Budget An overview of Finance Bill 2014

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1 Budget 2014 An overview of Finance Bill 2014

2 Agenda Direct Taxes Personal Taxation Corporate Tax Real Estate Investment Trust Capital Gains NGOs Transfer Pricing Procedures Indirect Taxes Service Tax Excise Customs

3 Personal Taxation

4 Personal Taxation No change in Basic Tax Rates No change in surcharge and cess also Basic Exemption limit increased by INR 50,000 From INR 200,000 to INR 250,000 In case of Senior Citizens, from INR 250,000 to INR 300,000 Ceiling u/s. 80C increased to INR 150,000 Pertains to Investment / Savings in PF, PPF, LIC, Housing Loan repayment, NSC, etc.

5 Personal Taxation Scope of Section 80CCD expanded All employees other than Central Govt. employees can join Until now employee joining after can only join Sub-limit of INR 100,000 introduced for contribution to such Pension Scheme Interest on Housing Loan Limit of deductibility of interest increased to INR 200,000 from INR 150,000 In respect of self occupied property

6 Corporate Tax

7 Dividend Taxation DDT is to be paid on grossed-up amount % of distributable profit (i.e. dividend + DDT) Effective rate of DDT: 20.5% of Dividend Concessional rate 15% of foreign dividend extended Section 115BBD was set to expire in March 31, 2014 It has been extended permanently

8 Investment Allowance Allowance of 15% of cost of new P&M In addition to the Depreciation allowance Introduced last year with Investment threshold of Rs. 100 crores for two years Investment threshold reduced to Rs. 25 crores in 1 year Deduction Available in the year of acquisition and installation Available for AY to AY Earlier Scheme to have parallel operation However, benefit can be claimed only under one scheme

9 Incentives Section 35AD - Two new businesses included Laying and operating a slurry pipeline for transportation of ire ore Setting-up and operating a semi-conductor wafer fabrication manufacturing unit No Double Deduction u/s. 35AD & 10AA Once deduction is claimed u/s. 35AD, no deduction u/s. 10AA for any year and vice versa Section 80IA benefit to power sector extended Sunset date for milestone extended to March 31, 2017

10 Section 40(a) Disallowance Disallowance for non-compliance of TDS Extended time allowed for deposit of TDS made from payment to NR No disallowance if deposited by due date for Return All the amounts paid to residents are now covered by Section 40(a)(ia) Hitherto salary was not covered Only 30% of the expenditure is disallowed Benefit not available in case of payment to NR

11 CSR Expenditure CSR Expenditure No automatic deduction u/s. 37(1) Not deemed to be spent wholly and exclusively for business purpose If the expense is in the nature of Section 30 to 36, it shall be governed by respective sections

12 12 Income Computation Income Computation and Disclosure Standards introduced CBDT formed a committee for formulating Tax Accounting Standards Recommended 14 TAS in its report in August, 2012 Committee recommended it should be called Income Computation Standards Proposal accepted Primary objective is to give clarity to avoid litigation

13 Other Changes Presumptive Taxation Differentiation of heavy goods carriage and others removed Rs. 7,500 per month per goods carriage would be presumed income Advance forfeited without transfer of property is to be treated as income Not to be reduced from cost of acquisition\ Section 73 In case of company with business of trading in shares Transactions of sale and purchase of shares would not be deemed to be speculative business Loan or deposit acceptance and repayment S. 269SS / 269T Payment through electronic clearing system would not trigger penalty

14 14 Other Changes Introduction of Advance Ruling for Resident assessee threshold and modalities to be prescribed Proposal to expand scope of Settlement Commission SC to remain once in a lifetime opportunity Direct Taxes Code Shall consider DTC 2014 along with Standing Committee Report

