INDIA BUDGET 2014 FOR PRIVATE CIRCULATION ONLY 10 July 2014

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1 INDIA BUDGET 2014 FOR PRIVATE CIRCULATION ONLY 10 July 2014

2 Contents Foreword 3 Key policy announcements 5 Tax proposals 11 Direct Taxes 12 Indirect taxes 28 Abbreviations 31 Disclaimer This material and the information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. No one should act on such material or information without appropriate professional advice after a thorough examination of the particular situation. JMP Advisors Pvt Ltd shall not be responsible for any loss whatsoever sustained by any person who relies on this material or information. 2 India Budget 2014

3 Foreword Budget 2014 is the first major policy document of the newly elected Modi Government and was one of the most anticipated budgets in recent times. It was the first significant opportunity for the Finance Minister to set the direction and pace of the development agenda of the new Government. The graph of public expectations for this budget had been rising over the last few weeks, as mirrored by the bullishness of the capital markets. In the interim Budget in February 2014, the earlier Finance Minister had set an ambitious target of keeping fiscal deficit at 4.1% of GDP. The Finance Minister has committed to maintain this figure and further promised to bring down the fiscal deficit to 3% of GDP in the next two years. GDP growth is pegged in the range of 5.4 to 5.9% in the current year, aimed at surpassing the sub 5% GDP growth during the last two consecutive years. Further, GDP growth is targeted to be in the range of 7% to 8% in the coming 3-4 years. Inflation has declined in the last two years; however it still remains above the comfort zone. While Wholesale price index (WPI) inflation has declined from 7.4% in FY to 6% in FY , food inflation, at a rate of 9.4%, continues to be higher than overall inflation. CPI has reduced from 10.21% in FY to 9.49% in FY Given this challenging economic backdrop and the paucity of time, it was highly debatable whether the Finance Minister could live up to the burgeoning expectations of creating a transforming environment and present a please all budget. However, it should not be forgotten that this Government is the first in almost 3 decades to win by a clear majority, resulting in easier decision making going forward. The rest of the world which had almost given up on India, has revived its interest in India. The Government needs to leverage this effectively. While the Budget does not have any big bang announcements, there are various welcome proposals such as focus on manufacturing, development of smart cities, e- visas for promoting tourism, development of power and infrastructure, agricultural reforms, revival of the coal sector, linking of rivers, Skill India programme, incentives for housing, increase in FDI caps for defence and insurance, tax incentives for Real Estate Investment Trusts and Infrastructure Investment Trusts, setting up of an Expenditure Management Commission and programme for good governance by means of digital e-governance. These measures indicate that the new Government has set the wheels in motion on the road to reviving the economy. On the tax front, industry expectations centred around a stable, predictable, less litigative and investor friendly tax regime leading to improved ease of doing business in India. These have been fulfilled to some extent by the proposals for expansion of scope of the Authority for Advance Rulings and Settlement Commission (although these proposals are absent in the Finance Bill), roll back provisions in Advance 3 India Budget 2014

4 Pricing Agreements for 4 preceding years, clarity on transfer pricing provisions and taxability of income of foreign funds etc. However, issues relating to subsidies, disinvestments, labour reforms, deferral of GAAR, definitive framework of the committee for scrutinizing litigation relating to retrospective amendment in respect of indirect transfers, increase in existing meagre limits for applicability of withholding tax provisions etc., have not been addressed. To conclude, the Finance Minister appears to have set a positive direction in his maiden budget. However, the Budget proposals alone are not sufficient to address the various economic problems and need to be followed up with strong execution. As the Finance Minister said in his speech, the Budget is only the first step in a long and arduous journey towards achieving sustainable growth. The JMP Advisors Team 10 July 2014 JMP Advisors Private Limited 12, Jolly Maker Chambers II Nariman Point Mumbai , India T: /67/68 info@jmpadvisors.in 4 India Budget 2014

5 Key policy announcements 5 India Budget 2014

6 Key policy announcements FDI It is proposed to raise the composite cap of FDI in defence and insurance from the existing 26% to 49%, with full Indian management and control, through the FIPB route. Infrastructure Shipping It is proposed to award 16 new port projects with a focus on port connectivity. It is further proposed to announce a comprehensive policy in the current year to promote ship building industry. Airports It is proposed to launch a scheme for development of new airports through the Airport Authority of India or PPPs. Capital markets The following measures are proposed to strengthen and modernize the financial sector: Enactment of the Indian Financial Code based on the recommendations of the Financial Sector Legislative Reforms Commission. Putting in place a modern monetary policy framework in close consultation with the RBI. Extending a liberalized facility of 5% withholding tax to all overseas bonds issued by Indian corporates for all the sectors and extending the validity of the scheme to 30 June Liberalizing the ADR/GDR regime to allow issuance of depository receipts on all permissible securities. Revamping the Indian Depository Receipt and introducing a more liberal and ambitious Bharat Depository Receipt. 6 India Budget 2014

