1. ACCRETIVE SDU India Budget 2014-15 Ringing in certainties Document date: 11.07.2014 Tax Answered

2. INDIA BUDGET 2014-15 Page 2 of 54 ACCRETIVE SDU PREAMBLE Since the time Indians have used their democratic power to ring in a Government of popular choice, all eyes were set on the new Finance Minister to somehow make our economic and fiscal problems disappear. And it does appear that the new FM has scored a few goals in his maiden budget. The tax proposals announced are towards ringing in an environment of certainty in tax regulations. However, no bold reforms have been attempted. To be specific, a firm timeline for the two eagerly awaited reforms, Goods and Service Tax and the new Direct Tax Code, has not been chalked out and as in previous budgets, a mere statement of intent has been made. Apart from that, the overall tax proposals are good and in the right direction. In this document, we have provided our perspective on certain key questions for the decision makers along with a detailed analysis of the proposals. 3. INDIA BUDGET 2014-15 Page 3 of 54 ACCRETIVE SDU Contents TAX ANSWERED.........................................................................................4 DIRECT TAX PROPOSALS............................................................................. 19 Corporate Tax................................................................................... 19 Rates of tax.................................................................................. 19 Applicability of Tax....................................................................... 19 Tax reliefs..................................................................................... 20 Taxation of incomes from investments ....................................... 21 REIT and Infrastructure Investment Trusts.................................. 23 Rationalization Measures............................................................ 26 Tax Deducted at Source / Withholding taxes .............................. 27 Transfer pricing............................................................................ 29 Alternate Minimum Tax (AMT).................................................... 30 Other proposals ........................................................................... 31 Taxation of Trusts............................................................................. 34 Rationalization Measures for Trusts............................................ 34 Personal taxes .................................................................................. 37 Rate of tax.................................................................................... 37 Tax reliefs..................................................................................... 38 INDIRECT TAX PROPOSALS .......................................................................... 40 Goods and Service Tax...................................................................... 40 Service Tax........................................................................................40 Negative list..................................................................................40 Exemptions ...................................................................................41 Advance Ruling provisions............................................................42 Place of provision of services........................................................43 Point of taxation...........................................................................43 Appeals.........................................................................................44 Tax administration .......................................................................44 Central Excise....................................................................................46 Rate of duty..................................................................................46 Changes in duty rates:..................................................................46 Valuation of excisable goods........................................................47 Appeals.........................................................................................48 Administrative ..............................................................................48 Others...........................................................................................48 CENVAT Credit ..................................................................................49 Customs............................................................................................50 Duty rates.....................................................................................50 Widening of tax base....................................................................50 Exemptions ...................................................................................51 Administrative ..............................................................................51 Duty free allowance under Baggage Rules ..................................51 Others...........................................................................................52 Central Sales Tax...............................................................................52 Effective Dates..................................................................................53 4. INDIA BUDGET 2014-15 Page 4 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU TAX ANSWERED X What is the tax policy framework of the New Government? Given that the interim budget 2014-15 was presented against the background of sub 5% growth, the FM had to encounter the challenge of an extremely limited fiscal space while preparing the tax proposals. The Medium Term Fiscal Policy Statement acknowledges that tax reforms and tax efforts are the most critical elements for the overall process of fiscal consolidation. It also states that the ultimate objective is to bring back the tax to at the GDP ratio to the pre-crisis levels. The FM has assured that the Government is committed to provide a stable and predictable taxation regime that would be investor friendly and spur growth. Accordingly, he has introduced measures to revive the economy, promote investment in manufacturing sector and rationalize tax provisions (aimed at reducing litigation and addressing the problem of inverted duty structure). He also has sought to bolster the tax administration, widen the tax base and reduce litigation. Related proposals in detail Not applicable What is the status on the two landmark reforms GST and DTC? Any measures to provide certainty on tax regime? What has he done on the retrospective amendments? What are the key economic indicators underlying the tax proposals? Tax Policy Decisions 5. INDIA BUDGET 2014-15 Page 5 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU What is the tax policy framework of the New Government? The FM mentioned that the debate on whether GST should be introduced should now come to an end. He indicated that Government would like to introduce GST to streamline the tax administration, avoid harassment to business and ensure higher revenue collection. He hopes to approve the legislative scheme in the course of the year, which would enable introduction of GST. On the Direct Taxes Code (DTC), the FM has mentioned that the Government will review the revised DTC which was made public in March 2014, take into consideration comments received from stakeholders and then take a view in the matter. To the stakeholders disappointment, no guidance has been provided on the timelines. Related proposals in detail No specific announcements What is the status on the two landmark reforms GST and DTC? Any measures to provide certainty on tax regime? What has he done on the retrospective amendments? What are the key economic indicators underlying the tax proposals? Tax Policy Decisions 6. INDIA BUDGET 2014-15 Page 6 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU What is the tax policy framework of the New Government? The industry and investors expected a drawback of the retrospective amendments introduced by the Finance Act, 2012. Particularly the amendments that had been introduced to overcome the Vodafone ruling which pertained to indirect transfer of assets located in India. While the FM did acknowledge the uncertainty arising out of such retrospective amendment to the tax laws, he also reaffirmed the Governments sovereign right to make such amendments. He however indicated that this power needs to be exercised with extreme caution and judiciousness. To improve the investor sentiments, he mentioned in his speech that a High Level Committee would be set-up to scrutinize all fresh cases arising out of the retrospective amendment of 2012 with regards to indirect transfers. The tax proposals for 2014-15, do not carry any retrospective amendments triggering additional tax risks or liabilities for the taxpayers. However it should be noted that the tax proposals do not provide any respite as such on the retrospective amendments introduced in the earlier years. Related proposals in detail Strengthening of AAR and Income-tax Settlement Commission Time limits specified for completion of adjn What is the status on the two landmark reforms GST and DTC? Any measures to provide certainty on tax regime? What has he done on the retrospective amendments? What are the key economic indicators underlying the tax proposals? Tax Policy Decisions 7. INDIA BUDGET 2014-15 Page 7 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU What is the tax policy framework of the New Government? Analysis of the GDP growth over the past 3 years shows a downward trend from 6.7% in 2011-12 to a sub 5% growth in 2012-13 (4.5%) and 2013-14 (4.7%). The forecast of GDP growth is expected to be between 5.4% and 5.9% in 2014-15. Further there is a shortfall in the revenue receipts vis--vis the envisaged growth in Budget 2013-14. As a proportion of the estimates, gross tax revenue was 92.1% in 2013-14. Indias tax collection is less than 9% of its GDP. FM has indicated that fiscal consolidation should be achieved by a higher tax to GDP ratio and by increasing the non-tax revenues, rather than by reducing the expenditure to GDP ratio as was done previously. He has retained the ambitious fiscal deficit target of 4.1% of the GDP for FY 2014-15.The FM has also retained the tax collection targets set in the interim