INDIA FISCAL BUDGET 2014 [analysis of key direct and indirect tax proposals] New Delhi July 14, 2014 presenter Sunil Arora FCA - Partner & Director Sundeep Gupta FCA - Partner & Director
DIRECT TAX Hits & Misses Key Proposals Individual Tax Corporate Tax Capital Gains Transfer Pricing Investment Linked Other Key Proposals Post Budget 3
Hits & Misses 4
HITS 5
MISSES 6
Key Proposals 7
INDIVIDUAL TAX Basic tax slabs for Individuals & HUFs enhanced i.e. FROM TO Income Range (Rs.) Rate (%) Income Range (Rs.) Rate (%) Upto 200,000 Nil Upto 250,000 Nil 200,001 to 500,000 10 250,001 to 500,000 10 500,001 to 10,00,000 20 500,001 to 1,000,000 20 1,000,001 and above 30 1,000,001 and above 30 Exemption limit for senior citizens (60 and above) enhanced to Rs. 3,00,000 Exemption limit for very senior citizens (80and above) remains at Rs. 5,00,000 Surcharge remains at 10 per cent on income exceeding Rs. 10 million 8
Interest deduction enhanced by Rs 50,000 in respect of self occupied residential property INDIVIDUAL TAX Investment limit in tax saving schemes enhanced by Rs 50,000 Payments exceeding Rs 100,000 towards non-exempt life insurance policies to attract tax-withholding at 2 per cent (effective October 2014) 9
CORPORATE TAX Corporate tax rates remain unchanged i.e. COMPANY Income Level (Rs Million) Upto 10 10 to 100 Above 100 Domestic Companies 30% 32.445% 33.99% Foreign Companies 40% 42.024% 43.26% Surcharge remain unchanged at 5 per cent and 10 per cent in case of domestic companies 2 per cent and 5 per cent in case of foreign companies where income exceeds Rs.10 million and Rs.100 million respectively Education cess and Secondary & Higher Education cess remain unchanged at 2 per cent at 1 per cent respectively 10
CORPORATE TAX Investment Allowance to Manufacturing Units Companies in manufacturing sector allowed 15% on investments in plant & machinery of Rs 250 mn or more installed during the year. Benefit available for investments upto March 31, 2017. Under existing law, the threshold was Rs 1000 mn over 2 years for investments upto March 31, 2015 Welcome proposal, as this can result in significant deductions on cost of plant and machinery in the year of investment Although no clarity on carry forward status; perhaps allowed 8 years as against depreciation, which is carried forward indefinitely 11
CORPORATE TAX Investment-linked Incentives Upfront 100% deduction for investment in capital assets for specified industries will additionally apply to business of slurry pipelines for iron-ore transportation and semiconductor wafer manufacturers Benefit denied when specified assets are not retained or exclusively used for eight consecutive years in specified businesses Interest on all foreign currency loans and long-term bonds (taken upto June 30, 2017) to enjoy 5% tax 12
CORPORATE TAX Disallowance of Payments/Expenditure Expenditure disallowance reduced from 100% to 30% for payments made to residents without meeting withholding tax requirements Now, all payments to residents viz salary, directors fee etc. disallowed if tax withholding compliances not met No disallowance on payments made to non-residents, if tax due is deposited before stipulated date of filing tax return Corporate Social Responsibility (CSR) expenditure as envisaged under Companies Act 2013 not tax deductible 13
Dividend Distribution Tax CORPORATE TAX Now to be computed based on total amount set aside for distribution. For instance, where the amount set aside out of profits is 100, distribution tax will be 17. Similarly, if the amount targeted for distribution is 83, this will have to be grossed up to arrive at distribution tax at 17 Overall, a domestic company now pays more taxes as compared to foreign company Particulars Existing Proposed Target distribution 83 83 Distribution tax 17% 17% Distribution tax computed 14 (83 X 17%) 17 (83/1 17%) Incremental tax impact 3 14
CAPITAL GAINS Gains from transfer of Indian securities would necessarily be classified as capital gains. This brings certainty in tax treatment of Foreign Portfolio Investors (FPIs or FIIs). However, not so beneficial in cases where no tax applies in absence of a Permanent Establishment (PE) Unlisted securities held upto 36 months now treated as short term capital assets, increasing capital gains tax by about 10%. Likely to impact capital gains on ESOPs of unlisted companies. Exit of investments by Private Equity funds may also get affected Transfer of Government Securities outside India between nonresidents not liable to capital gains tax 15
CAPITAL GAINS Reinvestment benefit under section 54/ 54F available only on when sales proceeds invested in one residential house within India Exemption on investment in specified bonds under section 54EC capped at Rs.5 million even when spread over two years Advances retained in respect of failed negotiations for transfer of capital asset to be taxed as other income 16
