Union Budget 2015 : The details
As the finance minister rose to present his budget speech the expectations of corporate India rose with him. Many expected this budget to be a big bang move towards reforms ( we argued against such events here). It is not the watershed moment that many expected or desired but it is a solid step in ensuring that the finances of the union are kept in proper shape.
The Finance minister has announced a number of measures that will help shore up tax collections, the imposition of Surcharges, raising of service tax rates being a few examples. While at the same time he has announced his intent to lower the rate of corporate tax from the current 30% to 25% over the next four years while phasing out several deductions at the same time. This is expected to reduce the administrative burden and reduce litigation with the welcome side effect of making our tax laws easier to comprehend for businesses.
The finance minister also laid down several steps to curb the use of black money in the economy, these include the enactment of a comprehensive legislation on the subject, imposition of stricter curbs on cash transactions and additional reporting requirements in year end tax returns.
On the positives, GAAR has been deferred, many in the industry would welcome a relook at the legislation as it stands today and reduce many of the inherent complications that form part of its being. Also welcome is the pass through status provided to AIFs and the clarification on taxation of Indirect transfers.
On the other side we have the new Place of Effective Management (POEM) provisions which may lead to an avalanche of litigation if not clarified soon. The raising of the surcharge on high net income individuals in the place of wealth tax is also harsh on several counts.
As is usual we have enclosed our analysis and comments on the significant changes proposed in the Budget. We look forward to your queries and comments on the same, we will be happy to resolve issues pertaining to this budget that your organization may face.
Taxation of Indirect Transfers Clarified
Taxation of indirect transfers of assets by foreign companies found its way to infamy in India via the much talked about retrospective amendment that was enacted in the budget of 2012. The then government had added an explanation ( explanation 5) to section 9(i) with retrospective effect to nullify the supreme courts judgment in favor of Vodafone. As per the explanation any asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India was deemed to be situated in India if the share or interest derived, directly or indirectly, its value substantially from the assets located in India. This is against the established practice around the world where capital gains are taxed by virtue of residence and not on basis of source.
While this retrograde step has not been reversed, the budget works to move towards aligning the provisions of the income tax Acct (ITA) with accepted global norms. To this effect the Honorable Finance Minister Announced the following steps :
• Test on Substantiality : This serves reduce confusion around the word “substantially”. As per the proposed provision :
o The share or interest of a foreign company or entity shall be deemed to derive its value substantially from the assets located in India, if on the specified date, the value of Indian assets,
exceeds the amount of INR 10 Crores; and
Represents at least 50% of the value of all the assets owned by such company or entity.
o For this purpose Value of an asset as on the specified date shall mean the fair market value of such asset without reduction of liabilities, if any. The manner of determination of fair market value of the Indian assets shall be prescribed in the rules. The denial of liabilities is unfair to the assessee’s who may have debt sitting on their books but will not be able to account for it for such purpose.
• Date of Valuation : the end of the accounting period preceding the date of transfer shall be the specified date of valuation. However, in a situation when the book value of the assets on the date of transfer exceeds by at least 15%. the book value of the assets as on the last balance sheet date preceding the date of transfer, then the specified date shall be the date of transfer.
• Taxation of gains : The gains arising from the transfer of shares where such shares derive substantial value from assets based in India shall be taxed on a proportional basis. While the basis for determining such ratio has not been defined, we expect it to be specified with the rules.
• Exemptions :As per the bill the provisions of taxation of indirect transfer shall not be applicable where :
o the transferor of shares of or interest in a foreign entity, along with its related parties does not hold
the right of control or management; and
the voting power or share capital or interest exceeding 5% of the total voting power or total share capital in the foreign company or entity directly holding the Indian assets.
o The transferor along with its related parties does not directly own the Indian assets and :
right of management or control in relation to such company or the entity; and
any rights in such company which would entitle it to either exercise control or management of the Holding Co or entitle it to voting power exceeding 5% in the company holding Indian assets.
o Exemptions under section 47 that are available to domestic companies have been extended to foreign entities deriving value from Indian assets.
Interest earned by foreign banks from permanent establishment ( PE) in India to be taxable
PE of a foreign bank shall be henceforth considered to be a separate person and interest payable by such unit to the parent entity shall be taxable in India by virtue of an explanation inserted in section 9(1)(v) of the act. Such interest paid was previously exempt under settled jurisprudence on account of mutuality and no TDS was deductible on such payments, however with effect from 1st of April 2016 the new regulations shall prevail.
Foreign Fund manager’s presence in India shall not create business connection!
As another step to bringing our tax laws in line with global best practices, a new section 9A is proposed inserted in the Act. As per this new provision, fund managers can stay in India without triggering a business connection that would lead to the income of the fund to be subject to tax in India ( See : Taxability of foreign entities in India) Going forward fund management activity carried out through an eligible fund manager acting on behalf of an eligible investment fund shall not constitute ‘business connection’ in India of the said fund and eligible investment funds shall not be said to be a resident in India merely because the eligible fund managers, undertaking the funds management activities on their behalf, are situated in India provided both the fund and the fund managers satisfy conditions stipulated in the bill. Further, all eligible funds shall have to submit a statement of compliance with the prescribed authorities within 90 days from the end of the financial year.