budget i.e. a 17 % increase from the revised estimates for FY 2013-14. The FM has positively indicated that the measures proposed by him are the beginning of a journey towards a sustained growth of 7-8 % or above within the next 3-4 years. Related proposals in detail Not Applicable What is the status on the two landmark reforms GST and DTC? Any measures to provide certainty on tax regime? What has he done on the retrospective amendments? What are the key economic indicators underlying the tax proposals? Tax Policy Decisions 8. INDIA BUDGET 2014-15 Page 8 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU X What steps has the Government proposed to bolster tax administration? The FM speech did provide a sense of strong intent to bolster the existing tax administration and certainty for taxpayers. Some of the key macro proposals include: Setting-up of a High level Committee to scrutinize fresh cases impacted by retrospective amendment on indirect transfers; Citing tax litigation, extending the applicability of AAR to resident private limited companies; setting up additional benches to speed up disposal of the applications; Broadening the scope and powers of Income-tax Settlement Commission to aid stability; Setting-up of 60 additional Aaykar Seva Kendras to promote excellence in service delivery; Setting-up of a High Level Committee to interact with industry on a regular basis to ensure that industry issues are not only heard but also promptly redressed (a two month time frame has been provided to issue clarity, where required). Expression of intent to adopt non-intrusive methods (such as information technology techniques) to broaden the tax base. Related proposals in detail Advance Ruling provisions extended to resident private limited companies Strengthening of AAR and Income-tax Settlement Commission Time limits specified for completion of adjudication Powers to issue orders for search or seizure delegated What are the proposals increasing the powers of the tax authorities particularly in relation to survey and penal proceedings? Tax Administration 9. INDIA BUDGET 2014-15 Page 9 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU What steps has the Government proposed to bolster tax administration? The Bill tabled by the FM proposes to extend the powers of the tax authorities to impound and retain documents inspected by them during the survey for a period of 15 days without approvals. The proposals also seek to extend the power of the tax authorities to undertake surveys to verify compliance with the TDS provisions. In relation to penal proceedings, it is proposed to empower Transfer Pricing Officers to levy penalty on taxpayers who fail to furnish the required information / documentation (which is currently restricted to only the Assessing Officers and Commissioner of Income-tax (Appeals)). Under the Indirect Tax laws, in addition to the Joint Commissioner, the Additional Commissioner or any other officer notified by the Board may also authorize an order for search or seizure of books or things or documents. Additionally, by law, the officers are required to complete the adjudication proceedings with 6 months / 1 year, depending upon the nature of notice. Further, the powers of the officers to grant a complete waiver of penalty is also curtailed. Together, the Government has clearly indicated its intention not to tolerate non-compliance. Related proposals in detail Powers of IT authorities extended Levy of penalty by Transfer Pricing Officer Time limits specified for completion of adjn Power for complete waiver of penalty withdrawn Powers to issue orders for search or seizure delegated Attachment of goods in case of transfer of business or change in ownership What are the proposals increasing the powers of the tax authorities particularly in relation to survey and penal proceedings? Tax Administration 10. INDIA BUDGET 2014-15 Page 10 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU x Any new tax levies been announced by Budget 2014? No new tax levies have been announced. However there have been changes in the applicability and scope of certain taxes. Significant ones are: Grossing up of dividend distribution tax to be paid by corporates and mutual funds would raise the effective tax on dividends. The inclusion of the following within the ambit of service tax - Sale of space or time for advertisements on segments like online and mobile advertising - Service provided by radio-taxis (now on par with rent-a-cab service), whether or not air-conditioned. - Exemption withdrawn in respect of renting of premises to educational institutions - Services by air-conditioned contract carriages like buses. - Technical testing of newly developed drugs on human participants. In addition to the above, certain exemptions (currently available) have either been reworded or curtailed. Related proposals in detail DDT to be computed on grossed up dividends Service tax sale of space for advertisement widened REIT and Infst Invt Trust regime introduced Services by radio taxi or radio cabs to be taxable Exemptions of services provided to educational institutions partially withdrawn Surcharge introduced on aerated waters @ 5% Any tax proposals to provide impetus to the economy? Which are the key sectors or product categories which have been impacted due to changes in duty rates? Are there any proposals which will impact cash flows in business? Tax as a Cost levies and Reliefs 11. INDIA BUDGET 2014-15 Page 11 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Have any new tax levies been announced by Budget 2014? Yes, there are specific measures to provide impetus to foreign investments / earnings, the real estate and construction and the manufacturing sectors. Uncertainty regarding the characterization of income on sale of foreign investments as Business Income or Capital Gains is removed. It is proposed that any security held by foreign institutional investor would be treated as capital asset only. Sunset clause for lower rate of taxation of 15% on dividend income received from specified foreign companies is extended indefinitely to boost repatriation of funds into India. The taxation regime for Real Estate Investment Trusts (REIT) and Infrastructure Investment Trust (InvITs), has been announced paving the way for its introduction by the SEBI. This is expected to boost investor participation in real estate and infrastructure. It will also ensure availability of funds to the sectors and cut down their reliance on banking channel funds. Contd Concessional rate of tax on long term overseas bonds Taxation of securities held by FII Extension of lower rate of taxation on certain dividends received from foreign companies Investment linked allowance for mfg companies Increase in deduction of interest on loan borrowed for acquisition / construction of self- occupied house property Increase in limit of deductions u/s 80C Any tax proposals to provide impetus to the economy? Which are the key sectors or product categories which have been impacted due to changes in duty rates? Are there any proposals which will impact cash flows in business? Tax as a Cost levies and Reliefs 12. INDIA BUDGET 2014-15 Page 12 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Multiple proposals in direct and indirect tax would boost the manufacturing sector. Examples being rationalisation of the investment allowance benefit available to manufacturing companies under the income-tax provisions, extension of sunset clauses for tax holiday on power sector, reduction of duty rates of various inputs used by the manufacturing sector. Concessional duty rates and excise incentives have also been prescribed to promote production of solar power and wind energy in India. Increase in Sec 80C deduction from Rs. 1 lakh to Rs. 1.5 lakhs. Increase in deduction for self-occupied housing propertys interest from Rs. 1.5 lakhs to Rs. 2 lakhs. Extension of sunset for certain companies in the power sector Deduction of pension contributions extended to private sector employees Transaction value applicable even if the cost of manufacture is higher than the sale price Changes in duty rates for Central Excise Changes in duty rates under Customs 13. INDIA BUDGET 2014-15 Page 13 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Have any new tax levies been announced by Budget 2014? The following are the key sectors or product categories impacted by a change in duty rates: Rate of duty on cigarettes, pan masala and other forms of tobacco and aerated drinks increased. Rate of duty on branded petrol, unbranded articles of precious metals, footwear and machinery required for solar power plants and compressed bio-gas plant reduced. Partial exemption of service tax reduced to 30% (from 40%) in respect of all works contracts other than original works. Related proposals in detail Changes in duty rates for Central Excise Changes in duty rates under Customs All works contracts other than original works liable to tax on 70% of the contract value Tax net for services relating to sale of space for advertisement widened Any tax proposals to provide impetus to the economy? Which are the key sectors or product categories which have been impacted due to changes in duty rates? Are there any proposals which will impact cash flows in business? Tax as a Cost levies and Reliefs 14. INDIA BUDGET 2014-15 Page 14 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Have any new tax levies been announced by Budget 2014? The following indirect tax proposals are expected to have an impact on the cash flow of the businesses: Input credits should be distributed to units irrespective of whether or not such common input services were used in all the units or only in some of the units. Powers to grant a 100% waiver of pre-deposits in case of appeals curtailed; mandatory pre-deposit of 7.5% or 10% of the disputed amounts is a pre-condition for filing of appeals Inter-unit transfer of unutilized CENVAT credits for LTUs is now restricted. Partial exemption of service tax reduced to 30% (from 40%) in respect of residuary class of works contracts. Interest for delayed payment of service tax increased multi-fold. Related proposals in detail Distribution of input credits by ISD All works contracts other than original works liable to tax on 70% of the contract value Transfer of unutilized credit from one unit to another in case of