7 Clarifying the tax treatment of foreign funds whose fund managers are located in India, which has been a long standing issue. Mandatory adoption of new Indian Accounting Standards by Indian companies from FY Banking It is proposed to launch a Financial Inclusion Mission on 15 August 2014 in order to provide banking services to all households in the country, with a focus on empowering weaker sections of society. It is proposed to encourage banks to extend long term loans to infrastructure companies with flexible structuring to absorb potential adverse contingencies. This is to be aided by permitting banks to raise long term funds for lending to infrastructure with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending. Smart cities It is proposed to develop one hundred Smart Cities as satellite towns of larger cities and by modernizing existing mid-sized cities. To encourage development of Smart Cities, which would provide residence for the neo middle class, it is proposed to reduce the requirement of built up area for FDI from 50,000 square metres to 20,000 square metres and capital conditions for FDI from USD 10 million to USD 5 million with a 3 year post completion lock-in. It is also proposed to exempt projects which commit at least 30% of the total project cost for low cost affordable housing, from minimum built up area and capitalisation requirements, with a 3 year lock-in period. E-visa In order to give an impetus to tourism, it is proposed to introduce Electronic Travel Authorization (e-visa) in a phased manner at nine airports where the necessary infrastructure would be put in place within the next six months. 7 India Budget 2014

8 REITs and InvITs It is proposed to introduce a taxation regime to provide tax incentives to REITs and InvITs for pooling of investments from various channels into the real estate and infrastructure sectors. This proposal is also aimed at reducing the dependence of these sectors on the banking industry and for attracting long term finance from domestic as well as foreign sources. Expenditure management commission It is proposed to set up an Expenditure Management Commission in line with the principle of Minimum Government, Maximum Governance to review efficiencies of Government expenditure. GST It is proposed to approve a legislative scheme during the current year to enable introduction of GST. Special Economic Zones It is proposed to take effective steps to operationalize the Special Economic Zones to make them effective instruments of industrial production, economic growth, export promotion and employment generation. Tax administration It is proposed that the Government will not ordinarily make any change retrospectively which creates a fresh liability. With a view to provide a stable, predictable and investor friendly tax regime, it is proposed that CBDT would set up a High Level Committee which would scrutinize all fresh cases arising out of retrospective amendment of 2012 in respect of indirect transfers which come to the notice of Assessing Officers. The existing proceedings would continue till they reach their conclusion. It is proposed to set up a High Level Committee to interact with trade and industry on a regular basis and ascertain areas where clarity in tax laws is required. 8 India Budget 2014

9 It is proposed to open 60 more Aaykar Seva Kendras in the current year to promote excellence in service delivery of the Income tax department. Direct taxes code Government will review the Direct Taxes Code (DTC) in its present shape and take a view in the matter after considering the comments received from all stakeholders. Skill India programme It is proposed to launch a national multi-skill programme to train the youth with an emphasis on employability and entrepreneur skills and training and support for traditional professions. With this move, it appears that the Government intends to achieve youth led development of the country by means of youth development. Micro, Small and Medium Enterprises sector TAX It is proposed to establish a committee with representatives from the Finance Ministry, Ministry of MSME and RBI to provide suggestions within 3 months in respect of financing the MSME sector. It is also proposed to review the definition of MSME to provide for a higher capital ceiling. Authority for Advance Rulings (AAR) and Settlement Commission (SC) It is proposed to extend the scope of AAR to resident taxpayers beyond a threshold amount (to be prescribed) for direct tax matters and to resident private limited companies for indirect tax matters in respect of proposed new activities and also to strengthen the AAR by constituting additional benches. It is proposed to extend the scope of SC to provide a one-time opportunity to taxpayers to approach the SC for settlement of disputes. However, these proposals are not mentioned in the Finance (No. 2) Bill, India Budget 2014

10 Petroleum and natural gas In order to accelerate production and exploitation of coal bed methane reserves, it is proposed to explore the possibility of using modern technology to revive old or closed wells to maximize production. It is proposed to rapidly scale up the usage of petroleum and natural gas, as it is clean and efficient to deliver. It is also proposed to develop additional 15,000 km of gas pipelines using appropriate PPP models, to complete the gas grid across the country and to increase the usage of domestic and imported gas, with the aim of reducing dependence on any one energy source in the long term. E-governance It is proposed to integrate services of all Central Government Departments and Ministries with the ebiz platform on priority by 31 December India Budget 2014

