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Analysis of Union budget 2014: Investment Environment and Tax Aspects

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The Hon’ble Finance Minister Shri. Arun Jaitley on 10.07.2014 presented the Union Budget 2014 and mentioned that slowdown in Indian economy has to be seen in the context of slowing global economic growth. He admitted there are green shoots of recovery seen in the global economy but mandate of “sab ka saath, sab ka vikaas” to be followed in order to leave no stone unturned in creating a vibrant India.

The central theme now is “minimum government, maximum governance” with emphasis on women, children, minorities, backward classes and disabled persons. Impetus has also been given to create opportunities for youth for skill development. Health, Education, Rural, Manufacturing, Infrastructure and affordable housing have been kept on the priority list. Capital Markets initiatives like liberalization of ADR, GDR regime, introduction of uniform KYC norms, one single operating DMAT account has also been touched upon.
Overall the budget has consolidated and rationalized the things and has tried to plug in the tax loopholes. Further there has been a clear acknowledgment now that retrospective taxation in future will not be resorted. All fresh cases arising out of the retrospective amendments of 2012 in direct transfers will be scrutinized by High level committee to be constituted by the CBDT before any action is initiated in such cases. The proposal to allow resident taxpayers to obtain an Advance Ruling in respect of their income tax liability is also a welcome move.

In our view, the delivery and governance of the budget with adherence to timelines will be a critical factor. Though a lot is needed but new Government has certainly laid down a roadmap of fiscal consolidation and stable growth in times to come.

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Analysis of Union budget 2014: Investment Environment and Tax Aspects

