JULY 17, 2014

By Jigar K Shah & Rohit Gupta, Deloitte Haskins & Sells LLP

THE Finance (No.2) Bill 2014, in an attempt to boost manufacturing sector, has proposed amendments granting additional allowance at 15% of the value of the new plant and machinery to small manufacturing industries as well under section 32AC of the Income tax Act, 1961 ("the Act"). Further, investment linked incentives (allowance of capital investment) available to certain specific industries, under section 35AD of the Act, is proposed to be extended to two more industries. Amendment is also proposed for facilitating foreign borrowings by the Indian Companies.

An amendment was made vide Finance Act, 2013 by allowing additional deduction of 15% of the capital expenditure incurred in excess of INR 100 crores, during April 2013 to March 2015, towards acquisition of new assets (plant and machinery). To drill down the benefit to the SMEs engaged in manufacturing, it is proposed to extend the scope of the provision to the companies investing more than INR 25 crores into new plant and machinery during any financial year falling with the period from April 2014 till March 2017.

The benefit of Section 35AD, where 100% of capital expenditure incurred for certain specified businesses is allowed as deduction, has been extended to two other businesses; (i.) laying and operating a slurry pipeline for transportation of iron ore and (ii.) setting up and operating semi-conductor water fabrication manufacturing unit to be notified by CBDT. It is also prescribed that the asset for which benefit is availed under this section has to be used for the specified business for 8 consecutive years. It is also proposed to provide for the situation where any asset for which deduction has been claimed under this section is then used for the business other than specified business during any year. Under such scenario benefit availed in the past year(s), as reduced by the amount of eligible depreciation, will be chargeable to tax as business income.

To facilitate the borrowings from the foreign financial markets conferring low borrowing costs, it is proposed that under Section 115A of the Act, the benefit of lower rate of taxation of 5% on interest income with respect to any 'long term bond' would be extended to 1st July 2017. Further, earlier the benefit was limited to 'infrastructure bonds' in addition to 'loan agreements', which has now been extended to all 'long term bonds'. The benefit is available subject to central government approvals to such bonds and loan agreements. General approval vide CBDT Circular No.7/2012, dated 21-09-2012, was granted in this regard to all ‘infrastructure bonds' and 'loan agreements' subject broadly to fulfillment of FEMA regulations and it may be expected that approval to other 'long terms bonds' would also be granted on the same lines. The applicable rate of withholding to the interest income arising out of such long term bonds would also be 5%. As a consequence change, the payment of interest with respect to such 'long term bonds' is also exempted from the sphere of Section 206AA of the Act wherein the absence of payee's PAN could otherwise result into a minimum 20% rate of tax withholding.