India: Budget 2015-16 – For The Corporates

The Union Budget for the financial year 2015-16, is focused on attracting investors, making India a business hub and reviving the economic growth in general. Apart from the above, it has definitely a lot in store for the corporate sector.

Among the positives for corporate India, here are few important changes which appear to bring predictability and some level of simplicity and transparency in the Government's thinking and proposals:

CORPORATE TAX RATE

The rate of corporate tax is proposed to be reduced from 30% to 25% over a period of four year, from next financial year onwards. This reduction will however come along with phasing out of certain exemptions and incentives which the corporate tax payers could avail till now.

The proposal is based on the contention that corporate tax in India @ 30% is higher than the rates in other Asian countries thus making domestic Indian market uncompetitive. Further the effective collection rate is 23%, which is an added loss, due to excessive exemptions and incentives. The exemption regime has given birth to foray of tax litigation along with loss of revenue and a disadvantageous position in global market.

This move can encourage foreign investors to invest in India and also help the government gain some revenue by reducing the exemptions. The effect on India Inc. seems positive right now but the final picture will depend on the final policy regarding exemptions.

Considering the reduction of corporate tax rates, the promoters will tend to reinvest the money into the company which will ultimately enable the company to promote investment and to create more jobs.

WEALTH TAX AND SURCHARGE

Wealth tax is proposed to be abolished completely and be replaced by 2% of additional surcharge on super rich taxpayers having taxable income of more than Rs. 1 crore.

Wealth tax was fixed at 1% of net taxable wealth of a taxpayer including assets like house, car, jewellery etc. which exceeded value of 30 lakh rupees. Due to low amount of tax collection and high cost of collection, the overall wealth collection procedure is very burdensome on the tax department, moreover since it is difficult to track assets like cash and gold. The government believes that the 2% surcharge is likely to bring in Rs. 9000 crores in revenue, contrary to Rs. 1,008 crores which is the wealth tax collected for the year 2013-14. Further, the companies and individuals will be spared from the additional burden of filing wealth tax returns as the information can now be captured in the income tax returns.

REAL ESTATE INVESTMENT TRUSTS (REITS) AND INFRASTRUCTURE INVESTMENTS TRUSTS (INVITS)

Real Estate Investment Trusts (REITs) and Infrastructure Investments Trusts (InviTs) have been incentivized again, by giving them pass through facility on the rental income generated by the assests owned by these funds. In the previous budget REITs had been given a partial pass through on interest income generated by them.

Moreover, it has been proposed to rationalize the capital gains regime for sponsors existing at the time of listing of the units of REIT's and InviT's, subject to payment of Securities Transaction Tax (STT).This has been done to give respite to and revive the construction industry. Freeing the funds stuck in various completed projects is also an issue. Pass through provisions may help avoid double taxation.

GOODS AND SERVICE TAX (GST)

The Finance Minister promised in his budget speech that the much awaited Goods and Services Tax (GST) will be implemented by 1st April, 2016. GST will replace multiple indirect state and central taxes and will reduce the cascading effect brought by taxation at multiple stages by various bodies. The government is preparing for this switch by increasing the service tax to 14%.

This uniform method of taxation is set to benefit the Fast Moving Consumer Goods Companies (FMCG) and boost investor confidence.

MAKE IN INDIA

a) Setting up manufaturing units in backward areas of the state of Andhra Pradesh and Telangana has been incentivized to promote manufacturing industry in India. From 1st April, 2015 to 31st March, 2020 any industrial being set up in backward areas of the given states will be eligible to claim additional depreciation of 15% and additional investment allowance of 15% on cost of new plant and machinery acquired and installed. This deduction will be in addition to existing deduction available under section 32AC of the Income Tax Act.

This is a welcome measure in materializing the government's promise of making India a manufacturing hub and development of indigenous industries.

b) In his speech, Finance Minister said that additional depreciation at 20% is allowed on new plant and machinery installed by a manufacturing unit or a unit engaged in generation and distribution of power. However, if the asset is installed after 30th September, 2014 only 10% of the additional depreciation is allowed. It is proposed to allow the remaining 10% of the additional depreciation in the subsequent previous year.

c) Further section 80JJAA of the Income Tax act is to be amended to provide tax benefit to "'person' deriving profits from manufacture of goods in a factory and paying wages to new regular workmen." Eligibility for this exemption has been set at factories employing 50 workmen.

d) Rate of income tax on royalty and fees for technical services has been reduced from 25% to 10% in order to facilitate technological support to young and small enterprises.

