60.51 61.14 65.03

Fiscal Deficit % of GDP 4.9 4.5 4.0 3.9

Revenue Deficit % of GDP 3.7 3.2 2.9 2.8

Economic Growth

Last year’s Economic Survey had argued in favour of a “persistent, creative and encompassing incrementalism” as the guide for prospective action and the benchmark for retrospective assessment. This time around, the Survey has called for “fortifying the Indian economy against possible spillover of weaker global business environment and recalibration of expectations”.

The Survey reveals that the Indian economy grew at 7.6% in 2015-16 and predicts growth to be between 7-7.75% in the coming fiscal, with downside risks because of ‘ongoing developments in the world economy’. The Survey lists the implementation of various ‘meaningful’ reforms (some of them are indicated below) for the economy performing ‘remarkably well’:

YY Creating the palpable and pervasive sense that corruption at the centre has been meaningfully addressed;

YY Liberalizing FDI across board, bringing about a change in philosophy, from viewing FDI as a tolerable necessity to something which was welcome;

YY Vigorously pursuing efforts to ease the cost of doing business which has allowed India to advance in cross-country competitiveness rankings and become the crucible for “million mutinies” reflected in the unprecedented dynamism of the startup and e-commerce sectors;

YY Restoring stability and predictability in tax decisions;

YY Advancing the game-changing JAM (Jan Dhan Aadhaar Mobile) agenda;

YY Attempting to change social norms in a number of areas: open defecation, and voluntarism in giving up subsidies; and

YY Avoiding policy reversals.


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The Survey remarks that the fiscal sector registered three striking successes: ongoing fiscal consolidation, improved indirect tax collection efficiency; and an improvement in the quality of spending at all levels of government.

Demand-side Story

The recent growth revival in India is predominantly consumption-driven. Three visible changes are taking place in aggregate demand. First, with improving growth in private consumption, its contribution to GDP growth is getting aligned to its GDP share. Second, aided by the growth in capital goods, the growth of fixed capital formation (also known as fixed investment and which reflects addition to the productive capacity in the economy) has picked up. A robust growth in valuables has been recorded during the current year. Third, the substantial erosion of global demand for Indian output, manifest in loss of Indian Exports, acts as a drag on domestic growth. It is from this angle that India’s achievement of being able to sustain its growth at a fairly high level, primarily on the strength of her domestic absorption, becomes noteworthy.

Supply-side Report Card

The Gross Value Added (GVA), which broadly reflects the supply or production side of the economy, registered an increase in the growth rate from 5.4% in 2012-13 to 7.1% in 2014-15. In the current year, the growth in GVA is likely to increase to 7.3%.

Talking of sectoral growth, agriculture (which includes forestry and fishing) contracted by 0.2% in 2014-15 but is expected to recover by 1.1% in the coming fiscal. Industry grew at 5.9% in 2014-15 [expected to grow 7.3% in 2015-16] whereas services expanded by 10.3% in the same period [expected to grow 9.2% in 2015-16]. Growth in the agriculture sector in 2015-16 has continued to be lower than the average of last decade, mainly on account of it being the second successive year of lower than – normal

monsoon rains. Growth in the service sector moderated slightly, but still remains robust; while the acceleration in manufacturing growth compensated for it.

Tax Collections

Contribution of Different Taxes in GTR in 2015-16

Customs Service tax

14

17

15

54

Excise duty Direct tax

Budget 2015-16 had envisaged a growth of 15.8% in the Gross Tax Receipts (‘GTR’). Direct taxes (income-tax and corporation tax) are estimated to contribute about 54% of GTR whereas indirect taxes put together could accrue about 46% of the GTR in 2015-16. The robust growth in GTR in the first three quarters of 2015-16 was aided by the 34.8% growth in indirect taxes, with union excise duties growing by about 68%. The excise collections may partly have been bolstered by the improved dynamics of economic activity as well as measures like increasing the excise duty on petrol and diesel in the milieu of falling international prices of crude oil. On the tax devolution front, with the changed regime for tax devolution, the taxes assigned to the states/UTs were raised by 36.6% in April-December 2015 over the corresponding period of the previous year.


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Concern Factors

To its credit, the Survey does highlight certain disappointments which could stifle India’s full supply potential – approval for the game-changing GST bills has proved elusive so far; the disinvestment program fell short of targets, including that of achieving strategic sales; and the next stage of subsidy rationalization is a work-in-progress. Critically, corporate and bank balance sheets remain stressed, affecting the prospects for reviving private investment, a key engine of long term growth.

The Survey pays due attention to the problems in the banking system that have been growing for some time. Stressed assets (non performing loans plus restructured assets) have been rising ever since 2010, impinging on capital positions, even as the strictures of Basel III loom ever closer on the horizon. It notes that the Banks have responded by limiting the flow of credit to the real economy so as to conserve capital, while investors have responded by pushing down bank valuations, especially over the past year. The shares of many banks now trade well below their book value. This balance sheet vulnerability is in some ways a mirror and derivative of similar frailties in the corporate sector, especially the large business houses that borrowed heavily during the boom years to invest in infrastructure and commodity-related businesses, such as steel. Corporate profits are low while debts are rising, forcing firms to cut investment to preserve cash flow. This situation is not sustainable; a decisive solution is needed. But finding one is difficult.

In sum, the Survey does note that for now but not indefinitely, the ‘sweet spot’ for India is still beckoningly there.

Forecast

The Survey notes that foreign demand is likely to be weak, forcing India – in the short run – to find and activate domestic sources of demand to prevent growth momentum from weakening. At the very least, a tail risk event (the Survey portends a major currency readjustment in Asia) would require the

Indian monetary and fiscal policy not to add to the deflationary impulses from abroad. The consolation would be that weaker oil and commodity prices would help keep inflation in check.

The Survey pins its hopes on two factors that could boost consumption. If and to the extent that the Seventh Pay Commission is implemented, increased spending from higher wages and allowances of government workers will start flowing through the economy. If, in addition, the monsoon returns to normal, agricultural incomes will improve. Against this, the disappearance of much of last year’s oil windfall would work to reduce consumption growth. Current prospects suggest that oil prices (Indian crude basket) might average US$ 35 per barrel in next fiscal year compared with US$ 45 per barrel in 2015-16. The resulting income gain would amount roughly equivalent to 1% point of GDP. But the Survey cautions that this would be half the size of last year’s gain, so consumption growth would be slow on this account next year.

Indian fortunes intertwined with Global Growth

The Survey recognizes the fact that reflecting India’s growing globalization, the correlation between India’s growth rate and that of the world has risen sharply to reasonably high levels. India’s contribution to global growth in PPP terms increased from an average of 8.3% during the period 2001 to 2007 to 14.4% in 2014. During the 1990s, the US’s contribution to the global GDP growth in PPP terms was, on an average, around 16% points higher than India’s. The picture changed dramatically in 2013 and 2014 when India’s contribution was higher than that of the US by 2.2 and 2.7% points respectively. While it sounds ‘too good to be true’ that India has indeed surpassed the US in certain growth parameter, however, what is undeniable is the fact that India’s real contribution to global growth is here to stay and will only increase in the short to mid-term.

A 1% point decrease in the world growth rate is now associated with a 0.42% decrease in


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Indian growth rates. Accordingly, if the world economy remains weak, India’s growth will face considerable headwinds. For example, if the world continues to grow at close to 3 percent over the next few years rather than returning to the buoyant 4-4.5% recorded during 2003-2011, India’s medium-term growth trajectory could well remain closer to 7-7.5%, notwithstanding the government’s reform initiatives, rather than rise to the 8-10% that its long-run potential suggests.

Perhaps it may not be out of place to predict that as India (and Indians) grows rapidly, it may not be long before one could say ‘if India gets sick, the world will need treatment’ (to paraphrase Mr. Palkhivala differently).

India-China Dance - Genuine Anxiety or Misplaced Optimism?

The Survey notes that India’s long run potential growth rate is around 8-10% whereas China would grow about 5%. Interestingly, the Survey observes that India is not rich enough despite its uncontestably vibrant political institutions whereas China is too rich notwithstanding its weak democratic institutions. The Survey notes that the Chinese economy is faced with concerns of rebalancing investment and consumption activities. In this backdrop, the Indian economy stands out ‘as a haven of macro-economic stability, resilience and optimism’.

Here, a word of caution would be in place. Die-hard (nationalistic) optimism could well spill into misplaced jingoism, which would pull wool over one’s myopic eyes; however, it may not sustain (unless focus is maintained) till the evils which were pushed under the carpet, come home to roost. The policy framers must set aim just as Arjuna did when aiming at the game parrot amidst the branches and leaves, not for a moment losing focus. India has potential, no doubt. India needs to make more progress on agricultural productivity, change mindsets, be more trade-enabled, have efficient infrastructure (roads, ports, connectivity etc). If India is to take its rightful place amongst the comity of nations,

it must unleash and harness the full potential in terms of the ‘3Ds’ as our Prime Minister puts it – Democracy, Demography and Demand. Otherwise, we run the risk of remaining, as Mr. T. N. Ninan has very nicely put it, in his book ‘The Turn of the Tortoise’, ‘a premature power’ which has taken large strides in the past quarter century and has become a leading economy, but it continues to have more poor people than any other country and a level of per capita income that puts it in the lowest quartile in a global country listing.

4. THE VITAL PUSH AHEAD - LET A THOUSAND FLOWERS BLOOM

Does the budget of 2016 go far enough in addressing the important and critical problems that the economy currently faces? To be sure, the FM has travelled that extra mile to reassure farmers that the country cares for them. He has allocated ` 35,984 crores to agriculture and farmer welfare and has promised grants in aid of 2.87 lakhs to gram panchayats and municipalities. 89 critical irrigation projects are being fast tracked and ` 1,700 crores has been allocated to them to increase the acreage under irrigation. Hopefully, the unified agricultural marketing scheme which twelve states have accepted will provide farmers the necessary platform to realize better value for their products. Considering that more than 60% of our population is engaged in agriculture, these outlays are perhaps necessary, especially as the rural economy has been through two droughts and many farmers have had to commit suicide because of indebtedness. Similarly, the many other rural welfare measures which have been taken are also welcome. These relate to sanitation, provision of cooking gas to poor families etc.

The current budget and the Economic Survey have both emphasized that the Government will adhere to its fiscal deficit target of 3.5% for the coming year. The CAD will range from 1% to 1.5%. These are welcome developments because the country needs to be in a strong position tomorrow to repay what it has borrowed today. The Government realizes that the current debt


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to GDP ratio at 67% is high and needs to be brought down. By adhering to certain discipline in its spending the Government would also be establishing credibility internationally with other international actors who deal with it.

With the slowing down of the world economy, India’s exports will continue to be adversely impacted. This is because unlike in the past, imports and exports taken together, are now of the order of 42% of the GDP. Currently, quite apart from the decline in international demand, the existing problems also relate to our exports not being able to match competition coming from smaller countries who have been able increase their market share. If the long term potential growth rate (8%-10%) of the Indian economy has to be realized, the country will have to increase its share of the world trade from 3% to 15%. This is one area where perhaps the Government could perhaps have done much more.

There are two other themes that emerge from the current economic situation in which the country currently finds itself. First of all it is interesting to note that both India and China are outliers in to the general relationship which economists have been able to perceive between democracy and economic development. Overall, the more democratic a country, the greater are the chances of its government being able to launch really successful programmes of economic development. By this logic, China should have been much less, and India, much more successful than what either of them has been so far. In India’s case, one mistake which the state committed in the past was to assume

too much responsibility (under socialist regimes) for making things happen. The government has now enunciated its new philosophy in its “Make in India” campaign in which it has clarified that it will only act as a facilitator and in the words of Mao allow entrepreneurs to take the initiative. It will thus “let a thousand flowers bloom.”

Were the Government really to do this, it would be left playing the role of a regulator or a facilitator. We would then in the long run end up with a leaner bureaucracy and it would become much easier for the country to absorb such expenditure as that which will arise from implementing the recommendations of the seventh pay commission.

It now remains for us to take stock and conclude our analysis. Over the long term we give ourselves less credit as a nation than what we perhaps deserve. Indeed as the statistical portion of the Economic Survey brings out, since 1950-51 per capita incomes have gone up 10.28 times in real terms despite the fact that the population has since then almost quadrupled. Similarly GDP has risen 38.27 times in real terms and per capita availability of food grains and pulses has gone up from 394 grams to 491.2 grams per capita per day. Babies born today will in all probability live up to the year 2083; at least 73% of them will be able to read and write.

These are not small achievements but the question really is could the country have done much better? Indeed that is what it seeks to do now. A billion people hope that the Government succeeds in its mission of ushering in happy days for the nation.


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Annexure 1 — List of important macro-economic initiatives taken by the Government in the current year and their current status

Serial no.

Policy initiative announced in the Budget 2015 Current status

1 Amendment in the RBI Act this year, to provide for a Monetary Policy Committee.

A Monetary Policy Framework Agreement between the Government and the RBI was signed on 20 February 2015. A draft Cabinet Note for amending the RBI Act 1934 for providing a Monetary Policy Committee has been circulated. Comments received are being finalized.

2 Amendments in the Finance Bill to the FRBM Act.

The proposed amendment to the FRBM Act as a part of Finance Bill, 2015 was passed by Parliament and notification issued. Consequently, FRBM (Amendment) Rules 2015 have also been approved by the Finance Minister and sent for vetting to the legislative Department, Ministry of Law and Justice.

3 Rationalization of subsidies. To check subsidy leakages, Government of India launched Direct Benefit Transfer for LPG consumer (DBTL) scheme namely, ‘PAHAL’, in 54 districts of the country on 15 November 2014 and in remaining districts of the country on 1 January 2015, covering 15.34 crores LPG consumers across the country.

To curb illegal diversion of subsidized urea, the cap/restriction on production of neem coated urea (NCU) has been removed. It has become mandatory for all indigenous producers of urea to produce 100% of their total production of subsidized urea as neem coated urea.

4 Allocation of ` 25,000 crores in 2015-16 to the corpus of Rural Infrastructure Development Fund (RIDF) set up in NABARD; ` 15,000 crores for Long Term Rural Credit Fund; ` 45,000 crores for Short Term Cooperative Rural Credit Refinance Fund; and ` 15,000 crores for Short Term RRB Refinance Fund to support the agricultural sector.

RBI has allocated the funds for the financial year 2015-16 out of short fall in priority sector lending (PSL) target.

Action completed.

5 Farm credit of ` 8.5 lakh crores during the FY 2015-16.

Agency wise and purpose wise targets were allocated to commercial banks, Cooperative Banks & RRBs and conveyed to RBI, NABARD, PSBs and SLBC convener banks on 23 March 2015.

Monitoring of agriculture credit flow is done on quarterly basis.

Action completed.

6 Allocation of ` 34,699 crores for improving the quality and effectiveness of activities under MGNREGA.

Budget provision of ` 34,699 crores during FY 2015-16 has been approved.

Revised Annexure 1.indd 25 3/2/2016 8:25:45 PM


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Serial no.


7 Creation of a unified national agriculture market.

A Central sector scheme on promotion of national agricultural market through the Agri-Tech Infrastructure Fund (ATIF) was approved with an allocation of ` 200 crores on CCEA on 1 July 2015. A Group of Experts has been set up under the Chairmanship of Dr. Ashok Gulati to look into uniform implementability of agriculture marketing reforms across all States/UTs. The National Agricultural Market (NAM) is expected to start functioning shortly in some of the mandis.

8 Budget proposes to create Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of ` 20,000 crores and credit guarantee corpus of ` 3,000 crores. MUDRA Bank will refinance Micro-Finance Institutions through a Pradhan Mantri Mudra Yojana. In lending, priority will be given to SC/ST enterprises.

A core group has been constituted to prepare the draft of the MUDRA Bill. SIDBI has constituted a 100% owned subsidiary NBFC called Micro Units Development & Refinance Agency Ltd. (MUDRA) to start the work of refinance and development of the sector. RBI has Allocated ` 20,000/- crores towards refinance corpus of MUDRA. RBI has already provided interim funds of ` 5,000 crores to MUDRA to start its refinance operation. Overall disbursement target of ` 1,22,188 crores under PMMY were allocated to PSBs (` 70,000 crores), RRBs (` 22,188 crores) and Private & Foreign Banks (` 30,000 crores) for the FY 2015-16. Mega Credit camps for “Shishu” category of MUDRA loans across the country during 25 September 2015 to 2 October 2015 had been organized.

9 To bring a comprehensive Bankruptcy Code in FY 2015-16, that will meet global standards and provide necessary judicial capacity.

A Committee was set up on 22 August 2014 for providing an entrepreneur friendly legal bankruptcy framework for India. The Committee submitted its Interim Report on 5 February 2015 and Final Report/Draft Law on 4 November 2015.

Further work is in progress.

10 Government proposes to utilize the vast Postal network with nearly 1,54,000 points of presence spread across the villages of the country. The Postal Department will make its proposed Payments Bank venture successful so that it can contribute further to the Pradhan Mantri Jan Dhan Yojana.

PIB memo has been approved by Hon’ble Ministry of Communications & Information Technology and circulated to various Ministries/Department for comments. Comments from some Departments are awaited.

RFP for selection of consultant for setting up of the India Post Payments Bank has been sent to DoLA for vetting.

11 It is proposed that NBFCs registered with RBI and having asset size of ` 500 crores and above will be considered for notifications as ‘Financial Institution’ in terms of the SARFAESI Act, 2002.

Draft Notification to this effect has been laid on the Tables of Rajya Sabha on 21 July 2015 and Lok Sabha on 24 July 2015.

Proposal in the process of implementation.



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Serial no.


12 A universal social security system for all Indians, specially the poor and the under-privileged.

The three Social Security Schemes viz. Atal Pension Yojana (APY), Pradhan Mantri Suraksha Bima Yojana (PMSBY) and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) were formally dedicated to the Nation by the Prime Minister on 9 May 2015.

Around 8, 34,617 people have joined APY as on 17 October, 2015. An exclusive website www.jansuraksha.gov.in has been created and state wise toll free numbers have been allotted to respond to the queries of the customers. Around 283,73,618 people have subscribed to PMJJBY and 884,24,371 people have subscribed to PMSBY as on 17 October 2015.

Work in progress.

13 Need to increase public investment.

All efforts are being made to increase GBS through expediting progress of various ongoing projects. A target for award of NH length of 10,000 km during FY 2015-16 has been set. Against this, NH length of 4,482 km has already been awarded at the end of third quarter against target of 5,652 km. A target has been set for completion of NH length of 6,300 km during 2015-16. Against this NH length of 2,446 km has already been completed at the end of third quarter i.e. September, 2015 against the target of 2,472 km. in the same quarter.

14 Establishment of a National Investment and Infrastructure Fund (NIIF),

(ii) Permission of tax free infrastructure bonds for the projects in the rail, road and irrigation sectors.

(iii) The PPP mode of infrastructure development to be revisited, and revitalised.

Allocated Tax Free Bonds amounting to ` 40,000 crores during 2015-16 to PSUs (NHAI, IRFC, HUDCO, IREDA, PFC, REC & NTPC) vide Notification dated 6th July, 2015.So far, a total amount of ` 9912.50 crores has been raised (Private + Public).

On the part relating to revisiting & revitalizing PPP model, a Committee was set up under the Chairmanship of Dr. Vijay Kelkar to review of the experience of PPP Policy, analyse risk involved in PPP Projects, propose design modifications to the contractual arrangements, etc. The Committee has submitted an advance copy of its report on 19 November 2015.

15 To establish, in NITI, the Atal Innovation Mission (AIM) to foster a culture of innovation, R&D and scientific research in India.

An Expert Committee to workout detailed contours of the AIM and SETU.


16 Government will encourage ports in public sector to corporatize and become companies under the Companies Act.

A Cabinet Note seeking approval for carrying out an amendment to the Major Port Trusts Act, 1963 to enable corporatization of the Major Port Trusts was sent to Cabinet Secretariat on 8 April 2015.


17 Ease of doing business in India to make India an investment

An ‘Expert Committee’ has been constituted to examine the possibility of replacing multiple prior permission with pre-existing regulatory mechanism on 6 April 2015. The Committee has held discussions with various stakeholders Its report is awaited.



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Serial no.


18 Setting up of 5 new Ultra Mega Power Projects (UMPPs), each of 4000 MWs in the plug-and play mode.

The second unit of Kudankulam Nuclear Power Station will be commissioned in 2015-16.

Various Central ministries such as M/o Road, Transport & Highways (removal of bottlenecks, streamlining of land acquisition etc.)

M/o Power — The Ministry of Power has tentatively identified following five UMPPs to bid out in the financial year 2015-16:

i) Cheyyur UMPP, Tamil Nadu.

ii) Bedabahal UMPP, Odisha.

iii) Bihar UMPP.

iv) Deoghar UMPP, Jharkhand.

v) Chhattisgarh UMPP.