11 Tax proposals TAX 11 India Budget 2014

12 Direct Taxes This section summarises significant direct tax proposals announced in the Budget These proposals are subject to enactment of Finance (No. 2) Bill, Further, most direct tax proposals in the Finance (No. 2) Bill, 2014 are effective from the FY unless otherwise specifically stated. Tax Rates The proposed rates for FY are given below. For Individuals Total Income Up to INR 250,000* Tax Rates*** Nil INR 250,001 to INR 500,000# 10% INR 500,001 o INR 1,000,000 20% Above INR 1,000,001** 30% * For a resident individual aged between sixty and eighty years, the basic exemption limit is INR 300,000. For a resident individual aged eighty years or above, the basic exemption limit is INR 500,000. # Rebate under section 87A from tax of upto INR 2,000 or 100% of the tax whichever is lower, will continue to be available to a resident individual whose total income is below INR 500,000. ** A 10% surcharge is applicable on if the total income exceeds INR 10 million (marginal relief available). *** 3% education cess and higher education cess is applicable on income tax (inclusive of surcharge, if any). Domestic companies No change in tax rates. The rate for domestic companies will continue to be 30%. A 5% surcharge is applicable if the total income exceeds INR 10 million but does not exceed INR 100 million (marginal relief available). A 10% surcharge is applicable if the total income exceeds INR 100 million (marginal relief available). 12 India Budget 2014

13 A 3% education cess and higher education cess is applicable on income tax (inclusive of surcharge, if any). Foreign company No change in tax rates. The rate for foreign companies will continue to be 40%. A 2% surcharge is applicable if the total income exceeds INR 10 million but does not exceed INR 100 million (marginal relief available). A 5% surcharge is applicable if the total income exceeds INR 100 million (marginal relief available). A 3% education cess and higher education cess is applicable on income tax (inclusive of surcharge, if any). Firms (including LLPs) No change in tax rates. Rate for firms continues to be 30%. A 10% surcharge is applicable if the total income exceeds INR 10 million (marginal relief available). A 3% education cess and higher education cess is applicable on income tax (inclusive of surcharge, if any). Minimum alternate tax ( MAT ) The basic rate for MAT applicable to companies remains unchanged at 18.5% (plus surcharge if any, and education cess and higher education 3%). Alternate minimum tax ( AMT ) In computing adjusted total income for calculating AMT, it is proposed that total income shall be increased by the investment linked deduction claimed under section 35AD on specified business after reducing the amount of depreciation in respect of such asset on which deduction is claimed. The basic rate for AMT applicable to a person other than a company remains unchanged at 18.5% (plus surcharge if any, and education cess and higher education cess@ 3%). It is proposed that the AMT credit will be eligible to be claimed in a year where a taxpayer is not liable to AMT related provisions i.e. no deduction is claimed under chapter VI A (part C) or section 10AA or section 35AD of the Act and even if the adjusted total income of specified taxpayer is below INR 2 million. 13 India Budget 2014

14 Dividend distribution tax ( DDT ) Dividend distributed by a domestic company is exempt in the hands of the shareholder. However, a domestic company is liable to pay (including surcharge and education cess). The amount of distributable dividends to the shareholder of the company is proposed to be grossed up for calculation of DDT. Current DDT = Distributable amount x (DDT Rate+ surcharge+ education cess) (DDT Rate+ surcharge+ education cess) Proposed DDT = Distributable amount x (DDT Rate+ surcharge+ education cess) 100 (DDT Rate+ surcharge+ education cess) The proposed amendment is effective from 01 October Tax in respect of income distributed by a mutual fund to unit holders is exempt in the hands of the unit holders. However, the mutual funds are liable to pay an additional income tax at the rate specified under section 115R. The amount of distributable income to the unit holders is proposed to be grossed up for purpose of computing the additional income tax under section 115R. The proposed amendment is effective from 01 October Capital Gains Definition of short term capital asset Currently, for classification as a short term capital asset, in respect of a share of a company or other listed security or a unit of a mutual fund and a zero coupon bond the holding period is upto 12 months. The intention of such shorter holding period was to encourage investment in the stock market. It is proposed to amend the definition of short term capital asset so that such shorter holding period of 12 months would be applicable only in case of securities listed on a recognised stock exchange and units of an equity oriented mutual fund. Accordingly, unlisted shares and securities, and units of mutual funds (other than equity oriented mutual funds) shall be considered as a short term capital asset if held for upto 36 months. This proposed amendment is retroactive in nature and can impact certain transactions which have been entered into in the past. 14 India Budget 2014

15 Tax on long term capital gains on units Currently, long term capital gains arising from transfer of units of Mutual Funds are eligible for a concessional tax rate of 10% (without the benefit of indexation). It is proposed to withdraw the said benefit under the proviso to section 112. Capital gains exemption in case of investments in a residential house property The existing provisions under section 54 and 54F provided a deduction for investment made in construction/purchase of a residential house for a rollover of the capital gains earned. It is proposed to amend section 54 and 54F to allow such deduction only if the investment is made in one residential house situated in India. Capital gains exemption on investments in specific bonds Exemption available under section 54EC relating to investment in specified bonds has been a matter of significant litigation since the taxpayers were claiming deduction of INR 10 million instead of the intended INR 5 million by spreading investment of INR 5 million over two financial years within the six months prescribed window. It is proposed to clarify that the total investment made by the taxpayer during the financial year in which the capital gain has arisen and in the subsequent financial year, shall not exceed INR 5 million for claiming deduction under section 54EC. Capital gains from transfer of an asset by way of compulsory acquisition Currently, there is uncertainty regarding the year of taxation of enhanced compensation received on compulsory acquisition and capital gains thereof. It has been clarified that enhanced compensation will be taxed as capital gains in the financial year in which final order of the court is passed. Cost inflation index The current cost inflation index is calculated based on the consumer price index for urban non-manual employees, which has been discontinued. Accordingly, it is proposed to amend section 48 to provide that the cost inflation index for future years would be notified based on the consumer price index (urban). The proposed amendment is effective from 01 April India Budget 2014