15 Business Trusts For Investment in Real Estate and Infrastructure Sector

16 16 Introduction of Business Trusts New concept of Business Trusts introduced for encouraging investments in real estate and infrastructure sector, defined as SEBI registered Real Estate Investment Trusts ( REITs ) or Infrastructure Investment Trusts ( InvITs ) Units of REITs and InvIT to be listed on recognized Stock Exchange REITs are investment vehicles in form of Trusts for investment in revenue generating assets in real estate, construction sector Introduced by Consultation Paper by SEBI on Investments in Completed, Revenue Generating Assets Regular distributions to unit-holders Easy avenues for exit for sponsor or developer Liquidity and Easy exit for investors due to listing of units Generally managed by Professional Managers Frameworks for REITs exist in USA, Singapore, Japan, Australia, France, UK

17 17 Introduction of Business Trusts InvITs are investment vehicles for financing infrastructure sector projects. Introduced by SEBI through Concept Paper dated Financing / Refinancing structures to boost infrastructure sector projects Frameworks in USA, Singapore, Hong Kong SEBI Regulations yet to be finalized. Consultative paper already published Corresponding amendments required under FEMA to enable investments in REITs and InvITs

18 Taxation of Business Trusts Nature of Income Business Trust Unit-Holders On Income arising to Business Trust and Distribution thereof to unit-holders Interest from SPV Exempt under Section 10(23FC) Taxable as interest income (Sec. 115UA) Liable to tax for nonresidents and 10% for residents (Sec. 194LB) Capital Gains Taxable Exempt under Section 10(23FD) Dividend Income Exempt under Section 10(34) Exempt under Section 10(23FD) Other Income Taxable at MMR Exempt under Section 10(23FD) On Transfer of units of Business Trust Capital Gains Not Applicable LTCG - Exempt under Section 10(38) (subject to certain exception for sponsor) & STCG 15% [111A] SPV means Indian Company where Business Trust holds controlling interest or percentage of shareholding or interest specified by SEBI regulations 18

19 19 Transition Provisions for Developers Transfer of investments in SPV by Developer to Business Trust in consideration of units of Business Trust Exempt from Capital Gains under Section 47 Capital Gain on subsequent transfer of units taxable Cost of shares of SPV to be cost of acquisition of unit (Sec. 49) Period of Holding of units to include period of holding of shares of SPV so transferred Long Term Capital Gains on subsequent transfer of units not eligible for exemption under Sec. 10(38)

20 Capital Gains

21 Capital Gains Section 54 / 54F Deduction restricted to only one new residential house Benefit only if investment is in India Section 54EC Investment restriction of INR 50L per FY retained Further restriction introduced Investment in certain bonds from capital gains arising from transfer of asset(s) during current and subsequent year cannot exceed INR 50L

22 Capital Gains Indirect Transfers No changes proposed High Level Committee to scrutinize fresh cases of taxation of indirect transfers due to retrospective amendments Longer period to qualify for LTCG 12 month period eligibility restricted only to listed securities and equity oriented funds Unlisted shares will have to be held for 36 months to qualify as LTCG Income of FII to be classified as Capital Gains Clarification to avoid significant issues on characterization of income Section 112 Tax at10% without Indexation Benefit restricted to only listed securities (other than unit)

23 NGOs

24 24 NGOs Approval of the Trusts U/s. 12 AA to be effective retrospectively Depreciation not to be available on assets, investment on which considered as application % of Government Funding to be prescribed to qualify a Hospital / Educational Institution as substantially financed by the Government U/s. 10 (23C) Section 10 (23C) and section 11 made mutually exclusive

25 Transfer Pricing

26 Transfer Pricing Deemed international transaction Transaction between two non-associated enterprise deemed as international transaction if the same is influenced by associated enterprise Condition introduced that at least one of the enterprises should be non-resident Roll back of Advance Pricing Agreement - APA Roll back up to 4 years permitted in case of similar transactions in earlier year

27 27 TP Rationalization Multiple Year Data Significantly important as currently benchmarking has inherent limitation due to lack of data Concept of Range Globally accepted concept being introduced in India Would help the MNCs to comply with TP Regulations in different jurisdictions simultaneously