TRANSFER PRICING Roll back mechanism introduced under Advance Pricing Agreement scheme to cover transactions undertaken in previous four years under specified circumstances Use of multiple year financial data permitted for benchmarking comparable transactions In specified cases, transfer price to be determined on the basis of price range (i.e. differential between upper and lower quartile) and not arithmetic mean 17
BUSINESS TRUST New tax regime introduced for taxability of Infrastructure Investment Trust or Real Estate Investment Trusts ( Business Trusts or Trusts ) A Trust can be set up which is listed and which invests into SPVs (i.e. real estate, infrastructure companies) by way of exchange of shares with units of Trust. Listed units are treated at par with shares for capital gains tax. Trust given pass through status. Investors taxable on interest and capital gains income on transfer of units of Trust. Trust taxable on Other incomes (like capital gains on selling shares of SPVs etc.). Migration of shares from direct holding structure to Trust is tax neutral 18
OTHER KEY PROPOSALS Interest, Penalties & Prosecution Inaccurate or incorrect information reported by specified financial institutions to attract penalty of Rs 50,000 Deliberate failure to produce books of accounts in tax proceedings may attract penalties and prosecution Interest to accrue from the date when demand first raised in case of deferment of outstanding tax demand 19
OTHER KEY PROPOSALS Resident companies exceeding specific threshold can now approach Authority of Advance Ruling. Scope of Settlement Commission to be widened Tax Withholding New provision introduced to enable the deductor to submit tax withholding correction statement within 10 days No time bar on tax officer to carry out an assessment in respect of tax withholding statements 20
Post Budget 32
POST BUDGET MEASURES Threshold prescribed for tax department to approach tribunals, high court and supreme court. An effective measure to contain litigation Clarified that enhanced rate of 20% on income from debt funds will apply retrospectively (i.e. April 1, 2014). This is likely to affect the markets for FMP instruments Date of implementation of GAAR (scheduled April 1, 2015) still unclear Retrospective amendments may be scrapped 22
INDIRECT TAX Hits & Misses Highlights Excise Service Tax Customs 2 3
Hits & Misses 24
HITS & MISSES 25
HIGHLIGHTS GST still on the anvil but no timeline defined General rates unchanged FIAT ruling overturned beneficially Benefit of advance ruling extended to resident companies Pre-deposit mandatory before appeal 2 6
SERVICE TAX Interest on delayed payments enhanced to a maximum of 30 per cent Any services of director now included in reverse charge Intermediary to now include facilitation of supply of goods Time limit for adjudication now 6 ~ 12 months E-payment of tax mandatory w.e.f Oct 1 2 7
SERVICE TAX CENVAT credit Claim only within 6 months w.e.f. Sept 1 On payment of service tax under full reverse charge; payment to service provider not required now Inclusions in Mega Exemption notification Micro insurance schemes of LIC upto Rs 50,000 sum assured GTA for organic manure Specified services in relation to cotton Foreign tours to foreigners Treatment or disposal of bio-medical waste 2 8
SERVICE TAX Exclusions from Negative list radio cabs sale of space/time on internet Exemptions withdrawn Air conditioned coaches for passengers Clinical trials on humans Renting of immovable property to educational institutions Other than specified services to educational institutions viz. transportation, house keeping, catering, security etc. Other than specified services to government/local authority viz. water supply, health, sanitation etc. 29
SERVICE TAX Valuation rules amended (w.e.f Oct 1) Works contracts 2 slabs of 40 and 70% now Passenger transport by other than cabs 40% Transport of goods by vessels 40% Radio cabs 40% without CENVAT credit (yet to be notified) 30
EXCISE DUTY Few changes in duty rates; basic rate remains unchanged Solar energy sector given impetus - exemption from duty for machinery or equipments for setting up projects E-payment of duty mandatory effective October 1st Delayed payment to attract penalty of 1% per month Activities in nature of packing, re-packing, labeling etc for specified products covered in manufacture viz. vaccines, tooth powder, packaged software, batteries, etc. 31
CUSTOM DUTY Few changes in duty rates ; basic rate remains unchanged Free baggage allowance for inbound passengers now Rs 45,000 32
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