16 Corporate taxation Corporate Social Responsibility (CSR) Companies meeting certain income/profit/turnover thresholds are mandatorily required to incur expenditure on specified CSR activities to the extent of at least 2% of profit in accordance with Companies Act, It is clarified that no deduction will be allowed for CSR expenditure under section 37 of the Act as it will be treated as application of income and not as business expenditure, incurred wholly and exclusively for the purpose of business. However, CSR expenditure which is of the nature specified in sections 30 to 36 of the Act and which fulfils the conditions mentioned therein will be eligible for deduction. This proposal appears to be unfair and is not likely to be favourably perceived by industry. Disallowance of expenditure for non-deduction of withholding tax In case of payments made to residents for a particular FY, deduction can be claimed in the same FY if the applicable withholding tax is deposited upto the date of filing the return of income of the payer for the relevant FY. However, in case of payments to non-residents, deduction can be claimed in the same FY only if the withholding tax is paid by the end of the relevant FY (i.e. by 31 March). It is proposed to extend the time limit for payment of withholding tax deducted on payments to non-residents upto the date of filing the return of income of the payer, i.e. to be brought at par with the provisions relating to withholding tax on payments to residents. Disallowance of payments to residents on which withholding tax is not deducted is proposed to be reduced to 30% of the payment amount. However, in case of payments made to non-residents, 100% disallowance continues on account of non-withholding of taxes. It is clarified that the scope of disallowance for non-deduction of withholding tax on payments to residents will cover all payments on which tax is required to be withheld (including salaries and directors fees). Speculative transaction in respect of commodity derivatives It is proposed to amend the section 43(5) to clarify that a transaction in commodity derivatives carried out on a recognized stock exchange with a time stamped contract note and chargeable to commodities transaction tax, shall not be considered as a speculative transaction. 16 India Budget 2014

17 The proposed amendment is retrospectively effective from 01 April Losses in speculation business Currently, there is disconnect between the definition of speculative transaction under section 43(5) and the Explanation to section 73. This anomaly is sought to be corrected by amending the explanation to section 73 by providing that the provision relating to deemed speculative income shall not be applicable to a company whose principal business is the business of trading in shares. For example, in a cash futures arbitrage composite transaction, the loss incurred on the cash leg is a deemed speculative loss, while the profit on the futures leg is a non-speculative business income. Hence, earlier, set off of the speculative loss from the cash leg against the profit from the corresponding futures leg within the same composite transaction was not permitted. Dividends received from specified foreign companies It is proposed to indefinitely extend the benefit of lower rate of taxation of dividends from certain foreign companies at 15%. Thus, such dividends shall continue to be taxed at a lower rate of 15% in the hands of the Indian company. Tax reliefs and incentives The limit under section 80C is increased from INR 100,000 to INR 150,000 for deduction from income in the hands of an individual with respect to amounts deposited in certain specified investment instruments. Deduction up to 10% of salary in respect of the employer s contribution to the pension scheme of Central Government under section 80CCD by a non- Central Government employer is proposed irrespective of the employee s date of joining employment. However, the deduction will be restricted to INR 100,000. Income from house property Deduction for interest on capital borrowed for acquisition or construction of a self-occupied house property, where such acquisition or construction is completed within 3 years from the end of the FY in which capital is borrowed, is proposed to be increased from INR 150,000 to INR 200,000 per annum. Power sector An extension of the sunset clause for deduction of 100% of the profits and gains derived by a power sector undertaking eligible under section 80 IA of the Act, and commencing the activity by 31 March 2017 is proposed. 17 India Budget 2014

