Tax & You: Budget 2015 - Direct Tax The direct tax proposals in Budget 2015 are straight forward and a step ahead towards reducing tax litigation. With no retrospective amendments being proposed, this could be an indication of the Government s intention of not to unsettle the past. Most changes are proposals put forth by the Finance Minister. Before these become law, they will undergo debates in Parliament and possible amendments. The final changes will come about after that, likely in May 2015. In general all the changes are applicable from AY 2016-17 (April 01 st 2015). Deviation from this rule is highlighted by way of a specific mention. Each change proposal comes with fine print, conditions and details. This note only highlights the changes and gives an overview. It is important to understand all the details before taking action. This Note explains only the important changes, and those relating to resident Indians. If you are interested in other changes, including for non-residents, please contact G&G. 1
Table of Contents 1. TAX RATES & SLABS... 3 RESIDENT INDIANS/HUF S... 3 RESIDENT COMPANIES: REDUCTION OF CORPORATE TAX RATE NOT NOW... 3 SURCHARGE... 3 EDUCATION CESSES... 4 BUDGET IMPACT ON EFFECTIVE TAX RATES... 4 2. DEDUCTION FOR INVESTMENT IN SUKANYA SAMRIDHI SCHEME... 4 3. INCREASE IN DEDUCTION FOR CONTRIBUTION TO ANNUITY PLANS OF ANY PENSION FUND... 4 4. ADDITIONAL DEDUCTION FOR NATIONAL PENSION SCHEME... 5 5. INCREASE IN DEDUCTIONS FOR PAYMENTS MADE FOR HEALTH INSURANCE... 5 6. DEDUCTIONS FOR THE TREATMENT OF DISABLED SEC 80DD & 80U... 6 7. DEDUCTION FOR TREATMENT OF CHRONIC DISEASES... 7 8. TRANSPORT ALLOWANCE INCREASED... 7 9. GENERAL ANTI AVOIDANCE RULES (GAAR) DEFERRED... 7 10. RELIEF TO STATE OF ANDHRA PRADESH AND TELANGANA... 7 ADDITIONAL INVESTMENT ALLOWANCE... 7 ADDITIONAL DEPRECIATION... 7 11. RATIONALISING CLAIM OF ADDITIONAL DEPRECIATION... 8 12. WEALTH TAX ACT ABOLISHED... 8 13. DEEMED GAINS ON TRANSFER OF SHARES OF A FOREIGN COMPANY CLARITY... 8 14. TAX ON ROYALTY AND FEES FOR TECHNICAL SERVICES (FTS)... 8 15. DEDUCTION FOR EMPLOYMENT OF NEW WORKMEN BY MANUFACTURERS... 9 16. CHARITABLE ACTIVITIES... 9 17. DONATIONS U/S 80G ANNOUNCEMENT OF NEW FUNDS... 9 18. TRANSFER PRICING (TP) SPECIFIED DOMESTIC TRANSACTION.... 9 19. NO TDS ON PROCEEDS FROM LIFE INSURANCE POLICIES UPON SUBMISSION OF FORM 15G/15H... 10 20. TDS ON PAYMENT TO TRANSPORTERS U/S 194C... 10 21. TDS ON PRE-MATURE TAXABLE WITHDRAWAL FROM EMPLOYEE PROVIDENT FUND SCHEME (EPFS)... 10 22. TDS ON INTEREST FROM CO-OPERATIVE BANKS... 10 23. TDS NOW MADE APPLICABLE ON RECURRING DEPOSIT (RD) INTEREST... 11 24. CURBING OF CERTAIN PAYMENTS/RECEIPTS IN CASH - SEC 269SS AND 269T... 11 25. PAYMENTS TO NON RESIDENTS MANDATORY REPORTING... 11 26. RESIDENTIAL STATUS OF A COMPANY DEFINITION AMENDED... 11 DISCLAIMER... 11 2
Direct Taxes 1. Tax Rates & Slabs Resident Indians/HUF s Tax rates have remained the same. Amount in ` Rates Individuals /HUF s Sr Citizens Very Sr Citizens Nil Upto 2.50 L Upto 3.0 L Upto 5 L 10% 2.50 to 5.0 L 3.0 to 5.0 L NA 20% 5.0 to 10.0 L 5.0 to 10.0 L 5.0 to 10.0 L 30% 10.0 L+ 10.0 L + 10.0L + Resident Companies: Reduction of Corporate tax rate not now The Finance Minister announced that corporate tax rate of an Indian company will be reduced from 30% to 25% over a period of 4 years. This change may begin from financial year 2016-17 and not early. Surcharge Surcharge @ 12% is applicable on tax for total income exceeding ` 1 Crore for all assessees except companies. Earlier the rate was 10%. In the case of domestic companies, and Foreign Companies surcharge is applicable as under: Slabs (`) for total Domestic Company Foreign Company income Upto 1 Cr. NIL NIL Between 1 Cr. to 10 Cr. 7% 2% Above 10 Cr 12% 5% 3
