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Budget analysis 2016

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A legal analysis of Budget 2016-17. It contains budget highlights, tax rates, commodity index, budget analysis.

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Budget analysis 2016

  1. 1. The information contained in this booklet is intended to provide only general in- formation and not for the advice on any particular matter. Subscribers and read- ers should seek appropriate professional advice before acting on the basis of any information contained herein. Taxmann. com, its directors, employees, agents, representatives and the authors expressly disclaim any and all liability to any person, whether a subscriber or not, in respect of anything and of the consequences of any- thing done or omitted to be done by any such person in reliance upon the contents of this booklet. No part of this booklet may be repro- duced or copied in any form or by any means graphic, electronic or mechanical including, printing, photocopying, re- cording, taping, or information retrieval systems or reproduced on any disc, tape perforated media or other information storage device, etc., without the written permission of the publishers. This product can be exported only by the Publishers. Breach of this condition is liable for legal action. All disputes are subject to Delhi jurisdiction only. Part - I l Budget Highlights 3-33 Part - II l Tax Rates 34-35 Part - III l Commodity Index 36-37 Part - IV l Budget Analysis 39-201 All Articles available at: www.taxmann.com CONTENTS
  2. 2. www.taxmann.com 3 Feb. 2016 Budget Highlights DIRECT TAXES Tax Rates · Finance Minister, Mr. Arun Jaitley, did not propose any change in the income-tax slab rates. However, various changes have been proposed in the income-tax provisions which would impact the taxable income of an individual. · Rate of surcharge is proposed to be increased from 12% to 15% if total income of an individual/HUF/AOP/BOI/trust exceed Rs. 1 crore. · An additional tax at 10% shall be paid by a resident individual, HUF or a firm on gross amount of dividend, if such dividend received by them from a domestic company exceeds Rs. 10 lakhs per annum. Dividend income is otherwise exempt under Section 10(34), however, it is proposed to be withdrawn in case of rich investors. · Relief under Section 87A is proposed to be raised from Rs. 2,000 to Rs. 5,000 in order to provide for relief to small taxpayers. Relief under Section 87A is available to a resident individual if his total income does not exceed Rs. 5,00,000. For Assessment Year 2017-18, the relief shall be allowed up to income-tax liability or Rs. 5,000, whichever is less. · Existing provisions of section 112(1)(c) provide that in the case of non-resident, income tax is payable at 10% on long-term capital gain arising from transfer of unlisted securities. The issue arose when some courts took a view that shares of private company were not ‘securities’ as defined in this section. Accordingly, the Finance Bill proposes an amendment to provide that income-tax is payable at 10% on long-term capital gains arising from the transfer of unlisted securities or shares of a closely held company.
  3. 3. 4 Feb. 2016 Budget Highlights www.taxmann.com Advance tax · Currently, non-corporates taxpayers pay advance tax in three instalments, viz. @30%, 60%, and 100% of tax on or before 15th September, 15th December and 15th March of each fiscal year respectively. The Finance Bill, 2016 proposes to treat the non-corporates at par with corporate taxpayers. In other words, non-corporate taxpayers shall be required to pay advance tax in four installments’, viz; 15%, 45%, 75% and 100% of tax on or before 15th June, 15th September, 15th December and 15th March respectively. · Earlier the taxpayers opting for presumptive taxation scheme under Section 44AD were not liable to pay advance tax. Further, these taxpayers were not liable for interest under sections 234B and 234C. It is now proposed that such taxpayers shall also pay the advance tax on or before 15th March of each previous year. Consequently, interest for default and deferment of advance tax under Section 234B and Section 234C respectively, shall also be levied. TDS/TCS · Section 206AA is proposed to be amended so that the withholding tax at higher rate shall not apply in case of a non-resident subject to prescribed conditions. Currently such exemption is given only in respect of payment of interest on long-term bonds as referred to in Section 194LC. · In order to rationalize the rates and base for TDS provisions, the threshold limit and the rates of deduction of tax at source have been revised substantially. The reduction in the rate of TDS and increase in threshold limit have been proposed in line with recommendations of the Justice Ishwar Committee on Tax Reforms. · The existing provision of Section 194-I provides the threshold limit of Rs.1,80,000 for deduction of tax at source. However, there may be cases where tax payable on recipient’s total income, including rental payments will be nil. Thus, the Finance Bill proposes to provide an option to the landlords to file declaration in Form 15G/15H for non-deduction of tax at source. · TCS is proposed to be levied at 1% in case of sale of goods or services, if value thereof exceeds Rs. 2 lakhs.
  4. 4. 5 Feb. 2016 Budget Highlights www.taxmann.com · TCS is proposed to be levied at 1% in case of sale of Motor vehicle, if value thereof exceeds Rs.10 lakhs. Presumptive Taxation Scheme · Currently, the presumptive tax regime does not apply to an assessee engaged in specified profession [as referred to in Section 44AA(1)]. A new Section 44ADA is proposed to be inserted for computing professional income on presumptive basis at 50% of gross receipts. Professionals can take benefit of such presumptive Scheme if their receipts do not exceed 50 lakh rupees. · Under existing provisions of Section 44AD eligible assessee can take benefit of presumptive taxation Scheme if his turnover or gross receipts in previous year does not exceed an amount of one crore rupees. Such threshold limit has been proposed to be increased from one crore rupees to two crore rupees. · If partnership firm is computing its business income on presumptive basis, it is proposed that salary and interest paid to its partners shall not be allowed as deduction from such presumptive income. · As a measure against misuse of presumptive taxation scheme, it is proposed that where an assessee declares profit on presumptive basis under Section 44AD for any previous year but does not declare profit on presumptive basis for subsequent five years, he shall not be eligible to claim the benefit of presumptive taxation again for next five years subsequent to the year in which the profit has not been declared in accordance with Section 44AD. Accounts and Audit · The threshold limit for audit under Section 44AB has been proposed to be increased to Rs. 50 lakhs from existing Rs. 25 lakhs in case of specified professions. · It is proposed that a taxpayer covered under new proposed section 44ADA [presumptive taxation scheme for specified professionals], shall get its accounts audited if he claims that the profits and gains from the profession are lower than the presumptive income and his income exceeds the maximum amount which is not chargeable to income-tax.
  5. 5. 6 Feb. 2016 Budget Highlights www.taxmann.com House Rent or Interest on house loan · Section 80EE proposes an additional deduction of up to Rs. 50,000 every year in respect of interest on housing loan. Such deduction shall be allowed to the first time individual buyers of a residential house property, if: a) Value of residential house property does not exceed Rs. 50 lakh; b) Amount of loan does not exceed Rs. 35 lakh; and c) The loan is sanctioned between 01-04-2016 and 31-03-2017. The proposed deduction shall be in addition to deduction of Rs. 2,00,000 allowed under section 24 of the Act. · An individual can claim deduction under section 80GG if he is paying house rent but not receiving any HRA from the employer. The least of following is allowed as deduction: a) Rent paid in excess of 10% of total income; b) Rs. 2,000 per month; or c) 25% of total income. The existing limit of Rs. 2,000 per month is proposed to be increased to Rs. 5,000 per month. · An assessee is allowed to claim deduction of up to Rs. 2,00,000 in respect of interest on loan taken for acquisition or construction of self- occupied house property, subject to certain conditions, inter-alia, house property has been acquired or constructed within a period of 3 years from the end of the financial year in which loan was taken. In view of the fact that housing projects often take longer time for completion, it is proposed that the deduction shall be available if property is acquired or constructed within 5 years from the end of the financial year in which capital was borrowed. Salary · Presently, any contribution made by the employer to the provident fund account of an employee is not charged to tax if it does not exceed 12% of salary. It is proposed that contribution in excess of 12% of salary or Rs. 1,50,000, whichever is less shall now be charged to tax in the hands of the employees as salary.