28 Procedures

29 Tax Deducted at Source Section 194DA: TDS on payment under life insurance 2% No TDS on payment up to INR 1L in a FY No TDS on amount exempt u/s. 10(10D) Section 194LC Concessional rate of 5% extended to borrowings up to June 30, 2017 Also, made applicable to all long term bonds PAN not applicable for payment of interest on bonds 206AA applicable on other borrowings Order u/s. 201 for TDS default can be passed until 7 years from end of FY of payment / credit Until now, it was 2 years where return is filed and 6 where it is not filed 29

30 30 Return Return is to be verified instead of sign and verify To enable verification manually or electronically Following entities to mandatorily file tax return if income exceeds basic exemption (without Sec. 10 exemption) Mutual Fund Securitization Trust Venture Capital Company / Fund REIT & Infra Investment Trust to mandatorily file Tax Return

31 31 Assessment Explicit power of survey for TDS / TCS matters Actually for curtailing powers of the TDS Survey Parties Power to call for information to prescribed authorities to verify information in its possession. Reference to Valuation Officer For referring the matter, AO need not be satisfied about correctness or completeness of the books Can be made for valuing any asset, property or investment Valuation Officer to value based on material provided by taxpayer and need to provide opportunity to taxpayer if other basis used Report to be submitted within 6 months Time taken in this is to be excluded in computing time frame for assessment u/s. 153 & 153B

32 32 Recovery of Demand Demand Notice u/s. 156 valid until completion of last appeal or other proceedings Recovery can be made based on that even after disposal of appeal, etc. No fresh demand notice required to be issued Recovery can be made immediately In case of increase in demand in appeal, Demand Notice for only differential amount In case of reduction in demand, intimation to the assessee and not to be recovered Interest to commence from expiry of period mentioned in the original notice Provisional Attachment to continue till 6 months from the date of completion of assessment, re-assessment (originally only for 2 years)

33 33 Annual Information Return AIR now changed to Statement of Financial Transaction or reportable Account Reporting financial institutions added to the list To inform within 10 days of any inaccuracy in the information obligation to carry out due diligence for identification of reportable account 271FAA Penalty provision for SFTRA Failure to carry out due diligence Knows about inaccuracy of information at the time of filing but does not inform Comes to know about inaccuracy after filing but fails to inform Flat Penalty of Rs. 50,000

34 Indirect Tax

35 Abstract of Receipts (Rs. in Crores) Tax Revenue Actual Budget Estimates Revised Estimates Budget Estimates Customs 165, , , , Excise 176, , , , Service Tax 132, , , , Total 484, , , ,902.00

Abstract of Receipts 2,50,000.00 2,00,000.00 1,50,000.

00 Custom Excise Service Tax - 2012-2013 Actual

36 Abstract of Receipts 2,50, ,00, ,50, ,00, , Custom Excise Service Tax Actual Budget Estimates Revised Estimates Budget Estimates Abstract of Receipts

(Provisional) Excise 209,940 195,679 Customs

37 Revenue forgone Excise & Customs ( Rs. In Crores) Particulars (Provisional) Excise 209, ,679 Customs 260, ,197 3,00,000 2,00, ,00,000 0 Excise Customs

38 Revenue forgone Export Promotion (Rs. In Crores) Type On Incentive Scheme 9,984 14,382 On Exemption Scheme 45,027 45,786 Total 54,911 60,168 50,000 40,000 30,000 20,000 10,000 - On Incentive Schemes On Exemption Schemes (Provisional)

39 Revenue Forgone Excise Details Estimated Revised (Rs. In Crores) Provisional Area based exemptions applicable in the North Eastern states, Uttarakhand, Himachal Pradesh, Jammu & Kashmir 18,500 16,631 17,999 Others 187, , ,680 Total 206, , ,679

40 Service Tax

41 Rate Remains unchanged at 12% Plus Cess

42 Legislative Changes Deletion from negative list The service tax presently leviable on sale of space or for time for advertisement in broadcast media, radio television etc is further extended to internet website, out of home media & all other Medias except print media. Service tax is proposed to be levied on Radio Taxi or Radio cab whether or not air conditioned [Section 66D(o)(vi)] Addition to exemption list Section 73 Recovery of tax Central Excise Officer will now be forced to determine the amount of Service Tax due within: 6 months from the date of the notice where it is possible to do so in respect of limitation specified as 18 months in sub-section 1 Within 1 year from the date of the notice in respect of cases other than the above

43 Legislative Changes Changes in Service Tax Payable under RCM The Service Tax in respect of Service provided by recovery agent to a banking company or a financial institution or a non-banking financial company is payable 100% by service recipient. This is effective from 11th July, The services provided by director to the body corporate are also covered under RCM in addition to service provided by director to the company.