Education cesses Education Cesses remain as before at 3% of the income tax and surcharge. Budget Impact on Effective Tax Rates a) Income Tax Assessee If Total Income is less than 1 Cr between 1 to 10 Cr Above 10 Cr Current Proposed Current Proposed Current Proposed Indian Company 30.90 30.90 32.45 33.06 33.99 34.61 Foreign Company 41.20 41.20 42.02 42.02 43.26 43.26 b) Minimum Alternate Tax Assessee If Book Profit is less than 1 Cr between 1 to 10 Cr Above 10 Cr Current Proposed Current Proposed Current Proposed Indian Company 19.06 19.06 20.01 20.39 20.96 21.34 Foreign Company 19.06 19.06 19.44 19.44 20.01 20.01 c) Dividend Distribution Tax Assessee Current Proposed All Companies 20.47 20.92 2. Deduction for Investment in Sukanya Samridhi Scheme Contribution to Sukanya Samridhi Scheme is eligible for Deduction u/s 80C. withdrawals under this scheme are also exempt from tax u/s 10(11A). Interest and 3. Increase in Deduction for Contribution to Annuity Plans of Any Pension Fund Investment limit for contribution to annuity plans of any pension fund is increased from ` 1 lakh to ` 1.5 Lakhs. The maximum deduction u/s 80C, 80CCC and 80CCD(1) remains unchanged at ` 1.5 Lakhs 4
4. Additional Deduction for National Pension Scheme Payment to National Pension Scheme is now eligible for additional deduction u/s 80CCD(1B) upto ` 50,000, if no deduction is claimed u/s 80CCD(1) for the amount so invested. For instance Mr. X makes following investments in FY 2015-16 Life insurance premium ` 20,000 Annuity plan of LIC pension fund ` 1,10,000 New Pension Scheme ` 80,000 Deduction available to Mr. X in both the scenarios is as under Type of investment Section Actual Investment Eligible Deduction Currently Proposed Remarks Life Insurance Premium 80C 20,000 20,000 20,000 Overall cap on Annuity plan 80CCC 1,10,000 1,00,000 1,10,000 New Pension Scheme 80CCD(1) 80,000 30,000 20,000 80CCD(1B) NA 50,000 Total 2,10,000 1,50,000 2,00,000 deduction u/s 80C, 80CCC and 80CCD(1) being ` 1.5 lacs Additional limit of ` 50,000 u/s 80CCD (1B) Net benefit of ` 50,000 under proposed law 5. Increase in Deductions for Payments Made for Health Insurance Deduction limits for payments made for health insurance of self and dependants, Senior citizens and members of HUF are proposed to be enhanced. Further a new class titled very senior citizens (80 years and above) is created with higher eligibility of deduction. It is also proposed to allow a deduction for medical expenses incurred on very senior citizens and are not covered by any medical insurance. However the overall deduction a person can avail is restricted to ` 30,000 for insurance premium and expenses incurred on very senior citizens not covered by medical insurance. 5
The current and proposed limits of deductions are captured in the following table: Amount in ` Category of Assessee Current Proposed Self (non-senior) 15,000 25,000* Self (senior) 20,000 30,000* Parents (non-senior) 15,000 25,000* Parents (seniors) 20,000 30,000* *Though in the budget speech as well as the memorandum explaining the finance bill it was proposed to enhance the limits of ` 15,000 to ` 25,000, the finance bill did not carry an amendment to this effect. This could be an unintentional error, which may be rectified at a later date. 6. Deductions for the Treatment of Disabled Sec 80DD & 80U Limit of deduction for medical treatment of persons with disability and severe disability increased. While sec 800DD is available for persons incurring expense on medical treatment (actual expense) of a disable dependant, sec 80U allows a fixed deduction to the disabled assessee irrespective of actual expenditure. Both the sections stipulate several other conditions that needs to be fulfilled for a rightful claim. Table hereunder summarizes the deduction available under both sections: Amount in ` Category 80DD 80U Presently Proposed Presently Proposed Disability 50,000 75,000 50,000 75,000 Severe Disability 100,000 125,000 100,000 125,000 6