Bid process and various other steps in this connection are in various stages of completion. The Unit 2 of Kudankulam Nuclear Power Project is under commissioning.

Action completed.

M/o Railways — Tenders for railway lines are awarded on the basis of open tender system after 70% land is available including forestry clearances.

D/o Atomic Energy — The second unit of Kudankulam nuclear power project is under commissioning The unit is expected to commence generation of power in the current FY 2015-16.

19 Government will endeavour to enhance allocations to MGNREGA by ` 5,000 crores; Integrated Child Development Scheme (ICDS) by ` 1,500 crores; Integrated Child Protection Scheme (ICPS) by ` 500 crores; and the Prdhan Mantri Krishi Sinchai Yojana by ` 3,000 crores; and the initial inflow of ` 5,000 crores into the NIIF.

EFC is being prepared; a Cabinet Note has already been circulated. Additional amount of ` 3,600 crores has been provided in the First batch of Supplementary Demands for Grants in the first batch of supplementary of ICDS.

20 Government will set up a Public Debt Management Agency (PDMA) which will bring both India’s external borrowings and domestic debt under one roof.

Detailed road map has been prepared for establishing PDMA. Consultations with RBI are going on. In the meantime, it is proposed to set-up an executive order non-statutory PDMA. Draft Cabinet Note for inter-ministerial consultation has been circulated.

21 Merger of Forwards Markets Commission with SEBI

FMC- SEBI merger has taken place on 28 September 2015. Notification has been issued in this regard.

Action completed.



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Serial no.


22 Task Force to establish a sector-neutral Financial Redressal Agency that will address grievances against all financial service provide.

The Task Force has been set up on 5 June 2015.

Action completed.

Reports of Task Forces have been examined.


23 Budget proposes to:

(i) Introduce a Gold Monetization Scheme, which will replace both the present Gold Deposit and Gold Metal Loan Schemes.

(ii) Also develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold.

(iii) Commence work on developing an Indian Gold Coin which will carry the Ashok Chakra on its face.

Final Cabinet Note has been approved and scheme has been introduced.

It has been implemented by Department of Commerce. The scheme has been introduced. The coin has been launched on 5 November 2015.

24 Budget proposes to introduce several measures that will incentivize credit or debit card transactions and disincentivise cash transactions.

Draft Cabinet Note has been circulated for comments.

25 Budget proposes to do away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, and replace them with composite caps.

No reported action.

26 Extending coverage of Visa on arrival.

The scheme has been extended to 74 countries till date.

27 Reform of procurement law. A draft bill has been prepared (Indian Institute of Public Administration was hired); received from IIPA on 30 November 2015.

28 Regulatory reform law that will bring about a cogency of approach across various sectors of infrastructure.

Draft Regulatory Reform Bill, 2015 has been prepared by NITI Aayog. NITI Aayog has been requested by the Finance Minister to undertake inter-ministerial consultations.




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Serial no.


29 National Skills Mission will be launched through the Skill Development and Entrepreneurship Ministry.

Launched by Hon’ble Prime Minister on 15 July 2015.

Action completed.

30 The National Optical Fibre Network Programme (NOFNP) of 7.5 lakh kms. networking 2.5 lakh villages is being speeded up by allowing willing States to undertake its execution on reimbursement of cost as determined by the Department of Telecommunications.

National Optical Fibre Network Programme (NOFNP):

vv No. of GPs where OFC laying completed: 24,156

vv No. of GPs where BB connectivity is available through NOFN: 2,098

vv OF cable laid: 55,505

vv PLB pipe laid: 81,997


31 The first phase of GIFT will soon become a reality. Appropriate regulations will be issued in March.

Regulatory framework for International Financial Service Centre (IFSC) was launched at a Conference on ‘Regulatory Framework for IFSC in India’ on 10 April 2015 at Gandhi Nagar, Gujarat. As a follow up to the guidelines by the IRDAI a format of application of registration has been issued on 6 October 2015 by IRDAI for the interested insurers.

Action completed.

32 For the quick resolution of commercial disputes, the Government proposes to set up exclusive commercial divisions in various courts in India.

“The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Bill, 2015” was introduced in the Rajya Sabha on 29 April 2015. The Bill has been referred to the Department Related Standing Committee for examination and report.

33 GST. Bill awaiting consideration and passing in the Rajya Sabha.

34 Black Money stashed away abroad.

The Undisclosed Foreign Income And Assets (Imposition of Tax) Act 2015 passed on 26 May 2015.

Action completed

35 Amendments to The Foreign Exchange Management Act, 1999 (FEMA) — seizure, confiscation, penalty and prosecution provisions in respect of assets held outside India in contravention of the provisions of this Act.

Amendment (new Section 13A & 37A) in Finance Act 2015 made. The enforcement notification has been issued, bringing provisions of the amendment into force.

36 Benami Transactions (Prohibition) Bill.

The Benami Transactions (Prohibition) Amendment Bill, 2015 was introduced in Lok Sabha on 13 May 2015.

Action completed.



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Annexure 2

Key Tax Policy announcemenTs since lasT BudgeTSince the last Budget, certain key policy decisions have been undertaken, some of the notable ones are listed below:

date Policy announcement

20 March 2015 Introduction of the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 & corresponding RBI Press Release on Regularization of Assets held Abroad by Person Resident in India under FEMA, 1999.

9 July 2015 Agreement between the Government of the Republic of India and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA.

20 October 2015 Notification of Transfer Pricing Rules to incorporate “range concept” and “use of multi-year data” to reduce litigation on transfer pricing issues.

15 December 2015 Amendment of Rules regarding quoting of PAN for specified transactionsIt has been decided that quoting of PAN will be required for transactions of an amount exceeding ` 2 lakh regardless of the mode of payment. To bring a balance between burden of compliance on legitimate transactions and the need to capture information relating to transactions of higher value, the Government has also enhanced the monetary limits of certain transactions which require quoting of PAN. The monetary limits have now been raised to ` 10 lakh from ` 5 lakh for sale or purchase of immovable property, to ` 50,000 from ` 25,000 in the case of hotel or restaurant bills.

23 December 2015 Draft Guiding Principles for determination of Place of Effective Management (POEM) of a Company.

31 December 2015 Amendment of Rules regarding quoting of PAN for specified transactions to come into force from 1st January, 2016 including acquiring immovable property.

Annexure 3

TaxPayers – a sTaTisTical PersPecTive

As per the data released by the CBDT, presently, over 4.5 crore taxpayers and 15 lakh deductors were using various e-enabled online taxpayer friendly end to end services viz. e-payment of taxes, efiling of tax returns and TDS statements, tax credit statements in Form 26AS, digital TDS certificates in Form 16/16A and issuance of refunds.

In the FY 2014-15, more than 94% of the tax returns had been filed on-line, while more than 80% of the direct tax revenue was being received online. Besides, about 99% of the TDS statements were being filed electronically. CBDT has claimed that while the TDS statements were processed within a week, the tax returns were being processed within an average period of 30 days. A large number of tax refunds were being directly credited to the bank accounts of the taxpayers.

In the FY 2015-16, the Tax Department had received more than 2.06 crore returns on the e-filing portal which was an increase of 26.12% over the corresponding period of the preceding the FY 2014-15, when about 1.63 crore returns were e-filed. The peak filing rate in the FY 2015-16 touched 3,475 returns per


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minute as compared to 2,901 returns per minute in the FY 2014-15. All these data points speak volumes about the sheer size and enormity of the tax-paying population. Compared to the population size of 1 billion Indians, the number of tax payers (after considering the foreign tax payers) clearly would show room for increase. This aspect has been the focus of successive Finance Ministers, even in this Budget. And rightly so.

Annexure 4

gisT of Procedural simPlificaTion measures announced By cBdT since lasT BudgeT

³eLee YegefcemleLee lees³eb, ³eLee yeerpeb leLeeç*d kegÀj: ~³eLee osµemleLee Yee<ee, ³eLee jepee leLee Òepee ~~

As the land so the [ground] water, as the seed so the sprout.

As the region [country] so the language, as the king so the people.

Like any other leader, every incumbent Finance Minister attempts to leave a legacy behind. To gauge what kind of legacy it would be, one has to look at the statements issued from the FM’s office (and twitter handle these days) and speeches made at various fora. Ever since this dispensation has assumed charge, ease of doing business in india has been a mantra, a guiding polestar and policies could be seen to be following this apt direction. Tax policy is an important tool for the Finance Minister to ‘walk the talk’ on the aspired legacy. Various measures have been announced and implemented since the last Budget with the objective of providing better taxpayer services, improving ease of doing business and reducing the burden of compliance on the tax payer. The Central Board of Direct Taxes has taken a number of decisions over last three months. The table below assembles those measures for the readers’ ready appreciation:

date measure impact

10 April 2015 The application for allotment of a Permanent Account Number (‘PAN’) may be made in Form No. INC-7 specified under sub-section (1) of section 7 of the Companies Act, 2013 for incorporation of the company.

One more option available to taxpayer to obtain PAN; facilitates ease of doing business.

24 April 2015 The CBDT has decided that in all cases of Foreign Institutional Investors receiving income from transactions in securities seeking treaty benefits under the provisions of respective DTAAs, decision may be taken on claims within one month from the date such claim is filed. Since the issue involved in such cases is limited, such claims should be decided expeditiously.

Fast tracking adjudication of claims under DTAA for FIIs.


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date measure impact

28 April 2015 The CBDT has decided to fast track all applications made by Voluntary Organisations/Trusts seeking approval u/s 11(1)(C) of the Act for rendering help to the victims of earthquake in Nepal. Approval under this section is required by the charitable institutions for application of their income outside India to promote international welfare. It will be the endeavor of the Department to process these applications within two working days of receiving the completed applications.

Fast tracking all applications made by Voluntary Organisations/Trusts seeking approval u/s 11(1)(C) of the Act for Nepal earthquake relief.

1 May 2015 A High Level Committee was constituted to interact with trade and industry on tax laws, headed by former Chief Economic Advisor (CEA), Ministry of Finance, Dr. Ashok Lahiri. The Committee invited various entities/associations/federations/any other stakeholders representing the trade and industry to present their views/suggestions in order to ascertain areas where clarity in tax laws is required.

Towards simplification of tax laws.

19 May 2015 Launching of “e-sahyog” Pilot Project to provide online facility to resolve mismatch of prepaid taxes in Income-tax Returns.The Income-tax Department has taken note of grievances of taxpayers arising on account of outstanding tax demand which may be inaccurate due to non-reporting or delayed reporting of TDS by deductors leading to mismatch between the claim and data available with the Department, non-posting of challans, non-disposal of rectification applications, incorrect details of income or pre-paid taxes reported by taxpayer etc.In order to swiftly and accurately resolve such grievances, the CBDT has issued a comprehensive Circular No. 8 of 2015 dated 14 May 2015. The Circular explains the various steps to be taken by the taxpayers to view and submit their response with regard to their outstanding tax demand. The Circular elucidates the range of facilities available and the responsibilities of the Assessing officers to verify and take corrective actions. Demand upto ` 1,00,000 for an Assessment year in case of an Individual or HUF which has already been paid but is shown as outstanding due to mis-match etc. can be rectified on the basis of evidence of tax paid as submitted by the taxpayer. The taxpayers may view their outstanding tax demand on their e-filing account at www.incometaxindiaefiling.gov.in and follow the steps elucidated in the Circular to submit their response either agreeing with or disputing the demand.

Step towards solving grievances relating to verification and correction of demand outstanding against taxpayers.Demonstrates the Income-tax Department’s commitment to early and satisfactory resolution of taxpayers’ grievances. About 95% of entries of demand involve demand upto ` 1 lakh and about 90 % of such assessees are Individuals and HUFs. It is expected that majority of the grievances of small taxpayers can be redressed by following the procedure prescribed in the circular.


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date measure impact

20 May 2015 Constitution of a Committee headed by Justice A.P. Shah to look into the issue of MAT on FIIs as well as other issues which are referred to it.

To settle the issue of applicability of MAT to FIIs.The Committee had recommended that section 115JB of the Income-tax Act may be amended to clarify the inapplicability of MAT provisions to FIIs/FPIs. Alternatively, the Committee has suggested that a Circular may be issued clarifying the inapplicability of MAT provisions to FIIs/FPIs. The Government has accepted the recommendation of the Committee to clarify the inapplicability of MAT to FIIs/FPIs and has decided that an appropriate amendment to the Income-tax Act will be carried out.

21 May 2015 Notification of Transfer Pricing Rules to incorporate “range concept” and use of “multi-year data”.The use of range concept, being a statistical tool, enhances the reliability of analysis undertaken for computation of ALP.The amended rules allow for introduction of a “range concept” for determination of ALP and “use of multiple year data” for undertaking comparability analysis in transfer pricing cases. The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices. Transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis.

Simplifying transfer pricing provisions and to reduce litigation on transfer pricing issues. Part of Government’s continuing initiative of providing a stable and certain direct tax regime.

29 July 2015 The Income-tax Department is addressing grievances through a multi-layered grievance redressal machinery including Centralised Public Grievance Redress and Monitoring System (CPGRAMS), Aayakar Seva Kendras (ASK), online grievance redressal through Central Processing Centre (CPC), etc. At the end of first quarter of the current Financial Year 65 percent of the rectification applications received in the Department were disposed off. The Department is working on improving systems to reduce the time taken in disposal of rectification applications.

Timely redressal of tax payer grievances and public service delivery.

30 September 2015 CBDT simplifies the format and procedure for Form No. 15G and Form No. 15H.

Simplification for the benefit of the ‘aam-aadmi’.


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date measure impact

14 October 2015 One of the pillars of the of the taxation proposals included in the Finance Minister’s budget speech for 2015-16 was extension of benefits to the middle class. In this process the Finance Minister announced extension of certain benefits in respect of medical treatment under section 80DDB. This section allows a deduction for expenditure incurred on treatment of specified ailments. The amended Rule relaxes the condition of obtaining the certificate for claiming expenditure under section 80DDB in respect of specified ailments from a specialist working in a Government hospital. As per amended Rule 11DD, the prescription can be issued by any specialist mentioned in the amended Rule. Henceforth, it will not be mandatory to obtain a certificate from a specialist working in a Government hospital.

Claiming of medical expenditure for tax purposes made easy.

15 December 2015 The monetary limits for filing of appeals by the Department before the Income Tax Appellate Tribunal and the High Courts have been revised to tax effect of ` 10 Lakhs and ` 20 Lakhs, respectively, from the present limits of tax effect of ` 4 Lakhs and ` 10 Lakhs. The revised limits have been made applicable retrospectively to pending appeals also. Directions have been issued that pending appeals which are below the revised monetary limits may be withdrawn or not pressed. In another noteworthy decision, the CBDT has issued an Office Memorandum directing Principal Chief Commissioners to constitute a collegium of Chief Commissioners of Income Tax comprising of two officers in their respective Regions. This collegium will consider withdrawal of appeals filed by the Department in cases involving tax effect above the revised monetary limit from the High Courts if no question of law is involved, the issue is considered settled by the Department or the appeal is no longer relevant in view of subsequent amendment.

Initiatives for reducing litigation.These two decisions are expected to reduce pending litigation filed by the Department by 50 percent and provide relief to taxpayers facing long standing litigation.

20 November 2015 Phasing out plan of deductions under the Act with reduction in tax rates for corporate taxpayers – feedback sought from the general public.

Aimed at phasing out deductions and exemptions, simplifying the tax law.

26 November 2015 In order to issue a comprehensive guidance/clarification on this matter, the stake holders and general public were requested to bring out issues/points which in their opinion would require further clarification/guidance for proper implementation of the provisions of the ICDS.

To provide clarity to taxpayers.

30 December 2015 Electronic filing of first appeal before CIT(Appeals). Towards e-governance, saves time and improves transparency.

31 December 2015 Streamlining scrutiny assessment proceedings and facilitating electronic communication.

Towards e-governance, saves time and improves transparency.


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date measure impact

15 January 2016 Initiatives for reducing litigation The CBDT has issued a number of Circulars for withdrawing or not pressing of appeals on settled issues relating to the subjects listed below:

vv Non applicability of Rule 9A of the Income-tax Rules 1962 in case of abandoned feature films.

vv Measurement of the distance for the purpose of section 2(14)(iii)(b) of the Income-tax Act for the period prior to assessment year 2014-15.

vv Interest from non-statutory liquidity ratio (non-SLR) securities.

vv Allowability of employer’s contribution to funds for welfare of employees in terms of section 43(b) of the Income-tax Act.

vv TDS under section 194Aof the Act on interest on fixed deposit made on the directions of the courts.

vv Recording of satisfaction note under section 158BD/153C of the Income-tax Act.

vv Non levy of penalty u/s 271(1) (c) wherein additions/disallowances were made under normal provisions of Income-tax Act 1961 but tax was levied under MAT provisions under section 115JB/115JC, for cases prior to A.Y. 2016-17.

To significantly reduce disputes and provide relief to taxpayers facing long standing litigation.

15 January 2016 Issue of refunds of smaller amounts. As a result of the special drive to issue smaller refunds, 18,28,627 refunds below ` 50,000/- involving a sum of ` 1,793 crore have been issued between 1 December, 2015 and 10 January, 2016. These refunds relate to Assessment years 2013-14 to 2015-16. In order to further expedite the process of issue of small refunds, CBDT has also directed CPC-Bengaluru and the field units that refunds up to ` 5,000/-, and refunds in cases where outstanding arrears are up to ` 5,000/- may be issued without any adjustment of outstanding arrears. Decision to expedite issue of refunds below ` 50,000 for A.Y. 2013-14 and 2014-15 for cases not selected for scrutiny.

An initiative to reduce taxpayer grievances and enhance the taxpayer satisfaction.

18 January 2016 Draft Report of Justice R.V. Easwar (Retd) Committee.

To simplify the provisions of Income-tax Act, 1961.

28 January 2016 Resolution of more than 100 cases of transfer pricing disputes with USA under MAP.

Step towards improving the business climate in India.


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DIRECT TAX

INCOME TAXThe clauses in the Finance Bill 2016 (the Bill, for short) in so far as they relate to direct taxes, when enacted, will operate prospectively and from AY 2017-18 onwards. Where the intention is otherwise, there will be a specific mention of the fact. The readers will notice that when we make our comments on the diverse clauses of the Bill we have indicated the material clauses in bracket.

Amendment to Tax Rates

For Individuals, Hindu Undivided Families and Association of Persons and Body of Individuals.

Existing Proposed

Income (`) Rate (%)

(1)(3)

Income (`) Rate (%) (1)(4)

0 – 2,50,000(2) Nil 0 – 2,50,000(2) Nil

2,50,001 – 5,00,000 10 2,50,001 – 5,00,000 10

5,00,001 – 10,00,000 20 5,00,001 – 10,00,000 20

10,00,001 and above 30 10,00,001 and above 30

(1) Education cess of 2% and secondary and higher education cess of 1% is leviable on the amount of income-tax.

(2) The basic exemption limit is ` 2,50,000 in case of every individual below the age of 60 years, ` 3,00,000 in case of resident individuals of the age of 60 years or more and ` 5,00,000 for ‘Very Senior Citizen” in case of resident individuals of age 80 years and above.

(3) Surcharge at the rate of 12% of such income tax in case of a person having a total income exceeding ` 1 crore.

(4) Surcharge at the rate of 15% of such income tax in case of a person having a total income exceeding ` 1 crore. Applicable AMT rate is 21.913% (inclusive of surcharge of 15% and education cess of 3%)

For Others

Description Existing Rate (%)

Proposed Rate (%)

A) Domestic company

Regular tax 34.608(5) 34.608(5)

Where the total turnover or gross receipts of the Company in the previous year 2014-15 does not exceed 5 crore

Not Applicable

31.961(6)

Newly set up domestic companies(7)

Not Applicable

28.84%(8)

MAT 21.342 (of book profits)(9)

21.342 (of book profits)(9)

DDT 20.358(10) 20.358(10)

Dividend Received from Foreign subsidiary company

20.358(11) 20.358(11)

B) Foreign company

Regular tax 43.26(12) 43.26(12)

C) Firm and LLP

Regular tax 34.608(13) 34.608(13)

Alternate Minimum Tax (AMT) 21.342(14) 21.342(14)

(5) Inclusive of surcharge of 12% and education cess of 3%. Where the total income is between ` 1 crore and ` 10 crore, then tax rate is 33.063% (inclusive of surcharge of 7% and education cess of 3%). Where the total income is equal to or less than ` 1 crore, then tax rate is 30.90% (inclusive of education cess only).

(6) Inclusive of surcharge of 7% and education cess of 3%. Where the total income is equal to or less than ` 1 crore, then tax rate is 29.87% (inclusive of education cess only).

(7) A new Section 115BA, has been inserted to provide relief to newly set up companies registered on or after 1 March 2016 and solely engaged in the business of manufacture or production of any article or thing and is not engaged in any other business



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(10) Inclusive of surcharge of 12% and education cess of 3%. Amount of distribution of dividend to shareholders to be grossed up for the purpose of DDT.





