Bk khare budget2015

Will the
2015 budget
usher in
Achche din
BUDGET SPECIAL

1 B. K. Khare & Co.
INDIA’S UNION BUDGET
B. K. Khare & Co.
Chartered Accountants
BUDGET ANALYSIS
2015
This publication is a service to our clients based on a quick appreciation of the budget proposals
and must not be regarded as professional advice, authoritative opinion or the sole basis for your
decisions. This publication does not constitute an offer or solicitation. For Private Circulation only.

B. K. Khare & Co. 2

3 B. K. Khare & Co.
CONTENTS
Poem 4
Editorial 6
Union Budget 2015 10
India at cross roads 10
Biting the Bullet 11
Economic Survey 2015 – Highlights 14
Challenges Ahead 17
Key Features 18
Direct Tax 21
Indirect Taxes 47
Highlights 47
Customs 48
Tax Rate 48
Central Excise 51
Service Tax 55

B. K. Khare Co. 4
Nani Palkhivala famously said
When the United States sneezes
The world catches pneumonia.
Now we can say
More modestly
With the growing strength of India’s economy
That when India sneezes
The world shivers
And reaches for a sweater.
India and China
The oldest civilizations
Are the newest kids on the Economic Block!
The Indian economy is heating up
And there might be a supernova explosion
With GST and business friendly policies
Mr Modi has vowed our business leaders
Impressed home and abroad with his precise
Rousing oratory
Eliciting rousing applause
Rather than stifled yawns
Playing to packed galleries
From Madison Square to Melbourne.
In New York at the turn of the last century
Fortunes were made by Rockerfellers and the like
In the period when America emerged as an economic superpower
And was forging its Swayambhu identity
Building cities and infrastructure that created
The New Guilded American Age.
But thereafter prosperity did spread
And for a while
The American Middle Class was the envy of one and all
Through the 1950’s, 1960’s and 1970’s.
We hope that this will happen in India as well
And with the growth of fortunes of the 1 per cent
The rest of the 99 per cent will benefit from the Boom
And the economic wave will lift millions
Out of aeons of poverty.
Happiness shared is happiness multiplied!

5 B. K. Khare Co.
Meanwhile the able Mr Raghuram Rajan
Fights against the Hydra of Inflation
Growth too has its downside
Like anything else.
We are now the Boom and Bust generation
Blase about the axiom
That wherever there is a Boom
There will be a Bust
Newton’s Third Law of Econometrics.
Science gives us the idea of scale and proportion
And how certain quantities are conserved
Things like Angular Momentum
If you draw your arms in when spinning
You spin faster and faster.
So one might ask
Does the balance of smiles and tears always remain the same?
Is the joke always at someone’s expense?
We can hope against hope
That Happiness and Wealth
Rather than being conserved quantities
Will subtly shift upwards
Towards greater and greater
All round contentment in the
Evolving Universe.
As Sant Dnyaneshwar foretold in his Pasayadan
We live in an interconnected world
He Vishwachee Mazhe Ghar
“The world is my oyster”
I pray for an Economic Boom time
Which is inclusive
And Leaves No Citizen Behind.
St. Dnyaneshwar at the end of his writing
‘Dnyaneshwari’ he prayed for the whole human being
To find Happiness for themselves without wishing
anything for himself !
In the same manner, we B.K. Khare Co. wish our
clients alround peace and indeed material prosperity !
Let me sign off by wishing all of you
Acche Din
Jo Aane Wale The
Aur Ab Aur Bhi Kareeb Aa Gaye.
— B. K. Khare

B. K. Khare Co. 6
Dear Esteemed Reader,
The Finance Minister’s Budget has been
universally hailed as a Budget for Business
and Growth. It seems to have something
for everybody although not much for the
middle class. The Finance Minister honoured
the true spirit of federalism by taking the
unprecedented step of increasing the
share of States in the divisible pool of taxes
to 42% (` 5.24 lakh crore in 2015-16). This
has undoubtedly squeezed the Centre’s
resources considerably. But as indicated by
him that would not deter him from adhering
to the challenging fiscal deficit target of
4.1% of GDP and committing to achieve the
medium term target of 3% of GDP in the next
three years.
Infrastructure which is the crying need of the
hour could be a roadblock in the growth
story. This has been an area of focus of
the present Government and has received
attention in this Budget. We certainly hope to
see more action in the times to come.There is
an additional earmarking of ` 70,000 crores
from the Centre’s Funds; capital expenditure
of the public sector units is expected to
increase by ` 80,844 crores. The Finance
Minister has also announced his intention
of setting up a National Investment and
Infrastructure Fund to which an annual flow
of ` 20,000 crores is promised.
The most noticed announcement in the
pro business measures of the Budget 2015
is of course the commitment to reduce
Corporate tax to 25% from the present rate
of 30% over the next four years.This conforms
to the international benchmark and should
in its own way make corporate India more
globally competitive. During the 35 years that
our firm has been commenting on Budget
proposals, this is the first time that such a
commitment for the future has been made
(although Mr. V. P. Singh in his own way
also committed the Government to a more
predictable tax regime). This reduction in rate,
we are informed, will also be accompanied
by a phasing out over the same period of
various incentives and tax holidays that are
currently available to companies. As a class
of tax payers they effectively pay tax at 23%
and therefore the proposed rate of 25% will
not translate into a revenue loss. This then
raises the question whether the proposed
reduction is an optical illusion? Is it really a
relief? In fact for the ensuing financial year
2015-16, a surcharge of 2% (discussed later)
is proposed to be levied which will increase
the tax rate for domestic companies to 34.61%
It is of course a step in the right direction
in terms of simple, predictable and certain
tax regime, since the various incentives had
led to a plethora of litigation, constituting
a large part of tax litigation. Reduction in
such litigation would reduce the burden of
the Courts and hopefully lead to speedier
justice for all.
There are a few incentives in the tax proposals
for furthering the ‘Make in India’ mantra
in the form of additional depreciation for
capital expenditure in the form of plant
and machinery and investment allowance
for new units in backward areas of Andhra
Pradesh and Telangana. Section 6 has
been amended for defining residence of a
company which is not an Indian company
to provide that if the effective control and
management of the company is at any time
of the year in India then it would in some
circumstances be resident in India. Although
this is in keeping with OECD guidelines
and DTAs and is ostensibly to take care of

7 B. K. Khare Co.
shell companies, such a step would widen
the test of residence. Again by including
ownership etc. in right of management or
control through an associated enterprise as
defined in Section 92A, the net is cast very
wide and would attract the provisions of
Explanation 5 to Section 9(1)(i). Both these
amendments would in our view receive
negative attention from MNCs seeking to do
business in India and once again obstruct
the ‘ease of doing business’ in the country.
Special tax regime for Alternative Investment
Funds has been introduced to cover trust,
company, limited liability partnership or
any other body corporate and they have
been provided pass through status. The said
proposed amendments have been brought
in to boost the infrastructure and improve
the investment climate in the country. The
requirement of tax withholding @ 10% from
distribution of non-business income by such
funds however appears harsh as refunds of
tax in the hands of unit holders are not easy
to get.
On the indirect tax front one of the most
eagerly awaited rationalization measure
of introduction of GST did not see much
light thrown except a re-assertion of the
commitment to introduce GST from 1 April
2016. After revealing the broad contours
of GST in the Constitution Amendment Bill
(122nd Amendment) recently introduced
in the Indian Parliament, it was widely
anticipated, as a build up to the budget,
that the draft GST legislation will be put in the
public domain for comments and views of all
the stakeholders. This was necessary, given
that we have just about a year to prepare for
the transition to the new GST regime.However
to pave the way for GST the FM has raised
tax rates in the current Budget – excise duty
to 12.5% (earlier 12.36%) and service tax to
14% (earlier 12.36%).The increase in tax rates
on services is even more severe, given the
impending 2% additional levy in the guise
of ‘Swachh Bharat Cess’ in addition to the
2% increase in the rate of service tax. This
is bound to make services more expensive
for the end consumer. It is well known that
GST will bring down compliance costs and
significantly eliminate tax cascading; hence,
higher tax rates may still not impact the
lower cost of goods services in the new
regime. This however cannot be said of the
present scheme of taxation where cross
credits between central indirect taxes and
state levies are not available.
Penal provisions have been liberalized under
Customs, Excise Service Tax laws to afford
an opportunity to tax evaders who want
to come clean by paying off the amount
demanded alongwith interest.
On Job Creation, it was expected that the
Small Medium sector will get a boost by
way of increase in threshold for payment of
excise duty or service tax; however, there is
no measure in this direction to encourage
entrepreneurship. Turnover thresholds for
small scale sector have been left untouched.
On Minimum Government and Maximum
Governance, one expected the cenvat
credit regime and mechanism for SAD
refunds and service tax refunds to be
liberalized to an audit based regime (grant
refund first and audit books subsequently)
but again apart from increasing the expiry
date for taking credit on invoices upto 1 year
(earlier 6 months) and facilitating electronic
registration within two working days in excise
service tax, not much action has been
witnessed at the ground level.

