10 July Budget Connect+ Education sector - Impact

Transcription

1 10 July 2014 Budget Connect+ Education sector - Impact

2 Executive summary Most education regulatory bodies mandate that an educational institution be run by a Trust, Society or a Company registered under Section 8 of the Companies Act 2013 (earlier Section 25 Company under Companies Act, 1956). The framework governing taxability of these education institutions has undergone a few changes under the Indian Union Budget for the financial year , presented by the Finance Minister on 10 July 2014 Apart from the traditional education services providers, there are various industry players who are not involved directly in the provision of education services, but play a vital role in enabling the education sector provide quality infrastructure, facilities and services to the respective students, teachers, etc. The changes brought around by the Union Budget are in the nature of rationalization measures, which are aimed at providing better clarity over the regulations governing the tax regime for educational institutions as well as the private players providing support services to these education institutions This alert captures the key changes proposed by the Union Budget 2014 which has an impact on the Education sector. Policy measures Employability of youth To improve the employability and entrepreneurial skill of the youth as well as provide training and support for traditional professions like welders and masons, a national multi-skill programme called Skill India is proposed to be launched. Employment exchanges are proposed to be transformed into career centres, and to provide information about job availability and extend counselling facility (at a cost of INR 100 crore). Young Leaders Programme (at a cost of INR 100 crore) is proposed to improve leadership skills of the youth. Apprenticeship Act is proposed to be suitably amended to make it more responsive to industry and youth and MSMEs will be encouraged to avail of the benefits of this scheme. K-12 segment Sarva Shiksha Abhiyan (at a cost of INR 28,635 crore), Rashtriya Madhyamik Shiksha Abhiyan (at a cost of INR 4,966 crore) and a School Assessment Programme (at a cost of INR 30 crore) are proposed to be initiated. Pandit Madan Mohan Malviya New Teachers Training Programme to infuse new training tools and motivate teachers (at a cost of INR 500 crores) is proposed to be launched. To exploit the reach of IT, a sum of INR 100 crore is set aside for

3 setting up virtual classrooms as Communication Linked Interface for Cultivating Knowledge (CLICK) and online courses. The nascent agri-biotech cluster in Mohali is proposed to be scaled up and two new clusters, in Pune and Kolkata are to be established. Higher Education Jai Prakash Narayan National Centre for Excellence in Humanities is proposed to be set-up in Madhya Pradesh. Five more IITs and IIMs are proposed to be set-up at a cost of INR 500 crores. Government also proposes to ease and simplify norms to facilitate education loans for higher studies. Agriculture: Others Global partnerships are to be developed under India s leadership to transform the Delhi component of the International Centre for Genetic Engineering and Biotechnology (ICGEB). Sports academies with international level facilities for training of accomplished in the country at junior and sub-junior level is proposed to be set-up for Shooting, Archery, Boxing, Wrestling, Weightlifting and various Track and field events. It is proposed to establish two more agricultural research institutions in Assam and Jharkhand with an initial sum of INR 100 crore in the current financial year. Agriculture Universities in Andhra Pradesh and Rajasthan and Horticulture Universities in Telangana and Haryana (at an initial cost of INR 200 crores) are proposed to be set-up. Kisan TV (at a cost of 100 crores) with the aim of disseminating real time information to the farmers regarding new farming techniques, water conservation, organic farming is proposed to be set-up. Bio-technology: A sports university is proposed to be set-up in Manipur at a cost of 100 crore. The National Academy for Customs & Excise is proposed to be set-up at Hindupur in Andhra Pradesh. A fund with an INR 200 crore corpus is proposed to be established to create a technology centre network, promote innovation, entrepreneurship and agroindustry. Hastkala Academy is proposed to be set-up in Delhi (at a cost of INR 30 crore) for preservation and documentation of the handicraft sector. Development of biotech clusters in Faridabad and Bengaluru is proposed to be scaled up and taken to the highest international quality.