The Income Declaration Scheme, 2016 – Chapter IX

The Bill introduces a new Chapter IX setting out the Income Declaration Scheme 2016.

This Scheme provides an opportunity to persons who have evaded or avoided paying full taxes

in the past to declare their undisclosed income and pay tax, surcharge and penalty totalling in all to 45% of such undisclosed income declared. The scheme is proposed to be brought into effect from 1 June 2016. It will remain open up to the date to be notified by the Central Government in the Official Gazette. It will be made applicable in respect of undisclosed income of any FY up to the year 2015-16. Tax will be at the rate of 30% of declared income as further increased by 25% of tax payable (to be called the Krishi Kalyan cess). A penalty at the rate of 25% of tax payable will also be levied on the undisclosed income declared under this Scheme.

Declaration of undisclosed income would include AYs for which assessee has failed to furnish a return under Section 139; failure to disclose income in the return filed; income escaping assessment by reason of failure of the assessee etc.

Where undisclosed income is declared in the form of investment in any asset the fair market value of such asset shall be deemed to be the undisclosed income. Manner of determining such fair market value would be prescribed.

It is proposed that following cases shall not be eligible for the Scheme:

a. where notices have been issued under Sections 142(1) or 143(2) or 148 or 153A or 153C, or

b. where a search or survey has been conducted and the time for issuance of notice under the relevant provisions of the Act has not expired, or

c. where information is received under an agreement with foreign countries regarding such income, or

d. cases covered under the Black Money Act, 2015, or

e. persons notified under Special Court Act, 1992, or


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f. cases covered under Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967, the Prevention of Corruption Act, 1988.

Payment of tax, surcharge and penalty may be made on or before a date to be notified by the Central Government in the Official Gazette and non-payment up to the date so notified shall render the declaration made under the scheme void.

The Scheme provides that declarations made under the Scheme shall be exempt from wealth-tax in respect of assets specified in declaration. It is also proposed that no scrutiny and enquiry under the Act and Wealth-tax Act shall be undertaken in respect of such declarations and immunity from prosecution under such Acts shall be duly provided.

Immunity from the Benami Transactions (Prohibition) Act, 1988 is also proposed for such declarations subject to certain conditions.

It is proposed to provide that where a declaration under the scheme has been made by misrepresentation or suppression of facts, such declaration shall be treated as void.

Nothing contained in the Scheme shall be construed as conferring any benefit, concession or immunity on any person other than the person making the declaration under this Scheme. In cases where any declaration has been made but no tax and penalty referred to the scheme has been paid within the time specified, the undisclosed income shall be chargeable to tax under the Act in the previous year in which such declaration is made.

In cases where any income has accrued, arisen or received or any asset has been acquired out of such income prior to commencement of this Scheme, and no declaration in respect of such income is made under the Scheme such income shall be deemed to have accrued, arisen or received, or the value of the asset acquired out of such income shall be deemed to have been

acquired or made, in the year in which a notice under Section 142, Section 143(2) or Section 148 or Section 153A or Section 153C of the Act is issued by the AO and the provisions of the Act shall apply accordingly.

It is further proposed that if any difficulty arises in giving effect to the provisions of this Scheme, the Central Government may, by order, not inconsistent with the provisions of this Scheme, remove such difficulty by an order not after the expiry of a period of 2 years from the date on which the provisions of this Scheme come into force and such order be laid before each House of Parliament.

It is proposed that the Central Board of Direct Taxes under the control of Central Government be provided the power to make rules, by notification in the Official Gazette, for carrying out the provisions of this Scheme and such rules made be laid before each House of Parliament in the manner provided in the scheme.

The Finance Minister has clarified that this is not a tax amnesty scheme and it is hoped that it does not violate the assurance given years ago by the government to the Supreme Court that no more tax amnesty schemes would be introduced

[Clause 178 to 196]

The Direct Tax Dispute Resolution Scheme, 2016 - Ease of doing business/dispute resolution measure

Clauses 197 to 208 of the Bill propose to add a new Chapter X to the Act laying out a Direct Tax Dispute Resolution Scheme. The Scheme is proposed to bring to an end protracted litigation, reduce pile up of cases and enable the Government to recover tax dues expeditiously.

The salient features of the proposed Scheme are as under:

YY The expressions declarant, designated authority, disputed income, disputed tax, disputed wealth, specified tax and tax arrear have been defined


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YY The scheme would be applicable to “tax arrear” which is defined as the amount of tax, interest or penalty determined under the Act or the Wealth-tax Act in respect of which appeal is pending before the first appellate authority viz. Commissioner of Income-tax (Appeals) or the Commissioner of Wealth-tax (Appeals) as on the 29 February 2016.

YY The pending appeal could be against an assessment order or a penalty order.

YY The declarant under the scheme would be required to pay tax at the applicable rate plus interest upto the date of assessment. However, in case of disputed tax exceeding ` 10 lakh, 25% of the minimum penalty leviable shall also be required to be paid.

YY In case of pending appeal against a penalty order, 25% of minimum penalty leviable shall be payable along with the tax and interest payable on account of assessment or reassessment.

YY Consequent to such declaration, appeal in respect of the disputed income and disputed wealth pending before the Commissioner (Appeals) shall be deemed to be withdrawn.

YY Person can also make a declaration in respect of any tax determined in consequence of or is validated by an amendment made with retrospective effect in the Act or Wealth-tax Act, as the case may be, for a period prior to the date of enactment of such amendment and a dispute in respect of which is pending as on 29 February 2016 (referred to as specified tax).

For availing the benefit of the Scheme, such declarant shall be required to withdraw any writ petition or any appeal filed against such specified tax before the Commissioner (Appeals) or the Tribunal or High Court or Supreme Court, before making the declaration and shall also be required to furnish a proof of such withdrawal. Further if any proceeding for arbitration, conciliation or mediation has been initiated by the declarant or he has given any notice under any law or

agreement entered into by India, whether for protection of investment or otherwise, he shall be required to withdraw such notice or claim for availing benefit under this Scheme.

Declarant shall be required to furnish an undertaking in the prescribed form and verified in the prescribed manner, waiving the right, whether direct or indirect, to seek or pursue any remedy or claim in relation to the specified tax which otherwise be available to them under any law, in equity, by statute or under an agreement, whether for protection of investment or otherwise, entered into by India with a country or territory outside India. It is proposed that no appellate authority or Arbitrator or Conciliator or Mediator shall proceed to decide an issue relating to the specified tax in the declaration in respect of which an order is made by the designated authority or in respect of the payment of the sum determined to be payable.

A declaration under the scheme may be made to the designated authority not below the rank of Commissioner in such form and verified in such manner as may be prescribed.

The designated authority shall within 60 days from the date of receipt of the declaration, determine the amount payable by the declarant. The declarant shall pay such sum within 30 days of the passing such order and furnish proof of payment of such sum. Any amount paid in pursuance of a declaration shall not be refundable under any circumstances.

No matter covered by order of designated authority shall be reopened in any other proceeding under the Act or Wealth-tax Act.

The designated authority shall subject to the conditions provided in the scheme grant immunity from instituting any proceeding for prosecution for any offence under the 2 Acts in respect of matters covered in the declaration. In case of specified tax the declarant shall also get immunity from imposition of penalty under the Act or the Wealth-tax Act. However, in case of tax arrears immunity from penalty is proposed to be of the amount that exceeds the penalty payable


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as per the scheme. The scheme provides waiver of interest under the Act or the Wealth-tax Act in respect of specified tax. However, waiver of interest in respect of tax arrears is to the extent the interest exceeds the amount of interest referred in the scheme.

Declarant is required to act bonafide and should not violate the conditions specified in the scheme. If the declaration is found to be false it would be presumed that the declaration was never made and the proceedings under the Act or Wealth-tax Act would get revived.

Nothing contained in this Scheme shall be construed as conferring any benefit, concession or immunity on the declarant in any proceedings other than those in relation to which the declaration has been made.

It is proposed that the Central Government may be given the power to issue such orders, instructions and directions for the proper administration of this Scheme. In case any difficulty arises in giving effect to the provisions of this Scheme, the Central Government may by order not inconsistent with the provisions of this Scheme remove the difficulty. However, no such order shall be made after the expiry of a period of 2 years from the date on which the provisions of this Scheme come into force.

Every such order would be laid immediately before each House of Parliament.

It is proposed that the Central Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this Scheme. Every rule made under this Scheme would be laid immediately before each House of Parliament in the manner specified in the scheme.

The scheme would not be applicable to a person in following circumstances:

(i) Cases where prosecution has been initiated before 29 February 2016

(ii) Search or survey cases where the declaration is in respect of tax arrears

(iii) Cases relating to undisclosed foreign income and assets

(iv) Cases based on information received under DTAA under Section 90 or 90A of the Act where the declaration is in respect of tax arrears

(iv) Person notified under Special Courts Act, 1992

(v) Cases covered under Narcotic Drugs and Psychotropic Substances Act, Indian Penal Code, Prevention of Corruption Act or Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974

The Scheme is proposed to come into force from 1 June 2016 and be open for declaration made upto a date to be notified by the Central Government in the Official Gazette.

It appears that the Scheme does not provide for a situation where tax arrear in respect of which appeal is pending has already been paid and in that sense there were no arrears as on 29 February 2016. May be the form of the declaration would cater to this.

Also, it is suggested that amounts paid under this scheme towards penalty – whether levied or leviable - should not be referred to as penalty in as much as there is no adjudication of the same. This may otherwise result in uncalled for negative fallouts eg. disqualification for empanelment or bids or requiring reporting as such in financial statements etc.

[Clauses 197 to 208 Chapter X]

Tax incentives for Start-ups – Section 80IAC

Start-up India is a star initiative of the Government of India, intended to build a strong eco-system for nurturing innovation and Start-ups in the country that will drive sustainable economic growth and generate large scale employment opportunities. The Government through this initiative aims to empower Start-ups to grow through innovation and design. With a view to providing an impetus to start-ups and facilitate their growth in the initial phase of their business, it is proposed to provide a deduction of 100% of the profits derived by an eligible start-up from a eligible business


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involving innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property for 3 years. This deduction may be claimed, at the option of the assessee, for 3 consecutive AYs out of 5 years beginning from the year in which the eligible start-up is incorporated. The deduction would be applicable to a start-up, which is not formed by splitting up, or reconstruction of a business already in existence; or by the transfer of plant and machinery previously used. The eligible start-up means a company engaged in eligible business which is incorporated on or after 1 April 2016 but before 1 April 2019, its turnover of its business does not exceed ` 25 crore in any of the financial years from 1 April 2016 to 31 March 2021 and it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified by the Central Government.

[Clause 41]

Tax Incentive on Newly set up domestic companies – Section 115BA

In order to provide relief to newly setup domestic companies, it is proposed to insert new Section 115BA, whereby an option has been given to a domestic company to pay income tax @ 25% on total income (subject to provisions of Sections 111A and 112) for any previous year relevant to the AY beginning from 1 April 2017 (i.e. AY 2017-18 onwards), if, -

(i) the company has been setup and registered on or after 1 March 2016

(ii) the company is engaged in the business of manufacture or production of any article or thing and is not engaged in any other business

(iii) the company while computing its total income has not claimed any benefit under Section 10AA, benefit of accelerated depreciation, benefit of additional depreciation, investment allowance, expenditure on scientific research, any deduction in respect of certain income

under Part C of Chapter VI-A other than the provisions of Section 80JJAA

(iv) without any set off of loss carried forward from any earlier AY if such loss is attributable to any of the deductions referred to above

(v) depreciation under Section 32 other than clause (iia) of sub-section 1 of Section 32 is determined in the prescribed manner

(vi) the option to apply the provisions of this concessional rate of tax is exercised by furnishing a declaration in the prescribed manner before the due date of furnishing of income tax return

(viii) sub-section 3 is proposed to be inserted to provide that the loss carried forward referred to above shall be deemed to have been given effect to and no further deduction for such loss shall be allowed for any subsequent year

[Clause 49]

Part of measures to give tax incentives to Start- ups – Section 54EE

In order to promote the start-up ecosystem it is envisaged in ‘start-up India Action Plan’ to establish a fund which would raise ` 2,500 crore annually for 4 years to finance the start-ups.

New Section 54EE is proposed to be inserted to provide exemption from capital gains tax if the long term capital gains proceeds are invested by the assessee in units of such specified fund as would be notified by the Central Government. It is further proposed to provide a lock in period of 3 years for such investment failing which the exemption would be withdrawn. Investment in the units of specified funds would be allowed up to ` 50 lakh.

[Clause 31]

Part of measures to give tax incentives to Start-ups- Section 54GB

With an objective to provide tax relief to an individual or HUF willing to set up a start-up


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company by selling a residential property it is proposed to amend Section 54GB to provide that long term capital gains arising on account of transfer of residential property shall be exempt if such capital gains are invested in subscription of shares of a company which qualifies to be a Small or Medium Enterprise under the Micro, Small and Medium Enterprises Act, 2006 subject to the condition that the individual or HUF holds more than 50% shares of the company and the company utilises the amount invested in the shares to purchase new asset before the due date of filing of return by the investor.

Further the existing provisions require that the investments should be made in purchase of new plant and machinery but does not include computer or computer software.

Computer or computer software form the core asset of a start-up company owing to the nature of business activity and therefore amendment is proposed to provide for inclusion of computer or computer software in case of technology driven start-ups certified by the Inter-Ministerial Board of Certification notified by the Central Government in the Official Gazette.

[Clause 32]

Equalisation Levy-Additional resource mobilisation measure – Chapter VIII

Chapter VIII is proposed to be inserted which deals with equalisation levy as an additional resource mobilisation measure.

Currently in the digital domain, business is conducted seamlessly without regard to national boundaries and tends to dissolve the link between income producing source location and final destination where the service/goods are consumed. The digital domain has given rise to new business models that rely more on digital and telecommunication network and do not require physical presence. Business in digital domain does not seem to occur in any specific physical location but instead takes place in the nebulous world of cyberspace. Persons carrying business in digital domain could be located

anywhere in the world. Entrepreneurs across the world have been quick to evolve their businesses to take advantage of these changes and derive substantial value from data collected and transmitted from such networks.

These new business models have created new tax challenges.

The digital business fundamentally challenges physical presence based PE rules. In the new economy, the fundamental PE components developed for the old economy i.e. place of business, location, and permanency are required to be reconciled with the new digital reality.

In order to address these challenges ‘equalisation levy’ is proposed at 6% of the amount of consideration for the specified services received or receivable by a non-resident from an Indian resident who is carrying on business or profession in India or from a non-resident having a PE in India. The levy would not be charged if the aggregate amount of consideration does not exceed ` 1 lakh.

Levy would also not be charged in a case where a non-resident providing the specified service has a PE in India and the service provided is effectively connected with the PE of the non-resident. The expressions PE, Online, Equalisation levy, Specified Service and Prescribed have been defined under the Chapter. The term “specified services” is defined to mean online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government.

Clause 163 of the Bill proposes for collection and recovery of the equalisation levy by a person resident in India and carrying on business or profession or a non-resident having PE in India, by way of deduction from the amount paid or payable to a non-resident in respect of specified services. The amount of levy so deducted is required to be paid to the credit of Central Government by the seventh day of the following month. The chapter inter alia provides for:


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YY Furnishing of statement in prescribed form, manner and setting forth particulars in respect of all specified services

YY Processing by the AO of the valuation of services and equalisation levy payable/refundable on the basis of such processing of statement. Mechanism for computation is also provided for in the chapter

YY Rectification of order passed by the AO

YY Imposition of simple interest for not crediting the levy collected to the credit of the Central Government

YY Imposition of penalty for failure to deduct equalisation levy either in full or in part and in other cases ` 1,000 for each failure

YY Imposition of penalty for failure to furnish statement

YY Punishment by way of imprisonment up to a period of 3 years and with fine for making false statement. Offence punishable under this clause is deemed to be non-cognisable within Code of Criminal Procedure. Prosecution for an offence is to be instituted only with the prior permission of Chief CIT

The order passed by the AO is appellable before the CIT Appeals. The assessee can file appeal before CIT Appeals if he denies his liability to be assessed under the chapter. Provisions of Sections 249 and 251 would be applicable to such appeals. The Chapter inter alia provides for appeal to Appellate Tribunal against the order of CIT Appeals. Provisions of Sections 252 to 255 would be applicable to such appeal.

Penalty is not imposable if the assessee proves that there was reasonable cause for the failure to comply with the provisions.

The Chapter provides that the existing provisions of Sections 120, 131, 133A, 138, 156, Chapter XV, 220 to 227, 229, 232, 260A, 261, 262, 265 to 269, 278B, 280A, 280B, 280C, 280D, 282 to 293 would apply in so far as they are applicable in relation to equalisation levy. These provisions relate to issue of notice of demand, recovery and collection of tax, appeals to High Court/Supreme Court etc.

The Chapter confers powers on the Central Government to make rules and issue orders for removal of any difficulty in giving effect to the provisions. Every Rule/Order is required to be placed before each house of Parliament. Any order is to be passed within 2 years from the date on which provisions of the Chapter come into force.

In order to avoid double taxation of income arising from the providing of specified services on which equalisation levy is chargeable the income from specified services is proposed to be exempt under Section 10 of the Act.

To ensure compliance, it is proposed that expenses incurred by the assessee towards specified services would not be allowed as a deduction if the assessee fails to deduct and deposit the equalisation levy to the credit of Central Government.

The Chapter VIII is proposed to come into force on such date as the Central Government by notification would appoint.

(Clauses 160 to 177 of Chapter VIII)

Rationalisation of the tax treatment of the recognised provident fund – Section 17 and Fourth Schedule of Act

Under the Fourth Schedule to the Act, contributions made by employer to the credit of an employee participating in a recognised provident fund, which are in excess of 12% of the salary of the employee, are liable to tax in the hands of the employee. Currently, there is a monetary ceiling for employee’s contribution to recognised provident fund but there is no monetary limit for the contribution made by the employer.

Section 80C of the Act provides for eligible limit of ` 1,50,000 for the employees contribution. To bring parity in the contribution made by the employer, it is proposed to amend the schedule and provide a limit of ` 1,50,000 on employer’s contribution, without attracting tax.

Accordingly, contribution by the employer up to 12% of the salary of the employee or ` 1,50,000,


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whichever is less, shall not be liable to tax in the hands of the employee. Amount in excess of the above, shall be deemed to have been received by the employee in that previous year and shall be included in his total income.

Further definition of perquisites under Section 17 of the Act is proposed to be amended to include an amount of any contribution to an approved superannuation fund, by the employer exceeding ` 1,50,000 (currently, ` 1,00,000) in the hands of the employee.

[Clause 9, 112]

NBFCs allowed deduction in respect of provision for bad and doubtful debts – Section 36 Existing Section 36(1)(viia) allows deduction in respect of any provision for bad and doubtful debts made by certain banks or financial institutions, subject to certain limits specified therein.

It is now proposed to insert clause (d) to Section 36(1)(viia) to allow deduction on account of provision for bad and doubtful debts to all NBFCs, in a sum not exceeding 5% of the total income computed before making deduction under Chapter VIA and under this clause.

[Clause 21]

Deduction in respect of employment of new workmen extended – Section 80JJAA

Existing Section 80JJAA provide for a deduction of 30% of additional wages paid to new regular workmen in a factory for 3 years. The benefit in the said Section applies to an Indian Company in the business of manufacture of goods in a factory, employing ‘workmen’ for not less than 300 days in the FY. Further, the deduction was allowed only if there was an increase of at least 10% in total number of workmen employed on the last day of the preceding year.

It is now proposed to substitute Section 80JJAA to extend this employment generation incentive to all sectors. Deduction under the said Section

shall be available in respect of cost incurred on any employee whose total emoluments are less than or equal to ` 25,000 per month. However, no deduction shall be allowed in respect of cost incurred on those employees, for whom the entire contribution under Employees’ Pension Scheme notified in accordance with Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, is paid by the Government.

It is further proposed to reduce minimum number of days of employment in a FY from 300 days to 240 days. The condition of 10% increase in number of employees every year is also done away with.

It is also proposed to provide that in the first year of a new business, 30% of all emoluments paid or payable to the employees employed during the previous year shall be allowed as deduction.

[Clause 44]

Phasing out of incentives of weighted deduction in various sections

As part of the exercise for phasing out incentives weighted deductions under Section 35 in respect of expenditure on scientific research is being phased out as follows:

Weighted deduction in respect of amounts paid to certain research associations or university etc. is proposed to be reduced from 175% to 150%. It is also proposed that deduction be further reduced to 100% in respect of any sum is paid in a previous year relevant to the AY beginning on or after the 1 April 2021

Weighted deduction in respect of amounts paid to a specified company [35(1)(iia)] and specified research association [35(1)(iii)] is proposed to be reduced from 125% to 100%

Weighted deduction in respect of sums paid to National Chemical Laboratory etc. [35(1)(2AA)] and in respect of expenditure incurred on scientific research on in-house research and development [35(1)(2AB)] is proposed to be reduced from 200% to 150%. It is also proposed that deduction be further reduced to 100% in


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respect of any sum paid or expenditure incurred in a previous year relevant to the AY beginning on or after the 1 April 2021.