MINIMUM ALTERNATE TAX (MAT)

The MAT provisions have been relaxed to the extent that the offshore investors don't have to pay MAT. The objective of MAT provisions was to bring 'zero tax companies' within the tax net. Since the government is focusing on its 'Make in India' drive, this exception will attract more investments from the Foreign Institutional Investors.

EASE OF DOING BUSINESS

a) Now online central excise and service tax registration can be completed in two working days. Further such taxpayers can issue digitally signed invoices and maintain electronic records. Time limit for taking CENVAT credit on inputs and input services is being increased from six months to one year as a measure of business facilitation.

b) The budget speech states that the present taxation structure has an inbuilt incentive for fund managers to operate from offshore locations. To encourage such offshore fund managers to relocate to India, it is proposed to modify the Permanent Establishment (PE) norms to the effect that mere presence of a fund manager in India would not constitute PE of the offshore funds resulting in adverse tax consequences.

c) A high level committee has to be set up by CBDT in order to review cases arising out of retrospective amendment to Income Tax Act regarding indirect transfers and coming to notice of the Assessing officer. Review by the committee will be necessary before any action can be taken in such cases.

COMPLIANCE AND BLACK MONEY

With the aim to bring back the wealth which legitimately belongs to the country, it has been proposed to enact a comprehensive new law on black money. Stringent provisions are to be put in place to penalize non disclosure of foreign assets and income. The offence will be made non compoundable and recourse to Settlement Commission will be restricted.. Rigorous imprisonment up to 10 years and levy of 300% of tax as penalty for concealment of income and assets has been proposed. Non filing of return or filing of return with inadequate disclosure of foreign assets is punishable with rigorous imprisonment up to 7 years. Moreover, the definition of 'proceeds of crime' under Prevention of Money Laundering Act has been amended to enable attachment and confiscation of equivalent asset in India in the cases where the asset is located abroad and cannot be forfeited.

Apart from the above, Benami Transactions (Prohibition) Bill will be introduced in the current session of the Parliament as stated in the Budget Speech. This will restrict the benami transactions and holding of benami property.

THRESHOLD RAISED FOR TRANSFER PRICING

In case of domestic transfer pricing, the threshold limit has been increased from INR 5crore to INR 20Crore [Section 92B]. This welcome step will benefit the small companies from making unnecessary compliances and hassles apart from easing the administrative burden on revenue authorities.

YOGA BECOMES TAX-FREE

Yoga is proposed to come under the ambit of charitable purpose under section 2(15) of the Income Tax Act. Accordingly, even if the activity is in the nature of trade, commerce or business, the trust would enjoy exemption on income from activities relating to yoga. This will ease the various opinions on whether the yoga is an activity eligible for tax exemption. Although, the Bombay High Court, in the case of the Rajneesh Foundation, had stated: "The philosophy and teaching of Acharya Rajneesh have become more acceptable to people during the last few years. Admittedly, the main thrust of the respondent is on meditation and nobody can dispute that, in India, meditation has been a very important source for physical, mental and spiritual well-being of human beings... When a large number of people feel (thus)... it must be held to be an activity for the advancement of general public utility."1

In order to mitigate the problem faced by many genuine charitable institutions, it is proposed to amend the ceiling on receipt from activities in the nature of trade, commerce or business to 20% of the total receipts from the existing ceilings of INR 25lakhs.

Further, it is proposed to amend the provisions of the IT Act so as to provide a mechanism to pre-empt the repetitive appeals by the revenue in the same assessee's case as the same question of law year after year.

CONCLUSION

There is definitely more good news than bad news for India corporate sector in the budget. Overall tax burden and liabilities on companies have been reduced and government support has been extended for setting up of new corporations. An effort has been made by the government in the direction of reducing unnecessary burden on corporations and reducing paper work. The focus is on restoring investor confidence and also by way of increasing the threshold for domestic transfer pricing and promoting yoga activities. But this budget is bound to increase tax litigation due to black money provisions. The final effects of the budget on corporations will be known only when the proposals are implemented but right now the budget is a gift from Modi Government to India Inc.

Footnote

1. MANU/MH/1048/[2005]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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