LTU restricted Rate of interest for delay in remittance of tax enhanced Application for stay for filing of appeal dispensed with; prescribed amounts to be pre-deposited Any tax proposals to provide impetus to the economy? Which are the key sectors or product categories which have been impacted due to changes in duty rates? Are there any proposals which will impact cash flows in business? Tax as a Cost levies and Reliefs 15. INDIA BUDGET 2014-15 Page 15 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU X What policy measures have been announced to boost Foreign Direct Investment (FDI)? The FM has announced the following measures to boost FDI in select sectors to help the larger interest of Indian economy: FDI in defence manufacturing increased from 26% to 49% (FIPB approval route). To aid growth of the insurance sector, the composite cap has been increased from 26% to 49%. Manufacturing units (under the automatic approval route) will be allowed to sell their products through retail including e-commerce platforms without any additional approval. To encourage the Governments vision of development of 100 smart cities, built up area and capital condition norms for FDI in real estate sector has been relaxed. Related proposals in detail Not Applicable What are the key amendments in Transfer Pricing? Cross Border Trade 16. INDIA BUDGET 2014-15 Page 16 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU What policy measures have been announced to boost Foreign Direct Investment (FDI)? The following key changes have been made to the transfer pricing laws with the aim of reducing litigation: To aid certainty in transfer pricing and to boost international transactions, rollback provision in the Advance Pricing Agreement (APA) scheme introduced. Under this, an APA entered into for future transaction may in specified circumstances also apply to international transactions undertaken in previous 4 years. In order to align Indian TP regulations with available best practices, the concept of range introduced for determining arms length price. Availability of a range of prices, rather than a single-point price, would make it easier for businesses to prove that they are at an arms length. Another step to align the Indian regulations with international best practices and to put a rest to the existing litigation in this regard is to allow the use of multiple year data for comparable analysis as opposed to using single year data. However, it should be noted that the definition of deemed international transactions has been broadened to bring within its ambit, transactions between two Indian resident entities, where an associated enterprise has significantly influenced the terms of the transaction. Related proposals in detail Roll back mechanism under the Advance Pricing Agreement (APA) Determination of arms length price (ALP) Scope of deemed international transactions extended What are the key amendments in Transfer Pricing? Tax as a Cost levies and Reliefs 17. INDIA BUDGET 2014-15 Page 17 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU x What are the key proposals to track as a Controller? As a Controller of your business, it would be important to track the following key direct tax proposals: Time limit for depositing taxes and claiming deduction on tax deductible payments to non-residents has been extended upto the due date for filing of return. Quantum of disallowance restricted to 30% of payment to resident without deduction of tax at source. Scope of disallowance made with respect to non-deduction of tax at source expanded to cover all transactions where TDS is applicable. No tax deduction would be available for CSR contributions in accordance with the new Companies Act, 2013. Further, it would be important to track the following key indirect tax proposals: Input CENVAT credit reversed earlier for non-receipt of export consideration can now be reclaimed on actual receipt. Contd Related proposals in detail Expenses in respect of CSR requirements Extended time limit to claim expenditure on non-resident payments liable for withholding tax Scope of disallowance of expenditure for failure to deduct / remit tax deducted at source extended to all payments Relaxation of disallowance for failure to deduct / remit taxes deducted CENVAT Credit in respect of export services Key Proposals in Tax - Controllers Dashboard 18. INDIA BUDGET 2014-15 Page 18 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Online remittance of service tax made mandatory for all assessees. However, the jurisdictional officers empowered to waive this on a case-to-case basis. Payment of disputed amounts (proportionately, as prescribed) made a pre-condition for filing of appeals. Application for stay no longer relevant. Inter-unit transfer of unutilized credits in case of LTUs restricted. This could impact cash flows especially where one of the units is export focused. Input credit of service tax to be availed within a maximum of 6 months, failing which the input credit will lapse. Facility of advance rulings extended to resident private limited companies; this will certainly help obtaining certainty in tax positions and avoiding litigations. Rate of interest for delay in payment of service tax substantially increased. Adjudication proceedings to be completed within 6 months and 1 years depending upon the type of notice issued. This will help address the problem of long pending adjudication matters. CENVAT credit to be availed within a maximum period of 6 months Joint charge mechanism in respect of renting of motor vehicles Remittance of service tax through internet banking made mandatory 19. INDIA BUDGET 2014-15 Page 19 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU DIRECT TAX PROPOSALS CORPORATE TAX Rates of tax Rates of taxes: There are no changes to the tax rates (including surcharge and education cess) for corporates. The effective rate of tax is tabulated below: Taxable Income (Rs) Domestic Company Foreign Company Upto 1,00,00,000 30.90% 41.20% 1,00,00,001 to 10,00,00,000 32.45% 42.02% Above 10,00,00,000 33.99% 43.26% - Marginal relief for surcharge shall be allowed. - There are no changes in the rates of Education Cess and Secondary and Higher Education Cess, which continues at 3%. Applicability of Tax Dividend distribution tax to be computed on grossed up dividends: Dividend distribution tax is levied at 15% (excluding surcharge and cess) on an amount declared, distributed or paid by way of dividends to shareholders. Currently, the dividend distribution tax is applied on the amount paid as dividend after reduction of distribution tax by the company (net of tax). It is now proposed that for determining the tax on distributed profits, the amount of dividends which are actually received by the shareholders of the domestic company need to be grossed up for the purpose of computing the additional tax. Similar amendment is proposed in respect of income distributed by the mutual funds to its investors 20. INDIA BUDGET 2014-15 Page 20 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU The above proposal is illustrated as under: Particulars Amount (Rs.) Dividend amount distributed 85,000 Grossing up (Rs.85,000 x 15%) / (1-0.15) 15,000 Increased amount 1,00,000 Dividend Distribution Tax @15% 15,000 These amendments will take effect from October 1, 2014. Extension of lower rate of taxation on certain dividends received from foreign companies: The lower rate of taxation of 15% on dividend income received from specified foreign companies had a sunset date of March 31, 2014. In order to encourage further repatriation of profits from overseas operations, it is proposed to continue the said benefit for future years i.e. without any sunset date. Tax reliefs Investment linked allowance for manufacturing companies: A manufacturing company is entitled to claim a deduction of 15% of the actual cost of the new asset, provided the investment in the new asset exceeds Rs. 100 crores. Such deduction is available for the Financial Year (FY) 2013-14 and FY 2014-15. Recognizing that the growth of the manufacturing sector is crucial for employment generation and economic development, the allowance for a deduction of 15% of the actual cost of the new asset is extended to manufacturing companies which acquire and install new assets exceeding Rs. 25 crores during the year. The benefit will be available up to March 31, 2017. 21. INDIA BUDGET 2014-15 Page 21 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Extension of sunset for certain companies in the power sector: Currently, undertakings in the power sector involved in generation and distribution or transmission / distribution of power or undertakes substantial renovation / modernization of existing transmission networks can claim a 10 year tax holiday in respect of specified income. To provide further time to the undertakings to commence the eligible activity to avail the tax incentive, it is now proposed to extend the tax holiday to undertakings which commence the prescribed activities on or before March 31, 2017 from the earlier date of March 31, 2014. Deduction in respect of capital expenditure on specified business: A deduction for the capital expenditure is available for specified businesses. It is now proposed to extend the said deduction to two more businesses viz., laying and operating a slurry pipeline for the transportation of iron ore and setting up and operating a semiconductor wafer fabrication manufacturing unit satisfying the prescribed guidelines. Taxation of incomes from investments Taxation of securities held by Foreign Institutional Investor (FII): It is proposed that any security held by a FII shall be regarded as a capital asset, irrespective of whether such security is held as capital investment or stock in trade. The proposal intends to clarify the ambiguity prevailing among the FIIs regarding the characterization of income from sale of securities as to whether the same is business income or capital gains income. It is also recognized that fund managers of these foreign investors are apprehensive that their presence in India may have adverse tax consequences. The amendment has been proposed to put an end to this uncertainty and to encourage these fund managers to operate from India. 