EY Tax Alert. Executive summary. Key highlights of the Interim Budget February 2014

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1 17 February 2014 EY Tax Alert Key highlights of the Interim Budget Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. The Finance Minister (FM) presented the Interim Budget for in the Parliament on 17 February This Tax Alert provides the key highlights of the Interim Budget. The Interim Budget was presented in the backdrop of the economy experiencing inflationary tendencies and sluggish growth. In keeping with the convention in presenting an Interim Budget, amendments have not been proposed to the tax laws. However, there have been some changes to the indirect tax rates, with the intention to give a stimulus to the manufacturing sector, in particular. On the direct taxes front, absence of amendment in the tax laws has consequences such as the tax holiday period for the power sector and concessional tax rate of 15% on dividends received from overseas subsidiary coming to an end on 31 March On the regulatory front, some steps have been envisaged to deepen and strengthen the Indian financial and commodity derivative markets. The FM also made certain policy announcements, which may be considered for implementation by the Government of India in due course, if considered appropriate. On the economy front, the FM announced that the fiscal deficit for FY will be at 4.6% of Gross Domestic Product (GDP), which is within the budgeted ceiling of 4.8%, a reduction in the current account deficit and some moderation in the inflation rate compared to last year.

2 1. Direct tax proposals No change in the tax rates The existing income tax rates for tax year will continue for tax year as well. The corresponding surcharge and cess would also continue. In addition, the rates of income tax, surcharge and cess for computing advance tax payable and tax deducted at source for the tax year remains unchanged from what is presently prevailing for the tax year Tax holiday for the power sector comes to an end The Income Tax Act (ITA) was amended by the Finance Act 2013 (FA 2013) to extend the tax holiday for undertakings engaged in power generation, transmission or distribution if it begins to generate power or starts transmission or distribution before 31 March 2014 or undertakes substantial renovation and modernization of existing network of transmission or distribution lines before 31 March This being an Interim Budget, no further extension has been proposed. One may, therefore, need to wait and see whether the regular budget to be presented, post the general elections, would have provisions to extend this tax holiday. New approach on tax benefits for funding scientific research The ITA allows deductions for expenditure on scientific research, on satisfaction of certain conditions. A new approach for funding and tax benefits has been proposed by the FM in his speech. A Research Funding Organisation (RFO) is planned to be set up that would fund research projects selected through a competitive process. Contributions to RFO would be eligible for tax benefits. At this stage, this is only a proposal and for implementing this, changes to the ITA need to be made. These changes are envisaged to be carried out when the regular budget is introduced. Direct Taxes Code (DTC) to be put up for public discussion The FM, in his speech, has also said that he intends to place the proposed DTC which was envisaged to comprehensively replace the ITA on the website for public discussion with the expectation that it would be passed in FY Key changes in the indirect tax rates Concessional tax rate of 15% on dividend received from foreign subsidiary not available after 31 March 2014 The FA 2013 had extended the concessional taxation rate of 15% on dividend received from foreign company (where Indian company holds 26% or more of equity capital) to the period up to 31 March This has not been extended further and, hence, dividends earned from 1 April 2014 onwards would be subject to the regular tax rates. Excise duty No change in the basic Excise duty rate of 12%. In order to stimulate growth in the capital goods and consumer goods sectors, Excise duty has been reduced from 12% to 10% in respect of machinery, mechanical appliances, electrical equipment and other goods falling under Chapter 84 and 85 of the Central Excise Tariff Act, 1985, for the period up to 30 June 2014.

3 Relief has been provided to the automobile sector by proposing reductions in the basic Excise duty rates for the period up to 30 June 2014, as follows: Rate movement (%) Items From To Small cars, motor cycles, scooters and commercial vehicles including vehicles intended to be used as ambulances, hybrid motor vehicles, road tractors for semitrailers having an engine capacity of more than 1800 cc Sports Utility Vehicles (SUVs) Large and mid-segment cars having engine capacity up to 1500 cc Large and mid-segment cars having engine capacity above 1500 cc imported for road construction, has now been withdrawn. The above changes are effective from 17 February Service tax No change in the basic Service tax rate of 12%. Due to an interpretation issue, some doubts were raised as to whether the tax exemption for specified services in relation to agricultural produce was confined only to paddy or whether it can be extended to rice as well. The issue has been put to rest as the activities of loading, unloading, packing and warehousing of rice have been specifically exempted from Service tax. Services provided by cord blood banks by way of preservation of stem cells and other services in relation to such preservation have been exempted from the levy of Service tax. Excise duty rates on chassis and trailers have also been reduced. Excise duty on mobile handsets has been reduced to 6% with CENVAT credit or 1% without CENVAT credit, in order to boost domestic production. The above changes are effective from 17 February Customs duty Basic Customs duty remains unchanged. Customs duty on specified types of non-edible industrial oils and its fractions, fatty acids and fatty alcohols has been reduced to 7.5% to encourage domestic production of soaps and oleo chemicals. Countervailing duty in lieu of Excise (CVD) exemption which was earlier available on specified machinery 3. Key policy announcements The following steps have been envisaged to deepen and strengthen the Indian financial commodity derivative markets: Comprehensively revamp the American Depository Receipt (ADR)/Global Depository Receipt (GDR) scheme and enlarge the scope of depository receipts Liberalization of rupee-denominated corporate bond market Deepen and strengthen the Currency Derivatives Market to enable Indian companies to fully hedge against foreign currency risk Create one record for all financial assets of every individual

4 Enable smoother clearing and settlement for international investors looking to invest in Indian bonds Amend the Forward Contracts (Regulation) Act to strengthen the regulatory framework of the commodity derivatives market Comments As this is an Interim Budget, there have been no significant changes made to the tax laws. The existing income tax rates along with the applicable Surcharge and Cess would continue to apply until changes are carried out as part of the regular budget, which is expected to take place in July The indirect tax cuts, as announced in the Interim Budget, would hopefully provide an impetus to consumption and result in higher growth of the manufacturing sector, particularly the automobile sector which is reeling under cost pressures and going through an unprecedented negative growth. The FM has also stated that more enquiries have been initiated into accounts held by Indian entities in no-tax or low-tax jurisdictions indicating that anti-tax evasion enforcement would continue. DTC which was envisaged to replace the existing ITA is expected to be placed on the website for public discussion with the FM expressing a hope that it would be passed in FY along with Goods and Services Tax (GST) laws. Steps have also been envisaged to deepen and strengthen the Indian financial and commodity derivative markets.

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