Sunset clause in Section 35(1) and Section 35(2AB)(5) is proposed to be omitted.

[Clause 15]

A new Section 35ABA is proposed to provide for spread over deduction in respect of any capital expenditure incurred, before the commencement of the business or thereafter at any time during any previous year for acquiring any right to use spectrum for telecommunication services.

The deduction is for the actual amount paid during the year and is to be allowed ‘equal to the appropriate fraction of the amount of such expenditure’ in each of the relevant previous years

Relevant previous year, in a case where the spectrum fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced and, in any other case, the previous years beginning with the previous year in which the spectrum fee is actually paid and the subsequent previous year or years during which the spectrum, for which the fee is paid, shall be in force;

Appropriate fraction has been defined to mean the fraction, the numerator of which is one and the denominator of which is the total number of the relevant previous years

Effectively therefore, deduction for spectrum fee would be allowed equally over all the relevant previous years with reference to amounts actually paid

[Clause 16]

Section 35AC allowing deduction for expenditure on eligible projects or schemes is being phased out from AY 2018-19

[Clause 17]

Section 35AD allows for deduction (including weighted deduction of 150% in case of some businesses) in respect of expenditure on specified business.

[Clause 18]

With effect from AY 2018-19 weighted deduction is proposed to be phased out.

It is proposed to extend deduction to expenditure on developing or maintaining and operating or developing, maintaining and operating a new infrastructure facility – road, highway project, a road including toll road, a bridge or a rail system; (ii) a highway project including housing or other activities being an integral part of the highway project; (iii) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system; (iv) a port, airport, inland waterway, inland port or navigational channel in the sea.

These projects are similar to those covered by the erstwhile Section 80 IA and the conditions required to be satisfied are also similar.

[Clause 16]

Weighted deduction of 150% for expenditure on agricultural project allowed under Section 35CCC is proposed to be reduced to 100% from AY 2018-19.

[Clause 19]

Weighted deduction of 150% allowed under Section 35CCD in respect of expenditure on skill development project is proposed to be phased out with effect from AY 2021-22

[Clause 20]

Deduction from profits and gains derived from business of developing and building affordable housing project – Section 80 IBA

With a view to incentivise affordable housing sector as a part of larger objective of ‘Housing for All’, it is proposed to provide for 100% deduction of the profits of an assessee derived from developing and building housing projects subject to certain conditions:-


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YY The Project is approved by the competent authority after 1 June 2016 but on or before 31 March 2019 in accordance with guidelines as may be prescribed

YY The project is completed within a period of 3 years from the date of approval

YY The built up area of the shops and other commercial establishments included in the housing project does not exceed 3% of the aggregate built up area

YY The project is on a plot of land measuring not less than 1,000 sq. metres where the project is located within the 4 metros namely Delhi, Mumbai, Chennai & Kolkata or within 25 km from the municipal limits of these cities and in any area within the jurisdiction of any other municipality or cantonment board, area of land should not be less than 2,000 sq. metres

YY The size of the residential unit in the said areas is not more than 30 sq. metres and 60 sq. metres, respectively. The section is ambiguous in regard to size of plot of land and area of residential unit for projects situated outside the limits of municipality or cantonment board. It appears that the housing projects outside the limits are not eligible

YY Where the residential unit is allotted to an individual, no other residential unit in the housing project shall be allotted to him or to the spouse or the minor children of such individual. It is to be noted that even though the proposed Section does not put restriction on the allotment to family members (other than stated above), the memorandum explaining the clause uses the words “any member of his family”. This may lead to litigation

YY Other conditions such as utilisation of specified floor area ratio and maintenance of separate books of accounts are also required to be fulfilled

The above conditions more or less are similar to conditions mentioned in Section 80-IB.

The proposed Section also provides that in case where the project is not completed within specified period, total amount of deduction claimed under this Section in one or more previous years shall be deemed to be business income of the assessee of the previous year in which the period for completion so expires.

The term residential unit has also been well defined and it means an independent unit with separate facilities for living, cooking and sanitary requirements, distinctly separated from other residential units within the building, which is directly accessible from an outer door or through and interior door in a shared hallway and not by walking through the living space of another household.

[Clause 43]

Taxation of Dividend in the hands of recipient – Section 115BBDA

New Section 115 BBDA is proposed to be inserted to provide that any income by way of dividend in excess of ` 10 lakh would be chargeable to tax in the case of an individual, HUF or a firm who is resident in India, at the rate of 10%. It is further proposed that no deduction of any expenditure or allowance or set off of loss would be allowed in computing the dividend income.

The taxation of dividend income in excess of ` 10 lakh thus is proposed to be on gross basis.

[Clause 50]

Amendments to Section 115JB Minimum Alternate Tax (MAT) – Section 115JB

It is proposed to insert clause (iig) in the Explanation 1 to Section 115JB to provide that amount of income by way of royalty in respect of a patent developed and registered in India, and which is chargeable to tax under provisions of Section 115BBF shall be reduced from the book profit if such amount is credited to the Profit


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& Loss Account. Clause (fd) is proposed to be inserted to provide that expenditure or allowance relatable to such royalty income shall be added to the book profit.

A Committee on Direct Tax matters headed by Hon’ble Justice A. P. Shah recommended for an amendment to Section 115JB to clarify the applicability of MAT provisions to Foreign Institutional Investors/Foreign Portfolio Investors (FIIs/FPIs) in view of the fact that FIIs and FPIs normally do not have a place of business in India.

In view of the recommendations of the committee and with a view to provide certainty in taxation of foreign companies, amendment is proposed to provide that with effect from 1 April 2001, the provisions of Section 115JB shall not be applicable to a foreign company if -

(i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of Section 90 or the Central Government has adopted any agreement under sub-section (1) of Section 90A and the assessee does not have a PE in India in accordance with the provisions of such Agreement; or

(ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause(i) above and the assessee is not required to seek registration under any law for the time being in force relating to companies.

This amendment is proposed to be effective retrospectively from the 1 April, 2001 and accordingly applicable to AY 2001-02 and onwards.

[Clause 53]

Exemption from requirement of furnishing PAN under Section 206AA to certain non-residents

The existing provisions of Section 206AA, inter alia, provide that any person who is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVIIB of the Act shall furnish his PAN to the person responsible for deducting such tax, failing which tax shall be

deducted at the rate mentioned in the relevant provisions of the Act or at the rate in force or at the rate of 20%, whichever is higher. The existing provisions of Section 206AA are also applicable to non-residents with an exception in respect of payment of interest on long-term bonds as referred to in Section 194LC.

In order to reduce burden of compliance, it is proposed to amend Section 206AA to provide that the provisions of that Section shall also not apply to a non-resident, not being a company, or to a foreign company, in respect of payment of interest on long term bonds as referred to in Section 194LC and any other payment subject to such conditions as may be prescribed.

The amendments are proposed to take effect from 1 June 2016.

[Clause 85]

Widening of Tax Base - Tax Collection at Source (TCS) on sale of vehicles; goods or services – Section 206C In order to reduce the quantum of cash transaction in sale of any goods and services and for curbing the flow of unaccounted money in the trading system and to bring high value transactions within the tax net, it is proposed to amend the aforesaid Section to provide that the seller shall collect tax at the rate of 1% from the purchaser on sale of motor vehicle of the value exceeding ` 10 lakh.

It is also proposed to apply the provision of collection of 1% tax in cases where seller receives consideration in cash for sale of any goods or consideration for providing of any services (other than payments on which tax is deducted at source under Chapter XVII-B) exceeding ` 2 lakh. It is also proposed to provide that this provision of TCS shall not apply in relation to sale of any goods (other than bullion and jewellery) or services to certain class of buyers who fulfil such conditions as may be prescribed.


[Clause 86]


[49]

Clarification to the definition of unlisted securities – Section 112 (1)

Existing provisions of clause (c) of sub-section (1) of Section 112 provide for a tax rate of 10% for long-term capital gain arising from transfer of securities, whether listed or unlisted. The expression “securities” for the purpose of the said provision has the same meaning as in clause (h) of Section 2 of the Securities Contracts (Regulations) Act, 1956 (‘SCRA’). A view has been taken by the courts that shares of a private company are not “securities”.

With a view to clarify the position regarding taxability, it is proposed to amend the provisions of clause (c) of sub-section (1) of Section 112 of the Act, so as to provide that long-term capital gains arising from the transfer of a capital asset being shares of a company not being a company in which the public are substantially interested, shall be chargeable to tax at the rate of 10%.

[Clause 48]

ChANGES IN PROCEDuRE FOR ASSESSMENT

Filing of return of Income – Section 139 Section 139 of the Act contains the entire code in relation to Returns of income.

It is proposed to amend the sixth proviso to sub-section (1) of the Section 139 to include that if a person during the previous year earns income which is exempt under clause (38) of Section 10 and income of such person without giving effect to the said clause of Section 10 exceeds the maximum amount which is not chargeable to tax, shall also be liable to file return of income for the previous year by the due date.

It is also proposed to substitute sub-section (4) of the aforesaid Section to provide that any person who has not furnished a return within the time allowed to him under sub-section (1), may furnish the return for any previous year at any time before the end of the relevant AY (as against one year

from the end of the relevant AY as at present) or before the completion of the assessment, whichever is earlier.

It is also proposed to amend sub-section (5) to permit revision even of a belated return filed under sub-section (4) which facility is presently available only to returns filed under Section 139(1) i.e. returns filed within time. This is a departure from the provisions of law as they have existed for all these years.

It is also proposed to provide that a return which is otherwise valid would not be treated as defective merely because self-assessment tax and interest payable in accordance with the provisions of Section 140A have not been paid on or before the date of furnishing of the return.

[Clause 65]

Processing under Section 143(1) be mandated before assessment – Section 143(1)Under the existing provisions of Section 143(1) the return of income is to be processed in a limited manner.

It is proposed to provide for mandatory processing of the return to make the following adjustments to the returned income:a. Disallowance of loss claimed for which return

was filed late

b. Disallowance of expenditure indicated in the audit report but not made while computing returned income

c. Disallowance of claims for deduction of income under Sections 10AA, 80-IA etc. if the return is furnished late

d. Addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in the computation of income

The safety net provided in this regard is that no such adjustment shall be made unless an intimation is given to the assessee of such adjustments and, before making such adjustments the response of the assessee shall be considered and where no response is received within 30 days of the issue of the intimation such adjustments shall be made.


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An intimation under Section 143(1) is appealable. These amendments are of far reaching implications.

Under the existing provision of sub-section (1D) of Section 143, processing of a return is not necessary where a notice has been issued to the assessee under sub-section (2) of the said Section. Section 143(1D) is now proposed to be amended to provide that before making an assessment under Section 143(3), a return shall first be processed under sub-section (1) of Section 143.

[Clause 66]

Rationalisation of time limit for assessment, reassessment and re-computation – Section 153

The existing statutory time limit for completion of assessment proceedings is 2 years from the end of the AY in which the income was first assessable. It is desirable that proceedings under the Act are finalised more expeditiously as digitisation of processes within the Department has enhanced efficiency in handling larger workloads. Accordingly, in order to simplify Section 153 by retaining only those provisions that are currently relevant, the following changes in time limit are proposed:

(i) the period, for completion of assessment under Section 143 or Section 144 will be changed from existing 2 years to 21 months from the end of the AY in which the income was first assessable

(ii) the period for completion of assessment under Section 147 will be changed from existing 1 year to 9 months from the end of the FY in which the notice under Section 148 was served

(iii) the period for completion of a fresh assessment in pursuance of an order under Section 254 or Section 263 or Section 264, setting aside or cancelling an assessment will be changed from 1 year to 9 months from the end of the FY in which the order under Section 254 is received by the Principal

Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, or the order under Section 263 or Section 264 is passed by the Principal Commissioner or Commissioner.

It is further proposed to provide that the period for giving effect to an order, under Sections 250 or 254 or 260 or 262 or 263 or 264 or an order of the Settlement Commission under sub-section (4) of Section 245D, where effect can be given wholly or partly otherwise than by making a fresh assessment or reassessment shall be 3 months from the end of the month in which order is received or passed, as the case may be, by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner.

It is also proposed that in a case where it is not possible for the AO to give effect to such an order within the aforesaid period, for reasons beyond his control, the Principal Commissioner or Commissioner on receipt of such reasons in writing from the AO, may allow additional time of 6 months to give effect to the said order, if he is satisfied with the reasons for the delay. However, in respect of cases pending as on 1 June 2016, the AO is bound to pass orders on or before 31 March 2017.

It is also proposed that where the assessment, reassessment or re-computation is made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under Sections 250, 254, 260, 262, 263, or Section 264 or in an order of any court in a proceeding otherwise than by way of appeal or reference under the Act, then such assessment, reassessment or re-computation shall be made on or before the expiry of 12 months from the end of the month in which such order is received by the Principal Commissioner or Commissioner. However, for cases pending as on 1 June 2016, the time limit for taking requisite action is proposed to be 31 March 2017 or 12 months from the end of the month in which such order is received, whichever is later.


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It is also proposed that where an assessment is made on a partner of the firm in consequence of an assessment made on the firm under Section 147, such assessment will be made on or before the expiry of 12 months from the end of the month in which the assessment order in the case of the firm is passed. However, for cases pending as on 1 June 2016, the time limit for taking requisite action is proposed to be 31 March 2017 or 12 months from the end of the end of the month in which order in case of firm is passed, whichever is later.

It is also proposed to make consequential changes in time limit for completion of assessment or reassessment by the AO in accordance with the extension of time limit provided to the TPO in certain cases by amendment in sub-section (3A) to Section 92CA.

The provisions of Section 153 as they stood immediately before the proposed amendment by the Bill, shall apply to and in relation to any order of assessment, reassessment or re-computation made before the 1 June 2016.

There are also provisions for exclusion of certain periods of time in certain situations

These amendments will take effect from 1 June 2016.

[Clause 68]

Extension of time-limit for completing TP Assessments in certain circumstances – Section 92CA

As per Section 92CA(3A) of the Act, the TPO has to pass his order 60 days prior to the date on which the limitation for making assessment expires. Explanation 1 to Section 153 of the Act enumerates situations where the periods involved therein shall be excluded to calculate the time limit for completion of assessments. Clause (ii) thereof covers the period during which the assessment proceeding is stayed by an order or injunction of any court. Clause (viii) thereof deals with situations where a reference for exchange of information has been made by the competent authority from foreign jurisdictions.

To harmonize the time-limit for completion of assessments as provided under Section 153 of the Act with Section 92CA(3A), it has been proposed to amend sub-section (3A) of Section 92CA to provide that where assessment proceedings are stayed by any court or where a reference for exchange of information has been made by the competent authority, the time available to the TPO for making an order after excluding the time for which assessment proceedings were stayed or the time taken for receipt of information, as the case may be, is less than 60 days, then such remaining period shall be extended to 60 days.

While it is definitely desirable that assessments are completed expeditiously to reap the benefits of automation and efficiency in the tax department, it must also be duly ensured that situations where the TPO is genuinely hindered from conducting the proceedings do not come in the way of a fair determination of the arm’s length price. This proposal of the Revenue is a welcome step towards rationalization of time-limit for concluding the TP assessments.

The amendment will take effect from 1 June 2016.

[Clause 46]

Rationalisation of time limit for assessment in search cases – Section 153B It is proposed to amend the time limit for completion of assessments made in cases covered under Section 153A or Section 153C to bring it in sync with the new time limits provided for other cases. Therefore, in order to simplify the provisions of Section 153B by retaining only those provisions that are relevant to the current provisions of the Act, this provision is proposed to be substituted with the following changes in time limits:

(i) The limitation for completion of assessment under Section 153A, in respect of each AY falling within 6 AYs referred to in clause (b) of sub-section (1) of Section 153A and in respect of the AY relevant to the previous year in which search is conducted under Section 132 or requisition is made under Section 132A will be changed from existing 2 years to 21 months from the end of the


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FY in which the last of the authorisation for search under Section 132 or for requisition under Section 132A was executed.

(ii) The limitation for completion of assessment in case of other person referred to in Section 153C shall be changed from the existing 2 years to 21 months from the end of the FY in which the last of the authorisation for search under Section 132 or requisition under Section 132A was executed or 9 months (changed from the existing 1 year) from the end of the FY in which the books of account or documents or assets seized or requisition are handed over under Section 153C to the AO having jurisdiction over such other person, whichever is later.

[Clause 69]

Providing legal framework for automation of various processes and paperless assessment – Section 282A Extant provisions of Section 282A provide that the notices or documents would have to be signed in manuscript by the issuing Income-tax Authority. It is proposed to provide that notices or and other documents can also be communicated in electronic form by the authority in accordance with such procedures as may be prescribed. Thus the notices and documents can be communicated to the assessee electronically and not mandatorily in hard paper formats.

It is also proposed to amend the existing provisions of Section 2 by inserting a new clause (23C) to define the term “hearing” to include communication of data and documents through electronic mode.

This amendments will take effect from the 1 June 2016.

[Clause 3 and 109]

Provision for providing bank guarantee to avoid attachment - Section 281B

The existing provisions of Section 281B empower the AO to provisionally attach any property of the

assessee during the pendency of assessment or reassessment proceedings for protecting the interest of revenue.

The Income Tax Simplification Committee (Easwar Committee) had recommended that provisional attachment of property could be substituted by a bank guarantee subject to fulfillment of certain conditions. Considering the above recommendation, it is proposed that the AO shall revoke provisional attachment of property made under sub-section (1) of the aforesaid section in a case where the assessee furnishes a bank guarantee from a scheduled bank, for an amount not less than the fair market value of such provisionally attached property or for an amount which is sufficient to protect the interests of the revenue.

It is also proposed to introduce sub-section 4 to sub-section 9 so as to provide guidance on procedural aspects in relation to bank guarantee in order to protect revenue’s interest.

YY On reference by the AO the valuation officer shall estimate the fair market value of the property and submit his report to the AO within 45 days

YY In order to ensure revocation of attachment of property in lieu of bank guarantee in a time bound manner, it is proposed to provide that an order revoking the attachment be made by the AO within 15 days of receipt of such guarantee, and in a case where a reference is made to the Valuation Officer, within 45 days from the date of receipt of such guarantee

YY AO is also empowered to invoke bank guarantee to recover the amount on failure of the assessee to make the payment specified in the notice of demand or on failure of the assessee to renew/furnish a new guarantee 15 days before the expiry of the guarantee and the realization shall be adjusted against the existing demand and the balance amount shall be deposited in a specified account


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YY AO is also authorized to release the guarantee where he is satisfied that guarantee is not required anymore to protect the interests of the revenue

Being an administrative matter it appears that the report of the Valuation Officer can at best be challenged only before the Departmental authorities.


[Clause 108]

Providing Time limit for disposing applications made by assessee – Sections 273A and 273AA or 220(2A)Under the existing provisions no time limit has been provided for passing of orders by the respective authorities under Section 220 [for reducing or waiving the amount of interest paid or payable under Section 220(2)] or under Sections 273A [for reducing or waiver of penalty in certain cases] or under Section 273AA [to grant immunity from penalty]. Further, these provisions do not specifically mandate that assessee be given an opportunity of being heard in case such application is rejected by an authority.

In order to rationalise the provisions and provide for specific time-line, following amendments to the existing provisions have been proposed:

Orders under Section 220(2A), Section 273A(4A) and Section 273AA(3A) will have to be passed by the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner, accepting or rejecting application of an assessee - within 12 months from the end of the month in which such application is received

It is also proposed to provide that no order rejecting the application of the assessee under Section 220(2A), Section 273A or Section 273AA shall be passed without giving the assessee an opportunity of being heard.

However, in respect of applications pending as on 1 June 2016, orders under said sections will have to be passed on or before 31 May 2017.


[Clause 88,104 and 105]

Taxation of Non-compete fees and exclusivity rights in case of Profession – Section 28 and Section 55

The existing provision of clause (va) of Section 28 of the Act include within the scope of “profit and gains of business or profession” any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business; or not to share any know how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services and is chargeable to tax as business income. Further, the provisions clarify that receipts for transfer of right to manufacture, produce or process any article or thing or right to carry on any business, which are chargeable to tax under the head “Capital gains”, would not be taxable as profits and gains of business or profession.

It is proposed to amend clause (va) of Section 28 of the Act to bring the non-compete fee received/receivable which are recurring in nature in relation to not carrying out any profession, within the scope of Section 28 of the Act. Further, it is also proposed to amend the proviso to clarify that receipts for transfer of right to carry on any profession, which are chargeable to tax under the head “Capital gains”, would not be taxable as profits and gains of business or profession.