22. INDIA BUDGET 2014-15 Page 22 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Mutual Funds, Securitization Trusts and Venture Capital Companies or Venture capital Funds to also file return of income: Presently, Mutual Funds (MFs), Securitization Trusts, Venture Capital Companies (VCC) or Venture Capital Funds (VCF) are not required to file income-tax returns. Instead, they are required to furnish a statement giving details of the nature of the income paid or credited during the previous year and other prescribed details. It is proposed to amend the provisions in this regard to require these entities to file the income- tax return if their total income, before claiming exemption, exceeds the basic exemption limit. Long term capital gains on transfer of listed securities and zero coupon bonds: The concessional tax rate of 10% on LTCG (computed without considering the indexation benefit) will be now restricted only to listed securities (other than a unit of a fund) and zero coupon bonds. Hitherto, this concessional rate was applicable to units of non-equity oriented funds. It may be noted that the LTCG arising from units of equity oriented funds which is liable to securities transaction tax continues to be exempt from tax. Unlisted securities and units of a debt oriented mutual funds to constitute short term capital assets (STCA) if held for less than 36 months: Currently, shares held in a company, listed securities, units of Unit Trust of India or Mutual Funds and zero coupon bonds held for not more than 12 months are considered as STCA. Acknowledging that such a provision was introduced for encouraging investment on stock market where prices of the securities are market determined, it is proposed to provide that an unlisted security and a unit of a mutual fund (other than an equity oriented fund) would constitute a STCA if it is held for not more than 36 months. Transfer of Government securities outside India by one non-resident to another: With a view to facilitate listing and trading of government securities outside India and to promote investment in such securities, it is now proposed to exempt from the purview of capital gains tax, transfer of a Government security by one non-resident to another non-resident made outside India through an intermediary dealing in settlement of securities. 23. INDIA BUDGET 2014-15 Page 23 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU REIT and Infrastructure Investment Trusts Real Estate Investment Trust (REIT) India has moved one step closer to usher in the dawn of REIT and join the likes of its global peers USA, Singapore, Australia, Japan, France and United Kingdom. The growth of Indian corporates and their demand for organized commercial space including warehouses, shopping centres, conference centres, etc. has necessitated the Finance Minister, in his maiden budget speech, to provide clarity on the applicability of taxes on REIT. While, the Securities and Exchange Board of India (SEBI) has issued a consultation paper on the draft SEBI (Real Estate Investment Trust) Regulations, 2013 for public comments, the much needed clarification on taxes will accelerate the operationalization. REIT is beneficial to both the investor and the industry. On the one hand, REIT provides investors an investment avenues, while on the other hand, provides the sponsor comprising of developers and private equity funds an options to exit or unlock value in assets thus providing them liquidity and enable them to invest in other projects. Further, REIT reduces the dependency on financial institutions who are averse to the real estate industry. In terms of the draft regulations, REIT in India would be set up as a Trust and would operate similar to Mutual Funds. REIT shall raise funds through an initial offer and requires mandatory listing on a recognized stock exchange. The funds mobilized shall be primarily invested in completed revenue generating properties (rent yielding assets) with an option to invest in properties directly or through special purpose vehicles (SPVs) whereby the controlling interest with more than 50% of voting rights or interest is held by such REIT. 24. INDIA BUDGET 2014-15 Page 24 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Tax on units of the trust: The units are considered on par with listed equity shares or units of an equity oriented fund for the purposes of capital gains taxation. The long term capital gain earned from transfer of units of trust are tax exempt whereas short term capital gain attract 15% tax. The above taxation rates shall not apply in case of units of trust acquired in exchange of shares held in SPVs. Further, any exchange of shares in a SPV to units of the trust shall not be considered as transfer and is exempt from taxation. Hence, the cost of acquisition and holding period of the shares shall also be reckoned for computing the amount of capital gain in the event of transfer of such exchanged units. Infrastructure Investment Trust (InvIT) Similarly, recognizing the need for a suitable structure to finance/refinance infrastructure sector and to attract international finance, SEBI issued the consultation paper on Infrastructure Investment Trusts (InvITs). The taxation of such trusts shall be similar to REITs. 25. INDIA BUDGET 2014-15 Page 25 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU TAXATION FRAMEWORK FOR REIT & InvITs Nature of Income Tax incidence or Chargeability in the hands of Remarks Unit-holder Trust SPV Interest For Resident unit-holders As per the rate applicable to such unit holder For Non-residents unit- holders At the rate of 5% Exempt Not Applicable Liable for with-holding of tax by the trust at the rate of 10% for resident unit-holders and 5% for non-resident unit- holders on distribution of interest income component. Dividend Exempt Exempt Liable for Dividend Distribution Tax Capital gains on disposal of assets held by the Trust Income distributed by the trust, to the extent of such capital gain, is exempt Based on the period of holding and type of asset, taxable at the rates of 15% or 20% or maximum marginal rate Not Applicable Any Other Income Income distributed by the trust, to the extent of such income, is exempt Taxable at Maximum marginal rates Not Applicable 26. INDIA BUDGET 2014-15 Page 26 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Rationalization Measures Expenses in respect of Corporate Social Responsibility (CSR) requirements: As per the provisions of the new Companies Act, 2013, certain companies are required to spend a prescribed percentage of profit on activities relating to CSR. It is clarified that the objective of CSR is to share the burden of the Government in providing the social services by companies having a prescribed profit / net worth / turnover threshold. Hence, it is proposed that expenditure incurred by a taxpayer on activities relating to CSR referred to in the Companies Act, 2013 would not be allowed as a deduction against the taxable income. However, CSR expenditure would be allowed as a deduction if the same qualifies as business expenditure under the other provisions of the income-tax law. Presumptive income from business of plying, hiring or leasing goods carriages: It is now proposed to provide for a uniform amount of presumptive income of Rs. 7,500 for every month (or part of a month) for all types of goods carriage without any distinction between heavy good vehicle (HGV) and vehicle other than HGV. Hitherto, the Act provided for presumptive taxation of income in the case of taxpayer engaged in the business of plying, hiring or leasing goods carriages be calculated at Rs. 5,000 per month in case of HGV and Rs. 4,500 per month in case of a vehicle other than HGV. Speculative transactions in respect of commodity derivatives: Hitherto, the Act provided that an eligible transaction in respect of trading in commodity derivatives carried out in a recognized exchange shall not be considered as speculative transaction. A subsequent Circular clarified that the eligible transaction shall include only those transactions in commodity derivatives which are liable to commodities transaction tax. It is now proposed to provide legislative effect to the same. Consequentially it is proposed that eligible transaction in respect of trading in commodity derivatives carried out in a recognized association and chargeable to commodities transaction tax shall not be considered to be a speculative transaction. 27. INDIA BUDGET 2014-15 Page 27 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Business engaged in trading of shares not deemed as speculative: As per existing provision, losses incurred in respect of a speculation business cannot be set off except against the profits of any other speculation business. Where any part of the business of a company consists of purchase or sale of shares, such company is deemed to be engaged in a speculation business. However, income earned by a company whose principal business is banking or granting of loans and advances were not deemed as speculative. Now, it is proposed to extend this exclusion for companies whose principal business is trading in shares. Tax Deducted at Source / Withholding taxes Concessional rate of tax on long term overseas bonds: The concessional rate of withholding tax at 5% applicable on interest payments made by Indian companies to non- residents has now been extended to any long term bond. Currently, the concessional rate is available only in respect of interest on long term infrastructure bonds. The benefit is also extended for a further period of 2 years on borrowings up to July 1, 2017. This proposal would be effective from October 1, 2014. Tax deduction at source from non-exempt payments made under life insurance policy: Any sum received under a life insurance policy (including bonus) which is not exempt from tax, and exceeds in aggregate Rs. 1 lakh during the year, is now proposed to be subjected to tax deduction at source at the rate of 2% of such payments. This proposal would be effective from October 1, 2014. Extended time limit to claim expenditure on non- resident payments liable for withholding tax: It is now proposed that payments to non-residents on which tax is deductible would be allowed as a deduction in computing the taxable income in the relevant financial year if the deducted tax is remitted within the due date specified for filing of return of income. Hitherto, such extended time limit was available only in respect of payments to residents on which tax is deductible. Relaxation of disallowance for failure to deduct / remit taxes deducted: Currently, in cases of non-deduction / non-payment of tax deducted at source on resident payments, the entire payment to such resident is disallowed. Recognizing the hardship caused to taxpayers, it is now proposed to restrict the disallowance to 30% of the expenditure claimed. 