  1. 1. “The policy of NDA Government is to promote Foreign Direct Investment (FDI) selectively in sectors where it helps the larger interest of the Indian Economy” “The Country is in no mood to suffer unemployment, inadequate basic amenties, lack of infrastructure and apathetic governance” “We can’t leave behind legacy of debt…. Can’t go on spending which would be financed by taxation at a future date” “To provide all households in the country with banking services, a time bound programme would be launched, it would particularly focus on empower the weaker sections of the society, including women, small and marginal farmers and labourers” BIG PICTURE Extracts from FM Budget speech
  2. 2. INTRODUCTION The Hon’ble Finance Minister Shri. Arun Jaitley on 10.07.2014 presented the Union Budget 2014 and mentioned that slowdown in Indian economy has to be seen in the context of slowing global economic growth. He admitted there are green shoots of recovery seen in the global economy but mandate of “sab ka saath, sab ka vikaas” to be followed in order to leave no stone unturned in creating a vibrant India. The central theme now is “minimum government, maximum governance” with emphasis on women, children, minorities, backward classes and disabled persons. Impetus has also been given to create opportunities for youth for skill development. Health, Education, Rural, Manufacturing, Infrastructure and affordable housing have been kept on the priority list. Capital Markets initiatives like liberalization of ADR, GDR regime, introduction of uniform KYC norms, one single operating DMAT account has also been touched upon. The Fiscal deficit for the current year has been contained at 4.5 per cent of GDP and for the year 2014-15 is estimated at 4.1 per cent. By 2016-17 fiscal deficit is targeted to be brought down to 3 per cent. On the other hand, it is food inflation that is worrying, and he said that all possible steps will be taken to augment the supply side to meet the growing demand for food items. The Finance Minister has showed greater worry towards black money and has admitted that bold steps are required to enhance economic activities and spurring growth in the economy. Given this backdrop, the Finance Minister identified following focus areas in Budget 2014-15:  Additional Resource Mobilization  Measures to Promote Socio-economic Growth  Relief and Welfare Measures  Widening of Tax Base and Anti Tax Avoidance Measures  Rationalization Measures We are providing herein the snapshot of the major budget 2014 proposals with our comments
  3. 3. The key Investment environment and Tax aspects proposed in Budget 2014 are summarized below. S.No. Proposal Impact Individual 1 Income tax exemption limit has been raised from INR 2 lakhs to INR 2.50 lakhs and that for senior citizens has been raised to INR 3.00 lakhs from INR 2.50 lakhs Individuals having taxable income up to INR.4 lakhs and making investment of INR 1.50 lakhs under section 80C will go out of the tax net. 2 Investment limit under section 80C of Income Tax Act, 1961 has been raised to INR 1.50 lakhs from INR 1.00 lakhs 3 Under PPF Scheme, the annual ceiling is proposed to be increased to INR 1.50 lakhs from the present limit of INR 1.00 lakhs This will encourage individuals to save more under PPF schemes and result in long term tax free wealth creation. 4 Deduction limit on account of interest on loan in respect of self occupied house property raised from INR 1.5 lakh to INR.2 lakh. This will provide relief and reduce the burden from high cost of borrowings and rising value of house property. 5 Kisan Vikas Patra is re-introduced This step will encourage people, who may have banked and unbanked savings to invest in this instrument. Corporate 1 Corporate tax rates and cess remain unchanged 2 For tax purpose only, it has been proposed the adoption of the new Indian Accounting Standards (IndAs) by the Indian companies from the financial year 2015-16 voluntarily and from the financial year 2016- 17 on a mandatory basis. This will curb the accounting jugglery practices and lead the Indian Financial code more transparent 3 Unlisted security and a unit of a mutual fund (Other than an equity oriented mutual fund) shall be a short term capital asset if it held for not more than thirty six months instead of twelve months. This will increase tax incidence for both resident as well as non resident transferors on transfer of such unlisted securities and may also have downward impact on debt mutual funds which constitute 75% of the Mutual Fund Industry This is also negative for M&A / PE industry. 4 Central Government may notify income computation and disclosure standards to be followed in specified situations This step will bring transparency 5 Income and dividend distribution tax to be levied on gross amount instead of amount paid net of taxes. This amendment shall take effect from 1 October 2014. This increases the rate of DDT from 17% to 20% (Approx). 6 Concessional withholding tax rate of 5% has been provided up to 1st July 2017 for interest on long term This will encourage raising of long term foreign borrowings by Indian companies.
  4. 4. foreign currency denominated bonds (and not only Infra bonds) . The amendment shall take effect from October 1, 2014. 7 Only those CSR expenditure that is of the nature described under section 30 to Section 36 of the Income Tax Act, 1961 may be allowable as deduction subject to fulfillment of the conditions prescribed in those sections. Disallowance of CSR expenditure as not being general expenditure incurred for business purpose provides clarity though not a welcome move 8 Disallowance of TDS default will be limited to 30% of expenditure, further the deductor would be able to claim a deduction for payments made to non-residents in the relevant year itself, if tax is deducted during that year and is paid on or before the due date for filing of the income return. This would improve TDS compliance Applicable on both Individual / Corporate 1 Any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset. Such sum shall be chargeable to income-tax under the head ‘income from other sources’ if negotiations do not result in transfer of such capital asset and such sum is forfeited. Tax incidence will be preponed to the year of forfeiture (instead of year in which the capital asset is transferred) and also it could be taxable at higher rate of 30%. Capital Market 1 Income arising to foreign portfolio investors from transaction in securities to be treated as capital gains. This would help in to remove uncertainties related to characterization of income of Foreign Portfolio Investors and encourage their fund managers to shift to India. It is a big boost to capital markets considering that FII’s are the major Value drivers MSME 1 Fund of Funds with a corpus of INR 10,000 crore for providing equity through venture capital funds, quasi equity, soft loans and other risk capita Will facilitate startup capital and risk capital for startup companies 2 Corpus of INR 200 crore to be set up to establish Technology Centre Network. Successful execution of all these promises will give a significant boost for entrepreneurs and SME’s and facilitate the promotion and development and enhancing the economic growth of the country. 3 Promised to develop an entrepreneur-friendly legal bankruptcy framework for SMEs that will enable easy exit 4 To incentivize small entrepreneurs in the manufacturing sector, the government has also proposed to provide investment allowance at the rate of 15 percent to a manufacturing company that invests more than INR 25