It is also proposed to amend Section 55 so as to provide that the ‘cost of acquisition’ and ‘cost of improvement’ for working out “Capital gains” on capital receipts arising out of transfer of right to carry on any profession shall also be taken as ‘nil’

[Clause 12 and 33]


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Rationalisation of scope of tax incentive – Section 32ACUnder the existing dispensation an assessee company engaged in manufacture or production of article or thing is eligible for investment allowance at the rate of 15% on investments made in new plant and machinery exceeding ` 25 crores provided acquisition and installation of new machinery and plant is made in the same previous year. The incentive is available upto 31 March 2017.

In order to remove the hardship caused due to the requirement of satisfaction of dual condition of acquisition and installation of new machinery and plant in the same previous year, an amendment is proposed in sub-section 1A of Section 32AC to provide that the acquisition of new plant and machinery exceeding ` 25 crores made in a previous year may be installed in the succeeding year but upto 31 March 2017 and such new plant & machinery would be eligible for investment allowance under the provisions of Section 32AC in the year of installation.

[Clause 14]

Rationlisation of provisions of Section 50C in case of sale consideration fixed under agreement executed prior to the date of registration of immovable property – Section 50

Amendment is proposed to the provisions of Section 50C to provide that where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration of the property are not the same, the stamp duty value on the date of the agreement may be taken for the purpose of computing the full value of consideration.

The proposed amendment is pursuant to the observation in this regard of Hon’ble Justice Easwar Committee on Tax Simplification.

It is further proposed that the provision shall apply only in a case where the amount of consideration referred to in the agreement or a part thereof has been paid by way of an account payee

cheque/draft or use of electronic clearing system through a bank account on or before the date of agreement for the transfer of immovable property.

[Clause 30]

Rationalization of penalty provisionsUnder the existing provisions, penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under Section 271(1)(c) of the Act. In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions, it is proposed that Section 271 shall not apply to and in relation to any assessment for the AY commencing on or after 1 April 2017. Effective from this date penalty shall be levied under the newly inserted Section 270A. This section provides for the levy of penalty in cases of under-reporting and misreporting of income.

Section 270A seeks to provide that the AO, Commissioner (Appeals) or the Principal Commissioner or Commissioner may levy a penalty if a person has under reported his income.

It is proposed that a person shall be considered to have under reported his income if,–

(a) the income assessed is greater than the income determined in the return processed under Section 143(1)(a); or

(b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished; or,

(c) the income reassessed is greater than the income assessed or reassessed immediately before such re-assessment; or,

(d) the amount of deemed total income assessed or reassessed as per the provisions of Sections 115JB or 115JC, as the case may be, is greater than the deemed total income determined in the return processed under Section 143(1)(a); or,

(e) the amount of deemed total income assessed as per the provisions of Sections 115JB or 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed; or,


[55]

(f) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

The amount of under-reported income is proposed to be calculated in different scenarios discussed below. In a case where a return is furnished and an assessment is made for the first time the amount of under reported income in case of all persons shall be the difference between the assessed income and the income determined under Section 143(1)(a). In a case where no return has been furnished and the return is furnished for the first time, the amount of under-reported income is proposed to be:

(i) for a company, firm or local authority, the assessed incomes

(ii) for a person other than company, firm or local authority, the difference between the assessed income and the maximum amount not chargeable to tax

In the case of any person, where income is not assessed for the first time, the amount of under reported income shall be the difference between the income assessed or determined in such order and the income assessed or determined in the order immediately preceding such order.

It is further proposed that in a case where under reported income arises out of determination of deemed total income in accordance with the provisions of Section 115JB or Section 115JC, the amount of total under reported income shall be determined

in accordance with the following formula–

(A – B) + (C – D)

where,

A = the total income assessed as per the provisions other than the provisions contained in Section 115JB or Section 115JC

(herein called general provisions);

B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under reported income;

C = the total income assessed as per the provisions contained in Section 115JB or Section 115JC;

D = the total income that would have been chargeable had the total income assessed as per the provisions contained in Section 115JB or Section 115JC been reduced by the amount of under reported income.

However, where the amount of under reported income on any issue is considered both under the provisions contained in Section 115JB or Section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

Where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed.

Calculation of under-reported income in a case where the source of any receipt, deposit or investment is linked to an earlier year is proposed to be provided based on the existing Explanation 2 to sub-section (1) of Section 271 (1).

It is also proposed that the under-reported income under this section shall not include the following cases:

(i) where the assessee offers an explanation and the income-tax authority is satisfied that the explanation is bona fide and all the material facts have been disclosed

(ii) where such under-reported income is determined on the basis of an estimate, if the accounts are correct and complete but the method employed is such that the income cannot properly be deducted therefrom

(iii) where the assessee has, on his own, estimated a lower amount of addition or disallowance on the issue and has included such amount in the computation of his income and disclosed all the facts material to the addition or disallowance


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(iv) where the assessee had maintained information and documents as prescribed under Section 92D, declared the international transaction under Chapter X and disclosed all the material facts relating to the transaction

(v) where the undisclosed income is on account of a search operation and penalty is leviable under Section 271AAB

It is proposed that the rate of penalty shall be 50% of the tax payable on under-reported income. However in a case, where under reporting of income results from misreporting of income by the assessee, the person shall be liable for penalty at the rate of 200% of the tax payable on such misreported income. The cases of misreporting of income have been specified as under:

(i) misrepresentation or suppression of facts

(ii) non-recording of investments in books of account

(iii) claiming of expenditure not substantiated by evidence

(iv) recording of a false entry in books of account

(v) failure to record any receipt in books of account having a bearing on total income

(vi) failure to report any international transaction or deemed international transaction under Chapter X

It is also proposed that in case of a company, firm or local authority, the tax payable on under reported income shall be calculated as if the under-reported income is the total income. In any other case the tax payable shall be 30% of the under-reported income.

It is also proposed that no addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other AY.

Consequential amendments have been proposed in Sections 119, 253, 271A, 271AA, 271AAB, 273A and 279 to provide reference to the newly inserted Section 270A.

The working of the provision has been illustrated through an example in the Bill.

[Clause 62, 93, 96, 98, 99, 100, 101, 104 & 107]

Immunity from imposition of penalty – Sections 249 and 270AAClause 97 of the Bill seeks to insert a new Section 270AA in the Act relating to immunity from imposition of penalty etc. It provides inter alia that an assessee may make an application to the AO for grant of immunity from imposition of penalty under Section 270A and initiation of proceedings under Section 276C, provided he pays the tax and interest payable as per the order of assessment or reassessment within the period specified in such notice of demand and does not prefer an appeal against such assessment order. The assessee can make such an application within 1 month from the end of the month in which the order of assessment or reassessment is received in the form and manner, as may be prescribed. It is proposed that the AO shall, on fulfillment of the above conditions and after the expiry of period of filing appeal as specified in sub-section (2) of Section 249, grant immunity from imposition of penalty and initiation of proceedings under Section 276C, where the penalty proceedings under Section 270A has not been initiated on account of the circumstances of misreporting as laid in sub-section (9) of Section 270A. It is also proposed that the AO is required to pass an order accepting or rejecting such application, as the case may be, within a period of 1 month from the end of the month in which such application is received. However, no order rejecting the application shall be passed by the AO unless the assessee has been given an opportunity of being heard The AO’s order in this regard shall be final.

This provision is applicable in respect of income that is underreported and to income that is misreported as explained in context of Section 270A.

An appeal before the Commissioner (Appeals) is to be made within 30 days of the receipt of the notice of demand relating to an assessment order.


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It is proposed to provide that in a case where the assessee makes an application under Section 270AA of the Act seeking immunity from penalty and prosecution, then, the period beginning from the date on which such application is made to the date on which the order rejecting the application is served on the assessee shall be excluded for.

[Clause 91 and 97]

Penalty for failure to furnish a report or for furnishing an inaccurate report under Section 286 – Section 271GB

The Bill seeks to insert a new Section 271GB in the Act. This new provision deals with penalty for failure to furnish a report or for actually furnishing an inaccurate report under Section 286. The section stipulates that if any reporting entity referred to in Section 286 fails to furnish a report referred to in sub-section (2) of the said Section then, the prescribed authority may direct such entity to pay by way of penalty a sum of ` 25,000 for every day for which the failure continues if the period of failure does not exceed 1 month and ` 15,000 for every day if the default continues beyond 1 month. It further provides that where any reporting entity fails to produce the information and documents within the period allowed under Section 286(6), the prescribed authority may direct that such entity shall pay, by way of penalty, a sum of ` 5,000 for every day during which the failure continues, beginning from the day immediately following the day after the period for furnishing the information and document expires. It also stipulates that if the failures continue after any order directing the person to pay by way of penalty any sum has been served on the entity, then the prescribed authority may direct that such entity shall pay, by way of penalty, a sum of ` 50,000 for every day for which such failure continues, beginning from the date of service of such order. It stipulates that in case a reporting entity provides inaccurate information in the report furnished in accordance with said Section 286(2), and where the entity knows of the inaccuracy at the time of furnishing the report but does not inform the prescribed authority or the entity discovers the inaccuracy

after the report is furnished and fails to inform the prescribed authority and furnish a correct report within a period of 15 days of such discovery, or the entity furnishes inaccurate information or document in response to notice under sub-section (6) of Section 286(6) then, the prescribed authority may direct that such person shall pay, by way of penalty, a sum of ` 5 lakh.

Provisions of Section 273B are also proposed to be amended to provide that the Section 271GB is also included where no penalty shall be imposable where the assessee proves that there was reasonable cause for failure.

[Clause 102 and 106]

Tax Residence for Corporates in India – ‘POEM’ Deferred – Section 6

Last year’s Budget had announced a paradigm shift in the concept of tax residence for corporates in India by introducing the concept of ‘Place of Effective Management’ (POEM). Accordingly, Section 6(3), which deals with the residential status of a Company, was amended to mean that a company shall be an Indian tax resident in any previous year if its place of effective management, in that year, was in India. Through an Explanation, ‘POEM’ was defined to mean a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance, made.

The Explanatory Memorandum to the Bill has stated that a set of guiding principles to be followed in the determination of POEM would be issued for the benefit of the taxpayers as well as the tax administration. These guidelines were eventually issued on 23 December 2015 in a draft form, seeking public comments and feedback. By and large, these guidelines, through the provision of certain criteria, sought to test whether the Company’s business was substantively carried out from India or otherwise. However, these guidelines were issued almost towards the sunset of the current fiscal and further, these guidelines raised certain issues that required reconsideration and clarifications. The Final guidelines have not yet


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seen the light of the day. Hence, it was inevitable that the Finance Minister had to postpone the implementation of POEM by a year, which he has done now in the current Budget.

This measure provides some relief to corporates especially those with outbound investments to plan their affairs keeping the requirements of POEM in mind.

Accordingly, POEM will now become applicable for testing corporate tax residency from 1 April 2017 and will apply in relation to AY 2017-18 and subsequent years.

[Clause 4]

Rationalization of certain eligibility conditions for offshore funds – Section 9A

Finance Act, 2015 had introduced Section 9A to the Act, w.e.f. 1 April 2016, which stated that in case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund. Thus, in case of an eligible offshore fund, it could not be said to be an Indian tax resident merely because its fund manager, undertaking fund management activities on its behalf, was situated in India.

The offshore fund was required to comply with certain conditions and stipulations stated in sub-Section 3 of this section. One of the conditions is that the fund should be a resident of a country or a specified territory with which India has signed agreements for providing double taxation relief and/or exchange of pertinent information [clause b]. This requirement has now been proposed to be liberalized. Accordingly, it would now be suffice if the fund has been established or incorporated or registered in a country or a specified territory notified by the Central Government.

Clause k of sub-section 3 stipulated that the fund shall not carry on or control and manage, directly or indirectly, any business in India or from India. Representations had been received from Industry that the latter part of the stipulation

i.e. fund should not manage any business from India ‘restricted the flexibility of operation of funds and focus should be on the nature of activities undertaken in India.’ Acceding to this request from Industry, the Budget proposes to drop this stipulation. Accordingly, now it is proposed that to be eligible, the fund shall not control or manage any business in India.

This step would benefit offshore funds operating in India.

This amendment will take effect from 1 April, 2017 and will accordingly apply in relation to AY 2017-18 and subsequent AYs.

[Clause 6]

Implementation of BEPS Plan, Action 13 – Section 92D & Section 286

In September 2014, the countries participating in the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project published the report on Action 13 titled ‘Guidance on Transfer Pricing Documentation and Country-by-Country Reporting’. The OECD’s objectives around BEPS Action 13 centered on revising and bringing in a completely new level of transparency in transfer pricing reporting. This Report described a three-tiered standardized approach to transfer pricing documentation. This standard consists of (i) a master file containing standardized information relevant for all Multinational enterprises (‘MNE’) group members; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a Country-by-Country Report containing certain information relating to the global allocation of the MNE group’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group (the ‘CbC Report’). Taken together, these three documents (CbC Report, Master file and Local file) would require taxpayers to articulate consistent transfer pricing positions and is expected to provide tax administrations with useful information to assess transfer pricing risks, thus facilitating efficient management of their limited resources.


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In February 2015, the OECD released a document providing guidance on the implementation of the CbC Reports. This document sets out guidance on the following matters relating to the implementation of the CbC Report: (i) the timing of preparation and filing of the CbC Report, (ii) which MNE groups should be required to file the CbC Report, (iii) the necessary conditions underpinning the obtaining and the use of the CbC Report by jurisdictions and (iv) the framework for government-to-government mechanisms to exchange CbC Reports together with the work plan for developing an implementation package.

The CbC Report requires MNEs to report annually and for each tax jurisdiction in which they do business; the amount of revenue, profit before income tax and income tax paid and accrued. It also requires MNEs to report their total employment, capital, accumulated earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in. This Report has to be submitted by parent entity of an international group to the prescribed authority in its country of residence and is to be based on consolidated financial statement of the group.

India which is a member of the G-20 grouping, had indicated during the run-up to the proposed adoption of Action 13 that it was likely to implement even more extensive forms of reporting and disclosures than what is proposed by Action 13. This Budget seeks to introduce Action 13 into the Indian TP legislation and implement the OECD guidance almost in toto. With this, India will be the early bird in Asia implementing Action 13 and will join select countries such as Denmark, Netherlands, Spain, Poland, Italy & France who’ve already done so.

The proposed requirement is that MNE based in India having consolidated group turnover of € 750 million (approx. ` 5,395 crores) will be required to submit the prescribed template containing information on the various group companies operating outside India. Thus, CbC reporting for

an international group having Indian parent, for the Previous Year 2016-17, shall apply only if the consolidated revenue of the international group in Previous Year 2015-16 exceeds € 750 million or approx. € 5,395 crore (the equivalent would be determinable based on exchange rate as on the last day of Previous Year 2015-16). In fact, the OECD Guidance Note believes that adoption of € 750 million as the threshold will exclude approx. 85-90% of MNE groups from the requirement to file the CbC Report, but expects the said Report to be filed by MNE groups controlling approx. 90% of corporate revenues.

Similarly, Indian subsidiaries of MNEs based abroad (known as ‘constituent entities’ and this includes the MNE’s PE in India for this purpose) will be required to submit the said information with Indian tax authorities in case their foreign parent does not submit the same with their tax jurisdiction.

The report shall be furnished in prescribed manner and in the prescribed form and would contain aggregate information in respect of revenue, profit & loss before income-tax, amount of income-tax paid and accrued, details of capital, accumulated earnings, number of employees, tangible assets other than cash or cash equivalent in respect of each country or territory along with details of each constituent’s residential status, nature and detail of main business activity and any other information as may be prescribed. This shall be based on the template provided in the OECD BEPS report on Action Plan 13.

Penal provisions have been proposed for defaults in submission of the CbC Reports or inaccurate particulars therein.

Adoption of Action 13 guidance provided by OECD was on expected lines and demonstrates the resolve of the present ruling dispensation in discouraging tax evasion and promoting information sharing. MNEs filing information under this requirement would need to gear up their compliance machinery and ensure consistency in information filed across jurisdictions. Confidentiality of the information reported would be something


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which the MNEs would seek to demand from the Revenue, especially given the price-sensitive and precious corporate information which is involved. All in all, interesting and taxing times ahead for taxpayers, tax consultants and tax administrators – all alike.

[Clauses 47 & 110]

The Bill proposes to introduce a new Chapter XII-EB setting out special provisions relating to tax on accrued income of certain trusts and institutions – Sections 115TD to 115TF

Any voluntary contribution received by a charitable trust or institution or a fund is included in the definition of income. Sections 11 and 12 of the Act provide for exemption to trusts or institutions in respect of income derived from property held under trust and voluntary contributions, subject to various conditions contained in the said sections. The primary condition for grant of exemption is that the income derived from property held under trust should be applied for the charitable purposes, and where such income cannot be applied during the previous year, it has to be accumulated and invested in the modes prescribed and applied for such purposes in accordance with various conditions provided in the section. If the accumulated income is not applied in accordance with the conditions provided in the said section within a specified time, then such income is deemed to be taxable income of the trust or the institution. Section 12AA provides for registration of the trust or institution which entitles them to be able to get the benefit of Sections 11 and 12. It also provides the circumstances under which the registration can be cancelled. Section 13 of the Act provides for the circumstances under which exemption under Section 11 or 12 in respect of whole or part of income would not be available to a trust or institution.

A society or a company or a trust or an institution carrying on charitable activity may voluntarily wind up its activities and dissolve or may also

merge with any other charitable or non-charitable institution, or it may convert into a non-charitable organization. In such a situation, the existing law does not provide any clarity as to how the assets of such a charitable institution shall be dealt with. Under provisions of Section 11 certain amount of income of prior period can be brought to tax on failure of certain conditions. However, there is no provision in the Act which ensure that the corpus and asset base of the trust accreted over period of time, with promise of it being used for charitable purpose, continues to be utilised for charitable purposes and is not used for any other purpose.

In the absence of a clear provision, it is always possible for charitable institutions to transfer assets to a non-charitable institution. There was a need to ensure that the benefit conferred over the years by way of exemption is not misused and to plug the gap in law in this regard.

Accordingly, it is proposed to amend the provisions of the Act and introduce a new Chapter to provide for levy of additional income-tax in case of conversion into, or merger with, any non-charitable form or on transfer of assets of a charitable organisation on its dissolution to a non-charitable institution.

The elements of the regime are:-

(i) The accretion in income (accreted income) of the trust or institution shall be taxable on conversion of trust or institution into a form not eligible for registration u/s 12 AA or on merger into an entity not having similar objects and registered under Section 12AA or on non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved under Section 10(23C) within a period twelve months from dissolution.

(ii) accreted income shall be amount of aggregate of total assets as reduced by the liability as on the specified date. The method of valuation is proposed to be prescribed in rules. The asset and the liability of the charitable organisation which have been charitable organisation within specified time will be excluded while calculating accreted income.


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(iii) The taxation of accreted income shall be at the maximum marginal rate.

(iv) This levy shall be in addition to any income chargeable to tax in the hands of the entity.

(v) This tax shall be final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it shall be leviable even if the rust or institution does not have any other income chargeable to tax in the relevant previous year.

(vi) In case of failure of payment of tax within the prescribed time a simple interest @ 1% per month or part of it shall be applicable for the period of non-payment.

Provisions are also proposed for payment of tax, interest, recovery of tax etc.

These amendments will take effect from 1 June, 2016.

[Clause 60]

Rationalisation of the provisions relating to Appellate Tribunal – Sections 252, 253, 254 and 255

In view of the fact that there are no extra-judicial or administrative duties or difference in the pay scale attached with the post of Senior Vice-president in the Tribunal, it is proposed to omit the reference of “Senior Vice-President”.

In a major liberalisation in line with the decision of the Government to minimise litigation, it is proposed to omit sub-sections (2A) and (3A) of Section 253 to do away with the filing of appeal by the AO against the order of the DRP.

These amendments will take effect from 1 day of June, 2016.

It is also proposed to provide that in cases where Department is already in appeal against the directions of DRP under sub-section (2A) of the Section 253 (as it stood before the amendment of the Finance Act, 2016), no fee will be payable.

This amendment will take effect retrospectively from 1 July, 2012.

The existing provisions sub-section (2) of the Section 254 of the Act, provide that the Appellate Tribunal may rectify any mistake apparent from the record in its order at any time within four years from the date of the order.

In order to bring certainty to the order of ITAT, it is proposed to amend sub-section (2) of Section 254 to provide that the Appellate Tribunal may rectify any mistake apparent from the record in its order at any time within six months from the end of the month in which the order was passed.

The existing provision of sub-section (3) of Section 255, inter alia, provides that a single member bench may dispose of any case which pertains to an assessee whose total income as computed by the AO does not exceed fifteen lakh rupees.

It is proposed to amend the said sub-section (3) so as to provide that a single member bench may dispose of a case where the total income as computed by the AO does not exceed fifty lakh rupees.

