India: Budget 2016: Key Tax Proposals

Last Updated: 2 March 2016
Article by Trilegal .

The Union Budget plays it safe with a focus on 'ease of doing business' and 'Make in India'. Phase wise simplification of tax regime through reduction in tax rates and removal of incentives focuses on manufacturing and Startups.

Union Finance Minister, Mr. Arun Jaitley, presented the Union Budget in Parliament on 29 February 2016. While no big bang changes have been proposed in the Union Budget, the tax proposals have been in line with the Government's emphasis of 'ease of doing business' and 'Make in India'. Most of the proposed tax changes are aimed at rationalization of tax, reduction of tax controversies and providing targeted incentives to manufacturing units and Startups. Below are the salient points of the direct and indirect tax proposals.

SECTION A: DIRECT TAX

1. Changes in tax rates/ surcharges

  1. Corporate tax rate

    • The corporate tax rate of 30% has not been changed for most companies. However, concessional rates have been prescribed for small and manufacturing companies.
    • A 29% rate has been prescribed for Indian companies whose annual turnover does not exceed INR 50 million (approximately US$ 735,000).
    • A rate of 25% has been prescribed for Indian manufacturing companies formed on or after 1 March 2016.
  2. Surcharge

    In case of an individual earning an income of more that INR 10 million (approximately US$ 147,000), surcharge has been increased to 15% from 12% taking the maximum marginal rate to 35.54%. Highest rate of surcharge for domestic firms and companies remain at 12% and for foreign companies at 5%.
  3. Dividend distribution tax (DDT)

    For annual dividend income of INR 1 million or more (approximately US$ 14,700), a resident investor (i.e. recipient of dividend), being an individual / Hindu Undivided Family (HUF) / firm, will pay an additional dividend distribution tax of 10%. This will not impact corporate shareholders of an Indian company.

2. Key changes that may have an impact on mergers & acquisitions

  1. Buyback distribution tax

    Buyback distribution tax will now apply to all kinds of buyback of unlisted shares and rules will be prescribed for computing 'distributed income'.
  2. Deemed income under section 56(2)(vii)

    Shares received by an individual or HUF as a result of demerger or amalgamation will not attract deemed income provisions of section 56(2)(vii) of the Income Tax Act. This exemption has not been extended to corporate shareholders.
  3. Capital gains on rupee denominated bond

    Currency fluctuation on account of appreciation of rupee against a foreign currency will not be taken into account while computing capital gains on redemption of rupee denominated bonds of an Indian company subscribed by a non-resident.
  4. Cost of acquisition/ improvement in respect of right to carry on any profession

    • Receipts from transfer of right to carry on any profession, are chargeable to tax under the head 'capital gains' and not business income.
    • The 'cost of acquisition' and 'cost of improvement' will be taken as 'nil' while computing capital gains on transfer of right to carry on profession.
  5. Conversion of company to limited liability partnership (LLP)

    Conversion of a company to a LLP would be considered tax neutral on satisfaction of an additional condition i.e. value of total assets in the books of the company in any of three financial years preceding the financial year in which conversion takes place, does not exceed INR 50 million (approximately US $ 735,000).

3. Phasing out of deductions/ exemptions/ incentives and new tax incentives under the Income Tax Act

  1. Phasing out of deductions/ exemptions/ incentives

    • Section 10AA deduction (applicable to units located in Special Economic Zones (SEZs)) will not be available to units commencing manufacture or production of articles or things or provision of services after 1 April 2020.
    • Deduction under Section 35AC relating to expenditure incurred on certain eligible social development schemes will not be available from 1 April 2017.
    • No deduction under Section 80IA (infrastructure related) or 80IAB (development of SEZs) or 80IB (backward area related) will be available if the specified activity commences on or after 1 April 2017.
    • Deduction under scientific research expenditure will be restricted to 100% (previously it ranged from 125% to 175%).
    • Accelerated depreciation will be restricted to 40% with effect from 1 April 2017.
  2. New tax incentives