GAAR deferred for two more years.
The Implementation of GAAR (Chapter X-A of the Act) has been deferred for two more years and shall now be applicable from FY 2017-18 (AY 2018-19). Further, the provision shall now be applicable prospectively. GAAR had first been envisioned to be enforced from 1st April 2014; this was later pushed back in 2013 to 1St April 2016 and has now been pushed further back.
Curbs on cash transactions imposed
In an effort to clamp down on the widespread use of black money the government has amended section 269SS and 269T of the act as per the amended provision any loans or advances exceeding Rs 20,000 in relations to immovable property shall have to be compulsorily undertaken through banking channels and can no longer be done in cash. The government has also amended the applicable penal provisions to ensure adequate penalties for contraventions.
A POEM, unkind
The government has proposed to introduce new standards based on Place of effective management (POEM) to determine the residential status of foreign companies in India. Under the POEM convention a company shall be said to be resident in India if:
1. It is an Indian company, or
2. Its place of effective management, at any time in that year, is in India
For this purpose POEM is defined as to mean a place where the key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are made. The amendment shall come into force from the 1st of April 2016.
POEMs shall mean that shell companies and other companies outside of India which are operated by Indian nationals shall now be considered residents of India and be taxable in India! This would be bad news for foreign corporations which are owned and controlled by Indian residents.
Reduction of Royalty rates
Section 115A of the act has been proposed to be amended to reduce the rate of tax on income earned on account of royalty and fee for technical services in India from the peak rate of 25% as proposed in 2013 to 10%. This will also reduce the applicable withholding taxes applicable on such royalty income with effect from AY 2016-17
Pass through benefits for AIFs
As per proposed section 10 (23FBA) to be added to the act any income of a recognised Category 1 or 2 AIF investment fund other than income accruing under the head “profits and gains from business and profession” shall be exempt from taxation in the hands of the fund. Further, as per section 10 (23FBB) any income in the hands of the investor which is in the nature of “profits and gains from business and profession” at the investor level shall be tax free in the hands of the investor.
This is in line with global norms where such funds are typically accorded pass through status and double taxation is avoided. Prior to this announcement only Category I AIFs under the venture capital fund sub-category and venture capital funds that were registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996 (VCF Regulations) were eligible for such pass though benefits.
MAT benefits for FIIs
The definition of book profits has been revised with effect from 1st April 2016 to exclude the following:
• Income and expenditure pertaining to members share of AOP on which no income tax is payable in accordance with section 86 of the IT act
• Income and expenditure pertaining to transactions in securities ( other than Short term capital gains on which no STT is applicable) in the hands of a FII
Depreciation benefits on short term assets
Where newly acquired assets are used for less than 180 days in a financial year, traditionally only 50% of the total depreciation allowable for that asset is allowed in the financial year in which the asset is first put to use. The balance 50% is lost incentive to the assessee.
As per the proposed amendment to section 32 (1)(ii) of the act the balance 50% shall be allowed in the immediately succeeding year in addition to the normal depreciation due in such year.
Investment allowances for newly formed states
A new section 32AD has been added to the act allowing an additional investment allowance of 15% of the cost of new assets acquired and installed by a new undertaking or enterprise set up between the period April 1, 2015 to March 31, 2016for manufacture or production of any article, in the notified backward areas of Andhra Pradesh and Telangana. Provided the new assets are acquired and installed by such enterprise between 1st April 2015 and 31st March 2020
Further, section 32(iia) has been proposed to be amended to provide for additional depreciation of 35% against the previously allowed 20% on new plant and machinery
Mergers of mutual fund schemes to be exempt from tax
Section 47 is proposed to be amended to exclude from purview of capital gains tax any transfer of units pursuant to a consolidation of two or more schemes of a fund, equity oriented or otherwise.
With this move unit holders shall not be subjected to capital gains on account of merger or acquisition of units.
Wealth tax: going, going, gone.
The government has proposed to abolish the levy of wealth tax and instead levy an additional surcharge of 2% on individuals earning Rs 1 crore or more during a financial year. The move is ostensibly aimed at reducing the administrative burden on the department since a surcharge is easier to collect and monitor as compared to wealth tax. This is however going to add a greater burden on those individuals whose assets were either exempt or below the taxable threshold.
The budget of 2015 has also proposed to amend the surcharges as applicable on various assesses as follows, they are expected to help the government shore up more revenue and control the fiscal deficit :
Companies with total income more than Rs 1 Crore but less than Rs 10 Crores
Companies with total income more than Rs 10 Crore
Foreign companies with total income more than Rs 1 Crore but less than Rs 10 Crores
Foreign companies with total income more than Rs 1 Crore
Individuals, Firms, local authorities with income exceeding Rs 1 Crore
TDS on payments to non-residents ( other than companies)
Foreign company with total income more than Rs 1 Crore but less than Rs 10 Crores
Foreign company with total income more than Rs 10 Crore
Relief for domestic transfer pricing
The definition of specified domestic transactions (SDT) has been amended to raise the threshold for applicable transactions to Rs 20 Crores from the current threshold of Rs 5 Crores this will mean that a majority of intercompany transaction shall not be subject to the provisions of domestic transfer pricing.