These amendments will take effect from 1 day of June, 2016.

[Clauses 92 to 95]

Changes in the due dates for payment of advance tax by non-corporate assessees – Sections 211 and 234C

The advance tax payment schedule for non-corporate assessees, currently, is 30%, 60% and 100% of tax payable on current income to be paid by 15 September, 15 December and 15 March respectively.

It is now proposed to rationalise and prescribe the same advance tax schedule for all corporate and non-corporate assessees, other than an eligible assessee in respect of eligible business under Section 44AD. The advance tax payable by all the assessee would be 15%, 45%, 75% and 100% of tax payable on current income to be paid by 15 June, 15 September, 15 December and 15 March respectively.


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It is also proposed that an eligible assessee in respect of an eligible business referred to in Section 44AD shall be required to pay the whole amount of such advance tax during each financial year on or before the 15th March.

Consequential amendments is also proposed to be made to Section 234C which provides for chargeability of interest for deferment of advance tax to bring it in line with the proposed amendments in Section 211.

It is also proposed that interest under Section 234C shall not be chargeable in case of an assessee having income under the head “Profits and gains of business or profession” for the first time, subject to fulfillment of conditions specified therein.

This amendment will take effect from 1 June 2016.

[Clause 87 and Clause 89]

Payment of interest on refund – Section 244A

Period for grant of interest Section 244A provides that an assessee would be entitled to interest on refund arising out of excess payment of advance tax, TDS or TCS. Interest is granted on such excess payment of tax beginning from 1 April of the AY till the date on which refund is granted.

It is proposed to amend Section 244A to provide that in cases where the return is filed after the due date, the period for grant of interest on refund may begin from the date of filing of return.

Interest on self-assessment tax

It is further proposed to provide that an assessee shall be eligible to interest on refund of self-assessment tax for the period beginning from the date of payment of tax or filing of return, whichever is later, to the date on which the refund is granted. For the purpose of determining the order of adjustment of payments received against the taxes due, the prepaid taxes i.e. the TDS, TCS and advance tax shall be adjusted first.

Additional interest on refund arising out of appeal effect

It is also proposed to provide that where a refund arises out of appeal effect being delayed beyond the time prescribed under Section 153(5) viz. 3 months from the end of month in which appeal order is received, the assessee shall be entitled to receive an additional interest on such refund amount at 3% per annum, for the period beginning from the date following the date of expiry of the time allowed under Section 153(5) to the date on which the refund is granted. Where extension is granted by the Principal Commissioner or Commissioner by invoking proviso to Section 153(5), the period of additional interest, shall begin from the expiry of such extended period.

These amendments will take effect from 1 June 2016.

[Clause 90]

Extension in the time period for acquisition/construction of property for claiming deduction of interest – Section 24(b)

The existing provision of Section 24(b) provides that interest payable on capital borrowed for acquisition or construction of a house property shall be deducted while computing income from house property. The second proviso to the said clause provides that a deduction of an amount of ` 2,00,000 shall be allowed where a house property has been acquired or constructed with capital borrowed on or after the 1 April 1999 and such acquisition or construction is completed within 3 years from the end of the financial year in which capital was borrowed. It is proposed to extend the said period of 3 years to 5 years.

[Clause 10]

Business losses cannot be set off against deemed undisclosed income – Section 115BBE Existing Section 115BBE provides that the income relating to Section 68 / Section 69 / Section 69A / Section 69B / Section 69C / Section 69D would be taxable at 30% and no deduction in respect


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of any expenditure or allowances in relation to income referred to in the said Sections shall be allowable. The said Section denied adjustment of any expenditure or allowance against the deemed undisclosed income, but was silent on set off of losses.

It is now proposed to amend Section 115BBE to expressly provide that no set off of any loss shall be allowable in respect of income under Section 68 / Section 69 / Section 69A / Section 69B / Section 69C / Section 69D.

[Clause 51]

Concessional tax treatment for royalty income from patent developed and registered in India – Section 115BBF

A new Section 115BBF is proposed to be inserted to provide that any income by way of royalty in respect of a patent, developed and registered in India shall be taxable at concessional rate of 10% (plus applicable surcharge and cess) on the gross royalty. It is further provided that no expenditure or allowance in respect of such royalty income shall be allowed as deduction while computing income from royalty.

The ‘royalty’ would include consideration, including lump sum consideration for transfer of all or any rights (including the granting of a licence) in respect of a patent, or imparting of any information concerning the working of, or the use of a patent or rendering of any services in connection with such activities.

The benefit of Section 115BBF is available only to a person resident in India and who is a patentee. The term ‘patentee’ has been defined to mean a person, being the true and first inventor of the invention and whose name is entered on the patent register as the patentee in accordance with Patents Act, 1970 and includes every such person, being the true and the first inventor of the invention, where more than one person is registered as patentee under Patents Act, 1970 in respect of that patent.

[Clause 52]

Amendment to Income which do not form part of total income – Section 10

Section 10 of the Act lists out various types of income which are not to be included in total income.

Following amendments to Section 10 are proposed:

Clause 12 provides that the accumulated balance due to and becoming payable to an employee participating in a recognised provident fund would be exempt from tax to the extent provided in Rule 8 in Part A of the Fourth Schedule to the Act.

In respect of accumulated balance attributable to employee’s contribution made on or after 1 April 2016 it is proposed to restrict the exemption to 40 percent of such accumulated balance due and payable on withdrawal.

However, the proposed amendment would not apply to employees whose monthly salary does not exceed the amount to be prescribed

Presently, any payment from the National Pension System Trust, at the time of closure of the account or at the time of the employee opting out of the pension scheme is taxable.

Vide new Clause 12AA It is proposed that 40% of the amount so payable would be exempt from tax and only the balance would be taxable.

Any payment from an approved superannuation fund is exempt from tax in the manner indicated in Clause 13. This includes payment in lieu of or in commutation of an annuity on retirement of the employee or his becoming incapacitated prior to such retirement.

It is proposed that only 40% of payment in lieu of or in commutation of an annuity purchased out of contributions made on or after the 1 day of April, 2016, would be exempt and the balance would be taken into account in computing his total income.

It proposed to extend the exemption under Clause 13 to payment from the superannuation


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fund to the account of the employee under the National Pension Scheme notified by the Central Government

Exemption available to interest on Gold Deposit Bonds under Clause 15 is proposed to be extended to interest on deposit certificates issued under the Gold Monetisation Scheme, 2015

Clause 23DA exempts income of a securitisation trust from the activity of securitisation.

Some consequential changes therein are proposed.

Clause 23FC exempts income of a business trust by way of interest received or receivable from a special purpose vehicle referred to therein.

It is proposed to extend the exemption to dividend referred to in the proposed sub-section (7) of Section 115-O

Under Clause 23FD a unit holder would continue to enjoy exemption in respect of distributed income received from the business trust which is of the same nature as interest but not the dividend referred to Clause 23FC

Clause 34 exempts income by way of dividends referred to in Section 115-O.

It is proposed to deny this exemption to dividend from domestic companies chargeable to tax under the proposed Section 115BBDA

Pursuant to a new taxation regime for securitisation trusts and its investors consequential changes are proposed in Clause 35A

Clause 38 exempts income arising from the transfer of a long-term capital asset being equity shares etc. where such transaction is chargeable to securities transactions tax.

It is proposed to do away with the requirement of chargeability to securities transactions tax in the case of a transaction undertaken on a recognised stock exchange located in any International Financial Services Centre and the consideration for such transaction is paid or payable in foreign currency

Definitions of International Financial Services Centre and recognised stock exchange are also proposed to be inserted.

A new Clause 48A is proposed to exempt any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India, subject to signing of an agreement and compliance with certain conditions

A new Clause 50 is proposed to exempt income arising from any specified service provided on or after the date on which the provisions of Chapter VIII of the Finance Act, 2016 comes into force and which is chargeable to equalisation levy under that Chapter

[Clause 7]

Rationalization of tax deduction at Source (TDS) provisions

Under the scheme of deduction of tax at source as provided in the Act, every person responsible for payment of specified sum to any person is required to deduct tax at source at the prescribed rate and deposit it with the Central Government within specified time. However, no deduction is required to be made if the payments do not exceed prescribed threshold limit.

In order to rationalise the rates and base for TDS provisions, the existing threshold limit for deduction of tax at source and the rates of deduction of tax at source are proposed to be revised as follows;

Revision in Threshold limit

– Section 192A (Payment of accumulated balance due to an employee) : increased from ` 30,000 to ` 50,000

– Section 194BB (Winnings from Horse Race) : increased from ` 5,000 to ` 10,000

– Section 194C (Payments to Contractors) : Aggregate annual limit of ` 75,000 increased to ` 1,00,000


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– 194LA (Payment of Compensation on acquisition of certain Immovable Property) :increased from ` 2,00,000 to ` 2,50,000

– 194D (Insurance Commission) : reduced from ` 20,000 to ` 15,000

– 194G (Commission on Sale of Lottery Tickets) : increased from ` 1,000 to ` 15,000

– 194H (Commission or Brokerage) : increased from ` 5,000 to ` 15,000

Revision in rates of TDS

– 194DA (Payment in respect of Life Insurance Policy) : rate reduced from 2% to 1%

– 194EE (Payments in respect of NSS Deposits) : Rate reduced from 20% to 10%

– 194D (Insurance Commission) : Rate reduced from 10% to 5%

– 194G (Commission on Sale of lottery tickets) : Rate reduced from 10% to 5%

– 194H (Commission or Brokerage) : Rate reduced from 10% to 5%

Certain non–operational provisions to be omitted:

– 194K (Income in respect of Units)

– 194L (Payment of Compensation on acquisition of capital asset)

The above revisions / omissions are proposed to take effect from 1 June 2016.

[Clauses 70 – 79]

Place of Effective Management – Section 6(3) and Special Provisions relating to foreign company said to be resident in India – Section 115Jh

The Finance Act, 2015 brought in amendment to the definition of residence of a company in India and provided that a company would be resident in India in any previous year if it is an Indian company or its POEM in that year is in

India. Prior to the amendment a company was resident in India if it was a resident company or the control and management of its affairs was situated wholly in India. POEM is defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made.

In the context of implementation of POEM based residence rule, certain issues, relating to the applicability of current provisions of the Act (like compliance requirement, applicability of specific provisions of the Act relating to advance tax payment, applicability of withholding tax/TDS provisions, computation of total income, set off of losses and manner of application of transfer pricing regime) to a company which is incorporated outside India and has not earlier been assessed to tax in India, have arisen. These compliance requirements would not have been undertaken by the company at the relevant time due to absence of any such requirement under tax laws of the country of incorporation of such company. Similarly, issues of computation of depreciation also arise when in earlier years it has not been subject to computation under the Act.

Problems highlighted also arise due to the fact that a company may be claiming to be a foreign company not resident in India but in the course of assessment, it is held to be resident based on POEM being in fact in India. This determination would be well after closure of the previous year and it may not be possible for the company to undertake many of procedural requirements. In order to provide clarity in respect of implementation of POEM based rule of residence and also to address concerns of the stakeholders, it is proposed to:-

(a) defer the applicability of POEM based residence test by one year and the determination of residence based on POEM shall be applicable from 1 April 2017


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(b) provide a transition mechanism for a company which is incorporated outside India and has not earlier been assessed to tax in India. The Central Government is proposed to be empowered to notify exception, modification and adaptation subject to which, the provisions of the Act relating to computation of income, treatment of unabsorbed depreciation, setoff or carry forward and setoff of losses, special provision relating to avoidance of tax and the collection and recovery of taxes shall apply in a case where a foreign company is said to be resident in India due to its POEM being in India for the first time and the said company has never been resident in India before.

(c) provide that these transition provisions would also cover any subsequent previous year upto the date of determination of POEM in an assessment proceedings. However, once the transition is complete, then normal provision of the Act would apply.

(d) provide that in the notification, certain conditions including procedural conditions subject to which these adaptations shall apply can be provided for and in case of failure to comply with the conditions, the benefit of such notification would not be available to the foreign company.

(e) provide that every notification issued in exercise of this power by the Central Government shall be laid before each house of the Parliament.

[Clauses 4, 54 and 235]

Dividend Distribution Tax on distribution made by a Special Purpose vehicle to Business Trust or by a company being a unit of an International Financial Services Centre – Section 115-OThe Finance (No. 2) Act, 2014 introduced a specific taxation regime for business trusts comprising of Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (Invits)

regulated by SEBI. This regime was introduced for focussing on the infrastructure and real estate sectors by providing a tax pass-through status to REITs and Invits.

Under the SEBI regulation, these business trusts can hold the income generating asset either directly or through a Special Purpose Vehicle (SPV). The SPV should hold at least 80% of the assets in properties and not invest in other SPV. The existing tax regime provides that in case of REITs, the income by way of interest paid by SPV being a company to REIT is given pass through i.e. it is not taxed at the level of REIT but in the hands of respective investors of REIT. The rental income from directly held assets by REIT is also allowed a pass through. In respect of assets held through an SPV, if the SPV is a company then the company pays normal corporate tax and thereafter when the income is distributed to the REIT being a shareholder, it suffers dividend distribution tax (DDT) which is paid by the SPV and thereafter the income is exempt both in the hands of REIT and also its investors.

It has been represented by the stakeholders that levy of DDT at the level of SPV when it distributes its current income to the business trust makes the business trust structure tax inefficient and adversely impacts the rate of return for the investor. This is more so, as under SEBI regulations both the SPV and business trust are obligated to distribute 90% of their operating income to the investors, whereas in case of a normal real estate company, there is no requirement of such annual distribution of dividends. It has been represented that because of the additional levy of DDT and associated tax inefficiency, these initiatives have not yet taken off. In order to further rationalize the taxation regime for business trusts and their investors, it is proposed to provide a special dispensation and exemption from levy of DDT. The salient features of the proposed dispensation are:-

(a) exemption from levy of DDT in respect of distributions made by the SPV to the business trust;


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(b) such dividend received by the business trust and its investor shall not be taxable in the hands of trust or investors;

(c) the exemption from levy of DDT would only be in the cases where the business trust either holds 100% of the share capital of the SPV or holds all of the share capital other than that which is required to be held by any other entity as part of any direction of any Government or specific requirement of any law to this effect or which is held by Government or Government bodies; and

(d) the exemption from the levy of DDT would only be in respect of dividends paid out of current income after the date when the business trust acquires the shareholding referred in (c) above in the SPV. The dividends paid out of accumulated and current profits upto this date shall be liable for levy of DDT as and when any dividend out of these profits is distributed by the company either to the business trust or any other shareholder.

The above amendment is proposed to take effect from 1 June 2016.

It is also proposed that no DDT shall be chargeable in respect of the total income of a company being a unit located in International Financial Services Centre, deriving income solely in convertible foreign exchange, for any AY on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after 1 April 2017 out of its current income, either in the hands of the company or the person receiving such dividend.

[Clauses 7, 55, 61 and 80]

Amendments to Section 47 relating to transactions not regarded as transfer – Section 47

YY New clause (vii c) is sought to be inserted to provide that any redemption of Sovereign Gold Bond issued by the RBI under Sovereign Gold Bond Scheme, 2015 in the hands of individual shall not be considered as transfer.

The amendment seeks to bring in parity in tax treatment between gold in physical form and Sovereign Gold Bond.

YY New clause (ea) in clause (xiiib) is sought to be inserted to provide that for availing tax neutral conversion of a Private limited or an Unlisted Public Company into Limited Liability Partnership (LLP), the value of the total assets in the books of account of the company in any of the three previous years preceding the previous year in which conversion takes place, should not exceed five crore rupees.

YY New clause (xix) is sought to be inserted in the Section to provide that any transfer by a unit holder of capital asset being unit or units held by him in the consolidating plan of a mutual fund scheme in consideration of allotment of unit or units in the consolidated plan of that scheme of the mutual fund shall not be considered as transfer for capital gains tax purposes. This amendment is proposed to extend capital gains tax exemption on merger or consolidation of different plans in a mutual fund scheme in the light of enabling guidelines issued by Securities Exchange Board of India (SEBI) for consolidation of mutual fund plans within a scheme.

The expressions consolidating plan, consolidated plan and mutual fund have been defined for the purposes of said new clause (xix).

[Clause 28]

Benefit of additional depreciation of 20% extended to the assessee engaged in the business of transmission of power – Section 32

Existing Section 32(1)(iia) allows benefit of additional depreciation of 20% of cost of new plant or machinery acquired and installed during


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the year, to assessees engaged, among others, in the business of generation and or generation and distribution of power. This is over and above the deduction allowed towards general depreciation under Section 32(1)(ii).

It is now proposed to extend this benefit to assessees engaged in the business of transmission of power.

[Clause 13]

Payments made to Railways covered under Section 43B

Existing Section 43B allows deduction for payment made by way of tax, cess, duty or fee, employer contribution to provident fund etc. in the previous year in which the amount is actually paid or before the due date of furnishing of return of income, irrespective of the method of accounting followed by a person.

It is now proposed to include amounts payable to Indian Railways for use of railway assets within the ambit of Section 43B. The assessee would accordingly be allowed deduction for such expenses only on payment basis.

[Clause 23]

Section 272A – Amendment in provisions of Penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections, etc.

It is proposed that penalty u/s 272A shall also be levied for default of failure to comply with a notice under sub-section (1) of Section 142 or sub-section (2) of Section 143 or to comply with a direction issued under sub-section (2A) of Section 142. Such penalty shall be levied by the income tax authority who had issued such notice or direction.

Clause (c) is being proposed to be amended by the Finance Bill, 2016, to replace the words “place and time” with “place and time; or”.

[Clause 103]

Carry forward and set off of loss computed in respect of Specified Business under Section 73A of the Act – Section 80As per Sections 80 and 139(3) of the Act a loss which has remained unabsorbed under the head “Profits and gains of business or profession”, in respect of a speculation business, under the head “Capital gains” and in the activity of owning and maintaining race horses is allowed to be carried forward and set off against the income determined under the respective head of income of subsequent years, provided that the income tax return pertaining to the year of incurrence of such loss has been filed within the due date prescribed under Section 139(1) of the Act. However, there is no similar condition of filing the income tax return in time prescribed for the purpose of carry forward and set off of loss incurred in respect of any specified business as referred to in Section 35AD. In order to rationalise these provisions, it is proposed to amend Section 80 whereby the loss determined as per Section 73A in respect of specified business as referred to in Section 35AD of the Act shall not be allowed to be carried forward and set off, if such loss has not been determined in pursuance of a return filed in accordance with the provisions of Section 139(3).

These amendments will take effect retrospectively from the AY 2016-17 and subsequent years.

[Clauses 35]

Tax Treatment on withdrawal from National Pension Scheme by Nominee on death of the assessee – Section 80CCDThe amount received by the nominee, on the death of the assessee, at the time of closure or his opting out of the National Pension Scheme shall be exempt from tax in the hands of such nominee.

[Clauses 36]

Deduction in respect of interest on loan taken for residential house property – Section 80EEThe existing provisions of Section 80EE provide a deduction of up to ` 1 lakh in respect of interest paid on loan by an individual for acquisition of a residential house property. This benefit was


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available for the two AYs i.e. AYs 2014-15 and 2015-16. In furtherance of the goal of the Government of providing ‘housing for all’, it is proposed to encourage first-home buyers to avail home loans, by providing additional deduction in respect of interest on loan taken for residential house property from any financial institution up to ` 50,000. This incentive is proposed to be extended to a residential house property of a value less than ` 50 lakhs in respect of which a loan of an amount not exceeding ` 35 lakhs has been sanctioned during the period from the 1April 2016 to 31 March 2017. It is also proposed to extend the benefit of deduction till the repayment of loan continues. The deduction under the proposed section is over and above the limit of ` 2 lakhs provided for a self-occupied property under Section 24 of the Act.

[Clause 37]

Deduction in respect of rents paid – Section 80GGThe existing provisions of Section 80GG provide for a deduction of any expenditure incurred by an individual assessee in excess of 10% of his total income towards payment of rent in respect of any furnished or unfurnished accommodation occupied by him for the purposes of his own residence if he is not granted house rent allowance by his employer, to the extent such excess expenditure does not exceed ` 2,000 per month or 25% of his total income for the year, whichever is less, subject to other conditions as prescribed therein.

In order to provide relief to the individual assessees, it is proposed to increase the maximum limit of deduction from existing ` 2,000 per month to ` 5,000 per month.

[Clause 38]

Deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, development of special economic zone and production of mineral oil and natural gas – Sections 80IA, 80IAB and 80IBAt present, 10 / 7 years tax holiday is available on the profits derived by the industrial undertakings

or enterprises engaged in infrastructure development, development of special economic zone and production of mineral oil and natural gas. The Finance Minister in his Budget Speech, 2015 indicated that the rate of corporate tax will be reduced from 30% to 25% over the next 4 years along with corresponding phasing out of exemptions and deductions. In order to implement this decision, it is proposed to phase out the above tax holidays by inserting a sunset clause whereby no deduction shall be available if the above specified activity commences on or after 1 April 2016, i.e. with effect from AY 2017-18 onwards.