  6. 6. 7 Feb. 2016 Budget Highlights www.taxmann.com · Any amount contributed to superannuation fund by an employer is treated as perquisite in hands of employee and chargeable to tax if the amount of contribution exceeds Rs. 1,00,000. It is proposed to raise the limit of employer's contribution from Rs. 1,00,000 to Rs. 1,50,000. Capital Gains · The scope of Section 50C was extended w.e.f. A.Y. 2010-11 to the transaction which were executed through agreement to sell or power of attorney. However, the present provisions of section 50C do not provide any relief where the seller has entered into an agreement to sell the asset much before the actual date of transfer of the immovable property and the sale consideration has been fixed in such agreement. To deal with such situation, the provision of Section 50C is proposed to be amended to provide that where the date of an agreement (fixing the value of consideration) for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value as on the date of the agreement shall be deemed to be the full value of consideration of the property. However, such provision shall apply only in a case where the amount of consideration referred to therein, or part thereof, has been paid by account-payee cheque or RTGS, etc., on or before the date of the agreement for transfer of such immovable property. · Section 54GB proposes that long-term capital gains arising from transfer of residential property of individual or HUF shall not be charged to tax if such capital gain is invested in shares of an eligible start-up. Such exemption shall be available if: a) Individual or HUF holds more than 50% shares of such start-up; and b) Such investment is utilized by the start-up to purchase new assets before due date of filing of return by investor. · A new Section 54EE is inserted to provide for exemption up to Rs. 50 lakhs for long term capital gains invested in units of funds set up by Government to promote start-ups. Exemption shall be reversed if amount invested is withdrawn within 3 years from date of making investment in specified funds. Further, if assessee takes any loan and/or advance against such investment then he is deemed to have transferred such specified asset on the date on which such loan or advance is taken. · It is proposed that no tax shall be levied on capital gain arising on redemption of Sovereign Gold Bond issued by the RBI under Sovereign
  7. 7. 8 Feb. 2016 Budget Highlights www.taxmann.com Gold Bond Scheme, 2015. However, any transfer of such bond shall be charged to tax. · Any benefit provided to an individual by way of allotment of shares for free or at concessional price is taxable as income from other source, if value of such benefit exceeds Rs. 50,000. However, it is proposed that no tax shall be charged if such allotment is made in: a) A scheme of business re-organization of co-operative bank; b) In a scheme of demerger; and c) In a scheme of amalgamation (if amalgamating company is an Indian Company) · Indexation benefits are proposed to be extended to all assessees in respect of Sovereign Gold Bond, 2015. It is further proposed that in case of a non-resident, any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond, shall be ignored for the purpose of computation of full value of consideration. Equalisation levy · Considering the potential of new digital economy and the rapidly evolving nature of business operations it became essential to address the challenges in terms of taxation of digital transactions. Accordingly, a new Chapter, titled “Equalisation levy” is proposed to be inserted in the Finance Bill to provide for an equalization levy at the rate of 6% of the amount of consideration for specified services [online advertisement services] received or receivable by a non-resident not having PE in India, from resident in India who carries on business or profession, or from a non-resident having PE in India. · Further, it has been provided that no such levy shall be made if aggregate amount of consideration for specified services does not exceed one lakh rupees in any previous year. In order to avoid double taxation, it is proposed to provide exemption under Section 10 for any income arising from providing specified services on which equalization levy is chargeable. Business deductions and expenditures · With a view to ensure the prompt payment of dues to Railways for use of the Railways assets, the provisions of Section 43B are proposed to
  8. 8. 9 Feb. 2016 Budget Highlights www.taxmann.com be expanded to include any sum payable by the assessee to the Indian Railways for the use of railway assets. · It is proposed that specified expenditures subject to Equalization Levy shall be disallowed under Section 40(a)(ib) if such levy has not been deducted or after deduction, has not been paid on or before the due date for filing of return of income. · The existing provision of section 32AC provides for investment allowance of 15% if new assets (plant and machinery) are acquired and installed in the same previous year. It is now proposed that the acquisition of the plant & machinery has to be made in the previous year. However, installation may be made by 31.03.2017 in order to avail of the benefit of investment allowance. The investment allowance shall be allowed in the previous year in which installation is made. · A new section 35ABA is proposed to be inserted to provide for tax treatment of spectrum fee paid by the telecommunication companies. It provides that any capital expenditure incurred on the acquisition of any right to use spectrum for telecommunication services by paying spectrum fee will be allowed as a deduction in equal instalments over the period for which the right to use spectrum remains in force. Concessional tax in respect of income from patents · In order to make India a global R&D hub, the FM has proposed a concessional tax rate at 10 percent on royalty earned from indigenously developed ‘Patent’. In this regard, a new section 115BBF is proposed to be inserted to provide that any income by way of royalty received in respect of a patent developed and registered in India shall be taxable at the rate of ten per cent (plus applicable surcharge and cess) on gross basis. · However, it is provided that the benefit of Section 115BBF shall be available only to a person resident in India, who is the true and first inventor of the patent. · The biggest advantage of the proposed amendment is that the concessional treatment applies not only to the new patents that would be registered but also to the existing patents. Tax on accreted income of certain trusts and institutions · A new Chapter XII-EB, containing Section 115TD, 115TE and 115TF, is
  9. 9. 10 Feb. 2016 Budget Highlights www.taxmann.com proposed to be inserted under the Act to provide that 'accreted income' of a trust or institution registered under section 12AA shall be chargeable to tax at the maximum marginal rates in following circumstances: a) If the trust or institution gets converted into any form which is not eligible under section 12AA; b) If the trust or institution gets merged into any entity which is not eligible under section 12AA; c) If the trust or institution, in case of dissolution, fails to transfer its assets to exempt entities under section 12AA and section 10(23C) (iv), (v), (vi) & (via). · The difference between the fair market value of the assets and liabilities of the trust or institution would be treated as 'accreted income' and tax thereon shall be paid in addition to the income-tax chargeable in respect of the total income of such trust or institution. Tax incentives for start-ups Deduction under Section 80-IAC · A new section 80-IAC is proposed to be inserted to provide for a deduction of up to 100% of the profits derived by an eligible start- up from a business involving innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. · The deduction can be availed by an eligible start-up for three consecutive assessment years out of five years, at the option of the assessee. Furthermore, the deduction shall be available only to start-ups set-up before 01.04.2019. Capital gain exemptions for investment in Start-ups · Section 54GB proposes that long-term capital gains arising from transfer of residential property of individual or HUF shall not be charged to tax if such capital gain is invested in shares of an eligible start-up. Such exemption shall be available if: a) Individual or HUF holds more than 50% shares of such start-up; and b) Such investment is utilized by the start-up to purchase new assets before due date of filing of return of investor.
  10. 10. 11 Feb. 2016 Budget Highlights www.taxmann.com · A new Section 54EE is inserted to provide for exemption up to Rs. 50 lakhs for long-term capital gains invested in units of funds set-up by Government to promote start-ups. Exemption shall be reversed if amount invested is withdrawn within 3 years from date of making investment in specified funds. Further, if assessee takes any loan and/or advance against such investment then he is deemed to have transferred such specified asset on the date on which such loan or advance is taken. Lower tax rate for newly setup manufacturing companies · A new section 115BA is proposed to be inserted in the Act to provide for an option to the newly set-up manufacturing companies incorporated on or after 1.3.2016 to offer their income to tax at 25% (plus surcharge and cess). · However, the option shall be available to underlying companies only when they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation. Other Tax incentives · Deduction under Section 80JJAA is proposed to be allowed to all assesses who are required to get their accounts audited. 30% of emoluments paid to employees would be allowed as a deduction provided emolument per employee per month is less than or equal to Rs. 25,000. However, no deduction is available where Government is paying for EPF of such employees. It is further proposed to reduce the minimum number of days of employment in a financial year from 300 days to 240 days and also the condition of 10% increase in number of employees every year is proposed to be withdrawn. · With a view to incentivize affordable housing sector as a part of larger objective of 'Housing for All', it is proposed to insert the Section 80-IABA in the Income-tax Act so as to provide for hundred per cent deduction of the profits of an assessee developing and building affordable housing projects, if the housing project is approved by the competent authority before the 31st March, 2019 subject to certain conditions as under: a) The project is completed within a period of 3 years from the date of approval; b) The project is on a plot of land measuring not less than 1,000 sq. meters where the project is within 25 km from the municipal limits of four metros and in any other area, it is measuring not less than
  11. 11. 12 Feb. 2016 Budget Highlights www.taxmann.com 2000 sq. meters where the size of the residential unit in the said areas is not more than thirty sq. meters and sixty sq. meters, respectively c) Where residential unit is allotted to an individual, no such unit shall be allotted to him or any member of his family, etc. Transfer Pricing Country-by-Country (CbC) Reporting · Indian transfer pricing provisions are proposed to be amended to incorporate BEPS recommendations. BEPS Action Plans recommend that the countries should adopt a standardized approach to transfer pricing documentation, inter-alia, suggests to maintain documents in following three parts: Country-by-Country Reports, Master File and Local File. · In line with the above recommendations, a new section 286 is proposed to be inserted under the Act requiring maintenance and furnishing of the CbC report by multinational enterprises (MNE’s) having prescribed annual consolidated revenues. · Further, in order to ensure compliance with the CbC reporting requirements, a new section 271GB is proposed to be introduced to penalize taxpayers in the event of default. · In addition to CbC, it is proposed that information and document in respect of the MNE Group (Master File) should also be furnished by a constituent entity of a MNE Group. In this regard a proviso is proposed to be introduced under section 92D, requiring a constituent entity to furnish the information and document relating to the MNE Group as may be prescribed. · In addition, section 271AA(2) has also been introduced proposing a penalty of INR 5,00,000 in case of non-furnishing of the required information/ document to the prescribed authority. Extension of time limit to Transfer Pricing Officer in certain cases · A proviso is proposed to be introduced to section 92CA(3A), requiring extension of the period of limitation for passing an order by a Transfer Pricing Officer ('TPO'), where assessment proceedings are stayed by any Court or where a reference for exchange of information has been made by the competent authority.
  12. 12. 13 Feb. 2016 Budget Highlights www.taxmann.com · In such cases, if the time available with the TPO to pass an order after excluding, the time for which the assessment proceedings were stayed or the time taken for receipt of information, as the case may be, is less than sixty days, then the period remaining with the TPO shall be extended to sixty days. DRP’s order can’t be challenged by revenue · In order to minimize litigations, it has been proposed to omit section 253(2A) and section 253(3A), to do away with the filing of appeal by the Assessing Officer, before the Appellate Tribunal, against the directions of the dispute resolution panel ('DRP'). Foreign Companies · The concept of Place of Effective Management (POEM) which was introduced by Finance Act, 2015 to determine residential status of a foreign company is proposed to be deferred by one year. Hence, the residential status of a foreign company on basis of POEM would be determined only from Assessment Year 2017-18 onwards. · A new Section 115JH is proposed to be introduced to provide immunity to foreign companies from certain compliances if such company’s held to be resident in India for the very first time. It is proposed that provisions relating to computation of income, treatment of unabsorbed depreciation, set off or carry forward of losses, advance tax, TDS or transfer pricing shall apply to said company subject to such modifications or exceptions, as may be prescribed by the Government. · The Finance Minister has propose a retrospective clarificatory amendment that the provisions of MAT, i.e., Section 115JB of the Act shall not be applicable to the foreign companies with retrospective effect from April 1, 2001, if: a) the foreign company is a resident of a country with which India has a DTAA and such company does not have a PE in India; or b) the foreign company is a resident of a country with which India does not have a DTAA and such company is not required to seek registration under any law for the time being in force relating to companies
  13. 13. 14 Feb. 2016 Budget Highlights www.taxmann.com · No MAT shall be leviable on royalty from patent as referred to in new section 115BBF proposed by the Finance Bill, 2016 · The Finance Bill, 2016 proposes to reduce the MAT rate from existing 18.5% to 9% in case of new unit established on or after April 1, 2016 in International Financial Services Center (‘IFSC’), provided such unit derives its income solely in convertible foreign exchange. · As per section 9 of the Act, any income derived through or from a business connection in India is deemed as income accrued or arisen in India. In India, foreign mining companies (‘FMC’) are allowed to trade in rough diamonds through ‘Special Notified Zone (SNZ)’. However, mere activity of displaying of rough diamonds by FMC constitutes as business connection in India, even though no actual sale takes place. Hence, in order to provide relief to FMC, section 9 is proposed to be amended to provide that no income shall be deemed to accrue or arise in India through or from the activities which are confined to display of uncut and unassorted diamonds in a notified SNZ. · To mobilise growth of International Financial Services Centres (IFCS), exemption from capital gain tax has been provided on income generated from transactions occurred in foreign currency on a recognised stock exchange located in IFCS. It is immaterial that STT has not been paid on those transactions. Further, it is proposed that MAT at the rate of 9% is leviable on company located in IFCS if their income is solely earned in convertible foreign exchange. · Eligible Investment Funds: a) As per section 9A, certain activities of an eligible investment fund do not to constitute business connection in India if it satisfies the certain conditions, inter-alia, the fund has to be resident of a country or territory with which India has entered into a DTAA or TIEA. Further, the fund shall not carry on or control and manage, directly or indirectly, any business in India or from India. b) Section 9A is proposed to be amended to relax the above stated conditions. It is provided that the benefit of section 9A shall also be available to a fund established or incorporated or registered outside India in a country or a specified territory as notified by the Central Government. c) Further, it is proposed to be provided that the condition of fund not controlling and managing any business in India or from India shall be restricted only in the context of activities in India.
