Budget to boost infra, farm sectors

It also aims to create a simpler and friendlier tax regime

DIRECT TAX PROVISIONS

The Finance Minister's (FM's) third budget was based on a transformative agenda, founded upon nine distinct pillars. It was aimed at creating a simpler and friendlier tax regime, while funding infrastructure development, agricultural growth and various social welfare schemes.
Read our full coverage on Union Budget 2016


Some key tax proposals are discussed below.

Proposals impacting start-ups
The Finance Bill proposes a new section, 80-IAC, providing a tax holiday on profits of start-ups incorporated prior to April 1, 2019, with revenues not exceeding Rs 25 crore. The benefit is available for any three consecutive tax years out of five years, upto March 31, 2021. In order to qualify, start-ups need to be innovators or deploy/commercialise new products/processes or provide technology-driven services. How beneficial this proposal will be remains to be seen, given that many start-ups do not generate profits in the initial years.

To incentivise promoters investing in start-ups, it is proposed to exempt long-term capital gains tax if:

• Proceeds from sale of property up to Rs 50 lakh are invested within six months from disposal of the property, in specified funds (for a defined period), and remain invested for a period of at least three years.
• Proceeds on sale of residential property prior to March 31, 2019 are invested by an individual/HUF in shares of an eligible start-up. This is subject to the promoter holding at least 50 per cent of the shares, and the amount invested being utilised for acquiring specified 'new' assets.
• No changes are proposed to section 79 (which imposes limitations on carry forward of tax losses where beneficial ownership of a company changes by more than 49 per cent). This would have been a welcome move, enabling divestment by initial investors in start-ups, without sacrificing the entity's tax losses.

Tax rates phase out and rationalisation of incentives
To incentivise manufacturing, an optional reduction in corporate tax rate to 25 per cent for domestic manufacturing companies, set up and registered on or after March 1, 2016, is proposed (Table 1). In order to avail of this benefit, the company should not claim profit/investment-linked incentives or deductions other than the benefit under section 80JJAA.

The Bill proposes to phase out several exemptions and deductions over the coming years. While these could prove to be a dampener for some industries, the introduction of a "patent box" regime, coupled with lower corporate tax rates in specified cases could compensate marginally for this move.

The FM has not provided a road map for reducing corporate tax rates and retained the base rate at 30 per cent for now. However, a step in the right direction has been taken through reducing the base corporate income-tax rate to 29 per cent for domestic companies with turnover not exceeding Rs 5 crore in the financial year ended March 2015.

The Bill expands the scope of section 80JJAA (deduction in respect of wages paid to new employees) to apply to all companies to which a tax audit applies (and not only manufacturing companies). Norms for minimum number of days of employment and maximum emoluments are prescribed.

International tax
With a view to introduce a "patent box" regime, effective April 1, 2016, it is proposed that royalty income of a resident from exploitation of patents developed and registered in India be taxed at 10 per cent on a gross basis. Such royalty income will also be exempt from MAT. In order to avail of this benefit, the taxpayer must be the inventor with the patent registered in India.

Further clarity on the application of this provision to other intangibles such as designs, copyrights, etc would be welcome.

Acknowledging BEPS Action Plan 13, the Budget has proposed the introduction of Country by Country Reporting ('CbCR') provisions. These are essentially intended to apply to taxpayers of Indian parentage with revenues exceeding a prescribed monetary limit (expected to be 750 million euros or about Rs 5,395 crore). Relaxations are provided in respect of Indian subsidiaries of foreign entities, where India can obtain the CbCR from the foreign parent's country, and other conditions are met.

 

The contents appear to be aligned to requirements specified in Action Plan 13 and include the maintenance of CbCR, master, and local files. The requirements of the local file are likely to be subsumed in the transfer pricing documentation that the Indian entity will maintain. CbCR requirements must be complied with by the due date of filing tax returns. Stiff penalties, on a graded basis, are prescribed for non-compliance with CbCR.