[Clause 39, 40 and 42]

Rebate of income tax in case of certain individual assessees – Section 87AThe existing provisions of Section 87A of the Act, provide that an individual resident in India whose total income does not exceed ` 5 lakhs would be eligible for a rebate of income tax of an amount equal to 100% of income-tax or an amount of ` 2,000, whichever is less. With the objective to provide relief to resident individuals in the lower income slab, it is proposed to increase the maximum amount of the above rebate from existing ` 2,000 to ` 5,000.

[Clause 45]

Tax on distribution of income by domestic company on buy-back of its shares – Section 115QAAs per Section 115QA of the Act income distributed on account of buy back of unlisted shares by a company is subject to the levy of additional Income-tax @ 20%. The distributed income has been defined in the section to mean the consideration paid by the company on buy back of shares as reduced by the amount which was received by the company for issue of such shares. Buyback has been defined to mean the purchase of a company of its own shares in accordance with the provisions of Section 77A of the Companies Act, 1956.

As the provisions of this Section of the Act is not in pace with the repeal of the old Companies Act. Recently doubts have been raised regarding the effect of buybacks undertaken by the company under the new Companies Act, 2013


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and applicability of provisions of Section 115QA to such transactions. Further, there is no clarity in determination of consideration received by the company at the time of issue of shares being bought back by the company, especially where shares may have been issued by the company in tranches, for different considerations, at different point of time or may have been issued in lieu of existing shares of another company under amalgamation, merger or demerger.

For the purposes of Section 115QA, it is the effect of buyback being in the nature of distribution of income which is relevant rather than particular provision of the law relating to companies under which it has been undertaken. Further, lack of clarity in the manner of determination of consideration received by the company would lead to avoidable disputes and also presents a tax arbitrage opportunity of scaling up of consideration particularly under a tax neutral business reorganisation followed by buyback of shares.

In order to provide clarity and remove any ambiguity on the above issues, it is proposed to amend Section 115QA to provide that the provisions of this section shall apply to any buy-back of unlisted share undertaken by the company in accordance with the new provisions of the law relating to the Companies and not necessarily restricted to only Section 77A of the Companies Act, 1956. It is further proposed to provide that for the purpose of computing distributed income, the amount received by the company in respect of the shares being bought back shall be determined in the prescribed manner. The rules would thereafter be framed to provide for manner of determination of the amount in various circumstances including shares being issued under tax neutral reorganisations and in different tranches.

The amendment is proposed to take effect from 1 June 2016.

[Clause 56]

New Taxation Regime for securitisation trust and its investors – Sections 115TA, 115TC and 115TCA

The Finance Act, 2013 introduced a special taxation regime in respect of income of the

securitisation trusts and the investors of such trusts under Chapter-XII-EA. The regime provides that income distributed by the securitisation trust to its investors (25% in the case of individual/HUF and 30% in other cases) shall be subject to a levy of additional tax to be paid by the securitisation trust within 14 days of distribution of income. Further, no distribution tax is to be levied if the distribution is made to an exempt entity. Consequent to the levy of distribution tax, the income of the investor, received from the securitisation trust, is exempt under Section 10(35A) of the Act and the income of securitisation trust itself is exempt under Section 10(23DA) of the Act.

It has been represented that the trusts set up by reconstruction companies or the securitisation companies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and regulated by the Reserve Bank of India (RBI) are not covered under the above special tax regime, although such trusts are also engaged in securitisation activity. It has been represented that the existing regime providing for final levy in the form of distribution tax is tax inefficient for the investors specially the banks and financial institutions. Disallowance of expenditure in respect of income received from a securitisation trust increases the effective rate of taxation. Further, the non-resident and resident investors are unable to take benefits of their specific tax status.

In order to rationalise the tax regime for securitisation trust and its investors, and to provide tax pass through treatment, it is proposed to discontinue with the current regime of distribution tax in case of distribution made by securitisation trusts with effect from 1 June 2016 and substitute the existing special regime for securitisation trusts by a new regime from AY 2017-18 having the following elements: -

(i) The new regime would apply to the securitisation trust being an SPV defined under SEBI (Public Offer and Listing of Securitised Debt Instrument) Regulations, 2008 or SPV as defined in the guidelines on securitisation of standard assets issued by RBI or being setup by a securitisation company or a reconstruction company in accordance with the SARFAESI Act;


[71]

(ii) The income of the securitisation trust would continue to be exempt; The income from trust however would not be exempt in the hands of the investor

(iii) The income accrued or received from the securitisation trust shall be taxable in the hands of investor in the same manner and to the same extent as it would have happened had investor made investment directly in the underlying assets and not through the trust;

(iv) Tax deduction at source shall be effected by the securitisation trust at the rate of 25% in case of payment to resident investors who are individual or HUF and @ 30% in case of others. In case of payments to non-resident investors, the deduction shall be at rates in force;

(v) The facility for the investors to obtain low or nil deduction of tax certificate would be available; and

(vi) The trust shall provide breakup regarding nature and proportion of its income to the investors and also to the prescribed income-tax authority.

These amendments are proposed to take effect from 1 June 2016.

[Clauses 3,7,57,58,59, 82 & 83]

Tax relief to Sovereign Gold bonds and Rupee denominated bonds held by non-residents – Section 48YY It is proposed to provide indexation benefit

in computing long term capital gains arising on transfer of Sovereign Gold Bonds issued under Sovereign Gold Bond Scheme 2015. The benefit would be available to all cases of assessees.

YY In order to promote investment by a non-resident in rupee denominated bonds of an Indian company in the light of the RBI permission granted to such invetsments in rupee denominated bonds an amendment is proposed to ignore the gains arising on appreciation of rupee against foreign currency at the time of computation of full value of consideration on redemption of rupee denominated bonds of the Indian company subscribed by the non-resident bearing the currency fluctuation risk.

[Clause 29]

Clarificatory amendment w.r.t. certain activity related to Diamond trading – Section 9The Commerce Ministry had announced in August 2015 that it will soon set up a special notified zone (SNZ) to facilitate imports and trading of rough diamonds which will boost the gems and jewellery sector. Accordingly, the DGFT had already issued the necessary notifications for setting up of the SNZs. The SNZ was envisaged to be a trading centre where leading foreign diamond mining companies (FMCs) could import and trade in rough diamonds without inviting income-tax assessments. The move was aimed to help develop the country as a trading hub for rough diamonds. Presently, diamond manufacturers of Gujarat and elsewhere travel to Dubai, Belgium or Israel to purchase raw materials, thereby ramping up cost.

Under the extant Section 5 (Total Income) read with Section 9 (Incomes which are deemed to accrue or arise in India & Business Connection), the activity of FMC of mere display of rough diamonds even with no actual sale taking place in India could lead to creation of business connection in India of the FMC. This potential tax exposure had been an area of concern for the FMCs who were willing to undertake these activities in India.

In order to facilitate the FMCs to undertake activity of display of uncut diamond (without any sorting or sale) in the SNZ, it has been proposed to amend Section 9 of the Act to provide that in the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India to it through or from the activities which are confined to display of uncut and unassorted diamonds in a Special Zone notified by the Central Government in the Official Gazette in this behalf.

This is a welcome measure demonstrating the sincere intent of the Government to promote India as a trading hub for rough diamonds.

This amendment will take effect retrospectively from 1 April 2016 and will accordingly apply in relation to AY 2016-17 and subsequent AYs

[Clause 5]


[72]

Sunset Clause provided for units operating from SEZs – Section 10AAThe Finance Minister in his Budget Speech, 2015 had indicated that the rate of corporate tax will be reduced from 30% to 25% over the next four years along with corresponding phasing out of exemptions and deductions. Accordingly, in November 2015, the CBDT had proposed removal of profit linked deductions to SEZs by 31 March, 2017 and had sought suggestions from the stakeholders in this regard. With a view not to disturb the status quo and to provide a fillip to the struggling SEZs in these trying times, the Budget has refrained from fast-tracking the sunset clause for the Section 10AA benefits. It has now been proposed that no deduction shall be available to units commencing manufacture or production of article or thing or start providing services on or after 1 April, 2020 (from PY 2020-21 onwards).

This welcome step is expected to give a fillip to the real estate sector i.e. the SEZs and promote the ‘Make in India’ campaign.

[Clause 8]

Deduction of expenditure incurred towards specified services only on payment of Equalisation levy – Section 40A new Chapter is proposed to be inserted titled as ‘Equalisation levy’ to provide for an equalisation levy of 6% on the amount of consideration for specified services received or receivable by a non-resident not having a PE in India, from a resident in India carrying on business or profession or from a non-resident having PE in India.

In order to ensure timely collection of Equalisation levy, it is proposed to amend Section 40(a) to provide that the expenses incurred by the assessee towards specified services chargeable to equalisation levy shall not be allowed as deduction, where such levy has not been deducted or after deduction, has not been paid to the credit of the Central Government on or before the due date of filing tax return. It is further provided that where Equalisation levy has been deducted in a subsequent year or has been deducted during the previous year but paid after the due date of filing tax return, the said payment towards specified services would be allowed as deduction in the year in which Equalisation levy has been paid.

This amendment will take effect from 1 June 2016.

[Clause 22]

Threshold limit for Tax Audit for person carrying on profession increased – Section 44AB Existing Section 44AB requires every person carrying on a profession to get his accounts audited if the total gross receipts in the previous year exceeds ` 25 Lakhs. It is now proposed to increase the threshold limit for Tax Audit for person carrying on profession to ` 50 Lakhs.

[Clause 25]

Threshold limit for presumptive taxation for person carrying on business increased – Section 44AD

Existing Section 44AD provides for a presumptive taxation scheme for an eligible business. Where in the case of an eligible assessee engaged in an eligible business having total turnover or gross receipts not exceeding ` 1 crore, a sum equal to 8% of the total turnover or gross receipts, or as the case may be, a sum higher than the aforesaid sum shall be deemed to be profits and gains of such business chargeable to tax.

It is now proposed to increase this threshold limit to ` 2 crores. Further, any expenditure in the nature of salary, remuneration, interest etc. paid to the partner as per clause (b) of Section 40 shall not be allowed as deduction, while computing the income under Section 44AD.

It is further proposed that where an eligible assessee, governed by presumptive taxation regime as per Section 44AD opts out of it before completion of 5 years from the FY in which he first offered income in accordance with Section 44AD, he would not be eligible to claim the benefit of such regime for 5 AYs subsequent to the AY of opting out and would also be required to maintain books of accounts as per Section 44AA.

The said assessee governed by Section 44AD would be required to pay advance tax by 15 March of the FY.

[Clause 24 and Clause 26]


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Presumptive taxation scheme extended to person carrying of profession – Section 44ADASection 44ADA is proposed to be inserted to provide for estimating the income of an assessee engaged in any profession such as legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other notified profession and whose total gross receipts does not exceed ` 50 lakhs in a FY. As per the proposed Section 44ADA, income would be a sum equal to 50% of the total gross receipts or as the case may be, a sum higher than the aforesaid sum earned by the assessee. While computing income as per Section 44ADA, permissible deductions under Sections 30 to 38 would be deemed to be allowed.Proposed Section 44ADA will apply only to resident assessees who are an individual, HUF or partnership firm and would not apply to LLP.It is also proposed that the assessee governed by Section 44ADA will not be required to maintain books of account under Section 44AA or to get the accounts audited under Section 44AB unless the assessee claims that the profits and gains from the aforesaid profession are lower than the profits and gains deemed to be his income under Section 44ADA.

[Clause 27]

Central Government subsidy or grant or cash assistance, etc. towards corpus of fund established for specific purposes exempted from income definition – Section 2(24) Section 2(24) of the Act provide that the income shall include assistance in the form of a subsidy or grant by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant which is to be reduced from the actual cost of the asset in accordance with the provisions of Explanation 10 to Section 43(1) of the Act.It is proposed to amend Section 2(24) of the Act to provide that subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State government shall not form part of income.

[Clause 3]

Taxation of unrealised rent and arrears of rent – Section 25A Sections 25A, 25AA and 25B which were enacted at different point of time, are proposed to be merged into a single Section 25A. As per the proposed Section 25A, the amount of unrealised rent / arrears of rent, realised / received subsequently, shall be charged to income-tax in the financial year in which such rent is realised / received, whether or not the assessee is the owner of the property in that financial year. 30% deduction shall be allowed on such rent subsequently realised / received.

[Clause 11]

Tax to be deducted at rates in force from payments to non-residents towards income in respect of units of investment fund – Section 194LBB The existing provisions requires Tax to be deducted at the rate of 10% in respect of specified income in respect of units of investment funds irrespective of the status of the payee. It is now proposed that in case where the payee is a non-resident (not being a company) or a foreign company TDS u/s 194LBB should be deducted at the rates in force instead of a flat rate of 10%.

Section 197 is also proposed to be amended so as to empower the AO to issue certificate for lower deduction in regard to payments covered under Section 194LBB.

The above revisions / omissions are proposed to take effect from 1 June 2016.

[Clauses 81 and 83]

TDS on income in respect of investment in securitization fund – Section 194LBC It is proposed that where any income is payable to an investor, being a resident, in respect of an investment in a securitisation trust specified in clause (d) of the Explanation to Section 115TCA, the person responsible for making the payment shall, at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon, at the rate of—

(i) twenty-five per cent, if the payee is an individual or a Hindu undivided family;


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(ii) thirty per cent, if the payee is any other person.

Further it is also proposed that where such income is payable to an investor, being a non-resident (not being a company) or a foreign company TDS shall be deducted at the rates in force.

The provision of Section 197 are also proposed to be amended for issuing certificate for lower deduction of tax in such cases.


[Clause 82 and 83]

No TDS u/s 194-I on rent income when such person gives declaration for tax on total income being Nil – Section 197 A The existing section provides that no deduction of tax shall be made under the sections referred to in the said section, if the individuals referred to in the said sections furnish to the persons responsible for paying any income of the nature referred to in specified sections, a declaration in writing in duplicate in the prescribed form and verified in the prescribed manner to the effect that the tax on his estimated total income of the previous year in which such income is to be included in computing his total income will be nil. It is proposed to extend the benefit of Nil deduction of tax at source to Section 194-I requiring deduction of tax at source from rent. The amendments are proposed to take effect from 1 June 2016.

[Clause 84]

Amendment to Section 288 – Appearance by Authorized Representative, consequential to amendment in Section 272A

It is proposed to amend the above section so as to provide that a person on whom a penalty has been imposed under the proposed clause (d) of sub-section (1) of Section 272A of the Income-tax Act [failure to comply with notices or directions etc] shall also not be barred from representing an assessee before any income-tax authority or the Appellate Tribunal.

[Clause 111]

Powers and jurisdiction of Income tax authorities – Section 119 It is proposed to make a reference to Section 270A in Section II9 (2)(a) to enable the Board to issue directions and instructions in respect of Section 270A of the Income-tax Act, as well. The proposed amendment is consequential to the insertion of a new Section 270A in the Act.

[Clause 62]

Jurisdiction of AO not to be questioned – Section 124 It is proposed to provide that in a case where a search is initiated under Section 132 or books of account, other documents or any assets are requisitioned under Section 132A, no person shall be entitled to call in question the jurisdiction of an Assessing Officer after the expiry of one month from the date on which he was served with a notice under Section 153A(1) or Section 153C (2) or after the completion of the assessment, whichever is earlier. This amendment will take effect from 1 June 2016.

[Clause 63]

Power to call for information – Section 133 C and Section 147 It is proposed to amend the Section 133C so as to further provide that the information and documents so obtained by such authority may be processed and the outcome of such processing may be made available to the Assessing Officer for further necessary action, if any. It is proposed to amend Section 147 to provide that income chargeable to tax has escaped assessment where on the basis of information or document received from the prescribed authority under Section 133C(2) it is noticed by the AO that income of the assessee exceeds the maximum amount not chargeable to tax or that the assessee has understated his income or has claimed excessive loss etc. This amendment will take effect from 1 June 2016.

[Clause 64 and 67]

Gold Monetisation Scheme, 2015 – Section 2(14) It is proposed to exclude from the definition of capital asset Deposit Certificates issued under the Gold Monetisation Scheme, 2015 and thereby to exempt them from capital gains tax.

[Clause 3]


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INDIRECT TAXESFM has identified nine pillars such as agricultural and farmer’s welfare, rural sector with emphasis on rural employment, infrastructure and investment, governance and ease of doing business, that will ‘Transform India’ to the next level. Several proposals have been made in the Finance Bill to achieve this objective. Some of which are highlighted below.

Highlights

YY Krishi Kalayan Cess @ 0.5% proposed to be levied on all taxable services thereby the raising the effective rate of tax on services to 15% (w.e.f. 1 June 2016).

YY Service tax exemption for construction of affordable housing up to 60 sq. m. under state and central housing schemes.

YY Existing exemption has been removed there by widening the tax base such as –


Yy Services by way of representation before an arbitral tribunal

Yy Assignment of the right to use the radio frequency spectrum by the Government and any subsequent transfer thereof by a person to another person shall be deemed to be a declared service and hence liable to service tax.

YY Indirect Tax Dispute Resolution Scheme proposed where under an assessee can put to an end to disputed cases pending before Commissioner (A) by paying disputed tax along with interest and penalty @ 25% of penalty ordered by the adjudicating authority.

YY Simplification of provisions relating to reversal of Cenvat credit on inputs / input services used in or in relation to the manufacture of exempted products removed and provision of exempted services.

YY Reduction in the rate of interest payable in case of delay in payment of service tax, excise and customs duty.

YY Provisions relating to distribution of credit by Input Service Distribution has been extended to outsourced manufacturers also.

YY Transactions involving supply of Information Technology Software on a media on which affixing of RSP is obligatory has been exempted from service tax.

YY Number of excise returns to be filed by assessee is proposed to be reduced from 27 to 13 (12 monthly returns and an annual return).

YY Infrastructure Cess upto 4% of the assessable value has been levied on specified vehicles.

YY Clean Environment Cess (formerly known as Clean Energy Cess) enhanced from ` 200 per tonne to ` 400 per tonne.

CUSTOMS

Tax Rate

YY Standard ad valorem rate of BCD has been retained at 10%.

YY No change in the levy of EC and SHEC on BCD.

Amendments to the Customs Act, 1962

Limitation period for issuance of SCN for recovery of duty not levied or not paid or short levied or short paid or erroneously refunded in cases not involving fraud, collusion, willful misstatement or suppression enhanced from one year to two years.

Other Amendments

Interest rates on delayed payment of Customs duty under Section 28AA are being rationalized at 15%.


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Sector specific rate changes and exemptions (w.e.f. 1 March 2016)

Automobiles

Description of goods

Existing BCD Rate

Revised BCD Rate

Golf cars 10% 60%

NIL BCD and 6% excise / CVD being extended on parts of electric vehicles and hybrid vehicles

Available upto 31 March 2016

Without any time limit

Description of “Engine for HV (Atkinson Cycle)” to Engine for xEV (hybrid electric vehicle)” for the purposes of Nil Basic customs Duty and 6% CVD being changed

Applicable BCD NIL

Description of “Engine for HV (Atkinson Cycle)” to Engine for xEV (hybrid electric vehicle)” being changed for the purposes of concessional 6% excise duty

12.50% 6%

Metals


Existing BCD Rate

Revised BCD Rate

Primary aluminium 5% 7.5%

Other aluminium products

7.50% 10%

Zinc alloys 5% 7.5%

Energy (including Renewable Energy)


Existing BCD Rate

Revised BCD Rate

Coal and Briquette 10% 2.5%

Lignite, Peat, Coke and Semi Coke, whether or not agglomerated

10% 2.5%

Coal gas, water gas, producer gas and similar gases, other than petroleum gases and other gaseous hydrocarbons

10% 2.5%

Industrial solar water heater

7.50% 10%

Solar tempered glass / solar tempered (anti-reflective coated) glass

NIL 5%

Solar Lamp 12.5% NIL

Chemical & Petrochemicals


Existing BCD Rate

Revised BCD Rate

Acyclic hydrocarbons and all cyclic hydrocarbons

5% / 2.5% 2.5%

Denatured ethyl alcohol (Ethanol)

5% 2.5%

Electronics / Hardware


Existing BCD Rate

Revised BCD Rate

Polypropylene granules / resins for the manufacture of capacitor grade plastic films

7.5% NIL

E-Readers NIL 7.5%

Parts of E-reader Applicable rate 5%

Magnetron having capacity of 1KW to 1.5 KW for use in manufacture of domestic microwave ovens

10% NIL

Machinery, electrical equipment, instrument and parts thereof (Except PCBs) for semiconductor wafer fabrication / LCD fabrication units

Applicable rate NIL

Machinery, electrical equipment, instrument and parts thereof (Except PCBs) imported for Assembly, Test, Marketing and Packaging of semiconductor chips (ATMP)

Applicable rate NIL

Parts and components, subparts for manufacture of specified Consumer Premises Equipments such as routers, broadband modems, set-top boxes for gaining access to internet, etc

Applicable rate NIL

Export Duty


Existing BCD Rate

Revised BCD Rate

Iron ore fines with Fe content below 58%

10% NIL

Iron ore lumps with Fe content below 58%

30% NIL

Chromium ores and concentrates, all sorts

30% NIL

Bauxite 20% 15%


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Amendment in the Baggage Rules pertaining to duty free allowance

Eligible passenger Origin country Duty free allowance

YY Passengers of Indian origin and foreigners residing in India

YY Tourists of foreign origin

Other than Nepal, Bhutan, Myanmar

YY ` 50,000/-

YY ` 15,000/-

YY Passengers of Indian origin and foreigners residing in India

YY Tourists of foreign origin

Nepal, Bhutan and Myanmar

By air ` 15,000/- or By land – Nil

Indian passenger who has been residing abroad for over one year

Anywhere Gold jewellery

YY Gentleman:– 20 gms with a value cap of ` 50,000/-

YY Lady:– 40 gms with a value cap of ` 1 Lac

All passengers Anywhere Alcohol liquor or wine : 2 litres

All passengers Anywhere Cigarettes: 200 nos. or Cigars up to 50 or Tobacco 250 grams

Passenger of 18 years and above

Anywhere One laptop computer (note book computer)

YY Changes have also been made in the Customs Baggage Declaration Regulations, 2013 whereby filing of customs declaration has been prescribed only for those passengers who carry dutiable or prohibited goods.