  14. 14. 15 Feb. 2016 Budget Highlights www.taxmann.com Buy-back of shares · The existing provisions of section 115QA provide for the levy of additional Income-tax at 20% of the distributed income on account of buy back of unlisted shares by a company. · The distributed income has been defined in the section to mean the consideration paid by the company on buy back of shares as reduced by the amount which was received by the company for issue of such shares. · Further, Buyback has been defined to mean the purchase of a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956. · The section 115QA is proposed to be amended to resolve the following controversies:- a) Whether section 115QA would apply to cases where shares were bought back by company under some other provision and not section 77A of the Companies Act, 1956? b) How the issue price would be determined where shares have been issued by the company in tranches for different considerations or issued in lieu of existing shares of another company under amalgamation, merger or demerger? · As regards the first controversy, it is proposed that the provisions of section 115QA shall apply to any buy back of unlisted share undertaken by the company in accordance with the provisions of the law relating to the Companies and not necessarily restricted to section 77A of the Companies Act, 1956. · The second controversy is proposed to be resolved by making rule in this regard. Non-compete fee in case of profession · Compensation paid for restrictive covenant in relation to business is taxable under Section 28(va). However, compensation paid for similar covenant in relation to any profession is not taxable under Section 28(va). Thus, an amendment is proposed to section 28(va) to bring the non-compete fee received/receivable in relation to an agreement for not carrying out any profession shall be charged to tax under the head business or profession.
  15. 15. 16 Feb. 2016 Budget Highlights www.taxmann.com · Further, it is also proposed to clarify that receipts for transfer of right to carry on any profession, which are chargeable to tax under the head "Capital gains", would not be taxable as profits and gains of business or profession. In such a case, it is proposed, that the 'cost of acquisition' and 'cost of improvement' for computing capital gains in respect of transfer of right to carry on any profession shall be nil. Return of Income · It is proposed that filing of return by an individual/HUF/AOP/BOI/artificial juridical person shall be mandatory even if their entire income is exempt from tax under Section 10(38). However, in such case the total income without giving effect to the provisions of Section 10(38) should exceed the maximum exemption limit to require the assessee to file the return of income. · Currently, the belated return can be filed even after expiry of relevant AY, i.e., before expiry of one year from the end of relevant AY or before completion of assessment, whichever is earlier. It is now proposed that belated return cannot be filed after expiry of relevant Assessment Year. Thus, belated return can be filed before the end of relevant AY or before completion of assessment, whichever is earlier. · It is also proposed that return which is otherwise valid shall not be treated as defective return just because self-assessment tax and interest have not been paid on or before date of furnishing of the return. · It has been proposed that belated return can also be revised if there is any omission or wrong statement in the return of income. · Existing provisions of Section 143(1D) provide that processing of return is not necessary in the case where assessee has been served scrutiny notice under Section 143(2). Now it has been proposed that processing of return is necessary before making scrutiny assessment. Appeals · Currently, Single Bench of the ITAT has the power to dispose off the cases pertaining to an assessee if total income as computed by Assessing Officers does not exceed fifteen lakh rupees. In view of the recent increase in monetary limit for filing appeal before the ITAT and to expedite the process of dispute resolution at the level of ITAT, the above limit is proposed to be increased to fifty lakh rupees.
  16. 16. 17 Feb. 2016 Budget Highlights www.taxmann.com · Section 249(2)(b) provides that an appeal before the Commissioner (Appeals) is to be made within thirty days of the receipt of the notice of demand relating to an assessment order. It is proposed that in a case where the assessee makes an application under section 270AA seeking immunity from penalty and prosecution then the period beginning from the date on which such application is made to the date on which the order rejecting the application is served on the assessee shall be excluded for calculation of the aforesaid thirty days period. Assessment · The existing provisions of section 254(2) of the Act provide that the Appellate Tribunal may rectify any mistake apparent from its order at any time within four years from the date of the order. In order to bring certainty in Tribunal’s order, it is proposed that the Appellate Tribunal may rectify any mistake apparent in its order at any time within six months from the end of the month in which the order was passed. · Recently CBDT has launched a project called ‘e-sahyog’. It provides for e-scrutiny of assessment in case of specified taxpayers. Therefore, in order to implement it successfully, a new definition of hearing is being proposed to be inserted. It will include communication of data and documents through electronic mode. · Following changes have been proposed in existing limit of assessment proceedings: a) Time-limit for completion of assessment under section 143 or section 144 proposed to be reduced from 2 years to 21 months from end of the assessment year in which the income was first assessable. b) Time-limit for completion of assessment under section 147 has been proposed to be reduced from 1 year to 9 months from end of the financial year in which the notice of reassessment has been served. c) Time period for giving effect to an order under sections 250 or 254 or 260 or 262 or 263 or 264 or an order of the Settlement Commission under section 245D(4) [where effect can be given wholly or partly otherwise than by making fresh assessment or reassessment] shall be three months from the end of month in which order is received or passed. d) Assessment, reassessment or recomputation made on assessee to give effect to finding or direction contained in order under section
  17. 17. 18 Feb. 2016 Budget Highlights www.taxmann.com 250, 254, 260, 262, 263, 264 or in an order of any court shall be made on or before the expiry of 12 months from the end of the month in which such order is received. e) Assessment initiated on partner of firm in consequence of assessment made on firm under Section 147 shall be proposed to be made on or before expiry of 12 months from end of the month in which assessment order of the firm is passed. f) It is also proposed to make consequential changes in time-limit for completion of assessment or reassessment by the AO in accordance with the extension of time-limit provided to the TPO in certain cases. g) It is also proposed to amend the time-limit for completion of assessment made under Section 153A or Section 153C cases to bring it in sync with the new time-limits provided for other cases. Interest on refund · Section 244A provides for interest on refund at 0.5% for every month or part of a month. Where the return is filed on or before the due date specified in section 139(1), the refund interest would be paid from 1st day of April of the assessment year. The Finance Bill, 2016 provides clarity by specifying that where the return is filed beyond the due date, interest on refund would be granted from the date of furnishing of the return. · It is further proposed that where refund is arises out of self-assessment tax paid under section 140A, such amount shall also be eligible for interest from the date of furnishing of the return or payment of tax, whichever is later, and up to the date on which the refund is granted. · Where refund arises out of appeal effect and there is delay in giving effect to the order beyond the prescribed time-limit, the assessee is entitled to receive an additional interest at the rate of 3% per annum for the period after the date of expiry of the prescribed time-limit and up to the date of grant of refund. Waiver of interest under Section 220 · Where taxpayer fails to pay the demand raised vide Section 156 noticed within 30 days, interest is charged at the rate of 1% per month for the period of delay. Section 220(2A) empowers the Principal Commissioner or Chief Commissioner to reduce or waive of the amount of interest
  18. 18. 19 Feb. 2016 Budget Highlights www.taxmann.com subject to satisfaction of certain conditions. Currently, there is no time limit for disposal of the petition filed by the taxpayers for waiver of interest under section 220(2). · The Finance Bill, 2016 proposes that the order accepting or rejecting the application of the taxpayer must be passed within 12 months from the end of the month in which the application was received. Further, in case of rejection of such application, no such order shall be passed, unless the taxpayer is given an opportunity of being heard. Pass-through status to Securitization Trust · At present, securitizations trusts are required to pay additional tax on income distributed to the investors. This present taxation regime of distribution tax is proposed to be substituted with a new taxation regime to provide pass-through status to the securitization trusts. · Accordingly, a new section 115TCA is proposed to be inserted to provide that the income of securitization trust shall continue to be exempt. However, exemption in respect of income of investor from securitization trust would not be available and any income from securitization trust would be taxable in the hands of investors. Further, securitization trust shall be liable to deduct tax at source while distributing income to its investors at the following rates: a) 25%, if income is distributed to an investor being an individual or HUF resident in India b) Rates in force, if payment is made to a non-resident investor c) 30%, in any other case · Further, present taxation regime is meant only for a trust created for securitization and excludes other entities engaged in the securitization activity. The new taxation regime would cover company, trust, or other entity constituted or established with the sole object of securitization. Penalties Immunity · The Finance Bill, 2016 proposes to insert section 270AA empowering the Assessing Officer to grant immunity from penalty under section 270A (i.e., penalty for under-reporting or misreporting of income).