B. K. Khare Co. 8
So far as maximising benefits to the economy
is concerned, levy of service tax on lottery
agents and chit fund operators is certainly
a move in the right direction and so is the
levy of tax on sin goods (higher excise on
cigarettes and service tax on job work for
alcoholic drinks) but increasing customs
duty on imported commercial vehicles and
metallurgical coke (an important input
for the steel and engineering industry) is
not a welcome step. And now even entry
to entertainment events and amusement
parks will bear a service tax in addition to
entertainment tax.
Wealth Tax has been abolished and this is
one further step taken by the present
Government in keeping with its theme
‘Minimum Government and Maximum
Governance’. Keeping in mind the practical
considerations of revenue loss a surcharge
of 2% is proposed to be imposed on high
income tax payers (taxable income of over
1 crore). Going by the math which the
Finance Minister himself mentioned, this
has again become a source of revenue
garnering; for against the revenue sacrifice of
INR 1,000 crores,the Government hopes to get
wealthier by collecting about INR 9,000 crores
from the 2% additional surcharge. However,
the draconian provisions sought to be
introduced in a separate legislation to
curb tax evasion and arrest the menace
of Black Money is neither in keeping with
minimum governance nor will it make the tax
administration less adversarial.The provisions
in the existing tax legislations and FEMA
are sufficient for the purpose of achieving
this objective. As an economist was heard
commenting in the media, the tax payers’
experience today is that discretion is never
used judiciously; thus, even an honest tax
payer would be alarmed by this measure.Tax
administration continues to be the biggest
challenge both to foreign investors and
the Indian tax payer. Not much has been
achieved in bringing in a tax payer friendly
approach.
Finally there is clarity on the fate of the
Direct Tax Code. It has now been officially
announced as buried and the provisions of
GAAR have also been deferred for another
two years. The Finance Minister clarified that
most of the provision of DTC have been
incorporated in the existing legislation which
is now well settled and well challenged.
The Finance Minister has introduced a ‘Gold
Monetisation Scheme’, whereby depositors
of gold with the Banks and other dealers,
would be able to earn interest on their gold.
The scheme would also allow jewelers to
obtain loans on their gold, held as stock
in trade. This scheme as its name suggests
intends to monetise gold which is otherwise
an idle asset. Sovereign Gold Bonds are also
proposed to develop an alternate financial
assets based on gold. Such bonds will
carry fixed rate of interest. Buyers of such
bonds would be getting bonds issued by
the Government instead of physical gold.
On maturity, bonds can be redeemed with
equal value of gold and interest thereon.
Both the above schemes would help to
reduce the demand of overseas gold and
black money as well as help in building
infrastructure out of money kept in the
Sovereign Gold Bonds.
Certain key Financial Market Reforms were
announced in the Budget for promoting
investment in India; Setting up a Public Debt
Management Agency (PDMA) to stream

9 B. K. Khare Co.
line government debt structure and enable
deepening of the bond market; proposed
merger of Forward Market Commission with
SEBI to strengthen regulation of commodity
forward markets and reduce wild speculation;
and creation of Task Force to establish a
sector-neutral Financial Redressal Agency
that will address grievances against all
financial service providers.
The present Government has already
made visible progress and stands further
committed to the cause of financial
inclusion. The program to enable a bank
account for each household under the
Financial Inclusion Mission has turned out
to be a significant achievement, with over
12.5 crore families brought into the financial
mainstream. Establishment of the Micro Units
Development Refinance Agency (MUDRA)
Bank, proposal to utilize the vast Indian
postal network for financial access, financing
the trade receivables of MSMEs, launching
the schemes to expand coverage of natural
and accidental death risk and provision of
pension to the needy are steps in the right
direction in the current Budget. In view of
the huge economic disparity between the
various sections of society and the large
number of people below the poverty line it
is incumbent on the Government to provide
necessary support and not merely depend
on the trickle-down effect of economic
progress. The Finance Minister has quoted
the Upanishads in the context of the
Government’s commitment to the have nots
which finds an echo in the poem penned
by Mr. B. K. Khare quoting Saint Gyaneshwar,
one of the greatest sages of Maharashtra.
Our detailed analysis of the Direct and
Indirect tax proposals is preceded by an
overview of the Indian Economy which we
hope you will find interesting reading
We look forward to your response.
Sincerely,
Padmini Khare Kaicker
Managing Partner
B. K. Khare Co.
Chartered Accountants
Date: 1 March 2015

B. K. Khare Co. 10
Union Budget 2015
1. India at cross roads:
demographic dividend or
nightmare?
India is today the world’s fourth largest
economy1
. This has been one of the most
significant achievements of our times. Only
fifty years ago, very much within the living
memory of many people, the country was
chronically and helplessly dependent upon
import of food grains from the U.S. Today,
despite the fast increasing population, it
is a powerhouse of agriculture and a net
exporter of food: life expectancy has doubled
and literacy rates quadrupled. India will soon
have the largest and youngest workforce the
world has ever known. It is also witnessing
one of the fastest waves of urbanization ever
recorded in history. In the coming decade its
workforce is slowly poised to increase from
58% to 68% of the population. As that of the
rest of the developed world ages and slowly
diminishes during the same time horizon, the
burgeoning working population in India is
capable of producing an unprecedented
bonanza in terms of GDP growth. More and
more young people, at the rate of nearly ten
million per annum, would be entering the
job market. If the economy can grow, create
enough jobs for them under the “Make in
India” program, and make sure that skilled
young men and women take advantage
of them, unprecedented creative and
entrepreneurial energies will unleash. But, if
the country fails to get its act together, new
investments do not materialize, or youth
are not skilled enough to take advantage
of the new opportunities that arise, the
1 Measuring GDP by the method of purchasing
power parity (PPP)
same demographic dividend will soon
convert into an unmitigated demographic
disaster, generating considerable social and
political stress.
The country thus stands at crossroads with
possibilities both of an unprecedented boon
as well as a slide into an economic quagmire
of unimaginable proportions. If there is any
certainty, it is only of huge expectations: if
unfulfilled, it would be a sordid tale of wasted
potential.The recent elections in Delhi during
the past year or so have shown how volatile
and impatient people have become.
There is thus absolutely no option for the
country except to expand its industrial and
manufacturing base, so as to absorb the
large annual influx of people into urban
areas. The following facts will amply testify to
the nature of the problem that we face:
Table 1
Sectoral Composition of GDP (%)
Year Agriculture Industry Services
1950-51 59 13 28
2011-12 14 27 59
Table 2
Sectoral Composition of Labour Force
Participation (%)
Year Agriculture Industry Services
1950-51 72.1 10.7 17.2
2011-12 52 14 34
The two tables above clearly indicate that
the economy has witnessed major structural
changes since independence. When India
became free or soon thereafter, agriculture
accounted for a little more than half the
output (GDP) that was produced; it however
employed about three-fourths of the

11 B. K. Khare Co.
country’s labour force; now, it employs 50% of
the labour force but produces less than 14%
of the nation’s output or GDP. This structural
shift in the composition of the GDP has been
accompanied by a movement towards
urban areas. In 1951, 82.7% of the population
lived in rural areas; by 2011, about 15% of this
population had migrated to urban areas
in search of new jobs. Today, 14% of the
population, mostly engaged in industry in
urban areas, produces 27% of the GDP and
another 34% of the population involved in
providing services,contributes 59% of the GDP.
It is in fact the industrial or manufacturing
sector that offers the maximum hope for
absorbing the large expected increase in
the work force, simply because the services
sector cannot create employment to the
same extent, even though the two sectors
are quite complementary to each other.
The trends we have witnessed in India are
very similar to what other advanced countries
witnessed while they were still developing.
Today barely 2% the population of the U.S. is
engaged in agriculture;this is simply because
unless farmers reap economies of scale, it is
just not a profitable activity and can provide
meaningful livelihoods to very few people;
most people have thus to migrate to urban
areas in manufacturing and service sectors
of the economy for their survival.
Reforms in the nineteen nineties focused
mostly on freeing product markets, and
inevitably produced a boon. The next
generation of reforms which we have been
waiting for a long time now must focus on
freeing the factor markets- namely, land,
labour and capital- so that poor people can
find livelihoods and with luck, in the words of
Mao Zedong, a thousand flowers can bloom.
2. Biting the bullet
It is in this context that the current state of
the economy has to be appraised: the year
started with the economy still in the throes
of a slowdown, caused partly by a policy
paralysis and partly by six years of double
digit inflation and high interest rates. When
the year began, industrial activity was
stagnant and infrastructural growth in
disarray. Earlier still, during the year 2013 the
economy had suffered a mini balance of
payment crisis, but was fortunately able to
recover from that without much pain.
Three developments occurring during the
current year have proved beneficial medicine
for nursing the economy back to health: first,
the fall in oil and other commodity prices
in the international market helped stabilize
both the fiscal and current account deficits
as well the rate of headline inflation in the
economy.High rate of food inflation,in certain
parts of the country, however, still remains a
matter of concern, but this did not prevent
the RBI from reducing the repo rate, thus
signalling an easy monetary policy.
Second, the decisive mandate given to the
new Government in the recent national
elections and the political stability that
followed fulfilled an important desire of
many well-wishers of the country. The
new Government was slow in its efforts to
introduce economic reforms, but was quick
in energizing the civil service, cutting red
tape and introducing administrative reforms.
As a consequence,(and this is the third major
trend to emerge), slow optimism began to
replace the pessimism that had grounded
the economy during the latter half of the
UPA-II regime. Sentiment improved although it
has still to result in actual hard investment on

B. K. Khare Co. 12
the ground. With an overall expected growth
rate of 5.3%, the economy out-performed
not only the emerging economies of India’s
class, but other economies of the world as
well. As Japan continues to stagnate, China
slows down, Europe struggles with legacy
problems, and the U.S. slowly recovers from
a recession, India, with an expected growth
rate of 5.3%, continued to be one beacon
of hope in the world. Even so, in January
this year the Government revised the
method of computing GDP from factor cost
to market price- supposedly to conform to
international norms. As a result, we were
informed that the economy had grown
by 6.9% in 2013-14, a year of severe policy
paralysis and economic slowdown! Currently,
when agriculture has suffered because of a
bad monsoon and industrial production is
more or less stagnant, we are slated to be
growing at 7.3% and have already overtaken
the Chinese! The new rates just do not
appear credible.
Even so, future growth is critically dependent
upon the Government’s willingness and
ability to persist with the next generation of
reforms that free up labour, capital and land
markets. Can the Government accept this
challenge?
If the Economic Survey 2015,is to be believed,
it already has.The Government is now aiming
for a growth rate of 8.1% to 8.5% in the year
2015-16 and about 10% in the medium
term. Simultaneously, it introduced a slew of
ordinances directed inter alia at making it
easier to acquire land for projects, raising the
ceiling for FDI in insurance from 26% to 49%
etc. These ordinances, particularly the two
indicated above, are being hotly contested
both inside and outside Parliament. So far
the Government has stayed the course. It
has signaled a similar intent with regard to
maintaining fiscal discipline.
Great Expectations
To put things in perspective, the Government
did start in right earnest, with a slew of
initiatives, to fulfil the great expectations that
had been placed upon it. Some of the key
initiatives it took were:
YY Swachh Bharat Abhiyan aiming to
ensure provision of clean defecation
facilities to all;
YY ‘Make in India’ to promote and
encourage domestic manufacturing
sector;
YY Deen Dayal Upadhyaya Grameen
Kaushal Yojana and Deen Dayal
Upadhyaya Antyodaya Yojana towards
skill development especially amongst
the youth;
YY National Policy for Skill Development
and Entrepreneurship” to align skilling
initiatives with global standards;
YY Liberalization of FDI policy for real estate
sector, enhancing the corpus of the
National Housing Bank and increasing
the income-tax incentives for housing
loans, all these towards fulfilling the
mission titled “Housing for All”;
YY National Optical Fibre Network aiming
to transform India into a digitally
empowered society and knowledge
economy;
YY Deendayal Upadhyaya Gram Jyoti
Yojana to improve rural electrification;
YY Beti Bachao, Beti Padhao Abhiyaan to
change mindsets to celebrate the girl
child;
YY Apprentice Protsahan Yojana to promote
apprentices in MSMEs;
YY Pradhan Mantri Jan Dhan Yojana for
greater financial inclusion;

