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Did budget meet expectations of Corporates?

JULY 24,2014

By Lakshit Desai & Deepa Bakhru, Deloitte Haskins & Sells LLP

FINANCE Minister presented the Finance (No. 2) Bill, 2014 in the Lok Sabha on 10 July 2014. This being the first budget of the new Government presented within forty five days of its formation, the Finance Minister probably did not have the sufficient time at his disposal. Therefore, no drastic reforms have been proposed. However, on an overall basis, the Government's focus clearly appears to be to promote growth through infrastructure development and to make taxpayer's life easy with a prudent and stable tax administration.

Finance Minister has made some very welcome policy announcements that will go a long way to bring clarity as well as certainty in tax laws and boost confidence of all the stakeholders. The same have been captured below:

++ Commitment to provide a stable and predictable tax regime that would be investor friendly and spur growth

++ Advance Rulings proposed to be extended to residents taxpayers (above a particular threshold) and additional benches of the Authority for Advance Rulings proposed

++ Enlarge the scope of the Income-tax Settlement Commission to enable taxpayers to approach the Commission for settlement of disputes

++ Set up a High Level Committee to interact with trade and industry on a regular basis and ascertain areas where clarity in tax laws is required

++ High Level Committee to be constituted by CBDT for scrutinizing fresh cases arising out of the retrospective amendments in respect of indirect transfers and not to ordinarily bring retrospective amendments to create fresh liabilities

++ Changes in the Transfer Pricing Regulations

Apart from above, the budget also proposed some welcome changes for the Corporates which are briefly discussed below:

Incentive for investment in specified plant or machinery

The Hon'ble Finance Minister in his budget speech acknowledged the paramount importance of the manufacturing sector for the growth of our economy and its multiplier effect on creation of job opportunities.

With a view to incentivize the manufacturing sector, the Finance Act 2013 had already introduced an investment linked allowance of 15% for corporate manufacturers who invest more than INR 100 crores in new plant and machinery during the period 1 April 2013 to 31 March 2015. The said deduction/allowance was therefore allowable for assessment years 2014-15 and 2015-16 only.

Considering the importance of growth of manufacturing sector for the purpose of employment generation and development of the economy, it has been proposed to reduce the threshold limit for investment in new plant and machinery to claim the above deduction/allowance.

It is proposed that if a company acquires and installs a new plant and machinery amounting more than INR 25 crores during any financial year, then it shall be eligible for a deduction of 15% of the cost of such new asset for the relevant financial year. This benefit is proposed to be applicable from 1 April 2014 to 31 March 2017. Further, the taxpayers who are eligible for the claiming deduction in respect of the aggregate investment of INR 100 crores under the existing provisions till 31 March 2015 will continue to be eligible for the deduction for financial year 2014-15 even if the investment in the said financial year is below the proposed investment limit of INR 25 crores.

This is a welcome change whereby mid-size manufacturers would now be able to avail the benefit of the investment allowance.

Extension of the sunset date under power sector

It has been proposed to extend the sunset date for 10 year tax holiday for the power sector undertakings to 31 March 2017. This will give much needed relief to the turbulent power sector and will help the investors to plan their investments better.

Roll back mechanism in the Advance Pricing Agreement (APA) scheme

APA scheme introduced in the year 2012 is a taxpayer friendly move and has therefore received a good response. The Hon'ble Finance Minister has proposed to strengthen the administrative set up of APA to expedite disposal of applications.

The Hon'ble Finance Minister has also proposed the introduction of a “Roll back” mechanism in the APA scheme whereby the APA entered into for future transactions will also be applicable to international transactions undertaken for a period not exceeding four years preceding the first year for which the APA applies. The APA rollback mechanism is proposed to be effective from 1 October 2014.

This roll back mechanism is a welcome move and will give the much required certainty to the stakeholders and help in reducing litigation.

Lower rate of tax on certain dividend received from foreign companies to continue without any sunset clause

An incentive in the form of lower rate of tax i.e. 15% (on gross basis) was provided for dividend received by an Indian company from a foreign company in which the Indian company is holding 26% or more of the equity share capital. This lower rate was applicable only for the assessment year 2012-13 and was subsequently extended twice to AY 2013-14 and 2014-15 respectively.  It has now been proposed to continue the said benefit of lower rate of tax for all the assessment years beginning assessment year 2015-16 without any sun set clause.

This will encourage Indian companies to repatriate the foreign exchange into India on regular basis and will ensure stability.

Concessional rate of withholding tax of 5% on certain interest extended

A concessional rate of withholding tax of 5% on interest (paid by an Indian company to non-residents on monies borrowed by it in foreign currency from a source outside India) applicable in respect of long term infrastructure bonds has now been extended to all long term bonds. Moreover, the permissible period of borrowing is also proposed to be extended by two years. In other words, the concessional rate of withholding tax will now be available in respect of borrowings made before 1 July 2017.

The concession in the withholding tax rate will be an incentive for the companies to avail the low cost long-term foreign borrowings.

