The 2014 Union Budget Analysis


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The 2014 Union Budget Analysis

  1. 1. July 2014 BUDGET ANALYSIS 2014-2015
  3. 3. Budget Highlights 2014-2015 | 3 KEY AMENDMENTS KEY DIRECT TAX AMENDMENTS Roll back of APA’s upto four previous years on finalization; transfer pricing changes No deduction for CSR expenditure Changes to disallowance of expenses for non withholding of taxes No sunset clause for 15% tax on foreign dividends Higher holding period for unlisted shares New deduction for specified business No GAAR deferral (applies from FY 2015-16)
  4. 4. Budget Highlights 2014-2015 | 4 ADVANCE PRICING AGREEMENT - ROLL BACK Amendment Implication Proposed roll-back of Advance Pricing Agreement (“APA”) provisions • The Finance (No 2) Bill, 2014 [“Finance Bill”] has proposed ‘roll back’ of Advance Pricing Agreement (“APA”) provisions • Prior to this amendment, the APA would have been applicable to prospectively to the agreed term which is not exceeding five years • Now, the regulations provide for the acceptance of the APA terms for 4 years prior to the initial year in the agreed APA • Effectively, on acceptance of APA, the tax payer can eliminate Transfer pricing litigation for 9 years (4 pre + 5 post) Much sought amendment would provide relief to companies and help reduce litigation in the field of transfer pricing
  5. 5. Budget Highlights 2014-2015 | 5 ADVANCE PRICING AGREEMENT - ROLL BACK Amendment Implication Transfer pricing proposals • Range concept for determining ALP, instead of arithmetic mean approach (mean will be used in absence of comparables’ data) • Allowing multiple year data for comparability analysis instead of single year only • Transactions between a the assesse and an unrelated domestic party deemed to be “international transaction” if there exists pre- arrangement between overseas related party and the unrelated domestic party • Amendments not in the Finance bill – expected to be moved soon Transfer pricing law brought on line with best practices
  6. 6. Budget Highlights 2014-2015 | 6 ADVANCE PRICING AGREEMENT - ROLL BACK Amendment Implication Advance Ruling and dispute resolution • AAR mechanism to include residents within its scope, subject to thresholds • Scope of Settlement Commission to be expanded to include dispute resolutions, as a one-time opportunity • Amendments not in the Finance bill – expected to be moved soon Helps dispute resolution
  7. 7. Budget Highlights 2014-2015 | 7 EXPENSES INCURRED FOR CSR ACTIVITIES Amendment Implication Clarity on deduction of CSR expenditure • No deduction under section 37 on CSR expenditure. CSR expenditure defined as deemed not to incurred ‘for the purpose of business or profession” • As per the Companies Act, 2013 specified companies are required to expend 2 percent of their profits towards CSR activities. • Non allowance of CSR expenditure to lead to an additional tax cost • The other deduction section, ie section 30 to 36 also require expenditure to be “for the purpose of business or profession” and therefore the claim may be an issue • Section 80G deductions should continue to be available for CSR on fulfillment of 80G conditions Expenditure incurred for CSR activities not to be allowed as a deduction
  8. 8. Budget Highlights 2014-2015 | 8 DIVIDENDS RECEIVED FROM FOREIGN COMPANIES Amendment Implication Concessional rate of tax on dividend received from foreign companies • Sunset clause on concessional rate of 15 percent on dividends received from foreign companies (>26 percent stake ) done away with  Earlier provisions had a sunset clause of March 2014 - This has now been removed Incentive to Indian Company to repatriate from its foreign associate companies
  9. 9. Budget Highlights 2014-2015 | 9 DEDUCTION OF CAPITAL EXPENDITURE INCURRED FOR SPECIFIED BUSINESS Amendment Implication Section 35AD amended to provide deduction for capital expenditure to semi- conductor wafer fabrication manufacturing units • Semi-conductor wafer fabrication manufacturing unit termed as “specified business” and extended an investment based deduction • The investment in the form of capital expenditure would be allowed in the year of acquisition • Acceleration of the deduction claim which would otherwise be allowed as a deduction through depreciation claim Incentive to the semi conductor industry which is capital intensive