  19. 19. 20 Feb. 2016 Budget Highlights www.taxmann.com · However, such immunity shall be subject to following conditions: a) the taxpayer pays the tax and interest payable as per the assessment order; b) such payment must be within the specified time-limit; c) he does not prefer an appeal against such assessment order; and d) he makes an application from the end of the month in which the order or assessment was received in the prescribed form. · This immunity, however, will not apply to misreporting of income and could be availed only in respect of under-reporting of income. Failure to maintain books of account · Currently, a penalty of Rs. 25,000 is levied under Section 271A for failure to maintain books of account as required under section 44AA. A clarification is proposed that this penalty could also be imposed even if penalty is levied under section 270A on the taxpayer. Failure to keep documentation for international transaction or specified domestic transaction · Currently, penalty for failure to keep and maintain information and documents of international transaction or specified domestic transaction or maintaining or furnishing incorrect information or document is liable for penalty at 2% of the value of each such transaction. The Finance Bill, 2016 proposes to dispense with the percentage levy of penalty and proposes penalty of Rs.5 lakhs without any lower or upper limit. Penalty for search cases · Presently, section 271AAB provides for penalty ranging from 30% to 90% of the undisclosed income in respect of search cases, where the search is initiated on or after 01.07.2012. · The Finance Bill, 2016 proposes to remove such discretionary penalty range and, hence, proposes penalty at 60% of tax payable in all search cases. Further, a consequential amendment is proposed to section 271AAB(2) to exempt levy of penalty under section 270A, since this section provides for comprehensive penalty in respect of search cases. Penalty for failure in compliance
  20. 20. 21 Feb. 2016 Budget Highlights www.taxmann.com · Section 271 which deals with penalty for failure to comply with the notice issued under section 142(1) or section 143(2) or failure to comply with a direction issued under section 142(2A) is proposed to be inapplicable from Assessment Year 2017-18 onwards. · New Section 270A is proposed to be inserted to deal only with penalty for under-reporting and misreporting of income. It does not deal with the other failures previously dealt with by section 271. · Therefore, it is proposed to amend section 272A to cover failures such as: (i) failure to comply with a notice issued under sections 142(1) or 143(2); and (ii) failure to comply with the direction for audit under section 142(2A). The penalty imposable would be Rs. 10,000 for each such failure. Power to reduce penalty · Presently, section 273A empowers the Principal Commissioner or the Commissioner to use discretion for waiver of penalty imposable on the taxpayer. However, there is no time-limit prescribed for accepting or rejecting the petition for waiver of penalty. · Hence, it is proposed to provide that the order of granting or rejecting immunity from specified penalty must be passed within a period of 12 months from the end of the month in which the application was received. Immunity from penalty if settlement proceedings stands abated · Presently, the proceedings before the Settlement Commission can abate in the circumstances mentioned in section 245HA. The Principal Commissioner or Commissioner may grant immunity from penalty to the taxpayer under section 273AA. However, there is no time-limit within which the application for immunity from penalty is to be decided. · The Finance Bill, 2016 proposes to amend section 273AA by mandating that the Principal Commissioner or Commissioner must pass an order accepting or rejecting the application of the assessee within a period of 12 months from the end of the month in which such application was received. Miscellaneous · Interest on deposit made under Gold Monetization Scheme, 2015 is proposed to be exempted under section 10(15). Further, Section 2(14)
  21. 21. 22 Feb. 2016 Budget Highlights www.taxmann.com is proposed to be amended to exclude the deposit made under the said scheme from definition of capital asset. Accordingly, no capital gain shall be levied. · Various exemptions/deductions, inter-alia, under section 10AA, 35, 80-IA, 80-IB, etc., are proposed to be phased out. · The Finance Act, 2015 had amended the definition of income under section 2(24) to provide that income shall include assistance in the form of subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement by Govt. either cash or in kind . · As a result, grant or cash assistance or subsidy, etc., provided by the Central Govt. for budgetary support of a trust or any other entity formed specifically for operationalizing government schemes will be taxed in the hands of trust. · An exception is proposed to be carved out that subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or State government shall not form part of income. INDIRECT TAXES Krishi Kalyan Cess (KKC) · In order to boost the agriculture sector, the Finance Minister has introduced a new Cess called as the Krishi Kalyan Cess. It shall to be levied @ 0.5% on value of all taxable services. Its proceeds will be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers. The Cess will come into force with effect from 1st June, 2016. Further, Service tax payer can claim input Tax credit of this Cess for payment of the same only. · After introduction of the KKC, the effective rate of service tax will be 15% as, Swachh Bharat Cess (SBC) at 0.5% is also leviable. Summary Chart of Service tax Rates Period Calculation Effective Rate Up to 31/5/15 12% ST + 0.24 EC +0.12% SHEC 12.36% 1/6/15 to 14/11/15 14% ST 14.00% 15/11/15 to 31/5/16 14% ST + 0.5% SBC 14.50%
  22. 22. 23 Feb. 2016 Budget Highlights www.taxmann.com 1/6/16 onwards 14% ST + 0.5% SBC +0.5% KKC 15.00% Infrastructure Cess – New levy · The pollution and traffic situation in the Indian cities is a matter of great concern. In order to deal with the pollution and traffic problems, the Finance Minister has introduced a new levy, called as Infrastructure Cess. It shall be utilized for the purposes of financing infrastructural projects. · It shall be levied on following motor vehicles: Sr. No. Type of Motor Vehicles Rate of Cess 1. Petrol/LPG/CNG driven motor vehicles of length not exceeding 4m and engine capacity not exceeding 1200cc 1% 2. Diesel driven motor vehicles of length not exceeding 4m and engine capacity not exceeding 1500cc 2.5% 3. Other higher engine capacity and SUVs and bigger sedans 4% 4. Three wheeler vehicles, Electrically operated vehicles, Hybrid vehicles, Hydrogen vehicles based on fuel cell technology, Motor vehicles which after clearance have been registered for use solely as taxis, Cars for physically handicapped persons and Motor vehicles cleared as ambulances or registered for use solely as ambulances. Exempt Note: No credit of Infrastructure Cess will be allowed, and credit of no other duty can be allowed to pay it. Section 3 of the Central Sales Tax Act, 1956: When is a sale or purchase of goods said to take place in course of inter-State trade or commerce? · In order to treat a sale or purchase of goods as inter-state sale or purchase, the sale or purchase should occasion the movement of goods from one State to another. · However, if the movement of goods commences and terminates in the same State, it shall not be deemed to be a movement of goods from one State to another State merely because of the fact that in the course of such movement, the goods pass through the territory of any other State.
  23. 23. 24 Feb. 2016 Budget Highlights www.taxmann.com · Now, it has been clarified that if the gas is sold or purchased and transported through a common carrier pipeline or any other common transport or distribution system and in process becomes co-mingled and fungible with other gas in the pipeline or system and such gas is introduced into the pipeline or system in one State and is taken out from the pipeline in another State, such sale or purchase of gas shall be deemed to be a movement of goods from one State to another. Amendment to the Oil Industry (Development) Act, 1974 · The Oil Industry (Development) Act, 1974 (OIDB) is being amended to reduce the rate of Oil Industries Development Cess on domestically produced crude oil from Rs. 4500 PMT to 20% ad valorem OIDB Cess. The amendment to the Act will be effective from the date of assent to the Finance Bill, 2016. Service tax leviable on activities carried out by Lottery Distributor · It has been clarified by amending explanation 2 to section 65B (44) that activity carried out by a lottery distributor or selling agents of the State Government under the provisions of the Lotteries (Regulation) Act, 1998 (17 of 1998), is leviable to service tax. Right to use radio-frequency spectrum is declared service · Assignment by the Government of the right to use the radio frequency spectrum is proposed to be declared service under section 66E and therefore it is made clear that it is not to be treated as sale of intangible goods. Section 67A linked with Point of Taxation Rules (POT) · Section 67A has been amended and linked with the POT Rules and thus harmony has been created. Now, it is expected to settle the disputes regarding applicability of rate of service tax. The POT Rules shall remain relevant for determining rate of service tax as well as due date of payment of tax. Period of limitation for bona-fide assesses extended · Section 73 empowers Central Excise Officer (‘CEO’) to serve recovery notice within 18 months from the relevant date to the person in whose case any service tax has not been levied or paid or has been short-
  24. 24. 25 Feb. 2016 Budget Highlights www.taxmann.com levied or short-paid or erroneously refunded, requiring him to show cause why he should not pay the amount specified in the notice. · Section 73 has been amended to increase the limitation period from 18 months to 30 months for short levy/non-levy/short payment/non-payment/ erroneous refund of Service Tax. Section 75 - Interest on delayed payment of service tax · Interest rates on delayed payment of duty/tax across all indirect taxes are being rationalized and made uniform at 15%, except in case of Service Tax collected but not deposited to the credit of the central government. In such case, the rate of interest will be 24% from the date on which the Service Tax payment became due. Further in case of assessees, whose value of taxable services in the preceding year/years covered by the notice is less than Rs.60 Lakh, the rate of interest on delayed payment of Service Tax will be reduced by 3%. Scenario Proposed Willful default* and value of taxable service in preceding year is less than Rs.60 lakh 21% Willful default and value of taxable service in preceding year is more than Rs.60 lakh 24% Other cases where value of taxable service in preceding year is less than Rs.60 Lakh 12% Other cases where value of taxable service in preceding year is more than Rs.60 Lakh 15% *Willful default- Cases where Service Tax collected but not deposited to the credit of central government Note: The above changes will come into effect on the day the Finance Bill receives the assent of the President. Explanation to section 78A · It is very practical and common that along with invoking penal provision of the Finance Act, personal penalties are also proposed against the officers of the organizations under section 78A of the Finance Act. However, it would sound absurd if the assessee, being company or firm, has concluded the proceedings, whereas the penalty proceedings are not settled with respect to the concerned persons. Consequently, amendment is being introduced by way of an explanation wherein it is clarified that
  25. 25. 26 Feb. 2016 Budget Highlights www.taxmann.com if the proceedings have been concluded against company or firm, then the penal proceedings initiated against the officers of the organization will be deemed to have been concluded as well. Section 89 - Offences and penalties · The power to arrest in Service Tax is being restricted only to situations, where the taxpayer has collected the tax but not deposited it to the credit of the central government, and that too the above a threshold of Rs.2 crore. The monetary limit for launching prosecution is being increased to Rs. 2 crore of Service Tax evasion. Amendment to Section 90 - Cognizance of offences · In case of Ajay Kumar Sandhu v. State of Haryana [2015] 62 taxmann. com 281 (Punjab & Haryana), the Hon’ble Punjab & Haryana High Court held that the Finance Act, 1994, being a special and complete Code, prevails over general provisions of IPC and, accordingly, for alleged non- payment of service tax, department cannot file FIR under provisions of IPC. · In order to remove the loose holes in the provision of Section 90 as we have seen in above case and to wide powers of department, the Finance Minister proposed to omit sub-section 2 to Section 90. Existing sub-section to section 90 provides that an offence even if it is cognizable and bailable as per the provisions of the Code of Criminal Procedure, 1973 shall be non-cognizable and bailable if it was not cognizable as per provision of the Finance Act, 1994. Section 91: Power to arrest · Now, in cases where the assessee is collecting Service Tax above Rs. 2Cr. and not depositing it to the credit of the central government, the Pr. CCE or CCE may authorize the Central Excise Officer, not below the rank of Superintendent of Central Excise, to arrest such all person. Threshold limit of performing artist services increased · The threshold exemption limit of consideration charged for services provided by a performing artist in folk or classical art forms of music, dance or theatre, is being increased from Rest 1 lakh to Rest 1.5 lakh per performance.