13 B. K. Khare Co.
YY NITI Aayog to foster cooperative
federalism;
YY Namami Gange for River Ganga
conservation;
YY Diamond Quadrilateral Project of high
speed trains connecting the 4 metros
Note:Some of the schemes mentioned above
are rechristened avatars of earlier schemes
and in some cases, initiatives have now
been taken up for pan-India implementation.
Since assuming office in May 2014, the new
Government has undertaken a number of
new reform measures whose cumulative
impact could be substantial. These include:
YY Deregulating diesel prices, paving the
way for new investments in this sector;
YY Raising gas prices from US$ 4.2 per
million British thermal unit to US$ 5.6,
and linking pricing, transparently and
automatically, to international prices so
as to provide incentives for greater gas
supply and thereby relieving the power
sector bottlenecks;
YY Taxing energy products by taking
advantage of declining oil prices,
resulting in additional tax collections;
YY Replacing the cooking gas subsidy by
direct transfers on a national scale;
YY Instituting the Expenditure Management
Commission, which has submitted
its interim report for rationalizing
expenditures;
YY Passing an ordinance to reform the coal
sector via auctions;
YY Securing the political agreement on
the goods and services tax (GST) that
will allow legislative passage of the
constitutional amendment bill;
YY Instituting a major program for financial
inclusion—the Pradhan Mantri Jan Dhan
Yojana;
YY Continuing the push to extending
coverage under the Aadhaar program,
targeting enrollment for 1 billion
Indians;
YY Increasing FDI caps in defence;
YY Eliminating the quantitative restrictions
on gold;
YY Passing an ordinance to make land
acquisition less onerous, thereby
easing the cost of doing business,
while ensuring that farmers get fair
compensation;
YY Facilitating Presidential assent for
labour reforms in Rajasthan, setting an
example for further reform initiatives
by the states; and consolidating and
making transparent a number of
labour laws;
YY Passing an ordinance increasing the FDI
cap in insurance to 49%;
YY Disinvestment of 10% of the government’s
stake in Coal India; and
YY Passing the Mines and Minerals
(Development and Regulation) (MMDR)
Amendment Ordinance, 2015 to revive
the hitherto stagnant mining sector
in the country and usher in greater
transparency and boost revenues for
the States.
Overall, the Government made the right
noises and sent out right signals to create
trust and a business-friendly atmosphere
inter-alia by not pursuing appeals in some
high profile tax cases, trying to make it
easy to do business in India and reforming
labour laws.To indicate political intent,it even
took the controversial ordinance route for
some key reforms such as land acquisition
and FDI in insurance. To be sure, it wanted
to shed past baggage in order to reposition
India on an 8-10% growth path.

B. K. Khare Co. 14
Emerging “Green Shoots”
According to a recent poll by FICCI,
measures announced by the Government
over the past seven-eight months revealed
a positive impact on the sentiment of the
business community. To the Government’s
credit, it has not played to the galleries
by rushing in ill-thought measures or
resorting to ad-hocism. The successful
coal and spectrum auctions are a case
in point. Given the weight of the colossal
expectations,it was easy for the Government
to cave in to such temptations to
demonstrate quick results. As the Economic
Survey puts it, what was required was
“a persistent, encompassing, and creative
incrementalism”. The potential impact of
the reform initiatives of this Government
will in on all likelihood yield results only over
time. The Government is correctly focusing
on strengthening fundamentals and is
resolved to calibrate and walk the difficult
path of fiscal consolidation.
It has also yet to figure out a way of getting
its legislative and reformist agenda passed
through the Rajya Sabha where it does not
enjoy a majority. And this may very well turn
out to be its Achilles heel.
3 ECONOMIC SURVEY 2015 -
HIGHLIGHTS
The Economic Survey suggests that India has
reached a‘sweet spot’in its economic history;
as a consequence it may now finally launch
itself on a sustained double-digit growth
trajectory. The economic consequences
of such a development are enormous.
A growth trajectory of that order will in time
“lift all boats” and allow millions to escape
from a life of poverty.
ECONOMIC GROWTH
As highlighted in the table below, the
economy has registered an impressive 6.9%
growth in FY 2013-14 as compared to the
previous estimate of 4.7%. In FY 2014-15 the
economy is expected to grow by 7.4%. This
may increase to a very healthy 8.5% from
FY 2015-16 onwards.
FY GDP Growth in %
(At Factor Cost,
Base Year 2011-12)
2012-13 5.1
2013-14 6.9
2014-15 7.4
2015-16 (Projected) 8.5
A word of caution would be in order though.
The numbers above are computed on the
basis of the revised estimates of national
income published by the Central Statistical
Office, by shifting the base year from 2011-12
to 2004-05. Ironically, this revision reveals that
the revival of growth actually started in 2013-
14 and further strengthened in 2014-15, an
analysis which does not appear to square
up with ground realities.
The steep decline in oil prices and buoyant
domestic demand, points out the Survey,
helped in the recovery posted during
2014-15 when the economy witnessed an
increase of 7.3% in exports and a decline
of 8.4% in imports. Not surprisingly, there
was a vast improvement in the current
account deficit.
Subdued economic conditions globally,
notably Europe, Japan and China,
coupled with some of India’s own structural
woes (viz., poor agricultural growth due
to failure of monsoons, inadequate
infrastructure and inadequate growth in
employment opportunities, etc.) could
possibly dampen the India growth story.

15 B. K. Khare Co.
However, the survey is optimistic of a strong
domestic demand to keep the growth
momentum going.
SECTORAL CONTRIBUTION
The sector-wise contribution to the GVA pie
as also to the total employment in 2014-15 is
depicted in the chart below:
Fig A reveals that the services sector
continues to dominate the overall economic
scene with a 53% share, in line with India’s
transition to a service economy. Industry
came second with 30% and agriculture
contributed about 17% to the gross value
added in the economy.
It may be noteworthy to add here that the
industrial and agriculture sectors have
posted a reduction in growth in 2014-15 as
compared to 2013-14.
Fig B makes for even more interesting
reading. In spite of contributing the least
to the economy, agriculture occupies
the prime position in employment:it employs
about 49% of the workforce. Industry
(24%) and the service (27%) sectors
contribute, more or less equal shares, to
the employment market. The skewed
sectoral contributions to the GVA vis-à-
vis their shares in providing employment
starkly highlights the pressing need to
skill the workforce, bring people into the
industry and services sectors and thus,
rectify this imbalance which has serious
repercussions on the economy as a whole
(urban migration on infrastructure, farm
loans, etc.)
SECTORAL GROWTH
The sector-wise growth has been compared
in the table below:
Sector 2012-13 2013-14 2014-15
Agriculture, forestry
fishing 1.2 3.7 1.1
Industry 2.3 4.5 5.9
Mining quarrying -0.2 5.4 2.3
Manufacturing 6.2 5.3 6.8
Electricity, gas, water
supply other utility
services 4.0 4.8 9.6
Construction -4.3 2.5 4.5
Services 8.0 9.1 10.6
Trade, hotels
restaurants, transport
communication 9.6 11.1 8.4
Financing, insurance,
real estate business
services 8.8 7.9 13.7
Community, social
personal services 4.7 7.9 9.0
GVA at basic prices 4.9 6.6 7.5
Agriculture Sector
The contribution of various sub-sectors to
agriculture (GVA at current prices) are
as follows:
Sub-sector Share in %
Crops 11.8
Livestock 3.9
Forestry logging 1.4
Fishing 0.9
The Survey has noted certain challenges
and indicated the policy recommendations,
notable ones are as follows:
YY The need of agriculture and food
sectors for huge investments in research,
education,irrigation,fertilizers,laboratories,
warehousing and cold storage;

B. K. Khare Co. 16
YY Poor yields in different crops as compared
to the better ones across the world;
YY Creation of national common market for
agricultural commodities;
YY Strengthening of Forward Markets
Commission.
Overall,the Survey estimates sustainable future
agricultural growth at about 4% per annum.
Industry Sector
The Prime Minister has made the revival
of Indian manufacturing a top priority as
reflected in the ‘Make in India’ campaign.
The Survey highlights that only registered or
formal manufacturing has the capacity to
emerge as a transformational sector in terms
of productivity and rapid growth. Accordingly,
it has identified this sector apart from financial
services, insurance and real estate services as
requiring significant skill profile improvements
to match underlying endowments.
If the Economic Survey truly reflects
Government’s thinking, it could perhaps
be inferred that the Government will not
hesitate to adopt ‘protectionist’ responses
(shielding domestic manufacturing from
foreign competition via tariffs and local
content requirements) to boost domestic
industrial growth.
Services Sector
The YoY growth in the services sector (as a
% to GDP growth) has been depicted in the
table below:
FY % to GDP
2012-13 8
2013-14 9.1
2014-15 10.6
It thus becomes evident that it was the
services sector which provided the basic
impetus for the growth during 2013-14.
Trade and repair services, rail transport,
communication and broadcasting services
achieved close to double digit growth in
2013-14. Growth in financial, real estate and
professional services increased from 7.9% to
13.7% and public administration, defence
and other services from 7.9% to 9.0% (yoy).
OTHER KEY MACRO ECONOMIC
INDICATORS
Fiscal Deficit
The fiscal deficit as a percentage of the GDP
over the past few years has been tabulated
in the table below:
% of GDP
2011-12 5.7
2012-13 4.8
2013-14 4.5
2014-15 4.1
2015-16 3.9
The budget documents reveal that the
Government stood by its commitment of
bringing down the fiscal deficit target for
2014-15 to 4.1% of GDP.However,the deadline
to reduce it to 3% of GDP by 2016-17 has now
been pushed back by another year.
INFLATION
Both the measures of inflation viz., the
headline inflation measured in terms of
Wholesale Price Index (WPI) and the Retail
inflation as measured by the Consumer
Price Index (CPI), have continued to show a
downward trend.
2011-12 2012-13 2013-14 2014-15
W h o l e s a l e
Price Index 8.9 7.4 6.0 3.4
C o n s u m e r
Price Index 8.4 10.4 9.7 6.2
As fuel has larger weight in the WPI, the
decline in oil prices led to sharper reduction in
the WPI as compared to the CPI.The Finance
Minister has indicated in the budget that
the Government will maintain CPI inflation at
around 5% in the immediate future.