    • Additional depreciation on acquisition of new machinery or plant at the rate of 20% is being extended to assessees engaged in the business of transmission of power.
    • Start-ups set up from 1 April 2016 upto 31 March 2019 are eligible for exemption equal to 100% of its income for 3 out of 5 years. However, Minimum Alternative Tax (MAT) will be applicable.
    • An exemption from capital gains tax has been provided to investors investing in notified Startups, if the long term capital gains proceeds are invested in units of a specified fund, as notified by the Central Government, subject to certain conditions.
    • To facilitate setting up of 'international financial services centre' (IFSC), certain tax benefits have been provided:

      • exemption from tax on capital gains arising from transactions undertaken in foreign currency on a recognized stock exchange located in IFSC even where securities transaction tax is not paid in respect of such transactions.
      • MAT will be chargeable at 9% from units located in IFSC.

4. Important procedural changes

  1. Direct Tax Dispute Resolution Scheme 2016

    • An assessee can settle disputes at the first appeal level by paying tax and interest. In cases where disputed tax exceeds INR 1 million or more (approximately US$ 14,700), 25% of minimum penalty will also be payable.
    • In case of any pending appeal against a penalty order, 25% of minimum penalty will be payable along with tax and interest.
  2. Applicability of MAT provisions to non residents

    In the previous budget an amendment had been introduced that MAT provisions would not apply to non-residents who do not have a permanent establishment in India. This amendment introduced in the last budget has now been made retrospectively applicable from 1 April 2001.
  3. Higher tax withholding for non-residents without PAN

    It has been announced that the higher tax withholding of 20% for non-residents without PAN will be rolled back and a foreign tax registration would be sufficient for withholding tax at normal rates.
  4. Payment of interest on refund

    • In order to ensure filing of return within the prescribed time-limit, where the return is filed after due date, the period for grant of interest on refund may begin from the date of filing of return.
    • Where refund arises out of appeal to the first appellate authority, and the refund is delayed beyond 90 days, the assessee will be entitled to a higher interest at the rate of 9%.
  5. Change in appeal provision

    In order to minimize litigation, the Budget proposes to amend the Income Tax Act to provide that an assessing officer cannot file an appeal before the Income Tax Appellate Tribunal against the order of the Dispute Resolution Panel.
  6. Reduction of penalty

    Previously the assessing officer had the discretion to levy penalty of 100% to 300% of tax evaded. This discretionary power of the assessing officer has now been curtailed by introducing a much lower graded penalty rate (50% to 200% of tax), for different classes of misdemeanours:

    • rate of penalty reduced to 50% of tax payable on under-reported income;
    • where under-reporting results from misreporting of income by the assessee, the rate of penalty is 200% of tax payable on misreported income;
    • rate of penalty is fixed at a flat 60% under Section 271AAB (Penalty where search has been initiated) of the Income Tax Act.
  7. Rationalization of TDS provisions

    • In relation to payments to contractors the existing aggregate annual threshold limit of INR 75,000 (approximately US$ 1100) has been increased to INR 1,00,000 (approximately US$ 1500).
    • Regarding commission or brokerage the existing threshold limit of INR 5,000 (approximately US$ 73) has been increased to INR 15,000 (approximately US$ 220) and the existing rate of 10% is proposed to be reduced to 5%.
  8. Exempt income under section 14A

    For the purpose of computing expenditure incurred to earn exempt income under section 14A of the Income Tax Act, it has been proposed to amend Rule 8D by restricting it to actual expenditure incurred.
  9. One time amnesty scheme and settlement of 'retro-tax' cases

    • An 'Income Disclosure Scheme 2016' has been introduced as a limited period compliance window for domestic tax payers with undisclosed income for any financial year upto 2015-16. Such domestic players can pay tax, surcharge and penalty of 45% to clear their past dues. This limited window is open from 1 June to 30 September 2016.
    • A one-time scheme for ongoing cases under retrospective amendments (such as the Vodafone case) has been provided. Under this scheme the taxpayer will be given the option to drop litigation/ arbitration by paying only the tax component (interest and penalty being waived).