  10. 10. Budget Highlights 2014-2015 | 10 INVESTMENT ALLOWANCE UNDER SECTION 32AC Amendment Implication Section 32AC amended to incentivize investment in manufacturing sector by SMEs • The scope of investment allowance has been enhanced, by reducing the threshold limits of procurement of new assets from Rs 100 crores rupees to Rs 25 crores • Available for investment up to to FY 2016-17 • Earlier threshold of Rs 100 crores too high for small and medium enterprises (“SMEs”) • Additional 15 percent deduction in the year of acquisition • New threshold and would augur well for the SME manufacturers • Capex on computers would not be eligible since these are already excluded in section 32AC Capacity and capital expansion of SMEs encouraged by this amendment
  11. 11. Budget Highlights 2014-2015 | 11 UNLISTED COMPANY SHARES Amendment Implication Section 2(42A) amended to enhance the holding period of shares of unlisted companies • Unlisted company shares to satisfy a higher threshold limit of 36 months to be called a ‘long term capital asset’  Earlier the limit was 12 months for a share. (Long term capital gain after 12 month acquisition subject to 20 percent tax)  All share transactions in the unlisted company would now be subject to 30 percent tax ie short term capital gain if within 36 months from the date of acquisition. Also no indexation on short term capital asset Impacts group restructuring
  12. 12. Budget Highlights 2014-2015 | 12 KEY AMENDMENTS TO TDS PROVISIONS Amendment Implication WITHHOLDING TAX PROVISIONS • Non resident payments: Time available till the filing of return of income to pay the withholding taxes and claim payments made to non residents as a deduction (brought on par with the provision for resident payments) • Resident payments: Quantum of disallowance reduced to 30 percent instead of earlier 100 percent of expenditure on which withholding of taxes is not done/paid • All payments to residents to come within the purview of disallowance. Salaries were earlier not subject to disallowance even in case non withholding of taxes • Period of limitation: Time limit to pass an order in case of a TDS default extended to 7 years from the end of the financial year of credit/payment for all resident payments; earlier provisions had a 2 year limit in case TDS returns we filed
  14. 14. Overall Government priorities  Commitment displayed towards introduction of GST  Finance Minister has also assured States Governments that the union government “will be more than fair in dealing with them”  However, no timeframe laid down for GST implementation  Proposal to setup a High Level Committee for ascertaining clarity in tax laws and issue appropriate clarifications within two months  Various measures towards reducing litigation Budget Analysis 2014-2015 | 14
  15. 15. Budget Analysis 2014-2015 | 15 SEZ notification amended SEZ Notification no 12/ 2013 has been amended as under:  Time limit for issuance of Form A-2 specified as 15 working days from the date of submission of Form A-1  Form A-2 to be effective from the date of verification of Form A-1 by the Specified Officer of the SEZ, subject to the Form A-1 being submitted to service tax department within 15 days of its verification. Where Form A-1 is submitted after 15 days, Form A-2 shall be effective from the date of such submission  Where form A-2 is not furnished by the SEZ developer/ unit within 3 months, the service provider would be required to pay service tax  Reasonable to say even for past period benefit should be available from date of approval of Form A1 NASSCOM pre-budget recommendation considered One of the key issues represented by NASSCOM before CBEC in its pre-budget memorandum
  16. 16. Budget Analysis 2014-2015 | 16 Online, mobile advertisements liable to service tax  Sale of space or time for advertisements across media (except print media) deleted from negative list and brought under tax net  New levy extended to advertisements in internet websites, mobile advertisements, out-of-home media, on film screen in theatres, bill boards, conveyances, buildings, automated teller machines, tickets, commercial publications, aerial advertising, etc  Sale of space for advertisements in print media continue to remain in negative list of services  Print media to include books and newspapers as per press and Registration of Books Act, 1867 (ie does not include commercial catalogues) Service Tax on online and mobile advertisements Effective after the after Finance Bill receives Presidential assent
  17. 17. Budget Analysis 2014-2015 | 17 Place of provision of service - Intermediary services Amendment Implication Definition of “intermediary ” amended to include intermediary in goods • Effective October 1, 2014, commission earned from overseas suppliers for facilitating sale/ supply of goods shall be liable to service tax based on the location of intermediary • Significant impact on Indian subsidiaries involved in facilitating sale of goods belonging to foreign principals • Conversely, no tax payable by Indian manufacturers on consideration paid to overseas agents involved in facilitating sale of goods outside India • Interpretative issues in respect of scope of intermediary, where activity involves host of brand building and marketing support • Since “securities‟ are treated as goods for service tax purposes, impact on brokerages to be analyzed Debate on applicability of service tax on intermediaries of software packages laid to rest