Foreign Direct Investment (FDI)

The Finance Minister has proposed to enhance FDI limits in defence and insurance sectors and to relax conditions for FDI in real estate development projects.

Further, it has been proposed to allow manufacturing units with FDI to sell their products through retail including E-commerce platforms without any additional approval.

The above liberalisation of FDI regulations should enable the respective sectors to get much needed foreign equity which in turn will help in the growth of the economy as well as in generating employment.

Real Estate Investment Trust and Infrastructure Investment Trust

In recent past, the Securities Exchange Board of India (SEBI) issued a consultative paper on two new categories of investment vehicles namely, the Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (Invit) for public comments. The regulations for these trusts are yet to be notified. In order to provide certainty on tax front, a specific taxation regime is proposed for these two new categories of investment vehicles (“business trusts”).

++ The units of the business trusts (which would be subject to STT) are proposed to be treated at par with listed equity shares and accordingly the long term capital gains would be exempted whereas Short term capital gains would be taxable @ 15% in the hands of investors.

++ The Sponsor would exchange their shares in the SPV for the units of the business trust. Sponsors are proposed to be taxed on disposal of units in the business trust and not at the time of exchange of shares in SPV. However, such units would not be entitled for the preferential tax treatment discussed above.

++ Capital gains on disposal of assets by the business trust shall be taxable in the hands of the business trust at applicable rates. However, if such capital gains are distributed, then the component of distributed income attributable to capital gains would be exempt in the hands of the unit holder.

++ Any dividend distributed by the SPV would be subject to Dividend Distribution Tax (DDT) and would accordingly exempt in the hands of the business trust. Similarly, the dividend component of the income distributed by the business trust to the unit holders will also be exempt.

++ The interest income received by the business trust from SPV will enjoy pass through status i.e. the same will not be taxable in the hands of business trust. However, the interest component of the income distributed the business trust would be taxable in the hands of unit holders and would accordingly be subject to withholding tax. Any other income of the business trust shall be taxable at the maximum marginal rate.

These structures have been aimed at reducing the pressure on the banking system while also making available fresh equity. These investment vehicles are also expected to attract long term finance from foreign and domestic sources including the NRIs. This is one more welcome move for the growth of real estate sector.

However, some of the below mentioned amendments were a setback for the Corporate sector.

Dividend distribution tax (‘DDT') on grossed up amount of dividend

Currently, DDT is levied at the rate of 15% on any amount declared, distributed or paid by way of dividend to its shareholders. In order to ensure that tax is levied on a proper base, it has been proposed that the DDT should be computed on the grossed up amount of dividend (after adding the tax impact of 15%) instead of amount paid net of taxes.

The proposed change would result in the increase in the total outgo on account of DDT for the companies declaring dividend.

Retrospective amendments

Certain retrospective tax amendments were introduced in the year 2012 on indirect transfer of shares, definition of royalty etc.

The Finance Minister in his budget speech has committed not to ordinarily bring about any change retrospectively which creates a fresh liability on taxpayers. It has also been proposed to set up a High Level Committee to scrutinize all fresh cases arising out of the retrospective amendments in respect of indirect transfers and coming to the notice of tax officers.

However, the Hon'ble Finance Minister has decided to let the pending cases (in connection with the retrospective amendments) reach their logical conclusion. Further, there is no clarity whether the proposed High Level Committee will also scrutinize fresh cases in respect of retrospective amendments relating to the definition of “royalty”. This is a major setback for corporates and foreign investors facing litigation on these issues. The general expectation was that the Government would take some concrete steps in this direction and make them prospective.

General Anti-Avoidance Rule (GAAR)

Another setback for corporates from the budget is in terms of GAAR which is going to come into effect from 1 April 2015. There is no certainty on the nature and more so on the implementation of GAAR. It was expected that GAAR provisions would be deferred since the government does not have an appropriate implementation mechanism in place for the same. Although the Finance Minister did mention that the Government will review the Direct Taxes Code (DTC) in its present shape and will take a view in the matter, there was no discussion on GAAR in the budget.

Corporate social responsibility (CSR) expenditure

The Companies Act, 2013 requires certain companies to spend a specified percentage of their profits on CSR activity. It has been proposed in the budget that the CSR expenditure would not be allowed as business expenditure under section 37 on the ground that such expenditure is not incurred for the purpose of business. This is contrary to the expectations of the corporate sector which was looking forward to a clarification allowing such expenditure especially given the fact that it is a statutory levy.

Conclusion

The Government has attempted to bring out various measures to boost economy and investor confidence with the clear focus to promote growth through infrastructure development as well as clarity and certainty in tax policies. It appears that through these reforms, the Government is trying to make taxpayer's life easy with a prudent and stable tax administration. However, at the same time, the budget seems to have fallen short of the taxpayers' expectations on various other points including much needed clarity on retrospective amendments carried out in 2012 and GAAR. The taxpayers are hoping that the next budget will adequately address them.


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