  26. 26. 27 Feb. 2016 Budget Highlights www.taxmann.com No exemption on services of transportation of passengers by ropeway, cable car or aerial tramway · Presently, exemption is available on the services of transportation of passengers, with or without accompanied belongings by ropeway, cable car or aerial tramway vide Sl. No. 23(c). This is being withdrawn with effect from 1st April, 2016. Service Tax leviable on Air-conditioned Stage carriage transportation · Presently the negative list entry in Section 66D (o) covers ‘services of transportation of passengers, with or without accompanied belongings, by a stage carriage’. It is proposed to omit the same with effect from 1st June, 2016. But the non-air-conditioned stage carriage transportation is exempted w.e.f. 1.3.2016. Therefore, service tax shall be levied on Air-conditioned stage carriage transportation. No service tax on Construction of low cost houses · Pradhan Mantri Awas Yojana has been launched by the Prime Minister, Narendra Modi that envisages the vision of Housing for all by the year 2022. The service tax exemption has been extended for services provided by way of construction, erection, commission or installation of original works pertaining to low cost houses up to a carpet area of 60 sq.m per house. The housing project is to be approved by the competent authority under the Pradhan Mantri Awas Yojana and under any housing scheme of a State Government. Both are exempted from service tax. Service Tax leviable on services of Senior Advocates · Now, services senior advocates provided to a person ordinarily carrying out any activity relating to industry, commerce or any other business of profession are not exempted and would be liable to service tax. Further also, this tax has to be paid by the service provider i.e. Senior Advocate and not by the receiver of services. No service tax on Services of life insurance business provided by way of annuity · The exemption has been extended for services of life insurance business by way of annuity under the National Pension System regulated by Pension Fund Regulatory and Development Authority of India (PFRDA) under the Pension Fund Regulatory and Development Authority Act, 2013.
  27. 27. 28 Feb. 2016 Budget Highlights www.taxmann.com This exemption is with effect from 01.04.2016 vide entry at sl. no 26(C) of Notification no.25/2012-ST dated 20.6.2012. Service provided by EPFO are exempt from service tax · Employee’s Provident Fund Organization (EPFO) provides savings and contingent payment mechanism for the employees upon retirement, resignation, death, house construction, higher education, marriage, illness etc. The exemption has been extended for services provided by EPFO. This exemption is with effect from 01.04.2016 vide entry at sl. no 49 of Notification no.25/2012-ST dated 20.6.2012 Service provided by SEBI are also exempt · The exemption has been extended for services provided by Securities and Exchange Board of India (SEBI) set up under the Securities and Exchange Board of India Act, 1992 (15 of 1992) by way of protecting the interests of investors in securities and to promote the development of, and to regulate, the securities market. This exemption is with effect from 01.04.2016 vide entry at sl. no 51 of Notification no.25/2012-ST dated 20.6.2012. Others · Services provided by the Indian Institutes of Management (IIM) by way of 2 year full time Post Graduate Programme in Management (PGPM), admissions to which are made through Common Admission Test conducted by IIMs, 5 year Integrated Programme in Management and Fellowship Programme in Management are being exempted from service tax. Rationalization of various Abatements · The restriction regarding availment of credit on input services has been removed. It enables taking of credit on input services, even though abatement is availed for following services: 1. Passenger/Goods Transportation by Rail – credit on input services extended 2. Transportation of Goods in Containers by Rail – credit on input services extended 3. Transportation of goods by Vessel – credit on input services extended
  28. 28. 29 Feb. 2016 Budget Highlights www.taxmann.com · Services provided by foreman to a chit fund under the Chit Funds Act, 1982 are proposed to be taxed at an abated value of 70% [i.e., with abatement of 30%], subject to the condition that Cenvat credit of inputs, input services and capital goods has not been availed. · Abatement rate on tour operator services other than packaged tour is proposed to increase from 60% to 70%, with effect from 01.04.2016. Now the Effective rate of service tax shall be 4.2% of amount charged as increased by Cess (SBC and KKC) ST on Single premium insurance policies is reduced from 3.5% to 1.4% · The service tax liability on single premium annuity (insurance) policies is being rationalized and the effective alternate service tax rate (composition rate) is being prescribed at 1.4% of the total premium charged. Construction/Maintenance services w.r.t. canal, dam or irrigation works exempted for specific period · Presently, such exemption is available to Government, local authority or a governmental authority. The exemption was extended for a specific period from 1.7.2012 to 29.1.2014 to such works undertaken for bodies set-up by Government but not necessarily by an Act of Parliament or the State Legislature. No more reverse charge on services provided by Mutual fund agents · Services provided by mutual fund agents/distributor to a mutual fund or asset management company are being put under forward charge, i.e. the service provider is being made liable to pay service tax. The small sub-agents down the distribution chain will still be eligible for small service provider exemption [threshold turnover of Rs 10 lakh/year] and a very small number will be liable to pay service tax. One Person Company (OPC) and HUF treated on par with individuals and firms · Individuals and partnership firms are given special treatment under rule 6 of the ST Rules, who are allowed to pay tax on quarterly basis upon receipt of service proceeds (up to Rs.50 lacs turnover). This benefit has been extended to OPCs and HUFs.
  29. 29. 30 Feb. 2016 Budget Highlights www.taxmann.com Annual service tax return to be filed · Service tax assessees above a certain threshold will also be required to file an annual return. This change shall come into effect from 1st April, 2016. Amendment to Central Excise Rule 7(4) · There have been constant litigations as regards the date from which interest is payable under section 11AA of the Central Excise Act, 1944 in case of Provisional Assessment under Rule 7 of the Central Excise Rules, 2002. Now, rule 7(4) has been amended, which clearly states that interest is payable under provisional assessment for the period starting with the first day after the due date till the date of actual payment, whether such amount is paid before or after the issue of order for final assessment. This is what the assessees were expecting from the government that the laws be made clear and precise so that there is no scope of any ambiguity and unnecessary travelling of issues up to Supreme Court level. Amendment to Rule 6 of CCR, 2004 · The principles relating to reversal of credit still remain unchanged but Rule 6 has been amended to recognize the concept of “common credit” for the first time and has cleared the ambiguity which existed on the credit of common input services which will prevent litigation in the future. Indirect Tax Dispute Resolution Scheme, 2016 · The scheme is a step towards resolving litigations still pending at the initial level before the first appellate authorities. The scheme, however, does not speak about monetary limits in appeals to which this scheme will apply. Persons opting for the scheme will have to pay the tax along with interest and in case the matter in appeal is related to penalty imposed under the impugned order then 25% of such penal amount will have to be paid. The unique feature of the scheme is that opting under scheme and paying tax and penalty would not render the matter as being decided on merits and would not result in any binding precedent for other cases. The rules for the schemes are yet to be framed. So one will have to wait until the rules are framed under the scheme before a person opts for such dispute resolution scheme.
  30. 30. 31 Feb. 2016 Budget Highlights www.taxmann.com Concept of special warehouse · New section 58A is inserted to vest in the Principal Commissioner of Customs or Commissioner of Customs, power to license a special warehouse wherein dutiable goods may be deposited and such warehouse shall be locked by the proper officer and no person shall enter the warehouse or remove any goods therefrom without the permission of the proper officer. No extension of time is required for unutilized inputs in EOU · Section 61 of the Customs Act used to specify the period for which goods may remain warehoused. Now, the unutilized inputs may remain in EOU, till the same are utilized for manufacture of finished goods. Earlier period of three years was provided. Power to grant exemption from customs duty · Now, there is no requirement of publishing and offering for sale any notification issue, by the Directorate of Publicity and Public Relations of CBEC. Section 47(1) of Customs - Clearance of goods for home consumption · If the proper officer is satisfied that any goods entered for home consumption are not prohibited goods and the importer has paid the import duty, the proper officer may issue an order permitting clearance of the goods for home consumption. Now, the Central Government may, by notification in the Official Gazette, permit certain class of importers to make deferred payment of said duty or any charges. Section 59- Warehousing bond · Bond amount has been increased from twice of the duty amount to thrice of the duty amount and security also will have to be given. Section 73A – Newly inserted section - Custody and removal of warehoused goods · All warehoused goods shall remain in the custody of the person who has been granted a license until they are cleared for home consumption or are transferred to another warehouse or are exported or removed.
  31. 31. 32 Feb. 2016 Budget Highlights www.taxmann.com The provision has been inserted so as to recover the duty either from custodian or importer as may be prescribed to protect the revenue. CORPORATE LAWS Govt. proposes to amend RBI Act to give statutory backing for monetary policy · In the Finance Bill 2016, the Government has proposed to amend the RBI Act, 1934 to set- up a Monetary Policy Committee (‘the Committee’) which shall fix the benchmark interest rate of the Central Bank and set inflation targets. The key proposed amendments to the RBI Act, 1934 are as under: a) Once in every 5 years, the Govt. shall, in consultation with the RBI, determine the inflation target in terms of the Consumer Price Index b) The Monetary Policy Committee shall determine the policy rate required to achieve the inflation target and the decision of the Committee shall be binding on the Bank c) The Bank shall, once in every six months, publish a document to be called the Monetary Policy Report, explaining the sources of inflation; and the forecasts of inflation for the period between 6 to 18 months from the date of publication of the document d) On failing to maintain inflation target, the RBI shall set out in a report to Govt. the reasons for failure to achieve the inflation target; the remedial action proposed to be taken by Bank and an estimate of time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions. Govt. proposes to amend FEMA; empowers adjudicating authority to recover arrears of penalty · A new Section 14A has been proposed to be inserted in the Foreign Exchange Management Act, 1999 which shall empower the adjudicating authority to order an officer not below the rank of Assistant Director to recover arrears of penalty from a person who fails to make full payment of penalty imposed on him under section 13 within 90 days from the date of service of notice for payment of such penalty.