  18. 18. Budget Analysis 2014-2015 | 18 CENVAT credit changes Amendment Implication Time limit for availment of CENVAT credit • Effective September 1, 2014, service provider to take credit on inputs and input services within six months from date of invoice • In effect, companies are required to make payment to vendor within 3 months from invoice date and avail CENVAT credit on inputs and input services within six months Re-availment of CENVAT credit on realization of export proceeds • CENVAT credit reversed on account of non- receipt of export proceeds within the specified period or extended period can be re-availed, if the export proceeds are received within one year from the period so specified or extended period
  19. 19. Budget Analysis 2014-2015 | 19 Point of taxation for recipient of service Amendment Implication Point of taxation in respect of services for which service tax is payable as a recipient of service amended • Point of taxation in respect of services for which service tax is payable as a recipient of service, will be the payment date or three months from the date of invoice, whichever is earlier • Earlier, the point of taxation for such services was the date of payment, if paid within six months from date of the invoice or as per general rule • Change effective October 1, 2014
  20. 20. Budget Analysis 2014-2015 | 20 Pre deposit  Filing of stay applications done away with – going forward, mandatory payment of pre-deposit at the time of filing appeals required as below: o 7.5% of the duty demanded or penalty imposed or both for filing of appeal before the Commissioner(Appeal) or the Tribunal at the first stage o 10% of the duty demanded or penalty imposed or both for filing second stage appeal before the Tribunal  Amount of pre-deposit payable subject to a ceiling of Rs 10 crore  Above provisions shall not apply to appeals / stay applications filed up to the date of Finance Bill receiving Presidential assent Mandatory pre-deposit for filing appeal
  21. 21. Budget Analysis 2014-2015 | 21 Interest payable on delay Extent of delay Simple interest rate per annum Upto 6 months 18% > 6 months < 12 months First 6 months – 18% Next 6 months – 24% >12 months First 6 months – 18% Next 6 months – 24% Period beyond 1 year – 30% Effective date of amendment – October 1, 2014 – 18% per annum applicable upto such date • Staggered manner of calculating interest for delay in payment of tax
  22. 22. Budget Analysis 2014-2015 | 22 Exemption from cess on CVD withdrawn  Exemption of cess on CVD pertaining to computers, laptops, printers, keyboards, monitors, packaged software and other specified products withdrawn  Effective rate of duty on import increased from 10% to 10.3%  Amendment brings the rate of duty on domestic manufacture and imports on par, at 10.3% Customs duty Deemed manufacture provisions to apply to software  Activities such as labelling or re-labelling or declaration or alteration of retail sale price deemed to be manufacture with respect to package or canned software  Companies to obtain excise registration and follow multiple procedural compliances as mandated
  23. 23. Budget Analysis 2014-2015 | 23 Impetus to domestic IT manufacturers  SAD exempted on all inputs / components for use in manufacture of personal computers (laptops/ desktops) and tablet computers  Exemption subject to compliance of Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996  Significant relief to manufacturers as this resolves the issue of an inverted duty structure that has been plaguing the industry  BCD at 10% imposed on specific non-ITA bound telecommunication products – inputs and components for manufacture of these products, continue to be exempt Customs duty
  24. 24. Budget Analysis 2014-2015 | 24  This presentation provides general information and guidance as on date of preparation and does not express views or expert opinions of BMR Advisors  The presentation is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this newsletter will be accepted by BMR Advisors  It is recommended that professional advice be sought based on the specific facts and circumstances  This presentation does not substitute the need to refer to the original pronouncements DISCLAIMER