17 B. K. Khare Co.
EXTERNAL SECTOR
The key macro-economic indicators in the
external sector are compiled in the table
below:
Indicator 2011-12 2012-13 2013-14 2014-15
Export Growth % 21.8 -1.8 4.7 4.0
Import Growth % 32.3 0.3 -8.3 3.6
Forex Reserves USD
Billion 294.4 292 304.2 328.7
Net FDI USD
Billion 22.06 19.82 21.56 16.18
Overall the the current account now stands
at 1.3 % of the GDP, thanks mostly to the
reduction in international price of oil.
TAX COLLECTIONS
The detailed break-up of the gross tax
revenue (GTR) is provided in the table below:
(` In crores)
Tax Head 2013-14 2014-15 2015-16
(1) Direct Taxes
a) On Income Expenditure
Corporate Income-tax 394,678 426,079 470,628
Income-tax (other than
corporate income-tax) 237,817 272,607 320,836
Hotel Receipts tax 1 – –
Interest tax 8 – –
FBT 5 – –
Others 9 – –
b) On Property and Capital
transactions
Estate duty 0 – –
Wealth tax 1,007 950 –
Gift tax 1 – –
STT 5,018 5,992 6,531
BCTT 0 – –
Total Direct taxes (a+b) 638,543 705,628 797,995
(2) Indirect Taxes
Customs 172,085 188,713 208,336
Excise duties 169,455 184,731 229,054
Service tax 154,779 168,132 209,774
Others 1,004 975 1,005
Taxes collected by Union
Territories without legislature
3,130 3,438 3,577
Total Indirect taxes 500,453 545,988 651,746
Gross Tax Revenue (GTR) (1+2) 1,138,995 1,251,616 1,449,741
% of direct taxes to GTR 56% 56% 55%
% of indirect taxes to GTR 44% 44% 45%
The proportion of direct taxes and indirect
taxes to the GTR over the past few years
has remained more or less constant but the
current statistics do now reflect much greater
reliance by the Central Government on direct
as opposed to indirect taxes for meeting
the country’s revenue needs. This is in sharp
contrast to the position that prevailed in
the past.
4 CHALLENGES AHEAD
The Finance Minister has listed five major
challenges in the Union Budget, viz. stress on
agricultural incomes; the need for increasing
investment in infrastructure; decline in
manufacturing witnessed in the recent past;
the emerging resource crunch, as higher
tax revenues devolve on states; and finally
the urgent requirement of maintaining fiscal
discipline. In order to meet these challenges,
the public sector needs to step in to catalyze
investment.
Arvind Panagriya observed recently that
“green shoots” of recovery were emerging
in the Indian economy. These shoots,
however, need, to be carefully and artfully
nurtured, and be provided with the right
environment to grow; otherwise they
will disappear.
On the whole, the Union Budget 2015,
is a step in the right direction even
though it travels “on a road less taken”.
The policy makers need to realize that
ultimately the key to the success of various
proposals will lie in effective implementation.
We have had good budgets in the past
as well, but they failed to leave a mark
because policy was poorly implemented.
It is thus very important therefore that
those called upon to deliver should not
lose focus.

B. K. Khare Co. 18
Key Features of Budget 2015-2016
presented on 28 February 2015
1 KEY ACHIEVEMENTS
Credibility of Indian economy has been
re-established in the last nine months.
After inheriting an economy with sentiments
of “doom and gloom” with adverse
macroeconomic indicators, nine months
have seen at turn around, making India
fastest growing large economy in the World
with a real GDP growth expected to be 7.4%
(New Series).
Three key achievements: 1) Financial
Inclusion - 12.5 crores families financially
mainstreamed in 100 days; 2) Transparent
Coal Block auctions to augment resources
of the States 3) Swachh Bharat Abhiyaan
to improve hygiene and cleanliness.
2 STATE OF THE ECONOMY
CPI inflation projected at 5% by the end of
the year, consequently, easing of monetary
policy.
GDP growth in 2015-16, projected to be
between 8 to 8.5%.
The fiscal deficit targets are 3.9%, 3.5%
and 3.0% in FY 2015-16, 2016-17 2017-18
respectively.
3 MAJOR CHALLENGES AHEAD
Five major challenges: Agricultural income
under stress, increasing investment in
infrastructure, decline in manufacturing,
resource crunch in view of higher devolution
in taxes to states, maintaining fiscal discipline.
4 KEY HIGHLIGHTS
Direct Transfer of Benefits to be extended
further with a view to increase the number
of beneficiaries from 1 crore to 10.3 crore.
Target of ` 8.5 lakh crore of agricultural credit
during the year 2015-16.
Government to work with the States, in NITI,
for the creation of a Unified National
Agriculture Market.
Micro Units Development Refinance Agency
(MUDRA) Bank, with a corpus of ` 20,000
crores, and credit guarantee corpus of
` 3,000 crores to be created.
A Trade Receivables discounting System
(TReDS) which will be an electronic platform
for facilitating financing of trade receivables
of MSMEs to be established.
Comprehensive Bankruptcy Code of global
standards to be brought in fiscal 2015-16
towards ease of doing business.
Postal network with 1,54,000 points of
presence spread across villages to be used
for increasing access of the people to the
formal financial system.
Pradhan Mantri Suraksha Bima Yojna to
cover accidental death risk of ` 2 Lakh for a
premium of just ` 12 per year.
Atal Pension Yojana to provide a defined
pension, depending on the contribution
and the period of contribution. Government
to contribute 50% of the beneficiaries’
premium limited to ` 1,000 each year, for five
years, in the new accounts opened before
31 December 2015.
Pradhan Mantri Jeevan Jyoti Bima Yojana
to cover both natural and accidental death
risk of ` 2 lakh at premium of ` 330 per year
for the age group of 18-50.
National Investment and Infrastructure Fund
(NIIF), to be established with an annual flow
of ` 20,000 crores to it.
Tax free infrastructure bonds for the projects
in the rail, road and irrigation sectors.
(SETU) Self-Employment and Talent Utilization)
to be established as Techno-financial,
incubation and facilitation program to
support all aspects of start-up business.

19 B. K. Khare Co.
An expert committee to examine the possibility
and prepare a draft legislation where the need
for multiple prior permission can be replaced
by a pre-existing regulatory mechanism.
5 new Ultra Mega Power Projects, each of
4000 MW, in the Plug-and-Play mode.
Public Debt Management Agency (PDMA)
bringing both external and domestic
borrowings under one roof to be set up
this year.
Forward Markets commission to be merged
with SEBI.
Section 6 of FEMA to be amended through
Finance Bill to provide control on capital flows
as equity will be exercised by Government in
consultation with RBI.
India Financial Code to be introduced soon
in Parliament for consideration
Gold monetisation scheme to allow the
depositors of gold to earn interest in their
metal accounts and the jewellers to obtain
loans in their metal account to be introduced.
Foreign investments in Alternate Investment
Funds to be allowed.
Distinction between different types of
foreign investments, especially between
foreign portfolio investments and foreign
direct investments to be done away with.
Replacement with composite caps.
Visas on arrival to be increased to 150
countries in stages.
Proposal to introduce a public Contracts
(resolution of disputes) Bill to streamline the
institutional arrangements for resolution of
such disputes.
An autonomous Bank Board Bureau to be
set up to improve the governance of public
sector bank.
The first phase of GIFT to become a reality very
soon. Appropriate regulations to be issued
in March.
Direct Tax Proposals
No change in rate of personal income tax.
Proposal to reduce corporate tax from 30%
to 25% over the next four years, starting from
next financial year.
Bill for a comprehensive new law to deal
with black money parked abroad to be
introduced in the current session.
Benami Transactions (Prohibition) Bill to curb
domestic black money to be introduced in
the current session of Parliament.
Tax “pass through” to be allowed to both
category I and category II alternative
investment funds.
Permanent Establishment (PE) norm to be
modified to encourage fund managers to
relocate to India.
General Anti Avoidance Rule (GAAR) to be
deferred by two years.
Additional investment allowance (@ 15%)
and additional depreciation (@35%) to new
manufacturing units set up during the period
01 April 2015 to 31 March 2020 in notified
backward areas of Andhra Pradesh and
Telangana.
Rate of Income-tax on royalty and fees for
technical services reduced from 25% to 10%
to facilitate technology inflow.
Benefit of deduction for employment of new
regular workmen to all business entities and
eligibility threshold reduced.
Monetary limit for a case to be heard by a
single member bench of ITAT increase from
` 5 lakh to ` 15 lakh.
Wealth-tax replaced with additional
surcharge of 2 per cent on super rich
with a taxable income of over ` 1 crore
annually.
Applicability of indirect transfer provisions
to dividends paid by foreign companies to
their shareholders to be addressed through
a clarificatory circular.

B. K. Khare Co. 20
Domestic transfer pricing threshold limit
increased from ` 5 crore to ` 20 crore.
MAT rationalised for FIIs and members of
an AOP.
Limit of deduction of health insurance
premium increased from ` 15,000 to
` 25,000, for senior citizens limit increased
from ` 20,000 to ` 30,000.
Senior citizens above the age of 80 years,
who are not covered by health insurance, to
be allowed deduction of ` 30,000 towards
medical expenditures.
To mitigate the problem being faced by many
genuine charitable institutions, it is proposed
to modify the ceiling on receipts from
activities in the nature of trade, commerce
or business to 20% of the total receipts from
the existing ceiling of ` 25 lakh.
Direct Tax Code not being pursued.
Indirect Tax Proposals
Basic Custom duty on certain inputs, raw
materials, inter mediates and components
in 22 items, reduced to minimise the impact
of duty inversion.
All goods, except populated printed circuit
boards for use in manufacture of ITA bound
items, exempted from SAD.
Time limit for taking CENVAT credit on inputs
and input services increased from 6 months
to 1 year.
Service-tax plus education cesses increased
from 12.36% to 14% to facilitate transition
to GST.
Education cess and the Secondary and
Higher education cess to be subsumed in
Central Excise Duty.