  5. 5. crore in any year in new plant and machinery. This benefit will be available for three years i.e. for investments up to March 31, 2017. Transfer Pricing 1 Introduction of “Roll Back” mechanism in the current APA (Advance Pricing Agreements) programme. For a period upto 4 years. This amendment will take effect from 1 October 2014 Accordingly, an APA, subject to prescribed conditions may also cover previous four years preceding the first year of APA i.e. 2012. This will provide further certainty and will align the regulations with the global best practices. 2 Range concept to be introduced for determination of arm’s length price. Concept of arithmetic mean to continue where number of comparables is inadequate. Appropriate rules will be prescribed in due course. This measure allows more flexibility and will go a long way in clearing out Transfer Pricing related litigation. 3 Proposed to use multiple year data for comparability analysis This will help Taxpayers to obtain accurate and reliable current year data while preparing the Transfer Pricing documentation. 4 A transaction between a taxpayer and an unrelated person that satisfies the conditions provided under Section 92B of the Act shall be deemed to be an international transaction, whether or not such unrelated person is a non-resident. This will work towards plugging some anomalies in the scope of the Transfer Pricing provisions where back to back agreements were entered to avoid Transfer Pricing. Foreign Direct Investment (FDI) 1 The composite cap in the insurance sector to be increased up to 49 per cent from 26 per cent with full Indian management and control through the FIPB route This is another stepping stone towards growth for the insurance sector. 2 The composite cap on foreign investment in Defence manufacturing to be raised to 49% with Indian management and control subject to an approval from FIPB This is another stepping stone towards growth for the defence sector. Infrastructure 1 Requirement of the built up area and capital conditions for FDI to be reduced from 50,000 square metres to 20,000 square metres and from USD 10 million to USD 5 million respectively for development of smart cities. This will help in development of infrastructure sector. 2 Real Estate Investment Trusts (REITs) and a modified REITs structure, i.e. Infrastructure Investment Trusts (InvITs) be introduced and given tax pass through status to avoid double taxation. This step will promote funding for the infrastructure sector,
  6. 6. INDIRECT TAXES In an attempt to boost the domestic manufacture, to encourage new investment in various sectors and to address inverted duty structure for specified sectors. Key changes taken are summarized below:  SERVICE TAX  The introduction of service tax on sale of ad space across platforms (except print media)  Services by air-conditioned contract carriages and technical testing of newly developed drugs on human participants brought under service tax.  Exemption available for specified micro insurance schemes expanded to cover all life micro-insurance schemes where the sum assured does not exceed Rs. 50, 000 per life insured.  For safe disposal of medical and clinical wastes, services provided by common biomedical waste treatment facilities exempted.  Services provided by Indian tour operators to foreign tourists in relation to a tour wholly conducted outside India to be taken out of the tax net and CENVAT credit for services of rent-a-cab and tour operators to be allowed to promote tourism.  Services provided by the Employees’ State Insurance Corporation for the period prior to 1st July 2012 exempted, from service tax.  To encourage prompt payment of service tax, simple interest rates per annum payable on delayed payments, are prescribed as follows; Extent of Delay Simple Interest rate per annum Up to six months 18% More than six months & and upto one year 18% for the first six months, and 24% for the period of delay beyond six months More than one year 18% for the first six months, 24% for second six months, and 30% for the period of delay beyond one year Above rates will be effective from 1st October 2014
  7. 7.  EXCISE o To finance Clean Environment initiatives, Clean Energy Cess increased from Rs.50 per tonne to Rs.100 per tonne. o Excise duty on cigarettes, pan masala, gutka, chewing tobacco and aerated waters containing added sugar has been increased. o Reduction in excise duty for specified food package industry from 10% to 6% o Concessional excise duty of 2 percent without CENVAT benefit and 6 percent with CENVAT benefit on sports gloves.  CUSTOMS o Basic customs duty is being reduced on fatty acids, oils, glycerine, petrochemicals, certain wind energy equipment etc. Cathode ray TVs, LCD and LED TV panels of below-19 inches and certain inputs used in solar power equipment are being fully exempted from basic customs duty. o Import of smart card will now attract higher CVD. o Imported flat-rolled stainless steel products will attract a higher basic customs duty. Overall the budget has consolidated and rationalized the things and has tried to plug in the tax loopholes. Further there has been a clear acknowledgment now that retrospective taxation in future will not be resorted. All fresh cases arising out of the retrospective amendments of 2012 in direct transfers will be scrutinized by High level committee to be constituted by the CBDT before any action is initiated in such cases. The proposal to allow resident taxpayers to obtain an Advance Ruling in respect of their income tax liability is also a welcome move. In our view, the delivery and governance of the budget with adherence to timelines will be a critical factor. Though a lot is needed but new Government has certainly laid down a roadmap of fiscal consolidation and stable growth in times to come.
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