7. Deduction for Treatment of Chronic Diseases Limit of deduction (sec 80DDB) for expenses incurred on medical treatment of very senior citizens (above 80 years) with chronic diseases, increased. Chronic diseases include Cancer, full blown AIDS, Thalassaemia, Haemophilia, etc., Amount in ` Assessee Presently Proposed Very Senior 60,000 80,000 Senior 60,000 60,000 Others 40,000 40,000 Requirement of obtaining such certificate from a specialist working in a Government hospital is relaxed. Now a certificate can be obtained from specialist doctor from any hospital. 8. Transport Allowance Increased Exemption for transport allowance to salaried employees is increased from ` 800 p.m to ` 1,600p.m. 9. General Anti Avoidance Rules (GAAR) Deferred Implementation of GAAR is deferred by 2 years and will apply prospectively from FY 2017-18. GAAR will not apply for investments made upto 31.3.2017. 10. Relief to State of Andhra Pradesh and Telangana Manufacturing units operating in notified backward areas in the state of Andhra Pradesh and Telangana, are given twin benefits of additional investment allowance and additional depreciation from AY 2016-17 to AY 2020-21. Additional Investment allowance Manufacturing units investing in plant and machinery in a year can now avail Additional Investment Allowance of 15% of the cost of plant and machinery u/s 32AD. This is in addition to the depreciation u/s 32 and existing investment allowance u/s 32AC. Additional Depreciation Additional depreciation can be claimed on the Plant & Machinery so acquired in the year of investment @ 35% instead of 20% available presently. 7
11. Rationalising Claim of Additional Depreciation Manufacturing and power generating units are eligible for additional depreciation @ 20% on plant and machinery acquired and put to use in the year of acquisition. However this benefit is restricted to 10% if the asset is acquired after September, depriving assessee of the balance 10% completely. To rationalise the claim for additional depreciation in such cases, it is proposed that the unavailed 10% would now be allowed in the subsequent year. This is a welcome move to encourage investments, without the fear of forgoing the deserving benefit. 12. Wealth Tax Act Abolished Long existing Wealth tax Act stands abolished. No Wealth Tax payable from assessment year 2016-17 (FY 2015-16). However, it is proposed to capture the information relating to assets in the income tax return. 13. Deemed Gains on Transfer of Shares of a Foreign Company Clarity Deemed capital gains arising on transfer of an asset deriving value from underlying assets in India Transfer of an asset (e.g. shares of a foreign company) is deemed to derive its value from India (and hence taxable in India) if such value Exceeds ` 10 crore and Represents at least 50% of value of all assets owned by the entity being transfered. Also, such taxable income would be computed on principle of proportionality based on value of assets located in India versus that located outside of India. Detailed rules in this regard are yet to be announced. The amendment brings in some amount of clarity on the intent of the law in taxing transactions outside the jurisdiction of India, relating to assets owned in India. 14. Tax on Royalty and Fees for Technical Services (FTS) Rate of tax on royalty and FTS paid to non-residents is decreased from 25% to 10%. This is a huge benefit for Indian entrepreneurs bearing the tax on such payments. 8
15. Deduction for Employment of New Workmen by Manufacturers Presently, additional deduction @ 30% of salary (u/s 80JJAA) paid to new workmen over 100 employees is allowed for three years including the year of employment, on fulfillment of prescribed conditions. This benefit is now extended to all manufacturers and not just Indian Companies. Further the existing requirement to employ minimum 100 regular workmen has now been reduced to 50, thereby extending the incentive to smaller units. Again a welcome move to boost employment in manufacturing sector and also a step forward to ensure success of make in India program. 16. Charitable Activities now Includes Yoga Definition of chartable purpose is amended to include YOGA as a specific category on par with the existing categories of medical relief, relief to poor and education. Advancement of any object in the nature of general public utility shall not be a charitable purpose, if it involves carrying of a business activity for a fee or consideration and the receipts thereof exceeds 20% of the total receipts (presently limit prescribed being ` 25 lakhs). This is to curb not-for-profit entities carrying on business under guise of charity. 17. Donations u/s 80G Announcement of New Funds Contributions to Swachh Bharat Kosh, Clean Ganga Fund and National Fund for Control of Drug Abuse, qualify for 100% deduction to all assessees. However, contribution to Swachh Bharat Kosh & Clean Ganga Fund should not be from the funds allocated for Corporate Social Responsibility (CSR). 18. Transfer Pricing (TP) Specified Domestic Transaction. To reduce the compliance burden on small businesses, threshold limit for applicability of TP regulations on specified domestic transaction increased from ` 5 Cores to ` 20 Crores. 9