21 B. K. Khare Co.
DIRECT TAX
INCOME TAX
The Clauses in the Finance Bill, 2015 (the Bill,
for short) in so far as they relate to direct taxes,
when enacted, will operate prospectively
and from AY 2016-17 onwards. Where the
intention is otherwise, there will be a specific
mention of the fact. The readers will notice
that when we make our comments on the
diverse clauses of the Bill we have indicated
the material clauses in bracket.
Amendment to Tax Rate
For Individuals, Hindu Undivided Families,
Association of Persons and Body of
Individuals.
Existing Proposed
Income (`) Rate (%)
(1)(3)
Income (`) Rate (%)
(1)(4)
0 – 2,50,000(2)
Nil 0 – 2,50,000(2)
Nil
2,50,001 – 5,00,000 10 2,50,001 – 5,00,000 10
5,00,001 – 10,00,000 20 5,00,001 – 10,00,000 20
10,00,001 and above 30 10,00,001 and above 30
(1) Education cess of 3% is leviable on the
amount of income-tax.
(2) The basic exemption limit is ` 2,50,000 in
case of every individual below the age
of 60 years, ` 3,00,000 in case of resident
individuals of the age of 60 years or
more and ` 5,00,000 for “Very Senior
Citizen” in case of resident individuals of
age 80 years and above. Surcharge at
the rate of 10% of such income tax in
case of a person having a total income
exceeding ` 1 crore.
(3) Surcharge at the rate of 10% of such
income tax in case of a person having
a total income exceeding ` 1 crore.
(4) Surcharge at the rate of 12% of such
income tax in case of a person having
a total income exceeding ` 1 crore.
For Others
Description Existing Rate
(%)
Proposed Rate
(%)
A) Domestic company
Regular tax 33.99(5)
34.608(6)
MAT 20.961
(of book profits)(7)
21.342
(of book profits)(8)
DDT 19.994 (9)
20.358(10)
Dividend Received
from Foreign
subsidiary company
19.994(11)
20.358(12)
B) Foreign company
43.26(13)
C) Firm and LLP
34.608(15)
Alternate Minimum
Tax (AMT)
20.961(16)
21.342(17)
(5) Inclusive of surcharge of 10% and
education cess of 3%. Where the total
income is between ` 1 crore and
` 10 crore, then tax rate is 32.445%
(inclusive of surcharge of 5% and
education cess of 3%). Where the
total income is equal to or less than
` 1 crore,then tax rate is 30.90% (inclusive
of education cess only).

B. K. Khare Co. 22
education cess of 3%). Where the total
income is equal to or less than ` 1 crore,
then tax rate is 19.055% (inclusive of
education cess only).
education cess of 3%. Amount of
distribution of dividend to shareholders
to be grossed up for the purpose of DDT.
education cess of 3%. Amount of
distribution of dividend to shareholders
to be grossed up for the purpose of DDT.
(inclusive of education cess only).
income is between ` 1 crore and ` 10 crore,
surcharge of 2% and education cess of
3%).Where the total income is equal to or
less than ` 1 crore, then tax rate is 41.20%
education cess of 3%. Where the
income is equal to or less than ` 1
crore, then tax rate is 30.90% (inclusive
Deferment of provisions relating to
General Anti Avoidance Rule (GAAR) –
Section 95
The existing provisions of GAAR are contained
in Chapter X-A (Sections 95 to 102) and
Section 144BA of the Income Tax Act, 1961
(IT Act). Chapter X-A provides the substantive
provision of GAAR whereas Section 144 BA
provide for the procedures to be under-
taken for invoking GAAR and passing an
assessment order invoking such provisions.
Concerns had been expressed regarding
certain aspects of GAAR. India is an active
participant of Base Erosion and Profit Shifting
(BEPS) project of the Organisation for
Economic Cooperation and Development
(OECD) and the report on aspects of BEPS
and measures to counter it is awaited.

23 B. K. Khare Co.
In the light of the said circumstances the
implementation of GAAR has been deferred
by two years and made applicable to
income of the FY 2017-18 (AY 2018-19), as a
measure to promote domestic industry and
improve investment climate.
The amendment is proposed to effective
from 1 April 2015.
[Clause 25]
Abolition of Wealth Tax
Currently wealth tax is levied on Individual,
HUF or Company if net wealth of the person
exceeds ` 30 lakhs on the last date of the
previous year. Only few specified assets
are taken into account for the purpose of
computing net wealth.
The collection of wealth tax has not
shown any buoyancy and has cast a
disproportionately high compliance burden
on the assessee and administrative burden
on the department.
It is therefore proposed to abolish levy of
wealth tax with effect from 1 April 2016
(AY 2016-17) onwards and an enhanced
surcharge is proposed on taxpayers
earning higher income. The details of levy of
enhanced surcharge are given under rates
of taxes.
[Clause 79]
Special Tax regime for Category I and
Category II Alternative Investment Funds
– Sections 115U and 115UA
Existing Section 10(23FB) of the Income
Tax Act exempts from taxation any income
of a Venture Capital Company (VCC) or a
Venture Capital Fund (VCF) from investments
in a Venture Capital Undertaking (VCU).
Section 115U of the Act provides that income
accruing or arising to or received by a
person out of investment made in a VCC or
VCF shall be taxable in the same manner
on a current year basis as if the person had
made a direct investment in a VCU.
Theses sections provide a tax pass through
(i.e. income is taxable in the hands of
the investors instead of VCF/VCC) only
to the funds, being set up as a company
or trust, which are registered under SEBI
Regulations as VCF before 21 May 2012
or Category I Alternative Investment Fund
(AIF) regulated by SEBI (AIF) Regulations
w.e.f. 21 May 2012.
Under the AIF Regulations various types
of AIFs have been classified under three
categories I, II and III AIFs. These AIFs
can be set up as a trust, company limited
liability partnership or any other body
corporate. Category I AIFs invest in start
up or early stage ventures or social
ventures or SMEs or infrastructure or other
sectors or in areas which the Government
or Regulators consider as socially or
economically desirable. Category II AIFs
are funds including Private Equity Funds
or Debt Funds which do not fall in
Category I and III AIFs and which do not
undertake leverage or borrowings other
than for meeting day to day operational
requirements. Category III AIFs are funds
which employ diverse or complex trading
strategies and may employ leverage.
It is proposed to provide a special tax
regime to rationalise the taxation of
Category I and II AIFs.
The salient features of tax regime are:
i. Income of the unit holder of investment
fund shall be chargeable to tax in the
same manner as if it were income
accruing or arising had the investment
been made directly by him.
ii. Income in the hands of investment
fund other than profits and gains of
business shall be exempt from tax.
Income of the investment fund in the
nature of Profits and gains shall be
taxable in its hands.
iii. Income of the same nature as Profits
and gains at the Investment Fund level

B. K. Khare Co. 24
would be exempt in the hands of the
investor.
iv. Any income other than income taxable
at the Investment fund level and
which is payable to a unit holder by
an Investment fund shall attract tax
deduction at source (TDS) at the rate of
ten percent and the fund is obligated to
deduct tax at source.
v. Income paid or credited by the
Investment fund shall be deemed
to be of the same nature and in the
same proportion in the hands of the
unit holder as if it had been received
by or had accrued or arisen to the
Investment fund.
vi. If there is a loss at the fund level
which is either current or which has
remained to be set off then the loss
would be carried over at the fund
level for set off against income of the
succeeding year in accordance with
the provisions of Chapter VI of Income
Tax Act. The loss shall not allowed pass
through to the investors.
vii. Provisions of Chapter XII-D (Dividend
Distribution Tax) or Chapter XII-E (Tax on
distributed income) shall not apply to
income paid by an Investment fund to
its unit holders.
viii. Income received by an Investment
fund is to be exempt from TDS
requirement. An appropriate notification
under Section 197A(1F) is proposed
to be issued subsequently for the said
purpose.
ix. The Investment fund will be mandatorily
required to file its return of income.
The fund is required to provide the
prescribed income tax authority and
the investors the details of various
components of its income.
x. The existing pass through regime is
proposed to continue to apply to a
VCF/VCC registered under SEBI VCF
Regulations 1996. Other VCFs viz.
Categories I and II AIFs would be subject
to the new pass through regime.
xi. In Section 115UA, reference to
Clause (23 FCA) Section 10 is proposed
to be inserted after reference to
Clause (23FC) of Section 10.
[Clauses 30, 31 32]
Residence in India – Section 6
Section 6 lays down the conditions to be
satisfied for a person to be treated as a
‘resident’ in India.
Explanation to Section 6(1), among others,
defines the residential status of an Indian
citizen, being a member of the crew of
an Indian ship, who leaves India in any
previous year.
It is now proposed to amend the section
to also deal with the situation of an Indian
citizen being a member of the crew of a
foreign bound ship (as opposed to foreign
bound Indian ship) leaving India.
It is proposed that in this case the period or
periods of stay in India shall, in respect of
such voyage, be determined in the manner
and subject to such conditions as may be
prescribed.
This amendment will take retrospective
effect from 1 April 2015 and will apply to
AY 2015-16 and subsequent years.
Section 6(3) deals with the residential status
of a company.
At present, to be categorised as a ‘resident
in India, one basic condition is that the
company should be an Indian company.
Alternatively, during that year the control and
management of its affairs should be situated
wholly in India.
Thus, if the control and management was
shown to be either not wholly in India or
not in India during the whole of the year,

