 "Roadmap for economic revival, with a long unfinished agenda: Vikas Vasal, KPMG")
The newly elected government presented its first union budget in the backdrop of huge expectations, given the thumping mandate given by the people of India. The economic survey highlighted the challenges that Indian economy is facing today including lower than five per cent GDP growth for two consecutive years, persistent uncertainty in global outlook, domestic constraints like low manufacturing base, delays in project approvals and persisting high inflation.
In this backdrop, the Finance Minister recognising limited room for fiscal maneuverability, has chosen to adopt a cautious path, with an announcement that this year’s Budget is just a curtain raiser with more to follow in future.
In case of individuals no change has been made in the tax rates, though some relief has been provided by increasing the lower tax slab rate from Rs 2 lakhs to Rs 2.5 lakhs. Further, some relief has been provided by increasing the popular tax deduction u/s 80 C to Rs 1.5 lakhs, and by increasing the interest deduction on housing loan for a self-occupied house property to Rs 2 lakhs.
In case of companies, the tax rate has not been changed, however, the Dividend Distribution Tax (DDT) would go up due to change in the computation mechanism. REITs have been provided tax-pass through status, thereby providing much needed clarity on this subject. To promote manufacturing sector, investment allowance to manufacturing companies for investing in new plant and machinery has been extended till March 31, 2017. Further, to encourage medium size companies, this deduction has also been extended for investment of Rs 25 crore or more made by these companies in new plant and machinery. To promote power sector, sunset date for claiming incentive has been extended till March 31, 2017.
Overseas borrowings have been made easier by allowing concessional withholding tax rate of 5% on interest paid on overseas borrowings for another two years and by extending this benefit to all long-term bonds, unlike at present where this benefit is restricted to only long term infrastructure bonds. To encourage repatriation of foreign dividend into India, such dividend shall continue to be taxed at concessional tax rate of 15% without any sunset clause. To remove ambiguity on characterization of income of FIIs, it has been clarified that any income from transfer of securities by these FIIs shall be in the nature of capital gains.
Another major relief provided to taxpayers is restriction of disallowance of expenditure to 30%, instead of 100% as at present, on account of non-deduction or non-payment of tax at source on specified payments made to residents. Further, it has been proposed to include all payments including salary and director sitting fee to resident, subject to deduction of tax at source under the ambit of these provisions. It has also been provided that now, payments to non-resident would not be disallowed in case tax deducted at source in previous year has been deposited on or before the filing of tax return.
In respect of Corporate Social Responsibility (CSR) provisions introduced by the Companies Act 2013, it has been clarified that CSR expenditure being application of income would not be allowed as tax deduction. An exception has been made for CSR expenditure falling within the ambit of specified tax provisions. This provision needs re-consideration, as companies have to incur this expenditure by virtue of the provisions under the Companies Act.
The demand to repeal retrospective tax changes introduced earlier has not been accepted. Instead it has been proposed to set up a high level committee to scrutinize all fresh tax cases arising from the retrospective amendments of 2012 in respect of indirect transfers.
The intent to reduce tax litigation which has adversely impacted India’s reputation as one of the most aggressive tax jurisdiction, is a welcome change. Extending the facility of advance ruling to residents, strengthening the authority for advance rulings by constituting additional benches and promising changes in India’s Transfer Pricing regulations to bring them in line with the leading practices, if implemented successfully, will go a long way in re-building business confidence.
Another bright spark in the Budget is the intent to introduce legislative reform this year to facilitate introduction of GST. Further, neutralising the impact of FIAT judgment and rationalization of the customs duty rates on import of coal will indeed benefit the industry.
Thus, overall it is a combination of prudent fiscal policy, with an eye on economic revival, and a long pending list of things to do in near future / next Budget. Further, successfully implementing the announcements made during the Budget speech will also not been an easy task.
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Vikas Vasal, Partner, KPMG in India
In this backdrop, the Finance Minister recognising limited room for fiscal maneuverability, has chosen to adopt a cautious path, with an announcement that this year’s Budget is just a curtain raiser with more to follow in future.
In case of individuals no change has been made in the tax rates, though some relief has been provided by increasing the lower tax slab rate from Rs 2 lakhs to Rs 2.5 lakhs. Further, some relief has been provided by increasing the popular tax deduction u/s 80 C to Rs 1.5 lakhs, and by increasing the interest deduction on housing loan for a self-occupied house property to Rs 2 lakhs.
In case of companies, the tax rate has not been changed, however, the Dividend Distribution Tax (DDT) would go up due to change in the computation mechanism. REITs have been provided tax-pass through status, thereby providing much needed clarity on this subject. To promote manufacturing sector, investment allowance to manufacturing companies for investing in new plant and machinery has been extended till March 31, 2017. Further, to encourage medium size companies, this deduction has also been extended for investment of Rs 25 crore or more made by these companies in new plant and machinery. To promote power sector, sunset date for claiming incentive has been extended till March 31, 2017.
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Overseas borrowings have been made easier by allowing concessional withholding tax rate of 5% on interest paid on overseas borrowings for another two years and by extending this benefit to all long-term bonds, unlike at present where this benefit is restricted to only long term infrastructure bonds. To encourage repatriation of foreign dividend into India, such dividend shall continue to be taxed at concessional tax rate of 15% without any sunset clause. To remove ambiguity on characterization of income of FIIs, it has been clarified that any income from transfer of securities by these FIIs shall be in the nature of capital gains.
Another major relief provided to taxpayers is restriction of disallowance of expenditure to 30%, instead of 100% as at present, on account of non-deduction or non-payment of tax at source on specified payments made to residents. Further, it has been proposed to include all payments including salary and director sitting fee to resident, subject to deduction of tax at source under the ambit of these provisions. It has also been provided that now, payments to non-resident would not be disallowed in case tax deducted at source in previous year has been deposited on or before the filing of tax return.
In respect of Corporate Social Responsibility (CSR) provisions introduced by the Companies Act 2013, it has been clarified that CSR expenditure being application of income would not be allowed as tax deduction. An exception has been made for CSR expenditure falling within the ambit of specified tax provisions. This provision needs re-consideration, as companies have to incur this expenditure by virtue of the provisions under the Companies Act.
The demand to repeal retrospective tax changes introduced earlier has not been accepted. Instead it has been proposed to set up a high level committee to scrutinize all fresh tax cases arising from the retrospective amendments of 2012 in respect of indirect transfers.
The intent to reduce tax litigation which has adversely impacted India’s reputation as one of the most aggressive tax jurisdiction, is a welcome change. Extending the facility of advance ruling to residents, strengthening the authority for advance rulings by constituting additional benches and promising changes in India’s Transfer Pricing regulations to bring them in line with the leading practices, if implemented successfully, will go a long way in re-building business confidence.
Another bright spark in the Budget is the intent to introduce legislative reform this year to facilitate introduction of GST. Further, neutralising the impact of FIAT judgment and rationalization of the customs duty rates on import of coal will indeed benefit the industry.
Thus, overall it is a combination of prudent fiscal policy, with an eye on economic revival, and a long pending list of things to do in near future / next Budget. Further, successfully implementing the announcements made during the Budget speech will also not been an easy task.
____________________________________________________________________________________________________
Vikas Vasal, Partner, KPMG in India