28. INDIA BUDGET 2014-15 Page 28 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Scope of disallowance of expenditure for failure to deduct / remit tax deducted at source extended to all payments: Currently, specific payments such as royalty, interest, etc., are disallowed if tax on such payments has not been deducted and / or not remitted to the Government within the prescribed time. The disallowance is now extended to all payments on which tax is required to be deducted at source and remitted to the Government. Consequentially now payments such as salary, directors fee will also be disallowed if tax is not deducted and / or not remitted to the Government. Filing of correction statements of tax deducted at source (TDS) and processing of such statements: Currently, the provisions related to filing of statements of tax deducted at source do not provide for filing correction statement for rectification of any mistake or to add, delete or update the information furnished in the original statement. Such corrections were being done on the basis of a notification issued in this regard. It is now proposed to amend the extant provisions to include the effect of the notification thereby enabling a deductor to file TDS correction statements and provide for their processing. Rationalization of provisions relating to scrutiny for TDS compliances: Under the existing provisions, an order deeming a taxpayer, who has filed the prescribed statement of TDS details, to be in default is required to be passed before the expiry of 2 years from the end of the financial year in which the statement is filed. Considering the fact that TDS statements are processed in a computerized environment, the time-limit of 2 years has been removed, since the issues would now pertain to transactions not reported. Further, it is now also proposed to increase the time limit for an order treating a taxpayer to be in default for non-compliance with TDS provisions from the present 6 years to 7 years from the end of the financial year in which the payment is made or credit is given. 29. INDIA BUDGET 2014-15 Page 29 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Transfer pricing Scope of deemed international transactions extended: Under the existing provisions, where an enterprise (taxpayer) enters into a transaction with an unrelated person and there exists a prior arrangement between the associated enterprise (AE) and the unrelated person, whereby the terms of the transaction are determined in substance between the AE and the person, then the transaction between the taxpayer and unrelated person is construed as an international transaction. The current provisions required either the taxpayer or the unrelated person to be a non-resident for the arrangement to qualify as a deemed international transaction. It is now proposed that whether the taxpayer or the unrelated person is a non-resident or not, the transaction between taxpayer and such unrelated person shall be deemed to be an international transaction covered within the ambit of the transfer pricing regulations. Roll back mechanism under the Advance Pricing Agreement (APA): The Finance Act, 2012 had introduced the APA Scheme. Under the said scheme, the CBDT was authorized, to enter into an APA for a period not exceeding 5 years prospectively. It is now proposed that APA may, subject to conditions, provide for determining the arms length price in relation to an international transaction entered during any period not more than 4 preceding previous years. This proposal is effective from October 1, 2014. Levy of penalty by Transfer Pricing Officer (TPO): Currently, an Assessing officer or Commissioner (Appeals) is empowered to levy a penalty on any person having an international transaction or specified domestic transaction, and fails to furnish information or document required by them. Considering the fact that TPO determines the arms length price in several cases, it is now proposed to include the TPO as an authority competent to levy penalty. This proposal is effective from October 1, 2014. 30. INDIA BUDGET 2014-15 Page 30 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Determination of arms length price (ALP): The Finance Minister (FM) mentioned in his Speech that to align the Transfer Pricing regulations in India with the best available practices, it is proposed to introduce range concept for determination of ALP. However, the arithmetic mean concept will continue to apply where number of comparable is inadequate. The FM mentioned this aspect is being analyzed and appropriate rules will be prescribed. The FM also mentioned that as per existing transfer pricing provisions, only one year data is allowed to be used for comparable analysis with some exception. It is proposed to amend the regulations to allow use of multiple year data. Alternate Minimum Tax (AMT) Scope of adjusted Total Income for levy of AMT extended: Every person, other than a company, is required to pay AMT at 18.5% on adjusted total income, if regular income tax payable is less than AMT. Under the existing provisions, in order to compute the adjusted total income for AMT purpose, the total income is increased by the amount of profit-linked incentives (including export profits of an SEZ unit). It is now proposed to adjust the total income of the taxpayer by deduction claimed under section 35AD towards capital expenditure of the specified business. However, deduction shall be allowed towards depreciation allowance as computed under the normal provisions. Credit for AMT: Under the existing provisions, AMT is applicable only in cases where adjusted total income exceeds Rs. 20 lakhs. The current provisions do not contemplate utilization of credit by the taxpayer if in any subsequent assessment year, the adjusted total income did not exceed the limit of Rs. 20 lakhs. Hence, it is now proposed that a taxpayer can utilize credit of AMT even if the income of the taxpayer is less than Rs. 20 lakhs. 31. INDIA BUDGET 2014-15 Page 31 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Other proposals Tax on advance money received and forfeited: It is now proposed to provide that any sum of money received as an advance or otherwise during the course of negotiations of transfer of a capital asset would be taxable as income from other sources if such sum is forfeited by the seller and the negotiations do not result in the transfer of capital asset. Hitherto, such sums were reduced from the cost of acquisition of the asset in the hands of the seller- forfeiter. Capital gain on compulsory acquisition of assets: Under the present provisions of the Act, where an asset is transferred by way of compulsory acquisition and where the amount of compensation is enhanced by a court / tribunal / authority, such gain is taxable in the year of receipt of the amount. Acknowledging the uncertainty about the year in which the amount of compensation is received pursuant to an interim order of a court / tribunal / authority, it is clarified that such compensation would be taxable in the year in which the final order of the court / tribunal / authority is made. Applicability of Tax Accounting Standards (TAS): The TAS as notified under the income-tax provisions would need to be followed for the computation of income and disclosure of information. The taxpayer need not necessarily maintain its books of accounts as per the TAS, and it would be sufficient that the computation of income and disclosure of information is in accordance with the notified tax accounting standards. Powers of income-tax authorities has been extended to include - Conducting surveys to verify withholding tax compliances, which was hitherto not provided in the Act; - Issuing notices for additional information for verifying the information in its possession This provision would be effective from October 1, 2014. 32. INDIA BUDGET 2014-15 Page 32 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Estimation of assets by the Valuation Officer: The extant provisions empowering the tax officer to refer a case for valuation of assets / property have been rationalized. It is now proposed to authorize the tax officer to refer valuation of any asset, property or investment to a Valuation Officer to estimate the value, including the fair value. The reference is irrespective of whether the tax officer is satisfied with the correctness of the accounts of the taxpayer or not. The Valuation Officer is then required to undertake the valuation in the prescribed manner and submit the report within 6 months from the end of the month of the reference from the tax officer. The period between the date of reference of the tax officer to the Valuation Officer and the date of receipt of the report from the Valuation Officer would be excluded in determining the period of limitation of the purpose of such assessments. Mode of acceptance / repayment of loans and deposits: Under the current provisions of the Act, a person is not permitted to take or give a loan or deposit, exceeding Rs. 20,000, to any other person otherwise than by account payee cheque or account payee bank draft. Recognizing the increasing use of internet banking facilities and payment gateways, it is now proposed that transfer of amounts by way of an electronic clearing system through a bank account would not be prohibited. Rationalization of provisions relating to filing of Annual Information Return (AIR): Currently, a tax payer is responsible for registering or maintaining books of account with regard to specified financial transaction is liable to file annual information return in Form 61A. Now, the budget proposes to rename AIR as Statement of financial transaction or reportable account and extend the provision to also include the reportable accounts of prescribed reporting financial institutions. Such financial institutions, nature of information, its manner of documentation and the due diligence procedures are yet to be prescribed. 