25 B. K. Khare Co.
residence could be shifted outside India
thereby affecting the ambit of taxation of the
income of such companies.
It is proposed that a company will be a
resident in India if its place of effective
management, at any time in that year, is
in India.
“Place of effective management” is defined
to mean a place where key management
and commercial decisions that are necessary
for the conduct of the business of an entity
as a whole are, in substance, made.
With this amendment provisions of the IT Act
would be aligned with those of the DTAA
entered into by India with other countries
and would also be line with the principles
recognised and accepted by OECD.
The aim of this amendment is stated to be to
deal with cases of creation of shell companies
incorporated outside India but effectively
controlled from India.This amendment could
have far reaching consequences.
[Clause 4]
Income deemed to accrue or arise in
India – Section 9
Indirect Transfers
This is one of amendments which has
been categorised under ‘Ease of doing
business/Dispute resolution’ and is stated
to be based on the recommendations
of the Expert Committee headed by
Dr. Parthasarathi Shome.
The Finance Act, 2012 inserted Explanation 5
in Section 9(1)(i) which deals with income
deemed to accrue or arise in India.The said
explanation, inserted with retrospective effect
from 1 April 1962, clarified that an asset or
capital asset, being any share or interest in a
company or entity registered or incorporated
outside India shall be deemed to be situated
in India if the value of share or interest is
derived directly or indirectly substantially
from the assets located in India.
The explanation was inserted with
retrospective effect to overcome the decision
in the case of Vodafone (341 ITR 1) wherein
Honourable Supreme Court had held that
transfer of shares of a foreign company which
has an Indian Company as its subsidiary
does not amount to transfer of any capital
asset situated in India within meaning of
fourth limb of Section 9(1)(i).
Subsequently the issue and applicability of
said Explanation 5 came up for consideration
before the Hon’ble Delhi High Court in the
case of Copal Research Ltd., Mauritius 226
Taxman 226. The Delhi High Court referred
to the substance of what the Explanation
sought to achieve viz. charge of tax on the
transfer of an asset where “in substance
the assets in India are transacted by
transacting in shares of overseas holding
companies”. The Hon’ble Court expressed
its view that a transfer of shares of foreign
companies would not in substance be held
to be a transfer of underlying Indian assets
unless at least 50% of the value of such
shares is derived from assets held in India.
The Delhi High Court inter alia referred to
the OECD Model Tax Convention on Income
and on Capital to add a persuasive and
not conclusive value and it was mentioned
that the taxation rights in case of sale of
shares are ceded to the country where
the underlying assets are situated only if
more than 50% of the value of such shares
is derived from such property. The High
Court also made a reference to the Shome
Committee Report and the Direct Tax Code,
2010, wherein the term ‘substantially’ was
considered to mean a threshold of 50% of
the total value derived from assets of the
entity. Based on the aforesaid reference, the
Court concluded that the term ‘substantially’
has been used to define the threshold of
attracting indirect transfer provisions and the
term was synonymous to ‘principally’,‘mainly’
or at least ‘majority’. Therefore, the Court
held that gains arising from transfer of shares
of an overseas company, which derives its

B. K. Khare Co. 26
value less than 50% of assets situated in
India would not be taxable in India under
Section 9(1)(i) of the Income Tax Act.
In order to give effect to the recommendations
of expert committee under Chairmanship
of Dr. Parthasarathy Shome amendments
have been proposed in Section 9(1)(i)
and Sections 47, 49 and 271GA, 273B
and 285A.
The Finance Act, 2012 inserted certain
clarificatory amendments in the provisions
of Section 9 one of which was insertion
of Explanation 5 in Section 9(1)(i), with
retrospective effect from 1 April 1962.
This Explanation clarified that an asset or
capital asset, being any share or interest in a
company or entity registered or incorporated
outside India shall be deemed to be situated
in India if the share or interest derives, directly
or indirectly, its value substantially from assets
located in India.
It is now proposed that the share or interest of
a foreign company or entity shall be deemed
to derive its value substantially from the assets
(whether tangible or intangible) located
in India, if on the specified date, the value
of Indian assets (a) exceeds the amount of
ten crore rupees and (b) represents at least
fifty per cent of the value of all the assets
owned by the company or entity.
Value of an asset would be the gross value
(without reduction of liabilities in respect of
such assets) to be determined in the manner
prescribed in the Rules.
Specified date is proposed to means (i) date
on which the accounting period of the
company or, as the case may be, the entity
ends preceding the date of transfer of a
share or an interest; or (ii) date of transfer, if
the book value of the assets of the company
or, as the case may be, the entity on the
date of transfer exceeds the book value
of the assets as on the date referred to in
Sub-clause (i), by fifteen per cent.
The expression“Accounting period”is defined
to cater to different situations.
The rigors of Explanation 5 are further
proposed to be reduced by providing that
the said deeming provision of indirect transfer
will not apply in the case of a non-resident
from transfer, outside India, of any share of, or
interest in, a company or an entity, registered
or incorporated outside India:
(i) if such company or entity directly owns
the assets situated in India;
(ii) the transferor [whether individually or
along with its associated enterprises
(as defined in Section 92A)], at any
time in the twelve months preceding
the date of transfer, neither holds the
right of management or control in
relation to such company or entity, nor
holds voting power or share capital or
interest exceeding five per cent of the
total voting power or total share capital
or total interest, as the case may be, of
such company or entity;
OR
a. if such company or entity indirectly owns
the assets situated in India, and,
b. the transferor (whether individually or
along with its associated enterprises), at
any time in the twelve months preceding
the date of transfer, neither holds the
right of management or control in relation
to such company or entity, nor holds
any right in, or in relation to, such
company or entity which would entitle
him to the right of management or
control in the company or entity that
directly owns the assets situated in India,
c. nor holds such percentage of voting
power or share capital or interest in
such company or entity which results
in holding of (either individually or
along with associated enterprises) a
voting power or share capital or interest
exceeding five per cent of the total

27 B. K. Khare Co.
voting power or total share capital or
total interest, as the case may be, of the
company or entity that directly owns the
assets situated in India.
It is further proposed that in a case where
all the assets owned, directly or indirectly,
by a company or, as the case may be, an
entity referred to in the Explanation 5, are
not located in India, the income of the non-
resident transferor, from transfer outside India
of a share of, or interest in, such company
or entity, deemed to accrue or arise in India
under this clause, shall be only such part of
the income as is reasonably attributable to
assets located in India and determined in
such manner as may be prescribed.
By including ownership etc. of right of
management or control through an
associated enterprise as defined in
Section 92A, the net is cast very wide to
attract the provisions of Explanation 5 to
Section 9(1)(i).
[Clause 5]
Allied to above certain amendments
have been proposed in the regime of
taxation of capital gains.
Following clauses are proposed to be
inserted in Section 47 which deals with
transactions not regarded as transfer of
capital assets.
Clause (viab) – Any transfer of shares
referred to in Explanation 5 to Section 9(1)(i)
whose value is derived substantially directly
or indirectly from shares of an Indian
company, in a scheme of amalgamation by
the amalgamating foreign company to the
amalgamated foreign company would not
be regarded as transfer if:
(A) at least twenty five per cent of the
shareholders of the amalgamating
foreign company continue to remain
shareholders of amalgamated foreign
company.
(B) such transfer of share does not attract
capital gains in the country in which
the amalgamating company is
incorporated.
Clause (vicc) – Any transfer of share
referred to in Explanation 5 to Section 9(1)(i)
whose value is derived substantially directly
or indirectly from shares of an Indian
company, in a demerger by a demerged
foreign company to the resulting foreign
company would not be regarded as
transfer if:
(a) the shareholders holding not less than
three fourths in value of the shares of the
demerged foreign company continue
to remain shareholders of the resulting
foreign company.
(b) such transfer of share does not attract
capital gains in the country in which the
resulting company is incorporated.
(c) Provisions of Sections 391 to 394 of the
Companies Act, 1956 shall not apply
in case of demerger referred to in this
Clause.
[Clause 13]
Section 9(1)(v) deals with deemed
accrual in India of Interest
It is proposed to provide that in the case
of a non-resident, being a person
engaged in the business of banking,
any interest payable by the permanent
establishment (as defined in Section 92F(iiia)
in India of such non-resident to the head
office or any permanent establishment
or any other part of such non-resident
outside India, shall be deemed to
accrue or arise in India and shall be
chargeable to tax in addition to any income
attributable to the permanent establishment
in India.
It is also proposed that the permanent
establishment in India shall be deemed

B. K. Khare Co. 28
to be a person separate and independent
of the non-resident person of which it
is a permanent establishment and the
provisions of the Act relating to computation
of total income, determination of tax
and collection and recovery shall apply
accordingly;
Such interest would however be entitled to
be deducted as expenditure in computing
the income of the permanent establishment
in India.
[Clause 5]
Permanent Establishment – eligible
investment fund – Section 9A
A new Section 9A – is proposed to be
inserted to provide that in the case of an
‘eligible investment fund’ fund management
activity carried out through an eligible fund
manager acting on behalf of such fund
would not constitute business connection in
India.
It is further proposed that an eligible
investment fund shall not be said to be
resident in India for the purpose of Section 6
merely because the eligible fund manager,
undertaking fund management activities on
its behalf, is situated in India.
An eligible investment fund has been defined
to mean a fund established or incorporated
or registered outside India, which collects
funds from its members for investing it for
their benefit and fulfils several stringent
conditions (including that it is not a person
resident in India; it is a resident of a country
with whom India has entered into DTAA; it
does not carry on or control and manage,
directly or indirectly, any business in India or
from India etc.)
Similarly, an eligible fund manager has been
defined to mean any person who is engaged
in the activity of fund management and
fulfils certain conditions (including that he
should be acting in the ordinary course of
his business as a fund manager etc.)
The Fund would be required to file an annual
statement in respect of its activities in a
financial year non furnishing of which would
attract penalty of ` 5 lacs.
This amendment would of course not affect
the taxability of the income of the Fund
earned or accrued in India de hors the
business connection in India constituted by
the fund manager. Similarly, the scope of
total income of the eligible fund manager or
its determination would not be affected by
this amendment.
This provision will help off shore funds in that
tax liability in respect of income arising to the
Fund would not be affected by the existence
of a fund manager in India for making
investments. Similarly, income of the Fund
from investments outside India would not be
taxable in India simply by reason of the fact
fund management activity in respect of such
investments has been undertaken through a
fund manager located in India.
It is further proposed that these exclusions
shall apply to income of the eligible
investment fund, which would have been
so included irrespective of whether the
activity of the eligible fund manager
constituted the business connection in India
of such fund or not.
It is similarly provided that nothing contained
in the proposed section shall have any effect
on the scope of total income or determination
of total income in the case of the eligible
fund manager.
[Clause 6]
Allowance of balance 50% additional
depreciation where assets used for less
than 180 days – Section 32(1)(ii)
The assessee, engaged in manufacture/
production of articles or things or in the
business of generation and distribution of
power is currently entitled to additional
depreciation of 20% on purchase and