4 Direct taxes Sector Specific Restriction on exemptions under Section 10 of Income Tax Act for educational institutions It has been proposed that trusts and charitable institutions availing exemption under Sections 11 to 13, or under Section 10(23C), would not be eligible to claim any other exemption under Section 10 (except the exemption in respect of agricultural income), for such income that becomes taxable due to non-compliance with any of the specified conditions pertaining to Section 11 to 13, or Section 10(23C). This would take effect from FY Disallowance of depreciation for capital assets purchased and treated as application of income In case of charitable institutions registered under Section 12AA / 10 (23C), purchase of a capital asset is considered as income applied for charitable purpose, basis which the income is exempt under these provisions. Further, these institutions were allowed depreciation on the very same capital assets, resulting in a double benefit to these institutions. In order to prevent this double benefit it has been proposed to not consider depreciation as application of income, in relation to capital assets, the purchase of which has been allowed as application of income. This would take effect from FY Meaning of substantially financed by the Government Exemptions under sub-clauses (iiiab) and (iiiac) of Section 10(23C) is available to institutions which are substantially financed by the Government. However, there was no clarity on what would constitute a substantial finance by the Government. In order to remove this anomaly, it is proposed to arrive at a percentage (to be notified separately) of total receipts of the institution, which would be considered substantial finance by the Government. This would take effect from FY Power to cancel registration under Section 12AA / 10(23C) expanded Where under the current provisions, a registration under Section 12AA / 10(23C) could be cancelled only where the activities of the institutions were not genuine, or were not being carried out as per the objectives of the institutions, now it has been proposed to empower cancellation of these registrations, additionally, if: Its income does not benefit general public; It is for benefit of a particular religious community or caste; Any income or property is applied for the benefits of specified interest parties; or Its funds are invested in prohibited modes This amendment is to take effect from 1 October Retrospective exemption under Section 12A Currently, registration under Section 12AA provides exemption to the charitable institution only on a prospective basis and not for the years prior to the period of application for registration. It has been proposed that once a charitable institution receives a registration under Section 12AA, such

5 exemption would be available to the institution for any assessment year prior to availing such registration, provided the objectives and activities of such charitable institution in the relevant assessment years are the same as the basis on which the registration has been granted. However, such benefit would not be available to an institution whose registration under Section 12AA has been cancelled after being granted. It has also been proposed that no further action would be taken to re-open the assessment under Section 147 of the Income Tax Act for any assessment year prior to availing the registration Corporate Social Responsibility CSR expenditure incurred as per Companies Act, 2013 is not an expenditure incurred wholly and exclusively for the purposes of business or profession and hence not deductible under Section 37(1) of the Act However, CSR expenditure covered under section 30 to 36 of the Act shall be allowed as a deduction, subject to fulfilment of prescribed conditions Tax Incentive for funding of long-term bonds Concessional tax rate of 5% on interest paid by an Indian Company to non-residents on borrowings made in foreign currency extended up to 1 July 2017 Beneficial rate of 5% also extended to interest on borrowings made by way of issuance of any long-term bond (including long term infrastructure bond) Amendment to take effect from 1 October 2014 Others Tax rates No changes proposed in the corporate tax rates including Minimum Alternate Tax Surcharge and education cess to continue at existing rates Roll back provision in Advance Pricing Agreements Roll back mechanism is proposed to be introduced in the Advance Pricing Agreements ( APA ). The APA may, subject to such prescribed conditions, procedure and manner, provide for determining the arm s length price or for specifying the manner in which arm s length price is to be determined in relation to an international transaction entered into by a person during any period not exceeding 4 financial years preceding the first of the financial years for which the APA applies in respect of the international transaction to be undertaken in future The aforementioned amendment shall be effective form 01 October 2014 Dividend and Income distribution tax For the purpose of determining the tax on distributed profits payable as dividends, the amount of dividend shall be increased to such amount as would, after reduction of the tax on such amount be equal to the net distributed profits. Thus, where the amount of dividend paid or distributed by a company is INR 85, then dividend distribution tax ( DDT ) under the amended provision would be calculated as follows:

6 Dividend amount distributed = INR 85 Increase by INR 15 [i.e. (85*0.15)/(1-0.15)] Increased amount = INR % of INR 100 = INR 15 Tax payable as DDT is INR 15 Dividend distributed to shareholders = INR 85 The aforementioned amendment shall be effective form 01 October 2014 Lower disallowance of expenditure on which no tax has been withheld In case of non-deduction or nonpayment of taxes withheld at source on payments made to residents, the disallowance of the expenditure shall be restricted to 30% of the amount of expenditure claimed Under section 40(a)(ia) of the Act, in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the financial year of payment, if tax is deducted during the financial year and the same is paid on or before the due date specified for filing of return of income under section 139(1) of the Act. However, in case of disallowance for non-payment of tax from payments made to nonresidents, this extended time limit of payment up to the date of filing of return of income under section 139(1) is not available. In order to provide similar extended time limit for payment of tax deducted from payments made to non-residents, it is proposed that the deductor shall be allowed to claim deduction for payments made to non-residents in the financial year of payment, if tax is deducted during the financial year and the same is paid on or before the due date specified for filing of corporate tax return. Further the scope of section 40(a)(ia) is expanded to include payments such as salary, directors fee which were currently not mentioned under the aforesaid section Long term capital gain on Unlisted Securities and Debt-Oriented Mutual Fund Units Period of holding for unlisted securities and units of debt oriented mutual fund increased from 12 months to 36 months Beneficial tax rate of 10% (without indexation benefit) limited to listed securities (other than unit) and zero coupon bonds Raising of limit for deduction under Section 80C The existing limit for deduction under Section 80C of INR 1 Lakh has been raised to INR 1.5 Lakhs. Investment under Section 80C includes payment of tuition fees for certain specified persons. Extension of advance ruling facility to residents Currently, an advance ruling can be obtained regarding the tax liability of a non-resident from the Authority for Advance Rulings. This facility is not available to resident taxpayers except Public Sector Undertakings. It has been proposed to enable resident taxpayers to obtain an advance ruling in respect of their income tax liability above a defined threshold. Enlargement of coverage under settlement commission It has been proposed to enlarge the scope of the Income-tax Settlement Commission

7 so that taxpayers may approach the Commission for settlement of disputes Indirect taxes Service tax Effective service tax rate unchanged at 12.36%. Change in Scope of service tax exemption (w.e.f. 11 July 2014) Exemption from service tax on services procured by an educational institution restricted to: transportation of students or staff, catering incl. mid-day meal schemes security, cleaning or housekeeping services; services relating to admission or conduct of examination Accordingly, the current exemption availed on procurement of services other than aforesaid specified service will henceforth not be available (eg. renting of immovable property services) Service tax exemption would be available to all services provided by educational institution to students, faculty and staff; Withdrawal of Excise duty of 2% (without CENVAT) on writing and printing paper for printing of educational textbook. Accordingly, the writing and printing paper for printing of educational textbook would be subject to excise duty of 6% with CENVAT benefit Other indirect tax proposals and Service Tax - applicable from 11 July 2014 Introduction of timeline of 6 months from the date of the invoice/ other relevant document for availing Cenvat credit on inputs and input services - applicable from 1 September 2014 Time limit for payment of value of service under reverse charge reduced to 3 months from date of invoice. Where payment is not made within the said period, point of taxation would be the following day on which the said period expires. Earlier absolute rate of 18 p.a. for delay in service tax is replaced with a graded system of interest for delay in service tax payment 18 % p.a. for first six months; 24% for delay beyond six months where delay is within 1 year; 30% for delay beyond 1 yr Applicable Mandatory requirement to make pre-deposit for filing appeals before Commissioner (Appeals) and CESTAT. Requirement to file application for stay has been dispense with; Scope of settlement commission expanded Specific rules to be prescribed under service tax for determining of exchange rate for valuation of services - reference to customs notification done away with Advance ruling is now an option extended to resident private limited companies under Customs, Excise

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