44 Legislative Changes Exemption Withdrawn The existing exemption in respect of Services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies, on human participants by a clinical research organization approved to conduct clinical trials by the Drug Controller General of India The exemption in respect of services of renting of immovable property made by an educational institution. The exemption in respect of passenger transportation provided by air conditioned contract carriage. As a result any service provided for transport of passenger by air conditioned contract carriage will attract Service Tax. Exemption in respect of services provided by Radio Taxi.

45 Legislative Changes Exemptions proposed 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. The transportation, by rail or a vessel, of cotton, ginned or baled covered in clause 20. To transportation, by Goods Transportation Agency, of chemical fertilizer, organic manure and oil cakes covered in clause 21. The services in respect of life micro-insurance product as approved by the Insurance Regulatory and Development Authority, having maximum amount of cover of fifty thousand rupees. The services provided to the educational institutions in respect of transportation of students catering services including mid-day meal, security or cleaning & housekeeping services.

46 Legislative Changes Partial Reverse Charge (w.e.f 01 st October, 2014) Name of Service Existing Revised (i) in respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on non abated value to any person who is not engaged in the similar line of business Service Provider Service Recipient 60% 40% 50% 50%

47 Credit of Service Tax Service Tax credit has been allowed for input services of renting of motor car in similar line of business i.e. Sub Contractor providing services to main Contractor. Similarly tour operator service providers are also allowed to avail credit for service tax paid by other tour operator for providing services

48 Legislative Changes Change in Rate of Interest payable on delayed payment of service tax: Presently, flat rate of interest at 18% p.a is payable on delayed payment of service tax. The revised rates as under are applicable from 01 St October, Period of delay Rate of simple interest Up to six months 18% More than six months and up to one year More than one year 18% for the first six months of delay and 24%, for the delay beyond six months. 18%. for the first six months of delay; 24 %for the period beyond six months up to one year and 30% for any delay beyond one year

49 Regulation Changes Changes in Service Tax Rules: Presently, the service tax payable in excess of Rs.1Lac is payable electronically (through internet banking). After revision all payments of service tax are to be paid electronically (through internet banking). The ceiling of Rs. 1 Lac is removed. This is effective from 1 st October, Changes in Point Of Taxation Rules: Amendment in Rule 7 The service tax payable under RCM, will became payable from date of payment or first day that occur immediately after three months from the date of invoice. Hence the period of six month is now reduced to three months. This is effective from 1 st October,2014.

50 Regulation Changes Change in Service Tax Valuation Rules The service portion in respect of services provided under the works contract in respect of the finishing and other services is increased from 60% to 70%. This is effective from 1 st October,2014. Changes in Place of Provision Rules The definition in Rule 2 of the term intermediary is amended such that services provided by intermediary for supply of goods will be subjected to service tax (Commission Agent). Amendment in Rule 4 clarifies that the rule is not intended to apply in the case of a service provided in respect of goods that are temporarily imported into India for repairs and are exported after the repairs without being put to any use in the taxable territory

51 Excise

52 Rate Basic Rate of Duty remains unchanged at 12% except duties on all products covered in Chapter 84 and 85 reduced to 10% which is valid upto 31 st December 2014

53 Legislative Changes Amendment in Central Excise Act, 1944: New Section 15(A) & 15(B) are inserted so as to prescribe that the third party sources shall furnish the periodical information in the prescribed manner. Further penal provisions are prescribed for failure to furnish the information. Assessee will now have to deposit mandatorily 7.5% of the aggregate amount of the demand alongwith the stay application and appeal to be filed to tribunal. In case of rebate of claim for export consignment it is to be deposited at 10%. Consequential amendments are also made in the Customs & Service Tax laws. The deposit will not exceed Rs.10 Crores