29 B. K. Khare Co.
installation of new plant machinery,subject
to compliance of specified conditions.Where
the asset was put to use for less than 180 days
in a year, the said additional depreciation
was allowed at 50% of such depreciation.
The existing provision was silent on the
assessee’s claim for depreciation of balance
50% in the succeeding year.The view that an
assessee is entitled to claim the deduction
for the balance 50% depreciation in the
succeeding year was upheld by the Cochin
Tribunal, the Mumbai Tribunal and the Delhi
Tribunal. The Chennai Tribunal however held
otherwise.
An amendment is proposed to allow the
balance 50% of the additional depreciation
on new plant or machinery acquired and
used for less than 180 days which has not
been allowed in the year of acquisition
and installation shall be allowed in the
immediately succeeding previous year. This
provision will take effect from the assessment
year 2016-17.
[Clause 10]
Additional depreciation at the rate of
35% for setting up of manufacturing units
in the notified backward area in Andhra
Pradesh orTelangana – Section 32(1)(iia)
In order to incentivise acquisition and
installation of plant and machinery for
setting up of manufacturing units in the
notified backward area in Andhra Pradesh
or Telangana, it is proposed to allow higher
additional depreciation at the rate of 35%
(instead of 20%) in respect of the actual cost
of new machinery or plant (other than a
ship and aircraft) acquired and installed by
a manufacturing undertaking or enterprise
which is set up in the notified backward
area on or after the 1 April 2015. This higher
additional depreciation shall be available in
respect of new plant or machinery acquired
and installed during the period beginning on
1 April 2015 and ending before 1 April 2020.
[Clause 10]
Additional investment allowance for
setting up of manufacturing units in
the notified backward area of Andhra
Pradesh or Telangana – Section 32AD
Section 32AC was inserted by the
Finance Act, 2013 in order to encourage
substantial investment in plant and
machinery by companies engaged
in the business of manufacture or
production of any article or thing.
Deduction allowable under Section 32AC
is 15% of actual cost of new plant and
machinery, subject to compliance of certain
specified conditions.
A new Section 32AD is proposed to be
inserted in order to encourage the setting
up of industrial undertaking in the backward
areas of Andhra Pradesh and Telangana.The
additional investment allowance would be
15% of the cost of new asset acquired and
installed by an assessee, if:
YY The undertaking or enterprise engaged
in manufacture or production of any
article or thing is set up after 1 April
2015 in the notified backward areas of
Andhra Pradesh and Telangana, and.
YY the new assets are acquired and
installed during the period between
1 April 2015 and 31 March 2020.
It has been clarified that if an undertaking
is set up in the notified backward areas in
Andhra Pradesh or Telangana, it shall be
eligible to claim deduction under the existing
provisions of Section 32AC as well as under
the proposed Section 32AD, on fulfilment of
conditions specified in both the sections.
In order to ensure that such manufacturing
undertaking or enterprise contributes to
economic growth of these backward areas
by carrying on manufacturing for a
substantial period of time, it is proposed to
provide suitable safeguards for restricting the
transfer of the plant or machinery for such
period of 5 years. However, the restriction

B. K. Khare Co. 30
of transfer shall not apply in the case of
amalgamation or demerger or business
reorganization. In such a scenario, the
conditions of restricting the transfer of the
plant or machinery for a period of 5 years
shall continue to apply to the amalgamated
company or resulting company or successor,
as the case may be.
[Clause 11]
Prescribed conditions relating to
maintenance of accounts, audit, etc.
to be fulfilled by the Approved In-House
RD facility – Section 35
Under Section 35(2AB) of the Act, weighted
deduction of 200% is allowed to a company
engaged in the business of biotechnology
or manufacturing of goods (except items
specified in Schedule-XI) for the expenditure
(not being expenditure in the nature of cost
of any land or building) incurred on scientific
research carried out in an approved in-
house research and development facility.
For availing this weighted deduction, the
assessee company is required to enter into
an agreement with, and obtain the approval
of the Secretary, Department of Scientific and
Industrial Research (DSIR) and the Secretary,
DSIR is required to send the report in this
regard to Director General of Income tax
(Exemption) in the prescribed Form.The latter
generally does not have jurisdiction over the
assessee company. Further, the company
is required to maintain separate books of
account for the approved RD facility and
is also required to get the accounts audited.
However, copy of the audit report is required
to be submitted to the DSIR only.
The Comptroller and Auditor General of
India recommended, in its report on the
performance audit of the pharmaceuticals
sector, that the implementation of the
weighted deduction under this section ought
to be rationalised.
In order to improve the monitoring
mechanism for weighted deduction under
this provision, it is proposed that the this
deduction shall be allowed if the company
enters into an agreement for cooperation
with the prescribed authority in such research
and development facility, fulfils prescribed
conditions with regard to maintenance and
audit of accounts and furnishes prescribed
reports.
It is also proposed that the prescribed
report referred to in Sections 35(2AA)
and 35(2AB) may be sent to the Principal
Chief Commissioner or Chief Commissioner
having jurisdiction over the company
claiming the weighted deduction under the
said sections instead of the Principal Director
or Director General of Income tax.
[Clause 12]
Rationalisation of provisions – Section
115JB
Section 86 of the Income Tax Act provides
that income tax is not payable on the
share of income of member of Association
of Persons (AOP) in certain circumstances.
However in case of a company which is a
member of an AOP, the share in the income
of AOP is liable to minimum alternate tax
(MAT) on such income credited to the
Profit Loss Account and therefore part of
the book profits of such company.
In case of partnership firm the profit share of
partner is exempt under Section 10(2A) and
therefore does not suffer MAT.
Amendment is proposed to exclude the share
of a member company in the income of AOP
credited to the Profit Loss Account from MAT
liability. Expenditure if any corresponding to
such excluded income is also proposed to
be added to book profits for determining
MAT liability. Clause (iib) is proposed to be
inserted in Explanation 1 below sub section
2 of Section 115JB for that purpose.
Finance Act (No.2) of 2014 provided that
any securities in which investment is made

31 B. K. Khare Co.
by Foreign Institutional Investor (FII) in
accordance with the regulations made
under SEBI Act, 1992 would be capital
assets i.e. investments and not stock in trade
and consequently income arising from
transactions in securities would constitute
capital gains.
An amendment is proposed to exclude
the capital gains arising from transactions
in securities (other than short term capital
gains arising on transactions on which STT is
not chargeable) from the book profits when
such amount is credited to the Profit Loss
Account for the purpose of determining MAT
liability in the hands of FII.
New Clause (iiC) is proposed to be inserted
in Explanation 1 below Sub-section 2 of
Section 115JB for that purpose.
[Clause 29]
Deduction for employment of new
workmen in excess of 50 workmen
allowable to non-corporate assessee’s –
Section 80JJAA
Under the existing provision deduction equal
to 30% of the additional wages paid to new
regular workmen in excess of one hundred
workmen employed during the year in factory
is allowed in case of assessee being an
Indian Company. It is proposed to omit the
words being an Indian Company. Thus the
deduction is proposed to be allowed for all
the assessee’s having manufacturing units.
It is also proposed that deduction would be
allowed in respect of payment of additional
wages in excess of fifty instead of hundred
workmen.
Further, under the existing provision
deduction is not allowed if the factory is
hived off or transferred from another existing
entity or acquired by the assessee company
as a result of amalgamation with another
company. It is proposed to amend the above
clause so as to provide that no deduction
shall be allowed if the factory is acquired
by the assessee by way of transfer from any
other person or as a result of any business
reorganization.
[Clause 22]
Raising the threshold limit for Specified
Domestic Transactions – Section 92BA
The existing provisions of Section 92BA define
Specified domestic transactions to mean
such transactions not being international
transactions where the aggregate value of
domestic transactions exceeds the thres-
hold limit of ` 5 crores. In order to address
the issue of compliance cost in case of
small businesses the said threshold limit is
proposed to be increased to ` 25 crores.
(Clause 24)
Reduction in rate of tax on income by way
of Royalty and Fees for Technical Services
in case of Non-Residents - Section 115A
The rate of tax of 25% on gross income by
way of royalty and fees for technical services
of non-resident tax payer has been specified
under the existing provisions.
In order to reduce the hardship faced by
the small entities due to high rate of 25% it
is proposed to reduce the rate of tax to 10%
under Section 115A.
[Clause 27]
Compliance and Penalty - Remittance
outside India – Section 195
Section 195(1) of the Act provides that
any person responsible for paying any
interest (other than interest referred to in
Sections 194LB or 194LC or 194LD of the
Act) or any sum chargeable to tax (not
being salary income) to a non-resident,
shall deduct tax at the rates in force. As
per Section 195(6) of the Act, such person
is required to furnish prescribed information
as per Rule 37BB (Form 15CA and 15CB) in
relation to such remittances.

B. K. Khare Co. 32
The mechanism of obtaining of information
in respect of remittances fulfils twin objectives
of ensuring deduction of tax at the
appropriate rate from taxable remittances
as well as identifying the remittances on
which the tax was deductible but was not
deducted at source. It is seen however in
practice that the remitter does not provide
the above information in respect of non-
taxable remittances. Therefore, it is felt that
obtaining of information only in respect of
remittances which the remitter declared as
taxable defeats one of the main principles
of obtaining information in respect of foreign
remittances i.e. to identify the taxable
remittances on which tax was deductible but
was not deducted.In view of this,it is proposed
that the person responsible for paying any
sum, whether chargeable to tax or not, to a
non-resident, not being a company, or to a
foreign company, under Section 195(1) shall
be required to furnish the information of the
prescribed sum in such form and manner as
may be prescribed.
Further,currentlythereisnoprovisionforlevying
of penalty for non-submission/inaccurate
submission of the prescribed information in
respect of remittance to the non-resident. For
ensuring submission of accurate information
in respect of remittance to a non-resident,
it is further proposed to levy a penalty of
` 1,00,000 for non-furnishing of information
or furnishing of incorrect information under
Section 195(6) except in the case where it is
proved that there was reasonable cause for
non-furnishing or incorrect furnishing of such
information.
These amendments will take effect from
1 June 2015.
It may be noted that as per the Supreme
Court judgements in the case of Vodafone
International Holdings B.V. v. UOI (204
Taxman 408) and GE Technology Cen (P)
Ltd v. CIT (193 Taxman 234), the provisions
of Section 195 would apply only if the sum
is chargeable to tax. Further, Rule 37BB,
notified vide Notification 67/2013 dated
2 September 2013, also provides that the
specified information (i.e. Form 15CA and
Form 15CB) is required to be furnished only
in the case of payments made to the non-
resident which are chargeable to tax in India.
This notification further provides that Form
15CA and 15CB are not required for 28 items
of remittances to the non-resident. In light of
the above jurisprudence and the relevant
extant regulations, it would appear that
this provision in the proposed amendment
may create some confusion and is also a
retrograde step. At the same time, the above
proposed amendment may also add to the
compliance burden of the assessee. Further,
there is an ambiguity with regard to the levy
of this penalty, namely, whether it is to be
levied per remittance or per financial year.
Perhaps greater clarity would be required on
these aspects.
[Clauses 48, 73 75]
Co-operative banks liable to deduct
tax at source on interest to members,
interest on recurring deposit liable for
deduction of tax at sources and tax on
interest on enhanced compensation
to be deducted at time of payment –
Section 194A
The existing provisions provided a general
exemption from making tax deduction
from payment of interest by all co-operative
societies to its members. However, there were
other specific provisions mandating the
deduction of tax from the payment of interest
on time deposits by the co-operative banks
to its members. Due to the above provisions a
doubt was created regarding the applicability
of the specific provision mandating deduction
of tax from the payment of interest on time
deposits by the co-operative bank to its
members. The existing provision is proposed
to be amended so as to specifically provide