5. Incorporation of base erosion & profit shifting (BEPS) recommendations

  1. Country By Country Reporting

    The requirement for country by country reporting for an international group having an Indian parent will only apply if the consolidated revenues of the group based on consolidated financial statements exceed the threshold of Euro 750 million (approximately INR 54,000 million).
  2. Equalization Levy

    Under the existing provisions of the Income Tax Act, online advertising and digital marketing services rendered from outside India do not fall under any of the taxable heads. In order to bring such services to tax, a new levy titled 'Equalization Levy' has been enacted at 6% of the amount of consideration for online advertisement / digital media services rendered by a non-resident.

6. Place of Effective Management (POEM)

The provision that a foreign company will be treated as an Indian Company if its POEM lies in India, has been deferred by 1 year and will be applicable from 1 April 2017. In order to provide clarity in respect of implementation of POEM, a transition mechanism for a company incorporated outside India and which has never been assessed to tax in India will be provided.

7. Tax treatment of funds/ business trusts

  1. Exemption from DDT on distribution made by SPV to business trust (REIT and INVITs).

    As per the current legislation, dividend received by a business trust from a special purpose vehicle (SPV) is subject to DDT at the SPV level but the same is exempt in the hands of the business trust.

    It is now proposed that the dividend received by the business trust will be exempt from DDT where the business trust either holds 100% of the share capital of the SPV or holds all the share capital other than that which is required to be held by any other entity as part of any direction of any Government.

    This exemption is restricted to payments made out of current income after the date when the business trust acquires the requisite shareholding in the SPV.
  2. Tax regime of securitisation trusts

    The following amendments are proposed to the existing regime:

    • The new regime will apply to a wider group of companies. It includes a securitisation trust being a SPV defined under the SEBI Regulations, 2008 or a SPV as defined in the guidelines on securitisation of standard assets issued by the RBI or being setup by a securitisation company or a reconstruction company in accordance with the SARFAESI Act;
    • The income of the securitisation trust shall continue to be exempt. However, exemption in respect of income of the investor from the securitisation trust would not be available and any income from the securitisation trust would be taxable in the hands of the investor (in the same manner had the investor invested directly in the capital asset);
    • Tax deduction at source shall be effected by the securitisation trust at the following rates:

      • in case of payment to resident investors which are individual or HUF- 25%;
      • in case of others- 30%;
      • In case of payments to non-resident investors- at rates in force;
    • Investors may obtain low or nil deduction of tax certificate;
    • The trust shall provide a breakup of the nature and proportion of its income to investors and also to the prescribed income-tax authority.
  3. Investment Funds

    Non-residents will now be allowed to approach the assessing officer for lower or NIL withholding available under relevant DTAA for deductions made by the Investment Fund.

SECTION B: INDIRECT TAX

1. Customs duty

  1. Base rate of Basic Customs Duty remains constant at 10%.
  2. In line with the 'Make in India' initiative to encourage manufacturing in India, concessional rates / exemption has been extended to inputs required for manufacture of final goods in specific sectors (mainly IT products). Concessional rates / exemption on such final goods has been withdrawn.
  3. Export duty has been reduced / exempted on specific iron ore categories, bauxite and chromium ores.
  4. Customs duty exemptions on tools and toolkits, and procedural relaxations have been extended to incentivise the Maintenance Repair and Overhaul sector in India.
  5. Specified class of importers or exporters (which are to be notified) have been permitted to make deferred payment of customs duty.
  6. Customs warehousing provisions have been revamped and a new warehouse category namely 'special warehouse' has been introduced. Specified goods (which are to be notified) stored in such warehouses, and access thereto will be under the physical control of the customs authorities.
  7. Normal period of limitation for issuing show cause notice has been increased from one year to two years in cases not involving fraud, suppression of facts, willful mis-statement, etc. However, no corresponding increase has been introduced in the limitation period for filing refunds.
  8. Rate of interest on delayed payment has been reduced from 18% to 15%.