19. No TDS on Proceeds from Life Insurance Policies upon Submission of Form 15G/15H Assessees can now receive proceeds from life insurance policy without TDS, (which is otherwise taxable) upon submission of form 15G/15H. 15G and 15H is a self declaration form declaring the fact that the tax on the estimated total income would be nil. 20. TDS on Payment to Transporters u/s 194C Presently no tax is deducted on payment to transporter on furnishing PAN. This was introduced to spare small transporters from TDS. It is now clarified that payment without TDS, can be made to transporter only if such transporter: furnishes the PAN and gives a declaration that he does not own more than 10 goods carriage during the previous year. (This is applicable from 01.06.2015) 21. TDS on Pre-mature Taxable Withdrawal from Employee Provident Fund Scheme (EPFS) Pre-mature taxable withdrawals from EPFS above ` 30,000 will now attract TDS @ 10% (sec 192A) However, non-furnishing of PAN to the EPFS on such withdrawals would call for deduction of tax at maximum marginal rate, i.e, @ 30%. 22. TDS on Interest from Co-operative Banks Co-operative banks will now have to deduct tax at source @ 10% on interest on time deposits to members holding shares of such banks. This is applicable to interest payable for the period commencing from 1 st June 2015. The minimum threshold of ` 10,000 for not deducting tax at source is applicable for bank as a whole and not per branch. 10
23. TDS Now Made Applicable on Recurring Deposit (RD) Interest Payment of interest on recurring deposit by banking company or Co-operative Banks will now attract TDS @ 10%. The existing threshold of ` 10,000 available will include interest from both recurring and fixed deposit cumulatively. 24. Curbing of Certain Payments/Receipts in cash - Sec 269SS and 269T Advances, deposits or other sums in relation to transfer of immovable properties cannot be accepted or repaid over ` 20,000 in cash. This is a move to encourage use of banking channels for real estate transaction and to curb black money transactions. 25. Payments to Non Residents Mandatory Reporting Any payments to non residents will now have to be reported in the prescribed form (yet to be notified), irrespective of taxability of such payments. This is to monitor outflow of funds and their taxability. Failure to furnish correct information may attract a penalty of ` 100,000. 26. Residential Status of a Company Definition Amended Definition of residential status of a company is amended to bring in companies that are effectively managed and controlled at any point of time in India, though not having physical presence or any business activities in India. Further, this is also proposed to bring parity with international tax laws. A company would now be resident in India if: it is an Indian company or its place of effective management at any time in that year is in India. Place of effective management(poem) would mean a place where key management and commercial decisions necessary for conduct of business of an entity as a whole are in substance made. Guiding principles on determining the POEM will be issued in due course to bring more clarity on the residential status of company not incorporated in India. Disclaimer This document is aimed at explaining in broad terms the proposals of the Budget according to our understanding of the law. It should not be taken as professional advice for decision making. It is intended to make you more informed. To take decisions on such issues, please consult a professional. E&OE 11