Recognising tax challenges created by the evolution of the digital economy, the introduction of an Equalisation Levy ('EL') is proposed. EL will be imposed at six per cent on the consideration received by a non-resident from an Indian resident carrying on business, or from a non-resident with a Permanent Establishment ('PE') in India. The levy will apply to services in the nature of online advertisements, provision for digital advertising space and other notified services. EL will not apply in cases where the non-resident service provider has a PE in India and such services are effectively connected to the PE or where the aggregate consideration does not exceed Rs 1 lakh in the year. Receipts which have been subject to EL will be tax-exempt in the hands of the non-resident service provider. A tax deduction will not be available to the payor unless EL has been deducted and paid in time on the amount.

While this provision could pose an additional cost for online companies (which tend to incur heavy losses), the eligibility of the EL to be credited through the use of tax treaties will require analysis.

The FM has also proposed a deferral of Place of Effective Management rules by a year and these will now be effective from April 1, 2016. However, no further deferral of General Anti-Avoidance Rules has been proposed and these will take effect from April 1, 2017.

Amnesty schemes/dispute resolution
Effective June 1, 2016, opportunity has been provided to taxpayers to declare previously undisclosed income. Such undisclosed income will be subject to a 30 per cent tax rate, cess at 25 per cent of tax, and penalty of 25 per cent of the tax amount. The success of this scheme in its newest avatar remains to be seen.

The FM has proposed a Dispute Resolution Scheme effective June 1, 2016, covering situations where taxpayers have disputes pending at CIT (A) as well as situations where a dispute has arisen on account of retrospective amendments undertaken in the past (Table 4).

In the case of disputes arising from prior retrospective amendments, the taxpayer will need to discharge the entire tax liability due in order to settle the dispute. Any pending appeals will need to be withdrawn in order for the dispute to be treated as settled.

Several recommendations of the Justice Easwar Committee towards simplification have found their way into the Bill.

An amendment to section 206AA is proposed, such that a non-resident taxpayer need not furnish a PAN to avail of the beneficial 10 per cent withholding tax rate on royalties/fees for technical services, subject to provision of prescribed details.

The proposals demonstrate the government's goal of moving to a taxpayer friendly regime.

Impact on individuals
Resident taxpayers with income less than Rs 5 lakh will benefit from an increased tax rebate of Rs 5,000. On the other hand, the surcharge for individuals with income exceeding Rs 1 crore has been increased to 15 per cent.
 

 

Resident individuals/HUFs/firms receiving dividend income exceeding Rs 10 lakh in a financial year will be subject to 10 per cent additional tax over and above DDT that the distributing company pays.
 

Individuals not in receipt of HRA and incurring rental expenses will be eligible for an enhanced monthly deduction of Rs 5,000. First-time home owners will be entitled to Rs 50,000 interest deduction, subject to certain conditions, including a limitation of Rs 50 lakh on the value of the house property.

The government has proposed to provide exemption on withdrawal from NPS up to 40 per cent of accumulated balance. To bring parity, taxation on withdrawal from other retirement schemes (PF/superannuation) is also proposed to be amended. One-time portability from PF to NPS on a tax-free basis is proposed.

Discretionary powers of the tax authorities on levy of penalty for concealment of income are sought to be curbed through section 270A. The section levies a 50 per cent penalty in case of under-reporting of income and a 200 per cent penalty in cases of misreporting of income.

Expansion of e-assessment facility to seven mega cities is proposed to simplify assessment proceedings for individuals.

Other key provisions
Effective June 1, 2016, buyback tax will apply to any buy-back of unlisted shares undertaken by a company, and not merely a buyback under section 77A of the Companies Act, 1956. Rules will be prescribed to compute the amount received on issue of shares in various circumstances, including payment in tranches, tax neutral reorganisations, etc.

Although the FM's speech suggested a reduction in the period for treating shares of unlisted companies as long-term assets to two years, necessary amendments do not appear to have found their way into the Bill.

A much-awaited retrospective clarification to the MAT regime is proposed, to the effect that MAT will not apply to foreign companies, subject to conditions.The trend of retrospective amendments appears to have been reversed -- being restricted to taxpayer beneficial issues.

In summary, the proposals signify a thrust towards a taxpayer-friendlier regime.