33. INDIA BUDGET 2014-15 Page 33 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Further, the provisions are also proposed to provide for correction of statements within 10 days of filing by the reporting person on discovery of any inaccuracy in information provided. Such correction benefits are also available to the statement filed in pursuance of notice received from income-tax department. In order to strengthen the regulations, levy of penalty of Rs. 50,000 is proposed in cases where inaccurate information is furnished. Such penalty shall be levied where inaccuracy is on account of failure to comply with due diligence requirement or having been aware of the inaccuracy at the time of furnishing the statement of information has not informed the same to the income-tax authority or under the circumstance where he fails to correct the statement on discovering the inaccuracy subsequent to filing the statement. Strengthening of Authority for Advance Rulings (AAR) and Income-tax Settlement Commission (ITSC): The FM in his Speech proposed to enable resident taxpayers to obtain an advance ruling from the AAR in respect of their income tax liability above a defined threshold (presently, this facility is available only to non-residents and Indian public sector enterprises); to strengthen the AAR by constituting additional benches; to enlarge the scope of the ITSC so that taxpayers may approach the Commission for settlement of disputes. This aspect is not part of the bill. However, the FM has mentioned necessary legislative amendments would be enacted to effect the above proposals. 34. INDIA BUDGET 2014-15 Page 34 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU TAXATION OF TRUSTS Rationalization Measures for Trusts Subsequent registration validates an earlier exemption entitlement to charitable or religious trusts: A trust or an institution can claim exemption of its income under the relevant provisions only after it is registered with the income-tax authorities. It is acknowledged that not granting exemption for the period prior to registration causes genuine hardship to trusts. It is now proposed that in case where the trust or institution is granted registration, the exemption benefit can be claimed for the earlier years if the assessment proceeding is pending for those years as on the date of the registration. This is subject to the objects and activities of the trust or institution remaining the same in the year of registration and earlier year/s. However, this benefit is not proposed to be extended to an applicant who has been refused registration or the registration granted to it was cancelled at any time. This proposal would be effective from October 1, 2014. Cancellation of registration of Trusts: In order to curtail deliberate violations of the conditions based on which the registration is granted, it is now proposed to extend the powers of the Commissioner to cancel the registration of a trust unless a reasonable cause is provided. Cancellation can be invoked only if it is noticed that the trust has violated the prescribed conditions such as the income of the trust does not ensure the benefit of general public; or is applied for the benefit of a specific religion, community or caste; or any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or the funds of the trust are invested in prohibited modes. This proposal would be effective from October 1, 2014. 35. INDIA BUDGET 2014-15 Page 35 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Rationalization of taxation of anonymous donations: At present, anonymous donations, received in excess of the prescribed limit, by an entity being university, hospital or other institution, liable to pay tax, is charged at the rate of 30%. Further, in order to compute tax on other income, the slab rate is applied after reducing the aggregate amount of anonymous donations. Now, it has been proposed to rationalize the tax computation methodology in the following manner: - 30% of the anonymous donations over and above 5% of the total donations received or Rs. 1 lakh, whichever is higher; and - Income-tax as computed under the normal provisions on total donations less anonymous donations less higher of 5% of the total donations received or Rs. 1 lakh considered previously. The tax impact of the amendment is illustrated below: # Description Upto AY 2014-15 AY 2015-16 1 Total Receipts (incl. anonymous donation) 10,00,000 10,00,000 2 Anonymous donation 1,20,000 1,20,000 3 5% of total receipt 50,000 50,000 4 Limit U/S 115BBC 1,00,000 1,00,000 5 30% of 20,000 i.e.(2-4) 6,000 6,000 6 Tax on Balance (Say 20%) 1,76,000 (10,00,000- 1,20,000) x 20% 1,96,000 10,00,000- (1,20,000- 1,00,000) x20% Total Tax Cost 1,82,000 2,02,000 36. INDIA BUDGET 2014-15 Page 36 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Exemptions claimed by trusts and similar organizations: In order to rationalize the provisions with respect to exemptions claimed by the trusts and institutions, it is now proposed as follows: - The existing provisions under section 10(23C) of the Act provide exemption, subject to various conditions, in respect of income of certain educational institutions, universities and hospitals which exist solely for educational purposes or solely for philanthropic purposes, and not for purposes of profit and which are wholly or substantially financed by the Government. It is proposed that if the prescribed institutions receives a grant which exceeds a prescribed percentage of total receipts, then such institution shall be considered as being substantially financed by the Government for that previous year. - The registered trusts or institutions that can claim exemption under the specific provisions (contained in section 11 and 12) would not be allowed to claim exemption under general exemptions (contained in section 10) in respect of income derived from property held under trust. - Similarly, an entity approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under the general provisions of section 10 in respect of income derived from property held under trust. - No allowance for depreciation shall be allowed in respect of an asset, acquisition of which has been claimed as an application of income by a trust or institution, etc. 37. INDIA BUDGET 2014-15 Page 37 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU PERSONAL TAXES Rate of tax It is proposed to increase the basic exemption limits by Rs. 50,000. The slabs proposed for FY 2014-15 are as follows: In the case of assessee being individual (below 60 years), HUFs, AOP, BOI and artificial juridical persons: Taxable Income (Rs) Tax rate Upto Rs. 2,50,000 Nil Rs. 2,50,001 to Rs. 5,00,000 10 percent Rs. 5,00,001 to Rs. 10,00,000 20 percent Above Rs. 10,00,000 30 percent In the case of individual, being a resident in India, who is of the age of sixty years or more but less than eighty years: Taxable Income (Rs) Tax rate Upto Rs. 3,00,000 Nil Rs. 3,00,001 to Rs. 5,00,000 10 percent Rs. 5,00,001 to Rs. 10,00,000 20 percent Above Rs. 10,00,000 30 percent There is no change in the rate of surcharge which continues to be at 10% in case the total income exceeds Rs. 1 crore and education cess which remains at 3%. Further there is no change in the slabs for resident individuals who is of the age of eighty years or more. 38. INDIA BUDGET 2014-15 Page 38 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Tax reliefs Increase in deduction of interest on loan borrowed for acquisition / construction of self-occupied house property: Considering the appreciation in the value of house property and cost of finance, the deduction available with respect to interest on loan borrowed for acquisition / construction of self-occupied house property is now increased from Rs. 1.5 lakhs to Rs. 2 lakhs. Increase in threshold limit of deductions: The overall ceiling for investment in the eligible instruments under sections 80C, 80CCD and 80CCE for availing deduction from income of an individual or HUF is increased to Rs. 1.5 lakhs from the existing Rs. 1 lakh in order to encourage household savings. Deduction of pension contributions extended to private sector employees: Currently, a deduction is available for any amount paid or deposited under a notified pension scheme by an individual employed by the Central Government or any other employer on or after January 1, 2004. It is proposed to remove the condition of the date of joining the service on or after January 1, 2004 for private sector employees as the date of joining the service is not relevant for the New Pension Scheme. Capital gains exemption in the case of investment in a residential housing property: Under the current provisions of the Act, relief from long term capital gains tax is available, where the sale consideration is, invested in a residential house. The phrase a residential house was interpreted by select courts to include more than one residential house and also the same could be situated outside India. To clarify this aspect, it is now proposed to suitably amend the provisions confirming that the relief is available only on one residential house in India. 39. INDIA BUDGET 2014-15 Page 39 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Capital gains exemption on investment in specified bonds: Currently, where a taxpayer derives any long term capital gains and the whole or part of such gains are investment in specified bonds within 6 months from the date of transfer, proportionate capital gains as computed under the provisions is not charged to tax. These provisions provide that the investment in the specified bonds during any financial year should not exceed Rs. 50 lakhs. These provisions resulted in an ambiguity as a consequence of which, capital gains arising during the year after the month of September were invested in the specified bonds in such a manner so as to split the investment in two FYs. This resulted in the claim for relief of Rs. 1 crore as against the intended limit of Rs. 50 lakhs. It is now clarified that the investment made by a taxpayer in the specified bond during the FY in which the original asset is transferred and in the subsequent financial year does not exceed Rs. 50 lakhs. 