CENTRAL EXCISE

Tax Rate

YY Standard ad valorem rate of Central Excise Duty has been retained at 12.5%.

Amendments to the Central Excise Act

YY Limitation period for issuance of SCN for recovery of duty not levied or not paid or short levied or short paid or erroneously refunded in cases not involving fraud,

collusion, willful misstatement or suppression enhanced from one year to two years.

YY In respect of following goods, the activity of packing, re-packing, labelling or relabelling including declaration or alteration of retail sale price or adoption or any other treatment thereon to render the product marketable, shall deem to be manufacture. Consequently, assessment of such products shall be based on Retail Sale Price (RSP) with appropriate abatement.

Yy All goods falling under heading 3401 and 3402

Yy Aluminium foils of a thickness not exceeding 0.2mm

Yy Wrist wearable devices (also known as smart watches)

Yy Accessories of motor vehicles

Amendment to Central Excise RulesYY Number of excise returns to be filed by an

assessee is proposed to be reduced from 27 to 13 (12 monthly returns and an annual return).

YY In case of provisional assessment, interest on unpaid amount shall be payable from the due date for payment of duty till the date of actual payment thereof, whether paid before or after the date of final assessment.

YY Facility for revising of returns, as is available to service providers, has been extended to manufacturers. An assessee who has filed the return within the due date shall now be eligible to revise such return by the end of the month in which original return was filed.

Amendment to Cenvat Credit Rules, 2004YY Cenvat credit on jigs, fixtures, moulds and

dies or tools falling under Chapter 82 of CETA which are sent directly to the premises of another manufacturer or job worker has been allowed to be taken by the manufacturer of final product without they being brought it to its own premises.


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YY Validity of order passed by the Deputy or Assistant Commissioner of central excise allowing removal of inputs or partially processed goods to a job worker and subsequent clearance of final products therefrom has been extended to three financial years.

YY Cenvat credit of service tax paid on services by way of assignment of rights to use any natural resources by the Government or any other person has been allowed to be taken over the period of such assignment. Further, in case of sub-assignment of such rights to any other person, Cenvat credit to the extent of service tax payable on such sub-assignment has been allowed to be taken in the same financial year in which such rights are sub-assigned. However, Cenvat credit in respect of annual or monthly user charges towards assignment of right to use natural resources has been allowed in the same financial year in which such charges are paid.

YY Cenvat credit on inputs and capital goods used for pumping of water, for captive use in the factory, is being allowed even where such capital goods are installed outside the factory.

YY All capital goods having value upto ` 10,000/- per piece are being included in the definition of Inputs.

YY Rule 6 of CCR, dealing with Cenvat credit on exempted goods / services has been rationalized as following:

Yy Full Cenvat credit of service tax paid on input services exclusively used for manufacturing non-exempted goods and provision of non-exempted services will be allowed.

Yy Definition of exempted services widened for the purpose of Rule 6 reversals to include an activity which is not a service.

Yy Increased disclosure to avoid subsequent disputes with the revenue authorities.

Yy Banking and final institutions including a NBFC will be allowed to either opt for payment of 7% of value of exempted services or pro-rata reversal or reversal of 50% of the Cenvat credit availed.

YY To do away with the controversy surrounding the time limit for filing of refund claim in respect of export of service, it has been prescribed that such refund claim has to be filed within one year –

Yy from the date of receipt of payment where the provision of service has been completed prior to the receipt of payment for such service.

Yy from the date of issue of invoice where the payment for such service has been received in advance prior to the issue of the invoice.

YY Infrastructure Cess levied as a duty of excise shall not be available for Cenvat credit. Also, Cenvat credit of other duties / taxes shall not be eligible to be utilised for payment of Infrastructure Cess.

YY Option has been granted to obtain single registration where two or more premises of the same factory are located in the nearby area falling within the jurisdiction of same Range Superintendent and the process undertaken therein are interlinked and the units are not operating under any area based exemption.

YY ISD facility for transfer of Cenvat credit currently available to premises of the same manufacturer / service provider has been extended to outsourced manufacturer also under certain circumstances. However, such outsourced manufacturer shall be required to maintain separate record for Cenvat credit transferred by each such ISD and shall be required to utilise it for payment of excise duty on goods manufactured for such ISD. Further, Cenvat credit on input services availed prior to 31 March shall not be entitled to be transferred to such outsourced manufacturer.


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Other Changes / Exemptions

YY Interest in case of short levy / non levy of duty or short payment / non-payment of duty has been reduced from 18% per annum to 15% per annum (w.e.f. 1 April 2016).

YY Limitation period for claiming rebate of excise duty paid on goods exported to country other than Bhutan has been prescribed as one year from the date of export.

YY Existing Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable and Other Goods) Rules allowing duty exemption to importer / manufacturer have been substituted with simplified rules allowing duty exemption to importers / manufacturers based on self-declaration instead of obtaining permission from Central Excise Authorities.

Sector Specific Changes in effective rate of excise duty (effective from 1 March, 2016)

Automobiles

YY Concessional excise duty of 6% granted to specified goods for use in the manufacture of electrically operated vehicles and hybrid vehicles is being extended without any time limit.

YY An Infrastructure Cess at the rate given below, as a duty of excise, is being imposed on motor vehicles falling under heading 8703

Description of Goods Rate

Three wheeled vehicles, Electrically operated vehicle, Hybrid vehicles, Hydrogen vehicles based on fuel cell technology, cars for physically handicapped persons and vehicles cleared as taxi / ambulances

NIL

Petrol / LPG / CNG driven motor vehicles of length not exceeding 4m and engine capacity not exceeding 1500cc

1%

Diesel driven motor vehicles lf length not exceeding 4m and engine capacity not exceeding 1500cc

2.5%

All categories of vehicles not covered above 4%

YY Accessories of certain vehicles falling under Chapter 87 have been made subject to assessment based on its MRP value.

Chemicals & FertilizersDescription of Goods Existing Rate Revised RateMicronutrients covered under Sr 1(f) of the Fertilizers Control Order, 1985 and manufactured by the manufacturers covered therein

12.5% 6%

Mixture of fertilizers, made by physical mixing of chemical fertilizers for supply to members of Co-operative Societies

1% (Without ITC) or

6% (With ITC)

NIL

Concrete Mix or Ready Mix Concrete manufactured at construction site for use thereat

12.5% NIL

Consumer Goods (Food & Non-Food)Description of Goods Existing Rate Revised RatePan Masala 16% 19%Waters, including mineral waters and aerated waters, containing added sugar or other sweetening matter or flavoured

18% 21%

Rubber sheets and resin rubber sheets for soles and heels

12.5% 6%

PSF / PVY manufactured from plastic scrap or plastic waste including waste PET bottles

6% (without Cenvat)

12.5% (without Cenvat)

Readymade garments and made up articles of textiles falling under Chapter 61,62 and 63 sold under a brand name and having RSP of ` 1,000 and above

NIL 12.5%1

Articles of jewellary NIL 12.5%2

Gold bars manufactured from gold ore or concentrate

9% 9.5%

Disposable aluminum containers, parts and pressure cookers

6%3 12.5%4

Specified Consumer Premise Equipments such as Routers, Broadband modems, Set-top boxes, reception apparatus, CCTV Camera, etc

12.5% 4%5 (without Cenvat

credit)

Refrigerated containers 12.5% 6%

1 2% without Cenvat credit2 1% without Cenvat credit3 2% without Cenvat credit4 2% without Cenvat credit5 12.5% with Cenvat credit


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YY Abatement rate from RSP on all categories of footware has been increased from 25% to 30%.

YY Tariff value for readymade garments and made up articles of textiles has been increased from 30% to 60%.

YY SSI exemption limit for articles of jewellary for home consumption, other than articles of silver jewellary but inclusive of articles of silver jewellary studded with diamond, ruby emerald or sapphire, has been increased from ` 150 lacs to ` 600 lacs provided that the aggregate value of clearances by such unit in the preceding financial year does not exceed ` 1,200 lacs.

Energy (including renewable energy)

Description of Goods Existing Rate Revised Rate

Aviation Turbine Fuel (except for supply to Scheduled Commuter Airlines from Regional Connectivity Scheme)

8% 14%

Solar lamps 12.5% NIL

Specified items for manufacture of rotor blades and intermediates, parts and sub parts of rotor blades for wind operated electricity generators

NIL 6%

YY Oil Industries Cess levied on domestically produced crude oil is being reduced from ` 4,500/- PMT to 20% ad valorem (from the date of enactment of Finance Bill 2016).

YY Clean Energy Cess (now renamed as Clean Environment Cess) on coal, lignite and peat increased from ` 200 per tonne to ` 400 per tonne (from the date of enactment of Finance Bill 2016).

YY Conditions for availing excise duty exemption in case of power generation project based on municipal and urban waste has been relaxed. Such projects have been allowed to avail the exemption based on valid agreement between producers of power with urban local body for processing of municipal waste for not less than 10 years from the date of commissioning of the project.

Cigarettes and tobacco products

Description Tariff Heading

Existing Rate

Revised Rate

Specific Duty per thousand

(in `)

Specific Duty per thousand

(in `)

Cigar and Cheroots 2402 10 10 3,375 3,755

Cigarillos 2402 10 20 12.5% or 3,375

whichever is higher

3,755

Cigarettes of tobacco substitutes

2402 90 10 3,375 3,755

Cigarettes of tobacco substitutes

2402 90 20 3,375 3,755

Others of tobacco Substitutes

2402 90 90 3,375 3,755

Pharma & Healthcare

Description of Goods Existing Rate Revised Rate

Disposable sterilized dialyzer and micro barrier of artificial kidney

12.5% NIL

SERVICE TAX

Tax Rate

YY Service Tax of 14% and Swachh Bharat Cess of 0.5% has been retained.

YY Krishi Kalyan Cess @ 0.5% is proposed to be levied with effect from 1 June 2016 on value of taxable service. This will take the effective rate of taxes on services to 15%.

YY Also, Krishi Kalyan Cess paid on input services shall be allowed to be used for payment of Krishi Kalyan Cess on output services.

Enlargement / curtailment or withdrawal of Service Tax exemption

Amendments to Mega Exemption YY Exemption introduced (effective on and

after 1 March 2016)

Yy Services by way of construction, erection etc. of a civil structure or any other


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original works pertaining to the “In-situ Rehabilitation of existing slum dwellers using land as a resource through private participation” component of Housing for All (‘HFA’) (Urban) Mission / Pradhan Mantri Awas Yojana (‘PMAY’), except in respect of such dwelling units of the projects which are not constructed for existing slum dwellers.

Yy Services by way of construction, erection etc. of civil structure or any other original works pertaining to the ‘Beneficiary-led individual house construction / enhancement’ component of Housing for All (HFA) (Urban) Mission / Pradhan Mantri Awas Yojana (PMAY).

Yy Specified services by way of full time residential Post Graduate Programme in Management (PGPM) provided by Indian Institutes of Management (IIM).

YY Exemption introduced (effective on and after 1 April 2016)

Yy Services of life insurance business provided by way of annuity under the National Pension System (NPS) regulated by Pension Fund Regulatory and Development Authority (PFRDA) of India.

Yy Investor protection services provided by Securities and Exchange Board of India.

Yy Services provided by Employees’ Provident Fund Organisation (EPFO) to employees.

Yy Services provided by approved biotechnology incubators to incubatees.

Yy Services provided by National Centre for Cold Chain Development by way of knowledge dissemination.

Yy Services provided by Insurance Regulatory and Development Authority (IRDA) of India.

Yy Services of general insurance business provided under ‘Niramaya’ Health Insurance scheme launched by National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disability in collaboration with private / public insurance companies.

Yy Threshold exemption limit for services provided by a performing artist in folk or classical art form of music, dance or theatre is being increased from ` 1 lakh to ` 1.5 lakh per performance.

Yy Services provided by trainers under Deen Dayal Upadhyaya Grameen Kaushalya Yojana.

Yy Services of assessing bodies empaneled centrally by Directorate General of Training, Ministry of Skill Development & Entrepreneurship by way of assessments under Skill Development Initiative (SDI) Scheme.

YY Exemption introduced by omitting entry from Negative list of services

Yy Services by way of transportation of goods by an aircraft from a place outside India upto the customs station of clearance in India (w.e.f. 1 June 2016).

Yy Services by way of

Y– pre-school education and education up to higher secondary school or equivalent;

Y– education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force;

Y– education as a part of an approved vocational education course (from enactment of Finance Bill 2016).


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YY Exemption withdrawn (Services now taxable) w.e.f. 1 March 2016 unless otherwise specified)


Yy A person represented on an arbitral tribunal to an arbitral tribunal

Yy Services by way of construction, erection, commissioning, installation, completion, fitting out, repairs, maintenance, renovation, or alteration of monorail and metro where the contract for such service was entered into before 1 March 2016 and appropriate stamp duty has been paid on such contract

Yy Transportation of passengers by air-conditioned stage carriage

YY Restoration of Exemption (from the date of enactment of Finance Bill 2016)

Yy Services provided to the Government, local authority or governmental authority by way of construction, erection, installation, completion, fitting out, repair, maintenance, renovation of

Y– civil structure or any other original works for use otherwise than for commerce, industry or any other business or profession

Y– structures meant for educational, clinical, cultural, art or cultural

Y– residential complex meant for self use or for their employees

Yy Construction, erection, commissioning or installation by way of original works pertaining to port or airport subject specified conditions

Notes

Y– Exemption contained hereinabove shall be subject to the condition that the contract for provision of aforesaid services had been entered into prior to 1 March 2015 and on which appropriate stamp

duty, where applicable, has been paid prior to that date.

Y– Services provided during the period 1 April 2015 to 29 February 2016 under such contracts are also proposed to be exempted from service tax.

Y– The exemption so provided shall be available till 31 March 2020.

YY Declared service (from the date of enactment of Finance Bill 2016)

Assignment by the Government of the right to use the radio frequency spectrum and subsequent transfer thereof shall be deemed to be a declared service and hence liable to service tax.

Reverse Charge (w.e.f. 1 April 2016)

Shift in the burden for payment of service tax from reverse charge to forward chargeDescription of service Person liable to

pay Service Tax% of taxable

value of service

Services provided by a mutual fund agent or distributor to mutual fund or asset management service

Service provider 100

Service provided by a selling or marketing agent of lottery tickets to a lottery distributor or selling agent of the State Government


Services provided by a senior advocate to an advocate or partnership firm of advocates


Any services provided by the Government or a Local Authority

Service receiver 100

Rationalization of interest rate (from the date of enactment of Finance Bill 2016)Nature of default Aggregate value

of taxable service in previous

FY > 60 lakhs

Aggregate value of taxable

services in previous

FY < 60 lakhs

Service tax has been collected but not paid to the Central Government

24% 24%

Other than those mentioned above

15% 12%


[83]

Amendment in abatement based rate on levy of Service Tax (w.e.f. 1 April 2016)

A) Revision in the condition for availing abatement in the value of taxable service

Nature of service Taxable Percentage

Revised Condition

Transport of goods by rail 30% Cenvat credit on inputs and capital

goods are not availed

Transport of passengers, with or without accompanied belongings, by rail

Transport of goods in vessel

50%

Consequent to the above change, Cenvat credit on input services has been allowed for availing the abatement from the value of taxable service.

B) New services brought under abated rate of service tax

Serial Entry Particulars Taxable Percentage

Condition

2A Transport of goods in container by rail by any person other than Indian Railways

40% Cenvat credit on inputs and capital goods are not availed

7A Services of goods transport agency in relation to transportation of used household goods

40% Availment of Cenvat credit on input, capital goods and input services are not availed

9A (c) a stage carriage

40%

C) Other changesYy Abatement rates in respect of services

provided by a tour operator (other than solely arranging or booking of accommodation) are being rationalized from 75% and 60% to 70%.

Yy A uniform abatement at the rate of 70% is being prescribed for services of construction of complex, building, civil structure, or part thereof.

Yy In case of Renting of Motor cab services, fair market value of all goods (including fuel) and services supplied by the recipient(s) to form part of the value of taxable service for availing the benefit of abatement.

Point of Taxation Rules, 2011

YY Specific rules making power are proposed to be granted to determine the time or point in time with respect to the rules of Service Tax (from the date of enactment of Finance Bill 2016).

YY Provisions of Rule 5 of the POTR for determining the point of taxation in case of new service shall also apply to any new levy on Services mutatis mutandis (w.e.f. 1 March 2016).

Other Amendments

YY Proposed Indirect Tax Dispute Resolution Scheme, 2016 (the Scheme)

Y– The Scheme shall be effective from 1 June 2016.

Y– It shall be applicable to dispute in respect of any provision pertaining to Customs, Central Excise and Service Tax which is pending before Commissioner (Appeals) as on 1 March 2016.

Y– Any person (‘declarant’) intending to avail of benefit under the Scheme has to make a declaration to the designated authority on or before 31 December 2016.

Y– In the event of payment the duty / tax due along with interest at applicable rate and penalty equivalent to 25% of the penalty imposed under the impugned order, the proceedings against the declarant shall be deemed to be closed and he will also get immunity from prosecution.

Y– The benefit under the Scheme shall not be available in specified cases such as search and seizure, prosecution cases, narcotics drugs or other prohibited goods, detention orders under COFEPOSA.

YY An annual return has been prescribed to be filed for each financial year by 30 November of the succeeding year. Further, failure to file such annual return shall be liable for payment of an amount not exceeding ` 20,000/- (w.e.f. 1 April 2016).


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YY Services in relation to Information Technology Software when recorded on a media and in respect of which it is required to affix Retail Sale Price under the Legal Metrology Act, 2010 has been exempted from payment of service subject to the condition inter alia that value of the package of such media produced / imported has been determined under Section 4A of CEA and appropriate central excise duty or additional duty of customs has been paid on the same.

YY Facility for payment of service tax on quarterly basis on receipt of consideration has been extended to One Person Company (OPC) whose aggregate value of services provided is up to ` 50 lakh in the previous financial year. Further, the benefit of quarterly payment of service tax has been extended to HUF.

YY Effective alternate service tax rate (composition rate) on single premium annuity (insurance) policies where the amount allocated for investment or savings on behalf of policy holder is not intimated to the policy holder at the time of providing of service has been prescribed at 1.4% of the total premium charged.

YY Limitation period for issuance of SCN for recovery of duty not levied or not paid or short levied or short paid or erroneously refunded in cases not involving fraud, collusion, willful misstatement or suppression enhanced from 18 months to 30 months.

YY The Monetary limit for filling complaints for punishable offences is proposed to be enhanced to ` 2 Crore.

YY The power to arrest in service tax law is proposed to be restricted only to situation where the tax payer has collected the tax but not deposited it with exchequer, and amount of such tax collected but not paid is above the threshold of ` 2 Crore.

CENTRAL SALES TAXYY An explanation 3 to the Section 3 of the

Central Sales Act, 1956 has been inserted to clarify that where co-mingled and fungible gas transported through a common carrier pipeline or any other transportation medium which moves from one state to another shall be deemed to be movement of goods from one state to another.

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BUDGET2016FOR PRIVATE CIRCULATION

Documents

B. K. Khare & Co.bkkhareco.com/uploads/media/B_K_Khare_Budget_2016.pdf · Head Ofﬁce: 706/708 Sharda Chambers, New Marine Lines, Mumbai 400020 T: +91 22 2200 7318/0607/6360 Pune