18 Investment allowance for a manufacturing company Currently, a 15% investment allowance is available to a manufacturing company for investment of INR 1 billion and above in new assets (plant & machinery) in two consecutive years i.e. AY and AY To incentivize investments by a manufacturing company, it is proposed to extend the 15% investment allowance available to a manufacturing company for investments of INR 250 million and above per year in new assets (plant and machinery) during the period beginning from 01 April 2014 to 31 March Further, a manufacturing company which has claimed 15% investment allowance in earlier years for investments of INR 1 billion continues to be eligible to claim additional investment allowance for investments which exceed INR 250 million per year during the period beginning from 01 April 2014 to 31 March Deduction in respect of capital expenditure on specified business It is proposed to widen the deduction in respect of capital expenditure on the following specified business under section 35AD which commences operations on or after 01 April i. Business of laying and operating a slurry pipeline for the transportation of iron ore. ii. Business of setting up and operating a semi-conductor wafer fabrication manufacturing unit as notified by the CBDT in accordance with the prescribed guidelines. The capital asset shall be used only for the specified business for a period of 8 years beginning with the year in which such asset is acquired or constructed. If the capital asset is used for any purpose other than specified business within a period of 8 years, the amount of deduction allowed after deducting the allowable depreciation, shall be deemed to be the business income of the previous year in which the asset is used for such other purpose (except in the case of sick industrial companies). It is proposed that no deduction under section 10AA (profits of SEZ) shall be available to a taxpayer in any AY in respect of such specified business, if a deduction is claimed under section 35AD, and vice versa. Taxation regime for Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InvIT) SEBI had issued draft regulations on two new categories of investment vehicles, REITs and InvITs ( business trusts ) for public comments. 18 India Budget 2014

19 While the SEBI regulations are yet to be notified, it is proposed to introduce a specific taxation regime for such business trusts. Internationally, REITs and InvITs are an effective method to channelize household savings into the real estate and infrastructure sectors. Business trusts would comprise a trustee (registered with SEBI), a sponsor and a manager. Business trusts would raise capital/debt by issue of listed units/debentures. Units/debt may be issued to both resident and non-resident investors. Business trusts would invest in shares/debt of Indian Special Purpose Vehicles (SPV) mainly owning real estate/infrastructure assets, owned by a sponsor. It may be necessary to ensure alignment of exchange control regulations and stamp duty provisions to enable a vibrant REIT/InvIT market in India. The units of the business trust are proposed to be treated at par with listed equity shares (subject to STT). Capital gains are proposed to be exempted in the case of LTCG and 15% in the case of STCG for investors who invest in the business trust, except for sponsors who exchange shares of the SPV for units in the business trust. Exchange of units in the business trust with shares in the SPV would not qualify for concessional tax treatment in the hands of the sponsor. Such transfer of units in the business trust by the sponsor would attract tax at the time of disposal of units by the sponsor. For computing capital gains, cost of units to be considered as cost of shares to the sponsor and holding period of shares to be considered in the holding period of units. However, the norms of holding period of unlisted shares (i.e. more than 36 months for being treated as long term capital asset) and applicable tax rates will apply to units held by the sponsor. DDT will be payable by the SPV on dividend paid to the business trust at prescribed rates. Tax implications for the business trust and investors In case of debt provided by the business trust to the sponsor, interest received by the business trust would be tax exempt and no tax would be withheld by the SPV, i.e. pass through status would be accorded to such interest. Interest on ECB availed in foreign currency by the business trust would be subject to withholding tax at 5% if the ECB is availed in the period between 1 July 2012 and 30 June India Budget 2014

20 No cascading effect for DDT, i.e. dividend paid by the SPV to be tax exempt in the hands of the business trust and onward distribution of dividend component by the business trust to its investors would be exempt from DDT. Capital gains on the transfer of assets held by the business trust would be taxed at the applicable rates in the hands of the business trust. No pass through status would be accorded to any other income of the business trust and such income would be taxed at the maximum marginal rate. Distribution of the capital gains (post taxation in the hands of the business trust) to the investors would be tax exempt, i.e. no pass through status. Interest paid by the business trust to the investors out of its interest income would be subject to withholding tax at 5% in the case of nonresident investors and 10% in the case of resident investors (as explained above, interest on ECBs availed of the by the business trust until 30 June 2017 would attract withholding tax of 5%). It may be noted that the interest is to be taxed in the hands of the investors at the normal rates of tax as applicable under the Act or the DTAA, as the case may be. The proposed amendments relating to REIT and InvIT are effective from 01 October Provisions relating to non-residents Characterisation of income in case of FIIs It is proposed to amend the definition of capital asset to include any security held by a foreign institutional investor (FII). Any income arising from transfer of such security by an FII (including a foreign portfolio investor) would be charged under the head capital gains only. The proposal provides certainty to FIIs about the characterisation of income earned by them. It is relevant to note that under the SEBI regulations pertaining to FIIs, they are prohibited from carrying out the business of trading in securities. Due to conflicting interpretations by the revenue, there was significant litigation on this score. This clarification is a step to eliminate litigation and encourage Fund Managers to be based in India. However, Indian portfolio managers as well as foreign private equity players have not been included under the said amendment. Similarly, FIIs whose income was taxed under the head business income would now be taxed under the head capital gains, subject to any DTAA benefits. Concessional rate of withholding tax on overseas borrowing It is proposed to extend the benefit of lower withholding tax rate of 5% on interest to non-residents for all bonds. Currently, this benefit is available 20 India Budget 2014