40. INDIA BUDGET 2014-15 Page 40 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU INDIRECT TAX PROPOSALS GOODS AND SERVICE TAX FM hopeful of finding a solution to approve the legislative scheme before the end of this year to enable implementation of GST. 9.The debate whether to introduce a Goods and Services Tax (GST) must now come to an end. We have discussed the issue for the past many years. Some States have been apprehensive about surrendering their taxation jurisdiction; others want to be adequately compensated. I have discussed the matter with the States both individually and collectively. I do hope we are able to find a solution in the course of this year and approve the legislative scheme which enables the introduction of GST. This will streamline the tax administration, avoid harassment of the business and result in higher revenue collection both for the Centre and the States. I assure all States that government will be more than fair in dealing with them. Extract from FMs speech SERVICE TAX The rate of service tax remains unchanged at 12.36% (including cess). Negative list Tax net for services relating to sale of space for advertisement widened: Sale of space for advertisements other than in print media will be liable to service tax. This would bring in sale of space for all other modes into the tax net such as online, mobile, websites, out-of- home, film screens, aerial, billboards etc would be taxable. Hitherto, only sale of space or time for broadcast on radio or television were liable to service tax. Services by radio taxi or radio cabs to be taxable: Services provided by radio taxi or radio cabs will be liable to service tax. They are now put on par with rent-a-cab services. Partial exemption (40% taxable) and reverse charge mechanism as applicable to rent-a-cab are also made applicable. 41. INDIA BUDGET 2014-15 Page 41 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Exemptions Exemptions of services provided to educational institutions partially withdrawn: Only the following services provided to educational institutions would be exempt: - Transportation of students, faculty and staff; - Catering, including any mid-day meals scheme sponsored by the Government; - Security, cleaning or house-keeping services; - Admission and conduct of examination services; Hitherto, all auxiliary educational service and renting of immovable property to educational institutions were exempt from service tax. Exemption for lodging services extended to non- commercial concerns also: The exemption of lodging provided by hotels, inns, guest houses, clubs or campsites extended to non-commercial concerns, viz., dharamshalas, ashrams or other entities. Hitherto, it was applicable only if provided by commercial concerns. All works contracts other than original works liable to tax on 70% of the contract value: The taxable value for all works contracts including maintenance and repair contracts but excluding original works will be 70% of the contract value (partial exemption of 40% reduced to 30%). Hitherto, the taxable value in respect of maintenance and repair contracts was at 70%; for all other works contracts (other than original works), it was at 60%. Partial exemption for transport of goods by vessels enhanced: The exemption for services in relation to transport of goods by vessel is enhanced from 50% to 60%. Accordingly, 40% of the total value would be liable to service tax. Exemption for contract carriages restricted: The exemption for service of providing air-conditioned contract carriage for the transportation of passengers withdrawn. 42. INDIA BUDGET 2014-15 Page 42 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Exemption for services provided to SEZs: The current provisions have been rationalized to provide more clarity in respect of certain procedural matters. The following are the measures taken: Form A-2 should be issued by the jurisdictional DC or AC of Central Excise to the SEZ (Developer / Unit) within 15 working days from the date of submission of Form A-1. Hitherto, there was no time limit prescribed for issuance of Form A-2. The authorization in Form A-2 will be valid from the date on which Form A-1 is verified by the Specified Officer of the SEZ. However, if the Form A-1 is not verified and issued within 15 days, the authorization will be valid from the date on which Form A-1 is submitted. Service provider may provide the services without charging service tax merely on the basis of Form A 1, pending issuance of Form A-2. However, if the SEZ Unit or the Developer does not provide a copy of Form A 2 within 3 months from the date of provision of service to the service provider, then the service provider shall have to pay service tax on such service. Scope of exemptions for certain services enlarged: The following services would be exempt from payment of service tax. - Services of life micro insurance approved by the IRDA and having maximum cover of Rs. 50,000. - Specialized financial services in relation to management of forex reserves received by the Reserve Bank of India. - Services of tour operators provided to foreign tourist in relation to a tour conducted wholly outside India - Services provided by operators of the Common Bio- medical Waste Treatment Facility to a clinical establishment by way of treatment or disposal of bio- medical waste or the processes incidental thereto. Advance Ruling provisions Advance Ruling provisions extended to resident private limited companies: Resident private limited companies can apply for advance rulings. Hitherto, it was applicable only to foreign companies, wholly owned subsidiaries of foreign companies, joint ventures and public limited companies. 43. INDIA BUDGET 2014-15 Page 43 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Place of provision of services Meaning of intermediary services enlarged: Intermediary services to include services of arranging or facilitating supply of goods in addition to services. Consequently, the place of provision, for determining the taxability of the transaction (will be taxable only if the place of provision is within India), in respect of such services would be the place where the intermediary is located. Prior to this amendment, the place of provision for arranging or facilitating supply of goods was the location of the recipient of services (under the residuary rule). Hiring of vessels: The place of provision in relation to hiring of vessels or aircraft shall be the place where the recipient of service is located, irrespective of period of hiring. However, in relation to yachts, the place of provision shall be the place where the provider of service is located. Temporary imports for repairs: Where the goods are temporarily imported for repair and re-export, the place of provision shall be the place where the recipient of services is located. However, where the goods are temporarily imported for reconditioning or reengineering, the place of provision would be the place where the reconditioning or reengineering is undertaken. Hitherto, in all the above cases, the place of provision was the place where the recipient of services was located. Point of taxation Under reverse charge mechanism: It is proposed that where the value of services is paid to the service provider within 3 months from the date of invoice, the point of taxation shall be the date of payment of the invoice value to the service provider (point of taxation determines the date on which the liability to pay tax arises). In all other cases (where the service provider is not paid within 3 months), it would be the first day after the expiry of such 3 months. Hitherto, in such cases, the point of taxation was deemed to be the date of invoice. 44. INDIA BUDGET 2014-15 Page 44 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Appeals Application for stay for filing of appeal dispensed with; prescribed amounts to be pre-deposited: Remittance of the following amounts will be pre-condition for preferring an appeal. - Appeal before Commissioner (Appeals): 7.5% - Appeal before CESTAT (against order of Commissioner (Appeals)): 10% - Appeal before CESTAT (against the order of Commissioner): 7.5% However, it is provided that the aggregate amount required to be deposited shall not exceed Rs. 10 crores. Accordingly, filing of application for stay of disputed amounts no longer required, even for the balance of disputed amounts. Hitherto, an application for stay of disputed taxes was required to be filed and the Appellate Authorities were empowered to grant a stay (including complete stay) on a case-to-case basis. Similar amendments have been made under the Central Excise and Customs laws. Tax administration Remittance of service tax through internet banking made mandatory: Remittance of service tax through internet banking is made mandatory for all service tax assessees. However, it is provided that jurisdictional authorities may on a case-to-case basis allow the assesse to remit the taxes in any other mode. Hitherto, online remittance was mandatory only for assessees who had paid Rs. 10 lakhs or more of output tax in the previous year. Rate of interest for delay in remittance of tax enhanced: The rate of interest for delay in payment of service tax would be as follows: Period of delay Rate of interest Upto 6 months 18% 6 months to 1 year 24% beyond 6 months More than 1 year 30% beyond 1 year 45. INDIA BUDGET 2014-15 Page 45 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Time limits specified for completion of adjudication: In cases where notices for recovery of tax have been issued, the tax officers are now mandatorily required to complete the adjudication proceedings and issue the orders within the following time limits: Type of notice Time Limit Notice for normal period of 18 months 6 months from the date of notice Notice for extended period of 5 years (involving fraud, collusion, willful mis-statement, suppression or evasion) 1 year from the date of notice Power for complete waiver of penalty withdrawn: In cases involving fraud, collusion, willful mis-statement, suppression or evasion, the penalty can be waived only upto 50%. Hitherto, 100% of penalty could be waived where a reasonable cause was shown for such failure. Powers to issue orders for search or seizure delegated: The Joint Commissioner of Central Excise, the Additional Commissioner of Central Excise or any other officer notified by the Board may authorize an order for search or seizure of books or things or documents. Hitherto, these powers were vested only with the Joint Commissioner of Central Excise. Attachment of goods in case of transfer of business or change in ownership: The department will be empowered to attach all goods in the custody of the transferee for any default or amounts recoverable from the transferor on the date of transfer of business. This would be applicable in respect of transfer of business and change in ownership of business. Services provided by a director: Services provided by a director to a body corporate would be liable to service tax under reverse charge mechanism. Hitherto, services provided by a director only to a company was subject to reverse charge mechanism. 