  32. 32. 33 Feb. 2016 Budget Highlights www.taxmann.com · It is also provided that such officer shall exercise all the powers which are conferred on the income-tax authority in relation to recovery of tax and the procedure laid down under the Second Schedule to the said Act shall mutatis mutandis apply in relation to recovery of arrears of penalty under FEMA Merger of three Tribunals for hearing appeals against order of adjudicating authorities · Section 25 of the Prevention of Money-Laundering Act, 2002 (‘PMLA’), which provides for establishment of Appellate Tribunal, has been amended to provide that the Appellate Tribunals established under the ‘Smugglers and ‘Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976’ shall be the Appellate Tribunal for hearing appeals against the orders of the Adjudicating Authority under the ‘PMLA’ and ‘the Narcotic Drugs and Psychotropic Substance Act, 1985’ Government narrows down definition of ‘Foreign Source’ under FCRA · Government has proposed retroactive amendment to the definition of ‘foreign Source’. A proviso has been inserted to Section 2(1)(j)(vi) of the FCRA to provide that if the nominal value of share capital is within the limits specified under the Foreign Exchange Management Act, 1999, then such company shall not be a foreign source even if the nominal value of share capital of a company is more than one-half of such value at the time of making the contribution. lll
  33. 33. www.taxmann.com 34 Feb. 2016 Income Tax Rates for Financial Year 2016-17 Tax Rates 1. Individual Male Tax Rates 1. Taxable Income upto ` 2,50,000 Nil 2. `2,50,000 to ` 5,00,000 10% 3. ` 5,00,000 to ` 10,00,000 20% 4. Above ` 10,00,000 30% Female Tax Rates 1. Taxable Income upto ` 2,50,000 Nil 2. `2,50,000 to ` 5,00,000 10% 3. ` 5,00,000 to ` 10,00,000 20% 4. Above ` 10,00,000 30% Senior Citizen Tax Rates 1. Taxable Income upto ` 3,00,000 Nil 2. `3,00,000 to ` 5,00,000 10% 3. ` 5,00,000 to ` 10,00,000 20% 4. Above ` 10,00,000 30% Super Senior Citizen Tax Rates 1. Taxable Income upto ` 5,00,000 Nil 2. ` 5,00,000 to ` 10,00,000 20% 3. Above ` 10,00,000 30% Plus: l Surcharge: 15% of the Income Tax if taxable income exceeds ` 1 crore. l Education Cess: 3% of the total of Income Tax and Surcharge. Note: Relief under Section 87A is available to a resident individual if his total income does not exceed ` 5,00,000. The relief available shall be 100% of income-tax or ` 5,000 whichever is less.
  34. 34. 35 Feb. 2016 Income Tax Rates for Financial Year 2015-16 www.taxmann.com 2. Co-operative Society: Income Slabs Tax Rates 1. Where the taxable income does not exceed ` 10,000 10% 2. Where the taxable income exceeds ` 10,000 but does not exceed ` 20,000. ` 1,000 + 20% of income in excess of ` 10,000. 3. Where the taxable income exceeds ` 20,000 ` 3,000 + 30% of the amount by which the taxable income exceeds ` 20,000 Plus: l Surcharge: 12% of the Income Tax if taxable income exceeds ` 1 crore. l Education Cess: 3% of the total of Income Tax and Surcharge. 3. Firm/Local Authority: Income Tax: 30% of taxable income Plus: l Surcharge: 12% of the Income Tax if taxable income exceeds ` 1 crore. l Education Cess: 3% of the total of Income Tax and Surcharge. 4. Domestic Company: · Income Tax: 30% of taxable income · Tax Rate is 29% if turnover or gross receipt of the company doesn't exceed Rs. 5 crore Plus: l Surcharge: n 7% of the Income-tax if taxable income exceeds ` 1 crore. n 12% of the income-tax if taxable income exceeds ` 10 crores. l Education Cess: 3% of the total of Income Tax and Surcharge. 5. Foreign Company: Income Tax: 40% of taxable income Plus: l Surcharge: n 2% of the Income-tax if taxable income exceeds ` 1 crore. n 5% of the Income-tax if taxable income exceeds ` 10 crores. l Education Cess: 3% of the total of Income Tax and Surcharge.
  35. 35. www.taxmann.com 36 Feb. 2016 Commodity Index S. No Items Old Excise Duty New Excise Duty Increase / decrease 1. Aerated Beverages 18% 21% increase 2. Cigarettes Rs.3375 per thousand Rs.3755 per thousand increase 3. Gutkha, chewing tobacco and jarda 70% 81% increase 4. Refrigerated containers 12.50% 6% decrease 5. Readymade garments 30% of retail sale price 60% of retail sale price increase 6. Branded readymade garments upto RSP Rs. 1000 Nil [without CENVAT credit] or 6%/12.5% [with CENVAT credit] 2% [without CENVAT credit] or 12.5% [with CENVAT credit]2% increase 7. Metals 2% [without CENVAT credit] or 6% [with CENVAT credit] 2% [without CENVAT credit] or 12.5% [with CENVAT credit] increase 8. Jewellery Nil 1% [without CENVAT credit] or 12.5% [with CENVAT credit] increase 9. Solar lamp 12.50% Nil decrease 10. Aviation Turbine Fuel 8% 14% increase
  36. 36. 37 Feb. 2016 Commodity Index www.taxmann.com 11. Charger/ adapter for supply to mobile phone manufacturers Nil 2% [without CENVAT credit] or 12.5% [with CENVAT credit] increase 12. Inputs, parts and components of mobile to actual user 12.5% / Nil Nil decrease 13. CCTV camera / IP camera, 12.50% 4% [without CENVAT credit] or 12.5% [with CENVAT credit] decrease 14. broadband Modems 12.50% 4% [without CENVAT credit] or 12.5% [with CENVAT credit] decrease 15. Set-top boxes for gaining ac- cess to internet 12.50% 4% [without CENVAT credit] or 12.5% [with CENVAT credit] decrease 16. Set-top boxes for T.V 12.50% 4% [without CENVAT credit] or 12.5% [with CENVAT credit] decrease 17. Electric motor 12.50% 6% decrease 18. Specified parts of Electric Ve- hicles and Hybrid Vehicles 6% Upto 31.03.2016 6% Without time limit no change 19. Hybrid electric vehicle 12.50% 6% decrease 20. Excise duty on sacks and plas- tic bags 12.5%/15% 15% increase 21. railway safety or traffic control equipment 12.50% 6% decrease 22. Ready Mix Concrete 2% [without input tax credit] / 6% [with input tax credit] nil decrease 23. Disposable sterilized dialyzer 12.50% nil decrease
  37. 37. 38 Feb. 2016 Commodity Index www.taxmann.com
  38. 38. www.taxmann.com 39 Feb. 2016 Finance Bill proposes rationalization of TDS rates and threshold limits Sr. No. Section Provision Existing provision Proposed amendment 1. 192A Payment of accumulated balance from provident fund account No TDS if payment does not exceed Rs. 30,000 No TDS if payment does not exceed Rs. 50,000 2. 194BB Winnings from Horse Race No TDS if payment does not exceed Rs. 5,000 No TDS if payment does not exceed Rs. 10,000 3. 194C Payments to Contractors No TDS if payment does not exceed Rs. 75,000 No TDS if payment does not exceed Rs. 100,000 4. 194D Payment of Insurance commission No TDS if payment does not exceed Rs. 20,000 Rate of TDS: 10% No TDS if payment does not exceed Rs. 15,000 Rate of TDS: 5% 5. 194DA Payment in respect of Life Insurance Policies Rate of TDS: 2% Rate of TDS: 1% 6. 194EE Payments in respect of NSS Deposits Rate of TDS: 20% Rate of TDS: 10% 7. 194G Commission on sale of lottery tickets No TDS if payment does not exceed Rs. 1,000 Rate of TDS: 10% No TDS if payment does not exceed Rs. 15,000 Rate of TDS: 5% 8. 194H Commission or brokerage No TDS if payment does not exceed Rs. 5,000 Rate of TDS: 10% No TDS if payment does not exceed Rs. 15,000 Rate of TDS: 5%
  39. 39. 40 Feb. 2016 Analysis of Budget 2016 www.taxmann.com Sr. No. Section Provision Existing provision Proposed amendment 9. 194-I Deduction of tax from payment of Rent No TDS if payment does not exceed Rs. 1,80,000 No TDS even if payment exceeds Rs. 1,80,000 provided landlord furnishes to the payer a self- declaration in prescribed Form. No. 15G/15H. 10. 194LA Payment of Compensation on acquisition of certain Immovable Property No TDS if payment does not exceed Rs. 200,000 No TDS if payment does not exceed Rs. 250,000 11. 194LBB Income in respect of Units of Investment Funds Rate of TDS: 10% Rate of TDS: (a) 10% in case resident (b) Rates in Force in case of non- resident 12. 194LBC Any Payment to an investor in respect of an investment in a securitisation trust (specified in Explanation of section115TCA) - Rate of TDS: (a) 25% in case of resident Individual or HUF (b) 30% in case of other resident payee (c) Rates in force in case of non- resident
  40. 40. 41 Feb. 2016 Analysis of Budget 2016 www.taxmann.com Sr. No. Section Provision Existing provision Proposed amendment 13. 206AA Exemption from Requirement of furnishing PAN to certain non-resident. Exemption from Section 206AA was allowed only in case of payment of interest on long-term bonds as referred to in section 194LC Section 206AA is proposed to be amended to provide exemption from withholding at higher rate in case of other payments made to non- resident as well subject to certain conditions as may be prescribed. 14. 206C Collection of TCS at 1% - Collection of TCS at 1% in case of: (a) Purchase of motor vehicle, if value thereof exceeds Rs. 10 lakhs (b) Purchase of any good or service, if value thereof exceeds Rs. 2 lakhs and the payment thereof is made in cash. lll
  41. 41. www.taxmann.com 42 Feb. 2016 Impact of Budget on Individual taxpayers- Direct Tax Proposals Finance Minister, Mr. Arun Jaitley, did not propose any change in the income- tax slab rates. However, various changes have been proposed in the income- tax provisions which impact the taxable income of an individual. All relevant proposals made for an Individual are as under: (1) Rate of surcharge shall be increased to 15% from 12% if total income of an individual exceeds Rs. 1 crore. (2) An additional tax at the rate of 10% of gross amount of dividend shall be paid by a resident individual, HUF or a firm, if dividend received by them from a domestic company exceed Rs. 10 lakhs per annum. Dividend income is otherwise exempt under Section 10(34), however, such exemption is proposed to be withdrawn in case of rich investors receiving dividend exceeding Rs. 10 lakhs [Section 115BBDA]. (3) Relief under Section 87A is proposed to be raised from Rs. 2,000 to Rs. 5,000 in order to provide relief to small taxpayers. Relief under Section 87A is available to a resident individual if his total income does not exceed Rs. 5,00,000. For Assessment Year 2017-18, the relief shall be allowed up to income-tax liability or Rs. 5,000 whichever is less. (4) Tax shall be collected at source at 1% in respect of following [Section 206C]: (a) Purchase of motor vehicle, if value thereof exceeds Rs. 10 lakhs (b) Purchase of any good or service, if value thereof exceeds Rs. 2 lakhs and the payment thereof is made in cash. (5) No tax on capital gain arising on redemption of Sovereign Gold Bond issued by the RBI under Sovereign Gold Bond Scheme, 2015 [Section 47] (6) Any benefit provided to an individual by way of allotment of shares at free or at concessional price is taxable as income from other source if value of such benefit exceeds Rs. 50,000. However, no tax shall be charged if such allotment is made in:
  42. 42. 43 Feb. 2016 Analysis of Budget 2016 www.taxmann.com (a) A scheme of business re-organization of co-operative bank; (b) In a scheme of demerger; and (c) In a scheme of amalgamation (if amalgamating company is an Indian Company) [Section 56(2)(vii)] (7) Section 80EE proposes an additional deduction of up to Rs. 50,000 every year in respect of interest on housing loan. Such deduction shall be allowed to the first time individual buyers of a residential house property, if: (a) Value of residential house property does not exceed Rs. 50 lakh; (b) Amount of loan does not exceed Rs. 35 lakh; and (c) The loan is sanctioned between 01-04-2016 and 31-03-2017. The proposed deduction shall be in addition to deduction of Rs. 2,00,000 allowed under section 24 of the Act. (8) Presumptive taxation scheme is proposed for a resident individual engaged in the specified profession. The presumptive scheme shall be available if the gross receipts from the profession does not exceed Rs. 50,00,000. The presumptive income shall be 50% of the gross receipts [Section 44ADA]. (9) The threshold limit for audit under Section 44AB has been proposed to be increase to Rs. 50 lakhs in case of specified professions [Section 44AB]. (10) An individual can claim deduction under section 80GG if he is paying house rent but not receiving any HRA from the employer. The least of following is allowed as deduction: (a) Rent paid in excess of 10% of total income; (b) Rs. 2,000 per month; or (c) 25% of total income. The existing limit of Rs. 2,000 per month is proposed to be increase to Rs. 5,000 per month. (11) Section 54GB proposes that long term capital gains arising from transfer of residential property of individual or HUF shall not be charged to tax if such capital gain is invested in shares of an eligible start-up. Such exemption shall be available if:
  43. 43. 44 Feb. 2016 Analysis of Budget 2016 www.taxmann.com (a) Individual or HUF holds more than 50% shares of such start-up; and (b) Such investment is utilized by the start-up to purchase new assets before due date of filing of return of investor. (12) An assessee is allowed to claim deduction of up to Rs. 2,00,000 in respect of interest on loan taken for acquisition or construction of self- occupied house property, subject to certain conditions, inter-alia, house property should be acquired or constructed within a period of 3 years from the end of the financial year in which loan was taken. In view of the fact that housing projects often take longer time for completion, it is proposed that the deduction shall be available if property is acquired or constructed within 5 years from the end of the financial year in which capital was borrowed [24(b)] (13) Section 197A provides that no tax shall be deducted if the payee furnishes to the payer a self- declaration in prescribed Form No. 15G/15H declaring that the tax on his estimated total income would be nil. At present, declaration under section 197A could be furnished only when payee is in receipt of following income: (a) Premature withdrawal from provident fund (b) Interest (c) Dividend (d) Payment in respect of life insurance policy (e) Payment in respect of deposit made in National Saving Scheme It is proposed to amend section 197A to provide that a person who is in receipt of rental income can also furnish self-declaration to the payer for no deduction of tax at source if tax on his total income (including rental income) is nil. (14) Presently, any contribution made by the employer to the provident fund account of an employee is not charged to tax if it does not exceed 12% of salary. It is proposed that contribution in excess of 12% of salary or Rs. 1,50,000, whichever is less shall now be charged to tax in the hands of the employees as salary. (15) Any amount contributed to superannuation fund by an employer is treated as perquisite in hands of employee and chargeable to tax if the amount of contribution exceeds Rs. 1,00,000. It is proposed to amend the said
  44. 44. 45 Feb. 2016 Analysis of Budget 2016 www.taxmann.com section so as to increase the limit of employer's contribution from Rs. 1,00,000 to Rs. 1,50,000. [Section 17(2)(vii)] (16) A new Section 54EE is inserted to provide for exemption up to Rs. 50 lakhs for long term capital gains invested in units of funds set up by Government to promote start-ups. Exemption shall be reversed if amount invested is withdrawn within 3 years from date of making investment in specified funds. (17) Non-compete fee received by an individual for not carrying out any profession is proposed to be charged to tax under section 28. (18) It is now mandatory for an individual/HUF/AOP/BOI/artificial juridical person to file return of income even if their entire income is exempt from tax under Section 10(38). However, in such case, the total income without giving effect to the provisions of Section 10(38) should exceed the maximum exemption limit to require the assessee to file the return of income. [139(1)] lll
  45. 45. www.taxmann.com 46 Feb. 2016 Impact of Budget on Individual taxpayers- Indirect Tax Proposals 1. Excise duty hiked on tobacco products, chewing tobacco and cigarette to be costlier: To discourage consumption of tobacco and tobacco products, FM proposes to increase the excise duties on various tobacco products other than Beedi by about 10 to 15%. 2. Excise duty levied on Branded readymade garments: Branded readymade garments and made up articles of textiles of retails price of Rs.1000 or more would be costly now. Now the manufacturers of above products would be liable to excise duty @ 2% without availing Input tax credit. Earlier manufactures were liable to NIL rate of duty on such product provided non availment of Input Tax Credit. 3. Jewellery will be costlier now: Basic excise duty @ 1% is being imposed on Articles of jewellery excluding silver jewellery and this will have major impact on individuals as well as Golsmiths. Also excise duty on gold bars manufactured from gold ore 4. All services are now costly by 0.5% due to introduction of new Krishi Kalyan Cess: Krishi Kalyan Cess is proposed to be levied with effect from 1st June, 2016 on any or all the taxable services at the rate of 0.5% on the value of such taxable services. Now, the effective rate of Service tax will be @15% and Swachh Bharat Cess at 0.5% is also leviable. 5. ST on Single premium insurance policies is reduced from 3.5% to 1.4%: The service tax liability on single premium annuity (insurance) policies is being
  46. 46. 47 Feb. 2016 Analysis of Budget 2016 www.taxmann.com rationalised and the effective alternate service tax rate (composition rate) is being prescribed at 1.4% of the total premium charged. 6. Uniform Interest rate on delayed payment of Indirect taxes: Interest rates on delayed payment of duty/tax across all indirect taxes is proposed to be made uniform at 15%, except in case of service tax collected but not deposited with the Central Government, in which case the rate of interest will be 24% 7. Riding of Air Conditioned Stage carriage will be costlier, being iable to ST: Now, service of transportation of passengers become taxable as these services are proposed to be omitted from negative list. But such services by a non- air conditioned stage carriage is exempted and therefore only air-conditioned stage carriage will be covered under service tax. 8. Services of transportation of passengers by ropeway, cable car and aerial tramway will be costlier: These services will be taxable as earlier covered under exemption notification but now these services are proposed to taxable and service tax would be levied. 9. No ST on construction services in relation to construction of Housing projects under PMAY: Services by way of construction, erection, etc., of original works pertaining to low cost houses up to a carpet area of 60 sq.m per house in a housing project under Pradhan Mantri Awaas Yojna or any housing scheme of a State Government are being exempted from service tax. 10. Tour operator services other than packaged tour to be cheaper now: Abatement rate on tour operator services other than packaged tour is proposed to increase from 60% to 70%, with effect from 01.04.2016. Now the Effective rate of service tax shall be 4.2% of amount charged as increased by Cess (SBC and KKC)
  47. 47. 48 Feb. 2016 Analysis of Budget 2016 www.taxmann.com 11. Levy of Infrastructure cess to deal with pollution and traffic problems: In order to deal the pollution and traffic problems Finance Minister introduced a new levy called Infrastructure Cess. It shall be lived on Motor Vehicles. Now, Petrol/LPG/CNG /Diesel motors vehicles shall be costlier upto 4%. 12. Certain Services have been exempted from Service tax: ¨ The services of life insurance business provided by way of annuity under the National Pension System (NPS) regulated by Pension Fund Regulatory and Development Authority (PFRDA) of India is being exempted from service tax. ¨ Services provided by "Employees Provident Fund Organization" (EPFO) to employees are being exempted from service tax. ¨ Services provided by the Indian Institutes of Management (IIM) by way of 2 year full time Post Graduate Programme in Management (PGPM), admissions to which are made through Common Admission Test conducted by IIMs, 5 year Integrated Programme in Management and Fellowship Programme in Management are being exempted from service tax. The threshold exemption limit of consideration charged for services provided by a performing artist in folk or classical art forms of music, dance or theatre, is being increased from Rs 1 lakh to Rs 1.5 lakh per performance. lll
  48. 48. www.taxmann.com 49 Feb. 2016 'How to tax e-commerce businesses'? - Equalisation Levy is an answer 1. Background Finance Minister has proposed Equalisation Levy (EL) through Finance Bill, 2016, Chapter VIII. E-commerce companies like Face Book, Google, etc. are growing very fast, earning substantial revenues and some of them are avoiding Income-tax in the Country of Source (COS) as well as Country of Residence (COR). E-commerce business is growing at the fastest rate globally and no Government in the world can allow this business to go tax free. It is now admitted by OECD and other concerned authorities that under the present rules of international taxation, E-commerce companies can escape taxation. The main reason is that under the existing rules of international taxation, COS can tax a non-resident providing E-commerce services only if the non-resident has a permanent establishment (PE) in the COS. E-commerce companies do not need PE in any COS. They can set up the companies in tax havens and avoid COR tax also. For the last few years, there was strong public criticism – in Britain and other European countries - of these companies escaping taxation. In the light of the American and European financial crisis, G20 countries asked OECD to come out with recommendations for necessary modifications in the existing rules so that E-commerce companies also can be taxed. BEPS Action Report No. 1 on Digital Commerce has discussed these issues. It has not made any specific recommendation. However, it has given three different options. One of the options is Equalisation Levy. When a company resident in COS earns revenue from E-commerce business, that company has to pay indirect taxes as well as Income-tax. However, when a non-resident company provides E-commerce services, it escapes Income-tax. Equalisation Levy tries to make a level playing field for both – Resident & Non-Resident.