21 on interest payment to non-residents by an Indian company on long term infrastructure bonds and loans in foreign currency, as below. i. The benefit is extended upto 30 June 2017; and ii. iii. The benefit is available on all long term bonds (including infrastructure bonds); and The benefit is available in case of interest payment made by business trusts to non-residents on all long term bonds and loans in foreign currency. It is also proposed to amend section 206AA to exempt the overseas holder of such bonds from the higher withholding rate in cases where PAN is not provided. The proposed amendment is effective from 01 October Transfer Pricing Roll back mechanism for APAs It is proposed to provide a roll back mechanism for APAs. Under the proposed roll back provisions, an APA may provide for the manner of determination of the ALP in relation to international transactions which had already been entered into during the four years prior to the first year of the period covered under an APA, subject to conditions to be prescribed. The proposed amendment is effective from 01 October Definition of international transaction As per the provisions of section 92B (2), an international transaction shall be deemed to include transactions entered into by an enterprise with an unrelated third party, in case a prior agreement exists in relation to the transaction with such third party and one of the AEs. It is proposed to clarify that such third party need not be a non-resident. Use of multiple year data and range concept for determination of ALP Currently, one year data is used for comparable analysis with some exceptions. The Finance Minister, in his speech, has proposed to allow the use of multiple year data for comparability analysis (rules will be prescribed in due course). In his speech, the Finance Minister also mentioned that the range concept for determination of ALP would be introduced (rules will be prescribed in due course). The existing concept of arithmetic mean would continue to apply where the number of comparables is inadequate. 21 India Budget 2014

22 Power to levy penalty with TPO It is proposed to amend section 271G of the Act to empower the TPO to levy a penalty for failure to furnish information or documents in relation to the international transactions entered by the taxpayer. Currently, the authority of levying of penalty under section 271G is vested only with AO and CIT(A). The proposed amendment is effective from 01 October Provisions relating to taxation of charitable trusts Section 10(23C) substantially financed by the Government Currently, as per the provisions of the Act, an exemption is available in respect to the income earned by certain specified educational institutions, universities and hospitals which are wholly or substantially financed by the Government. The said phrase has not been defined in the Act and has led to significant litigation. A welcome amendment is proposed by inserting an explanation under section 10(23C) to clarify that university or other educational institution, hospital or other specified institution shall be considered as substantially financed by the government only if the government grant received by it during the relevant previous year exceeds a percentage (to be prescribed) of its total receipts (including any voluntary contributions). Registration vis-à-vis exemption It is proposed to amend the Act to provide that a trust or an institution which is registered under section 12AA of the Act, cannot claim exemption under any provision of section 10 of the Act, except for agricultural income. Similarly, an entity registered under section 10(23C) cannot claim exemption under sections 11 and 12 of the Act. It is proposed to provide in case of trusts registered under section 12AA, that exemption as per sections 11 and 12 with respect to the income derived from property held under trust, shall also be available for the assessments pertaining to earlier years preceding the date of such registration, provided the objects of the trust have been consistently carried out and all the other conditions have been satisfied. Currently, a commissioner of income tax can deregister a trust only on two grounds viz. non-performance of objects and non-genuine activities. It is proposed to provide four additional grounds viz. if income does not enure for benefit of the general public, any particular religious community or caste benefitted (for trusts settled post commencement of the Act), funds income or properties of the trusts are applied for the benefit of specified 22 India Budget 2014

23 persons (trustees, settlor etc.) or funds of the trust are invested in modes prohibited under section 11 of the Act. It is proposed that in computing income of the charitable trusts/institution, any deduction or depreciation in respect of an asset, the cost of acquisition of which has been claimed as an application of income in any year, will be excluded. The proposed amendment is effective from 01 October Anonymous donations In respect of anonymous donations to a trust which are taxed at the maximum marginal rate, it is now proposed that aggregate amount of such donations be deducted from the total income of the trust for the purpose of determining application of the income on objects required for exemption under section 11 of the Act. Withholding taxes 2% TDS on taxable life insurance receipts It is proposed under the newly inserted section 194DA that TDS at the rate of 2% will apply on any sum (including sum allocated by way of bonus) paid under a life insurance policy which does not fulfil the conditions specified under section 10 (10D), where the aggregate sum payable during a FY exceeds INR 100,000. The proposed amendment is effective from 01 October Filling of correction statement codified under the Act A deduct0r of TDS needs to file a correction statement for rectification of information furnished under the quarterly e-tds statement. However, there was no provision in the Act enabling the filing of a correction statement. Therefore, a provision in this regard has been expressly inserted in the Act. The proposed amendment is effective from 01 October Timeline for passing an order deeming TDS deductor as an assessee in default It is proposed to omit the clause which refers to the time limit of 2 years from the end of the financial year in which the TDS statement is filed for passing of an order, by deeming a deductor as an assessee in default for not deducting the whole or any part of TDS. Further, the time limit for passing an order deeming a deductor as an assessee in default for not deducting the whole or any part of TDS, has been extended for one more year to align it with the existing time limit for 23 India Budget 2014