33 B. K. Khare Co.
that the exemption provided from deduction
of tax from payment of interest to members
by a co-operative society shall not apply to
payment of interest on time deposits by the co-
operative banks to its members. Accordingly,
the co-operative banks will be required
to deduct tax at source on payment of
interest even to its members on such deposits
w.e.f. 1 June 2015.
Under the existing provisions tax at source
was required to be deducted on time
deposits. However, the term time deposits
excluded recurring deposits from its scope.
It is now proposed to include recurring
deposits in the definition of time deposits
for the purpose of deduction of tax
under Section 194A. Accordingly, tax is
required to be deducted even on interest on
recurring deposits subject to threshold limit
of ` 10,000.
As per the existing provision tax was required
to be deducted on interest paid or credited
whichever is earlier on compensation
awarded by the Motor Accident Claim
Tribunal if the amount of such interest
credited or paid during a financial year
exceeds ` 50,000/-. The provisions of
Section 56(2)(viii) and Section 145A
provided interest received on compensation
or enhanced compensation shall be
deemed to be the income of the year in
which such interest is received. In view of
the above deduction of tax on such interest
on mercantile/accrual basis has resulted
into undue hardship and mismatch. It is,
therefore, proposed that deduction of tax
under Section 194A of the Act from interest
payment on the compensation amount
awarded by the Motor Accident Claim
Tribunal compensation shall be made only
at the time of payment, if the amount of
such payment or aggregate amount of such
payments during a financial year exceeds
` 50,000/-.
Under the existing provision the interest
income for the purpose of deduction of tax
by the banking company or the co-operative
bank or the public company is computed
with reference to a branch of these entities.
It is proposed that in case of entities who
have adopted core banking solutions, the
computation of interest income for the
purposes of deduction of tax should be
made with reference to the income credited
or paid by such entities instead of the existing
provision of branch wise computation of
interest.
The amendments are proposed to take effect
from 1 June 2015.
[Clause 42]
Tax is required to be deducted on
payments of plying, hiring or leasing of
goods carriage to contractors who owns
more than 10 goods carriage vehicles –
Section 194C
As per the existing provisions, the person
responsible for paying or crediting any
sum to the account of a contractor
during the course of the business of
plying, hiring or leasing goods carriages is
not required to deduct tax at source once
such contractor provides his Permanent
Account Number.
The existing provision is now proposed to
be amended to provide that the payee
would not be required to deduct tax only in
cases where such contractor owns 10 or less
goods carriages at any time during the year
and furnishes a declaration to that effect
alongwith his PAN to the person paying or
crediting such sum.
The amendment is proposed to take effect
from 1 June 2015.
[Clause 43]

B. K. Khare Co. 34
Section 295 – Enabling provision for CBDT
to notify Rules for giving foreign tax credit
Presently the IT Act does not provide for the
manner of granting credit of taxes paid
outside India. Amendment is proposed to be
brought in Sub-section (2) of Section 295 to
provide that CBDT may make and notify Rules
laying down procedure for granting relief or
deduction under Section 90 / 90A / 91 as
the case may be in respect of any income
tax paid in any country or specified territory
outside India against the income tax payable
under the Income–tax Act.
The amendment is proposed to take effect
from 1 June 2015.
[Clause 78]
Amount of tax sought to be evaded in the
case of penalty where the concealment
of income occurs under general
provisions; but the ultimate tax liability is
paid under MAT – Section 271(1)(c)
As per Section 271(1)(c) of the Act, a penalty
for concealment of income or for furnishing
inaccurate particulars of income is levied on
the “amount of tax sought to be evaded”,
which has been defined as the difference
between the tax due on the income
assessed and the tax which would have
been chargeable had such total income
been reduced by the amount of concealed
income.
However, difficulties have arisen in the
computation of amount of tax sought to
be evaded where the concealment of
income or furnishing inaccurate particulars
of income occurs in the computation of
income under provisions of Section 115JB
or 115JC of the Act and also under the
provisions other than the provisions of
Section 115JB or 115JC of the Act (hereafter
referred as general provisions). In the case
of CIT v. Nalwa Sons Investments Ltd. (327
ITR 543)(Del), CIT v. Jindal Polyester Steel
Ltd. (ITA No. 73 of 2001)(All), Harshvardhan
Chemicals Minerals Ltd. v. DCIT (39 TTJ 212)
(Jai) [confirmed in 259 ITR 212(Raj)], it has
been held that penalty under Section 271(1)
(c) cannot be levied in cases where the
concealment of income occurs under the
income computed under general provisions
but the tax is paid under the provisions of
Section 115JB or 115JC of the Act.
In order to remove the above anomaly
after taking cognisance of the fact that the
assessee gets MAT credit once it is assessed
to tax in future years under the general
provisions of the Act certain amendments
have proposed to Section 271(1)(c).
Accordingly, it is proposed to amend Section
271 of the Act so as to provide that the
amount of tax sought to be evaded shall be
the summation of tax sought to be evaded
under the general provisions and the tax
sought to be evaded under the provisions
of Section 115JB or 115JC. However, if an
amount of concealment of income on any
issue is considered both under the general
provisions and provisions of Section 115JB
or 115JC, then such amount shall not be
considered in computing tax sought to be
evaded under the provisions of Section
115JB or 115JC. Further, in a case where the
provisions of Section 115JB or 115JC are not
applicable, the computation of tax sought
to be evaded under such provisions shall be
ignored. This proposition has been illustrated
in the Section by using a formula.
[Clause 68]
Withholding tax from Salaries
Employer to obtain evidence or proof of
claim for estimating income or computing tax
deductible of the employee – Section 192
The Supreme Court in the case of Larsen
Toubro Limited (Civil Appeal 992 and 993
of 2005) in respect of obtaining supporting
documents for claim of leave travel allowance
had noted that the beneficiary of exemption
under Section 10(5) is an individual
employee and in the absence of a circular

35 B. K. Khare Co.
from the Central Board of Direct Taxes (CBDT)
the employer was not required to collect
and examine the supporting evidence to
the claim made by an employee. However
subsequently the CBDT vide CIRCULAR
NO. 8/2012 [F.No. 275/192/2012-IT(B)],
Dated 5 October 2012 provided that the
employer has to satisfy the obligation that
leave travel (fare) concession is not taxable
in view of Section 10(5) and is required
to obtain and preserve the evidence in
support thereof.
It is now proposed to insert Sub-clause (2D)
to provide that the person responsible for
making the payment referred to in Section
192(1) i.e. Salary, shall for the purposes
of estimating income of the assessee
(i.e. employee) or computing tax deductible
at source under Sub-section (1), obtain from
the assessee evidence or proof or particulars
of prescribed claims (including claims for
set-off of loss) under the provisions of the
Act in such form and manner as may be
prescribed.
Increase in exempt transport allowance
For salaried individuals exemption on
account of transport allowance is proposed
to be doubled to ` 1,600 per month from the
existing limit of ` 800 per month.
This amendment is proposed to take effect
from 1 June 2015.
[Clause 40]
Tax @ 10% required to be deducted
on payment of taxable accumulated
balance due to employee participating
in recognized provident fund in specified
cases – Section 192A and Section 197A
As per Rule 8 of part A of the Fourth Schedule
of the IT Act, accumulated balance due and
payable to an employee participating in a
Recognized Provident Fund (RPF) is taxable
if the employee makes a withdrawal before
continuous service of five years (other
than cases of termination due to ill health,
closure of business etc.) and does not opt
for transfer of accumulated balance to the
new employer. Rule 9 of the above Fourth
schedule provides that where the amount to
be withdrawn from a RPF are taxable in view
of the provisions contained in Rule 8, the
trustees of the RPF are required to calculate
and deduct tax in the specified manner from
the payment of the accumulated balance
to the employee. Considering the practical
difficulties for obtaining the information
regarding the taxability of the employee it
was not possible for the Trustees of the RPF
to comply with the aforesaid provisions.
It is now proposed to insert new Section
192A to provide that in a case where the
accumulated balance due to an employee
of RPF is includible in his total income on
account of provisions of Rule 8 of part A of
the Fourth Schedule of the IT Act not being
applicable, tax at the rate of 10% is to be
deducted at the time of payment of the
accumulated balance due to the employee
in a sum exceeding ` 30,000.
Further, it is also proposed that the
person / employee entitled to receive any
amount of accumulated balance from
the RPF on which tax is deductible should
furnish his PAN to the person responsible
for deducting such tax. In case where such
person / employee fails to provide his PAN,
tax would be deducted at the maximum
marginal rate.
However, a corresponding amendment
is also proposed in Section 197A to allow
person / employee receiving the balance
due from a RPF to file a self-declaration in
form no. 15G stating that his total income
including taxable pre-mature withdrawal from
RPF does not exceed the maximum amount
not chargeable to tax. On furnishing of such
declaration no tax would be deducted by
the trustees of the RPF on payment of dues
to such person / employee.
These amendments will take effect from
1 June 2015.
[Clause 41 49]

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