  49. 49. 50 Feb. 2016 Analysis of Budget 2016 www.taxmann.com 2. Finance Bill Proposals 2.1 Only Non-Resident earners: Equalisation Levy is proposed to be charged only on non-residents of India. Its very purpose is to protect Indian Residents. Hence Indian E-commerce companies like Flipkart, Snap Deal etc. are not liable to Equalisation Levy. If a company is non-resident today and it opens a subsidiary or a PE in India to provide E-commerce services in India; it will be liable to normal Indian Income-tax and it will escape Equalisation Levy. 2.2 Only Services: Equalisation Levy is charged only for services. There is no such tax on goods sold through e-commerce. Simple reason is: Somehow, the rules of international taxation have distinguished goods and services. This weakness in the system continues at present. Finance Minister is not trying to remove a global weakness through its budget proposals. The impact is: Even after the budget is passed, if someone purchases goods on e-commerce platforms, he will not have to deduct Equalisation Levy at source. 2.3 No Characterisation, No PE: EL is so designed that there is no characterisation issue. One does not have to determine whether it is a business income, royalty, or FTS or any other category of income. There is no need to determine Permanent Establishment or any other nexus to India. Simply because a non-resident earns revenue from India he is liable to EL. 2.4 Independent Tax: This is not Income-tax. Chapter VIII of Finance Bill does not become part of the Income-tax law. Like STT, it will remain a separate tax. Hence, Double Tax Avoidance Agreements are not applicable to EL. 2.5 Compliance: 2.5-1 Ideally, the responsibility to pay tax and file EL returns should be on the non-resident. However, enforcing these obligations on a non-resident requires a lot of ground work. Best method of ensuring compliance by Non-Residents who have no PE in India would be – to ask all banks,
  50. 50. 51 Feb. 2016 Analysis of Budget 2016 www.taxmann.com credit card companies and Payment Gateways to deduct EL before making the remittance abroad. However, at present, there is no mechanism under which EL can be deducted by credit card companies from payments made through credit cards. The E-Commerce Committee had a discussion with Reserve Bank of India. And RBI confirmed that at present, it will not be possible to impose TDS through credit cards. (Note: In this article, by the term "TDS" we mean Deduction of Equalisation Levy at Source.) In the circumstances, the only mechanism available to the Government of India was to recover the tax from the Indian resident payer. It may be noted that the present proposal is a work-in-progress. A lot of work needs to be done. Government in collaboration with Reserve Bank of India may work out a mechanism whereby any payment from an Indian resident to a non-resident can be separated if it is an E-commerce payment. Once this step is implemented, EL can be deducted by credit card companies, banks and all payment gateways. Until this is done, a compromise has to be accepted. This is what the Finance Bill proposes. The onus of compliance is on Resident Payers. Under the Finance Bill proposal, Indian resident payers will deduct EL at source and pay to the Government of India. Whole mechanism for charging of tax, payment of tax, filing of returns and assessments – all can be completed on internet. The tax deductor may not have to meet Income-tax department. 2.5-2 Only persons carrying on business or profession and making payment for specified services to non-resident E-commerce companies are liable for deducting EL at source and paying to Government of India. The payment mechanism is simple. From all the payments to a non-resident, tax may be deducted throughout a month. It has to be paid to the Government of India on or before 7th day of next succeeding month. A return of EL needs to be filed after the end of the year on or before a date to be prescribed by EL rules. If the Indian resident assessee does not pay tax to the Government of India, he will be liable to tax, interest and penalty under Chapter VIII of the Finance Act. He will also be liable to disallowance of expenditure from his business income under Section 40(a)(ib). 2.5-3 At present, the non-resident has no responsibility under the law. He does not have to file any tax return nor pay anything. If a resident payer does not deduct EL at source and does not pay to the Government of
  51. 51. 52 Feb. 2016 Analysis of Budget 2016 www.taxmann.com India, it does not mean that the non-resident receiver is then liable to pay the tax. 2.6 Administration: Equalisation Levy will be administered by Income-tax department. 2.7 Scheme of the tax: Chapter VIII: In a very small chapter all the provisions for charging of tax, scope of revenues, liable to tax, collection machinery, assessment, penalty and prosecution, appeals – everything is provided. Hence this chapter is an independent complete chapter by itself. 2.8 Home Consumer: Millions of home consumers and small business consumers utilise internet services like Google, Face Book, What's App etc. Most of us do not make any payment to the service provider. Hence we are not liable to deduct any tax at source. Assuming some home consumer makes payment for any specialised services, he will still not be liable to deduct any tax. This is specifically provided in the charging section – 162 (1) (i). This means that millions of consumers are not at all affected by EL. Even for business payers, the TDS is applicable only if his payment for specified services to non-resident service provider exceeds Rs. 1,00,000 during a financial year. Thus assesses making small payments are exempted from TDS compliance. One Non-Resident may receive – say Rs. 99,000 from ten Indian assesses. Still, he will not suffer any EL. Similarly, one resident may pay Rs. 99,000 to ten non-residents. He will not be liable to deduct EL. It may be noted that the NR E-commerce MNCs earn from Rs. 100 crores to Rs. 5,000 crores from India. For these target companies, the thresholds of Rs. 1,00,000 are so small that any manipulation by increasing companies won't be worthwhile. 2.9 No Double Taxation within India: Once a non-residents income is chargeable to tax under chapter VIII of Finance Bill, 2016, it is exempted from Indian Income-tax under Section 10 (50). Thus, there will be no double taxation of the same income within India. It may be better for the non-resident to be covered under EL rather than under ITA.
  52. 52. 53 Feb. 2016 Analysis of Budget 2016 www.taxmann.com 2.10 No Grossing Up: Under Indian Income-tax Act, Section 195 etc. provide for deduction of Income- tax at source from payments made to non-residents. There are cases when the non-resident insists that the tax should be borne by Indian resident. In such a situation, the Indian resident has to gross up the tax and suffer more. For illustration, if the TDS rate is 10%, in this situation, Indian resident payer will have to suffer 11% tax. Section 163 of Chapter VIII provides for deduction and payment of EL. Section 163 (3) provides that even if Indian resident payer does not deduct EL, he has to make payment of EL to Government of India. Thus, consider that the Indian resident has made a payment of Rs. 100 to the non-resident, he has not deducted any tax at source. He will simply pay Rs. 6 to the Government of India and close the chapter. 2.11 Tax Rate: The rate of tax under EL is only 6%. This is much lower than the normal TDS rates of 10% to 15%. This is an attraction for the non-residents. Instead of suffering a higher rate of tax under Income-tax, they can bear the EL and pay lower tax. Further, there will be no further controversy about characterisation of payment, determination of PE etc. The whole scheme will be simple in administration by the department and compliance by the assessee. The lower rate compensates for the fact that most assessees will not be able to claim credit of EL under the Double Tax Avoidance Agreements. They can ofcourse claim the EL as an expenditure suffered by them but not the relief of full tax adjustments. 2.12 Specified Service: Section 161(h) defines specified service as – online advertisement, provision of digital advertising space etc. and includes any other service as may be notified by the Government. It may be noted that E-commerce is a constantly developing business. There are so many technologies which together make it possible to do global business without PE in COS. Some of them can be listed as: computers, internet, television, mobile phones, satellites, cables, telephones; and a convergence of all these technologies. Each technology in the field of science keeps developing. Convergence of developing technologies provide a huge constantly changing mechanism for developing new businesses. Today traditional businesses conduct
  53. 53. 54 Feb. 2016 Analysis of Budget 2016 www.taxmann.com their business with new technologies. And completely new businesses are developing. In this situation, defining anything as E-commerce would be incorrect. Today's definition in the law will require an amendment within a few years. Recognising this fact, OECD had earlier published its reports under the title – "E-commerce". Present BEPS action reports are calling the same business as "Digital Commerce". Sometime back E-commerce could be conducted only through computers. At that time, no one could imagine international business transacted through telephones. Today, international business through mobile phones has become a reality. It is eminently possible that in three years time, there will be another way of doing international business which is not considered today. Recognising these facts of modern life, the budget proposal defines the services as "Specified Service". This definition can always be expanded by the Government. Thus the law provides for flexibility in line with the kind of business proposed to be taxed. On the whole, Finance Minister has made an efficient and simple proposal to tax giant MNC. Author is a practising chartered accountant from Mumbai. He was a member in both committees appointed by CBDT for E-commerce: the High Powered Committee of 1999-2000; and the E-commerce Committee of 2015-16. lll
  54. 54. www.taxmann.com 55 Feb. 2016 Proposed changes in the Indian Transfer Pricing Regime by the Finance Bill, 2016 Country-by-country reporting and Master File International taxation has assumed the center stage in the arena of taxation. Digital economy and other changes in the way international business is carried out has forced tax policy of G-20 and the Organization of Economic Cooperation and Development ('OECD') member countries to re-examine several aspects related to international taxation. The OECD came out with analysis on Base Erosion and Profit Shifting ('BEPS') identifying 15 action points. Issues relating to transfer pricing have been discussed in Actions 8 to 10 and Action 13. Action 13 has been devoted to "Transfer Pricing Documentation and Country- by-Country Reporting". The report suggests that taxpayers should maintain documents in three parts: Country-by-Country Reports, Master File and Local File. This is driven by the need to have transparency on the part of taxpayers in sharing all facts relevant to international transactions. Though India is not a member of OECD, it has been actively involved in the deliberations on BEPS organized by the OECD. In all interactions with taxpayers Indian tax authorities have been indicating that they are serious about implementing the suggestions by the OECD to the extent possible. It is in line with the above that the Finance Minister has introduced the Country-by-Country ('CBC') reporting and the Master File in the Finance Bill, 2016.Section 286 has been proposed to be introduced in the Income-tax Act, 1961 ('the Act'), requiring maintenance and furnishing of the CbC report. The salient features of section 286 are as follows: · The CbC reporting requirement would mandatorily apply to multinational enterprise ('MNE') Group having annual consolidated revenues exceeding INR 5,395 Crores (equivalent to € 750 Million2) in the previous year 2015-16

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