2. Central excise

  1. Base rate of excise duty remains constant at 12.5%.
  2. In order to encourage manufacturing in India, concessional rates / exemptions have been provided for final goods in specific sectors, mainly in the IT space.
  3. Excise duty rates of 6% (without cenvat credit) or 12.4% (with cenvat credit) have been imposed on branded textile articles with a retail sale price of INR 1000 and above (approximately US$ 15).
  4. Clean Energy Cess has been renamed as Clean Environment Cess and the rate thereof has been increased from INR 200 per tonne to INR 400 per tonne.
  5. The rate of Oil Industries Development Cess, on domestically produced crude oil, has changed from INR 4500 PMT to 20% ad valorem.
  6. A non-creditable Infrastructure Cess levied on motor vehicles of chapter heading 8703 of Excise Tariff has been introduced.
  7. In order to ease tax compliance, several minor cesses levied by various ministries with low levels of collection are proposed to be removed.
  8. Excise Rules are proposed to be amended to reduce number of returns to be filed and allow revision of excise return.
  9. Limitation period for issuance of show cause notice in cases not involving fraud, collusion, suppression etc. is proposed to be enhanced to 24 months from the current 12 months.
  10. The rate of interest on delayed payment has been reduced from 18% to 15%.

3. Service tax

  1. Effective service tax rate has been increased to 15%. Krishi Kalyan Cess at the rate of 0.5% will be levied on the value of all taxable services.
  2. The assignment by the government of the right to use radio-frequency spectrum and subsequent transfers are proposed to be a 'declared service'.
  3. Service tax has been proposed to be levied on:

    • Services of transport of passengers by an air-conditioned stage carrier.
    • Services by way of transportation of goods by vessels.
    • Some of the key exemptions that have been introduced / restored are:
    • Exemption on services provided by way of construction, erection, maintenance etc. of canal, dam or irrigation works provided to entities set up by the government (introduced in January 2014) retrospectively granted from the period 1 July 2012.
    • Exemption for the following services has been restored till 30 March 2020:

      • specific construction, erection etc. services provided to the government or local authority or governmental authority.
      • specific construction, erection etc. of original works pertaining to airports and ports.
  4. The following changes have been introduced in the reverse charge mechanism:

    • liability of recipient business entity to pay service tax on any service provided to it by government or local authorities.
    • liability of recipient business entity to pay service tax on receiving services of way of transportation of goods by vessels into India, from a service provider located outside India.
  5. Limitation period for recovery of service tax in cases not involving fraud, collusion, suppression etc. are proposed to be enhanced to 30 months from the current 18 months.
  6. A uniform interest rate of 15% on delayed payment of service tax has been proposed. Also, a higher rate of interest at 24% in cases where service tax has been collected but not deposited has been proposed.
  7. Assesses above a specified threshold (which will be notified) are required to file an annual service tax return.

4. Cenvat credit

  1. Definition of capital goods and inputs has been expanded.
  2. Credit of Krishi Kalyan Cess paid on input services will be available as cenvat credit but can be utilized only against output Krishi Kalyan Cess liability.
  3. Cenvat credit of service tax paid on assignment of natural resources (such as spectrum) has been permitted.
  4. Cenvat credit provisions relating to reversal of credit in respect of inputs and input services used for manufacturing exempted goods or provision of exempted services have been simplified and rationalized to address various ambiguities which are subject of frequent litigation.
  5. Provisions relating to input service distributor has been broadened and rationalized. Further, a manufacturer with multiple manufacturing units has been permitted to maintain a common warehouse for inputs and distribute inputs with credits to the individual manufacturing units.

5. Indirect Tax Dispute Resolution Scheme, 2016

Indirect Tax Dispute Resolution Scheme, 2016 has been introduced as a one-time measure towards settlement of matters pending before the Commissioner (Appeals) for demands of customs duty, central excise duty or service tax. On payment of tax due along with interest and 25% of the penalty imposed through the order-in-original the assessee / appellant may settle the matter under this scheme. On such payment all dues would be discharged and the appellant will get immunity from all proceedings.

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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