46. INDIA BUDGET 2014-15 Page 46 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Services provided by recovery agents liable to tax under RCM: Services provided by recovery agents to Banks, Financial Institutions and NBFCs will be liable to service tax under reverse charge mechanism. This would be under the complete reverse charge. Joint charge mechanism in respect of renting of motor vehicles: The proportion of service tax liable to be paid by the recipient of service increased from 40% to 50% of service tax. This would be applicable in respect of transactions where the service tax is charged by the service provider on non-abated value. Hitherto, the recipient of service was liable to pay 40% and provider of service was liable to pay 60% of the service tax liability. CENTRAL EXCISE Rate of duty The mean rate of basic excise duty remain unchanged at 12.36%. Surcharge introduced on aerated waters @ 5%: Surcharge of 5% imposed on waters, including aerated waters, containing added sugar i.e. aerated waters, lemonade and other. (Note: TRU Circular and memorandum indicates this levy as additional duty of excise at 5%) Changes in duty rates: Description Proposed rate Current rate Tobacco products Cigarettes less than 65 mm (per 1000 sticks) Rs. 1150 Rs. 660 Cigarettes others 21% 11% Pan masala 16% 12% Unmanufactured tobacco 55% 50% Gutkha and chewing tobacco 70% 60% Petroleum 47. INDIA BUDGET 2014-15 Page 47 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Description Proposed rate Current rate Branded petrol Rs. 7.5 per lt Rs. 2.35 per lt Others PSF and PFY polyester stable fibre and polyester filament yarn (with CENVAT credit and without CENVAT, respectively) 6% / 2% Nil Exemptions: Complete exemption from basic excise duty on machinery, equipment etc. required for initial setting up of: - Solar energy production projects - Compressed biogas plant (Bio-CNG) wholly exempt from basic excise duty. Plastic materials reprocessed out of the scrap or waste and cleared into the DTA by an EOU wholly exempt from basic excise duty. Un-branded articles of precious metals exempt from excise duty retrospectively for the period 01.03.2011 to 16.03.2012. Rate of duty on Footwear, having retail sale price of Rs. 500 to Rs. 1,000 reduced to 6% from 12%. The rate of duty where the retail sale price is upto Rs. 500 remains exempted. Education Cess and SHE Cess on customs duty component are exempt on goods cleared by an EOU into the DTA. Valuation of excisable goods Transaction value applicable even if the cost of manufacture is higher than the sale price: Where the price is not the sole consideration for sale and where such goods are sold by the assessee at a price lower than the manufacturing cost + profit, it is provided that the transaction value shall be the excisable value. The cost + profit is not relevant for levy of excise duty. In the case of Fiat India Private Limited (37 STT 147 SC), the Honble Supreme Court had held that where the transaction value is lower than the cost of manufacture + profit thereto, the cost + profit so determined would be the excisable value. The impact of this judgement is negated by this amendment. 48. INDIA BUDGET 2014-15 Page 48 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Appeals Threshold limit for admission of appeal by CESTAT enhanced: The discretionary powers of CESTAT to reject the appeal on the ground of monetary limits is enhanced to Rs. 2 lakhs from Rs. 50,000. Similar amendment has been made under the Customs laws. Appeal will directly lie before the Supreme Court: In respect of questions involving excisability of goods, the appeal against the order of the Tribunal (CESTAT) would directly lie before the Supreme Court. Administrative Application for settlement of cases: Filling of application before the Settlement Commission to be allowed even in cases where the applicant has not filed the returns. Hitherto, the applicant who had not filed the returns was not allowed to opt for settlement of cases. Dis-entitled from filing an application: Imposition of penalty on the grounds of concealment of duty liability would disqualify such a person from applying for settlement in respect of any other matter. It is clarified that the concealment of duty liability should relate to any such concealment made from the officer of central excise and not from the Settlement Commission. Similar amendments have been made under the Customs laws. Customs and Central Excise Settlement Commission renamed: Customs and Central Excise Settlement Commission shall be re-designated as Customs, Central Excise and Service Tax Settlement Commission. Others Penalty if the duty is not paid within 1 month: The manufacturer will be liable to pay mandatory penalty at 1% per month or part thereof, of the duty declared in the return. This would be applicable if the duty is not paid within the 1 month from the due date. 49. INDIA BUDGET 2014-15 Page 49 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU CENVAT CREDIT Transfer of unutilized credit from one unit to another in case of LTU restricted: In case of LTUs, the benefit of transferring unutilized CENVAT credit from one manufacturing unit to other manufacturing unit(s) is restricted. Hitherto, even where the credits did not relate to the transferee unit, the transfer of credit was freely allowed. CENVAT credit to be availed within a maximum period of 6 months: It is provided that CENVAT credit should be mandatorily availed within 6 months from the date on which the credit was eligible to be availed (date of the relevant invoice). In the event, the CENVAT credit is not availed within such period, the same would lapse. Availment of credit in respect of reverse charge transactions: In case of transactions where service tax is payable under full reverse charge mechanism, the recipient of service shall be eligible to avail the CENVAT credit of such service tax only after making the payment of such service tax to the service provider. Hitherto, payment to service provider was also required to be made in addition to payment of the value of service. CENVAT Credit in respect of export services: In respect of export services if the consideration is not received within a period of 6 months (or such extended period) it is provided that the same should be reckoned as exempted services. Accordingly, the CENVAT credit attributable to such transactions will have to be reversed. It is further provided that if the consideration is received within 1 year or such extended period, the CENVAT credit reversed earlier may be reclaimed on the date of receipt of such consideration. Distribution of input credits by ISD: The method of distribution of input service tax credit attributable to more than one units by adopting the turnover ratio of the previous year is clarified with an illustration. It is further clarified that the distribution should be done on the basis of the previous years ratio irrespective of whether or not such common input services were used in all the units or only in some of the units. 50. INDIA BUDGET 2014-15 Page 50 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU CUSTOMS Duty rates The mean rate of basic customs duty remains unchanged at 10% on non-agricultural goods. Changes in duty rates for certain specific goods Description Proposed rate Current rate Chemicals and Petrochemicals Methyl alcohol 5% 7.5% Ethyl alcohol and other spirits, denatured, of any strength 5% 7.5% Metals Specified stainless steel flat products 7.5% 5% Precious Metals Half-cut or broken diamonds 2.5% Nil Cut and polished diamonds including lab-grown diamonds and colored gemstones 2.5% 2% Pre-forms of precious and semi- precious stones Nil 2% Electronics/Hardware Description Proposed rate Current rate LCD and LED TV panels of below 19 inches Nil 10% Specified telecommunication products not covered under the ITA (Information Technology Agreement) 10% Nil E readers Nil 7.5% Rate of basic customs duty and CVD on machinery, equipment etc required for setting up of solar energy production is proposed to be reduced to 5% and Nil, respectively. Widening of tax base Levy of safeguard duty on certain inputs / raw materials: Import of inputs / raw materials by an EOU or SEZ which are subsequently cleared as such, into the DTA will be liable to safeguard duties, as applicable to direct imports. 51. INDIA BUDGET 2014-15 Page 51 of 54 Contents Tax Policy Decisions Tax Administration Tax Cost Levies and Reliefs Cross Border Trade Controllers Dashboard Direct Tax Proposals Indirect Tax Proposals ACCRETIVE SDU Exemptions Exemption of SAD: The following will be exempt from special additional duty of customs (SAD @ 4%). - All inputs or components for use in the manufacture of personal computers (laptop or desktop) including tablet computers - Parts and raw materials for manufacture of wind operated electricity generators Administrative Imports through land: In case of imports in a vehicle through road, importer will be permitted to file the Bill of Entry prior to filing the Import Report or Import Manifest. Hitherto, a Bill of Entry was permitted to be filed only after the delivery of Import Report or Import Manifest. Further, the Bill of Entry shall be deemed to have been presented on the date of such entry inwards of the vehicle and accordingly such date would be considered as the date for determination of rate of duty and tariff value of imported goods. Duty free allowance under Baggage Rules Increase in duty free allowance under Baggage Rules: The duty free allowance for passengers returning from countries other than Nepal, Bhutan, Myanmar or China is amended as follows: Description* w.e.f 11.07.2014 Upto 10.07.2014 Passengers of age, 10 years and above returning after stay of: - More than 3 days - Less than 3 days 45,000 17,500 35,000 15,000 Passengers upto 10