Rates going up
The service tax rate is proposed to be amended to 14% all inclusive from the current rate of 12.36% (including cess) via amendment in section 66B from a date to be notified by the government. The increase in rate is in line with the target rate under GST which is going to be between 14-19%.
Further, it is proposed to levy an additional cess of 2% on the value of services.
Definitions see change
While transactions in Money and actionable claims were exempt from service tax earlier, as per proposed amendment to the definition of a service, Any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind, in any other manner or by a foreman of chit fund for conducting or organising a chit in any manner.
The definition of consideration has been amended to include reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. This implies that reimbursements that were previously exempt from service tax on basis of settled jurisprudence are now taxable.
No penalty is to be paid if Service Tax and interest is paid within 30 days of issuance of notice
Reduced penalty equal to 25% of the penalty imposed under an order-in-original to be paid if the Service Tax, interest and reduced penalty is paid within 30 days of such order
Reduced penalty equal to 25% to be imposed when Service Tax amount gets reduced in any appellate
proceeding and the Service Tax, interest and reduced penalty is paid within 30 days of such order-in-appeal
Section 80 which provides for the waiver of penalty in cases where there was reasonable cause for failure to pay service taxes has been removed. This is bound to have negative consequences for tax payers who would have been otherwise able to take benefits of this clause in case of genuine hardship.
Amendments in Negative List
• Admission to entertainment event and access to amusement facility shall now be subject to service tax having been removed from the negative list, Services by way of admission to entertainment event of concerts, pageants, musical performances, concerts, award functions and sporting events other than the recognized sporting events, if the amount charged is more than INR 500 for right to admission to such an event.
• Manufacture of alcohol for human consumption has been excluded from the definition of process amounting to manufacture and is therefore subject to service tax
• Services provided by a government or local authority have been excluded from the negative list thereby subjecting them to taxation
• Exhibition of movie by exhibitor (theatre owner) to distributor or AoP consisting of such exhibitor as one of its members
• Service by way of right to admission to Exhibition of cinematographic film, circus, dance or theatrical performance including drama or ballet Recognized sporting events Concerts, pageants, award functions, musical performances, sporting events other than a recognized sporting event, where consideration for admission is less than INR 500 per person
• Services of effluent treatment by an operator of Common Effluent Treatment Plant
• Services by way of transportation of a patient in an ambulance
• Pre-conditioning, pre-cooling, ripening, waxing, retail packing, labelling services of fruits and vegetables
• Transport of export goods by road from the place of removal to a land customs station
• Services by way of admission to a museum, national park, wildlife sanctuary, tiger reserve or zoo
• Services of life insurance business provided under the Varishtha Pension Bima Yojana
Tax exemptions for deposits made for the girl child
Investment made in the Sukanya samridhi scheme to be eligible be eligible for the deduction under section 80C. Further interest accruing in such deposit shall be exempt from taxes along with withdrawal from the said scheme.
The benefits of the scheme shall be available to the parent or legal guardian of the girl child for whose benefit such a deposit is made. This amendment shall be applicable retrospective and accordingly apply to assessment year 2015-16 onwards
Health premiums get better?
It has been proposed to amend the existing provisions under section 80D to allow for the deduction of Rs 25,000 and Rs 30,000 in respect to sums paid in respect of premiums paid for health insurance by Individuals and Senior citizens respectively. This is against the existing deductions available of Rs 15,000 and Rs 20,000. Further in the case of senior citizens who do not have healthcare coverage medical expenses of up to Rs 30,000 shall be allowed as deduction under this head.
Healthcare expense limit goes up
The finance minister has proposed provide deduction under section 80DDB against amount paid by the assessee for the treatment of chronic and protracted diseases such as cancer, thalassemia etc. for his own benefit or for the benefit of a dependent relative on the basis of a prescription from a specialist doctor. It is further been proposed to provide a deduction of Rs 80,000 under the head to very senior citizens against the limit of Rs 60,000 for senior citizens.
Similarly the deductions under section 80DD and 80U for persons with disabilities and severe disabilities respectively have been enhanced from their current limits of Rs 50,000 and Rs 100,000 to Rs 75,000 and Rs 125,000 respectively.
Limits under 80CCC, 80CCD to rise
It has been proposed to enhance the deduction under section 80CCC available on account of contributions by an individual to effect or keep in force a contract for any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from a fund set up under a pension scheme, from the current limit of Rs 100,000 to Rs 150,000.
Similarly contributions by individuals to a notified pension scheme were allowed as deductions up to a limit of 10% of the salary or gross total income of the individual or Rs 100,000 whichever is less. IT has been proposed as part of this budget to raise the limit to Rs 150,000
Withholding taxes in effect on Life Insurance payments
Section 194DA has been introduced into the act to ensure that TDS at the rate of 2%is deducted from payments made under a life insurance policy that is chargeable to tax under the act.
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