24 reopening of cases for assessment. Accordingly, no order can be passed treating a deductor as an assessee in default for not deducting TDS after the expiry of seven years from the end of the FY in which payment is made or credit is given, whether the TDS return has been filed or otherwise. The proposed amendment is effective from 01 October Other key tax proposals Income computation and disclosure standards Currently, section 145 provides that the method of accounting for computation of income can be either cash or mercantile basis. This provision also empowers the Central Government to notify accounting standards for any class of taxpayer/class of income. As of date, only two accounting standards have been notified. It is proposed that the Central Government may notify computation and disclosure standards to be followed by a prescribed category of taxpayer or for a class of income. Further, it is provided that a best judgment assessment may be carried out by the AO if the income has not been computed in accordance with such notified standards. Advance of transfer of a capital asset It is proposed to tax advances received against purchase of a capital asset and forfeited in the course of negotiations, as income from other sources. Further, to avoid double taxation, it is proposed that such advance forfeited need not be deducted from the cost of acquisition of the capital asset. Introduction of new income tax authorities It is proposed to introduce four new income tax authorities - Principal Chief Commissioner of Income tax, Principal Commissioner of Income tax, Principal Director General of Income tax and Principal Director of Income tax. The proposed amendment is effective from 01 June Survey proceedings It is proposed to widen the scope of survey proceedings to include verification of whether tax has been deducted or collected at source. It is also proposed to extend the time period for retention of books of account or documents by any income tax authority (without obtaining approval of the Chief Commissioner of Director General) during the course of survey from 10 days to 15 days. The proposed amendment is effective from 01 October India Budget 2014

25 Reference to Valuation Officer during the course of assessment proceedings It is proposed to be clarified that rejection of books of accounts of the taxpayer is not a pre-requisite for an AO to refer valuation of any asset, property or investment to a Valuation Officer during the course of assessment proceedings. The Valuation Officer is now required to send the report to the AO within 6 months from the end of the month in which the reference is made by the AO. The proposed amendment is effective from 01 October Interest payable on tax demand It is proposed to be clarified that interest specified in a notice of demand served in assessment or appeal proceedings continues to be valid until final disposal of the appeal/proceedings. Where the amount on which interest was payable, is reduced by reason of a rectification or an appellate order and subsequently the said amount is increased by a revision order, then interest would be payable on the increased amount from the end of the payment period specified in the original order levying the demand. The proposed amendment is effective from 01 October Failure to produce accounts or documents In case of a wilful failure to produce accounts or documents required to be produced in accordance with any notice for assessment, it is now proposed to impose rigorous imprisonment along with a fine with the amount of the fine left at the discretion of the AO. The proposed amendment is effective from 01 October Provisional attachment of property The period for provisional attachment of property of the taxpayer during the pendency of assessment or reassessment proceedings, with the approval of the Chief Commissioner or Commissioner, is proposed to be extended from 6 months from the date of the AO s order to 2 years or 60 days after the date of the AO s order, whichever is later. The proposed amendment is effective from 01 October Annual information return It is proposed to bring in prescribed reporting financial institutions within the ambit of specified persons required to furnish annual information 25 India Budget 2014

26 return. Financial institutions are required to furnish a statement of information in respect of specified financial transactions or reportable accounts. The Government is required to prescribe rules to specify the persons covered, nature of financial information, manner of maintaining financial information, etc. Any discrepancy noted in the specified financial information submitted by any person or noted in pursuance of any notice received from the AO, is to be informed to the AO within 10 days of receipt of the said notice and to be corrected in the prescribed manner. It is proposed to impose penalty for non-submission of statement of information or for submission of inaccurate statement of information. Other procedural proposals It is now codified that a return of income bearing a digital signature is considered to be verified by the person filing it. The proposed amendment is effective from 01 October It is now codified that acceptance or repayment of loans or deposits exceeding INR 20,000 by use of an electronic clearing system through a bank account is permissible, subject to fulfilment of other conditions in this regard. Tax administration reforms AAR The Finance Minister made an announcement in his budget speech to reduce the growing litigation in direct taxes which would include extending the facility of obtaining an advance ruling to a resident taxpayer, beyond a prescribed threshold amount (currently, AAR is available only to non-resident taxpayers and resident PSUs). Further, to strengthen the AAR the Finance Minister has proposed constituting additional benches for AAR in his budget speech. However, there is no amendment proposed in the Finance Bill in this regard. Enlarging scope of Settlement Commission One of the key announcements in the Finance Minister s speech to effectively manage the growing tax litigation includes extending the scope of the Income Tax Settlement Commission. However, there is no amendment proposed in the Finance Bill in this regard. 26 India Budget 2014

27 High Level Committee for all fresh cases of indirect transfers The Finance Minister stated in his speech that to provide a stable, predictable and investor friendly tax regime, it is proposed to constitute a High Level Committee by CBDT to scrutinize all fresh cases arising out of the retrospective amendment of 2012 relating to indirect transfers. Further, it is proposed that the Government will not ordinarily make any retrospective amendment which creates a fresh liability on a taxpayer. High Level Committee to interact with trade and Industry It is proposed to set up a High Level Committee to interact with trade and industry on a regular basis and ascertain areas where clarity in tax laws is required. Based on the recommendations of the committee, CBDT shall issue appropriate clarification on the tax issue within two months. 27 India Budget 2014