54 Legislative Changes Presently the validity period of the stay is prescribed at six months. The proposal is to remove this validity to reduce the complications. This is consequent upon Tribunal taking view in a recent pronouncement that the Stay gets automatically vacated after 6 months. Presently the tribunal is given discretionary power not to admit the appeal where the duty involved is upto Rs.50,000. This limit is enhanced to Rs.200,000. Consequential amendments are made in the customs laws

55 Regulation Changes Amendment in CENVAT Credit Rules: The Definition of the place of the removal of goods is clarified in newly inserted Rule 2(qa) of The CENVAT Credit Rules, It now includes: a factory or any other place or premises of production or manufacture of the excisable goods a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory Amendment in Rule 4 now introduces time limit for availing of CENVAT credit in respect of input service. The limit proposed is prescribed as six months from the date of the invoice. Earlier there was no specific time limit provided in the rules. This is an important amendment for availment of the CENVAT credit. Changes will be effective from 01 st September, 2014.

56 Regulation Changes Amendment in Rule 12A (Cenvat Credit Rules) The said rule is amended to prohibit the transfer of the input credit of service tax taken by large tax payers after 10 th July,2014 from one unit to another unit.

57 Regulation Changes Amendment in Central Excise Rules, Presently, the Excise duty in excess of Rs.1Lac is required to be paid electronically (through internet banking). The amendment now proposes all payments of excise duty to be paid electronically (through internet banking). The ceiling of Rs. 1Lac is removed. This is effective from 1 st October, [Rule 8(1B) inserted] Penalty at the rate of 1% per month prescribed for delay in payment of the Excise duty beyond period of one month.[rule 8(3A) substituted] Amendment in Central Excise (Determination of Value) Rules, 2000: The proviso is inserted in Rule 6 now allows the duty to be charged on price which is less than the cost without any deemed value to be attributed to the transaction if it is not the sole consideration for sale of such excisable goods and no additional consideration is flowing directly or indirectly from the buyer to such assesse. The above amendment is made to overcome the incorrect interpretation made from the decision of the honorable Supreme Court in the case of Fiat India Limited.

58 Tariff Changes There are numerous tariff changes which are designed to target the growth of infrastructure. Particularly solar power and agri processing, electronic (LCD LED panels) Some of the changes are for rationalisation of duties in relation to excise / VAT (GST?)

59 Customs

60 Legislative Changes Amendment made in section 46 The proviso allowing manual bill of entry has been omitted. allowing filing Bill of Entry in advance for importation of goods before the 30 days of the expected date of arrival of the consignment by land. Amendment in Customs Tariff Act Section 8B is being amended so as to provide for the levy of safeguard duty on inputs cleared into DTA as such, or are used in manufacture of final products & cleared into DTA. This is effective from 11 th July, 2014.

61 Tariff Changes There are numerous tariff changes which are designed to target the growth of infrastructure. Particularly solar power and agri processing, electronic (LCD LED panels) Some of the changes are for rationalisation of duties in relation to excise / VAT (GST?)

62 This presentation is prepared exclusively for the benefit and use of the clients of K. C. Mehta & Co. This should not be used as a substitute for professional advice. Reasonable care has been taken for ensuring the accuracy and the authenticity of the contents of the presentation. However, we do not take any responsibility for any error or omission contained therein on any account. It is recommended that the readers should take professional advice before acting on the same. The provisions contained in Finance (No. 2) Bill, 2014 are the proposals and are likely to undergo amendments while passing through the Houses of the Parliament before being enacted.

Highlights of Budget Proposals

A) Income Tax Highlights of Budget Proposals Ambalal Patel & Co. i. Tax rates There is no change in Rates of Income Tax, Surcharge or Education Cess. However there are changes in Slabs of Income tax for