28 Indirect taxes The Finance Minister has sought to give a boost to domestic manufacturing and disincentivise imports by increasing the rates of Customs duties while lowering Excise duties. He has also attempted to address the issue of inverted duties. The changes in the rates/provisions of Custom duties, Excise duties and Service tax come into effect on various dates. The Finance Minister has sought to levy increased Excise duties on products detrimental to health notably cigarettes and related tobacco products, pan masala and sugar based/sweetened/flavoured drinks. At the same time, the duty free allowance on cigarettes and tobacco has been reduced to 100 cigarettes and 125 gm respectively. The Excise duty on cigarettes has been increased by percentages ranging from 11% to 72% as per different categories and lengths. The free baggage allowance under the baggage rules has been increased from INR 35,000 to INR 45,000. The Finance Minister proposes to extend the scope of the Settlement Commission to facilitate quick dispute resolution and expand the scheme of Advance Rulings to resident private limited companies. In case of issue of a demand notice by the Customs, Excise or Service tax authorities, prior to filing an appeal, a pre-deposit of upto 10% of the demand is proposed by the Finance Minister. The Finance Minister proposes to approve a legislative scheme, during the current year for the rollout of the Goods and Services tax (GST). However, no timeline for such rollout has been announced, possibly due to the complexity of GST, the constitutional amendments and parliamentary approvals required, the information technology backbone required as well as the multiple stakeholders involved. In a nutshell, the key indirect proposals in the Finance (No. 2) Bill, 2014 are encapsulated below: Customs duty Customs duties have been increased as a fillip to domestic manufacturers. Further, the Finance Minister has also tried to eliminate inverted duty structures (e.g. where earlier the rate of imported ships for shipbreaking was 5% but duty on scrap iron was 2.5%, a uniform rate of 2.5% has been proposed) A few key items where customs duties have been changed are as follows: Item Current rate Proposed rate of BCD Metallurgical coke Nil 2.5% 28 India Budget 2014

29 Coal 2-5% 2.5%BCD and 2% CVD Stainless steel flats 5% 7.5% Ships imported for breaking LCD/LED TV panels (< 19 ) and color picture tubes 5% 2.5% 10% Nil E-book readers 7.5% Nil Telecom products not covered under IT Agreement Half cut or broken diamonds Nil 10% Nil 2.5% Gemstones 2% 2.5% Forged steel rings for renewable energy systems 10% 5% Excise duty To give a boost to the manufacturing sector, the Finance Minister has sought to rationalise and simplify Excise duties. He has done away with multiple classifications of similar goods e.g. prescribing a uniform duty on all types of coal. Furthermore, in a major sop to the manufacturing industry, the Finance Minister has proposed that Excise duty will be chargeable on the transaction value even if the same is below the cost of production. This negates the effect of the landmark apex court judgement in the case of Fiat where it was held that Excise duty is leviable on cost of production even if goods were sold at a price below such cost. Excise duty concessions to the capital goods, consumer durables and automobile sectors had earlier been extended upto 31 December Some key changes in Excise duty rates are as follows: Item Current rate Proposed rate Pan masala 12% 16% Machinery for agriculture processing and packaging 10% 6% 29 India Budget 2014

30 Copper wire windings 10% 12% Forged steel rings in renewable energy generators 12% NIL Clean energy cess on coal, peat & lignite INR 50 per tonne INR 100 per tonne Footwear (priced between Rs 501 to Rs 1,000 per pair) 12% 6% Branded petrol INR 7.50 per litre INR 2.35 per litre Service tax Service tax is one of the fastest growing sectors as the Indian economy has been fast metamorphosing into a service based economy. The negative list is proposed to be pruned further and more services are sought to be taxed. The salient amendments in the Service tax sphere are as follows: Service tax is levied on space advertised in cyberspace and on mobile advertising platforms. Service tax is proposed to be levied on Radio taxis and Cabs, AC bus hire and clinical research on human participants. The list of eligible services rendered by Government is sought to be pruned. Certain services like foreign tourist services outside India by Indian operators, transport of cotton, specialised financial services availed by RBI from offshore service providers and treatment of bio medical wastes have been exempted. In the case of hire of motor vehicles, Service tax has to be borne equally by the service provider as well as the service recipient. This puts a compliance burden on both the entities without any apparent revenue advantage. The interest rates on arrears of Service tax are sought to be enhanced on a slab-wise basis based on the period of delay from 18% p.a. for delays of upto 6 months to as high as 30% p.a. for delays in excess of one year. CENVAT credit rules and Service tax rules, as well as certain procedural provisions are sought to be amended, rationalised or simplified. 30 India Budget 2014