MARCH 05, 2015

By Rajesh C. Patil & Niti Shah Deloitte Haskins & Sells LLP  

PRECEDED by the soaring expectations, it appears that the first full-fledged Budget by the present Government did not leave the corporates dissatisfied.With the thrust on the 'Make in India' initiative, various proposals announced in the Budget have been supported by numerous measures in order to enhance investments in the manufacturing industry. Some of the proposed amendments are outlined below:

General Anti-Avoidance Rules (GAAR)

The provisions relating to GAAR are proposed to be deferred by two years, and further being made applicable in respect of investments made after 31 March 2017.

Corporate Tax Rate

The Finance Minister has proposed to relax the corporate tax rate from 30% to 25% over the next four years starting from financial year 2016-17. This is to be accompanied by rationalization and removal of various kinds of tax exemptions and incentives. It is important to wait and watch which exemptions and incentives the Government intends to do away with and whether it will leave behind any areas of litigation.

Wealth Tax

The abolition of wealth tax with effect from financial year 2015-16 will reduce compliance burden on the taxpayer and administrative burden on the Department. However, the Finance Minister has indicated that the information relating to assets which are currently required to be furnished in the wealth tax return will need to be reported in the income tax return form.

Benefits to the industrial undertakings in backward areas

Welcome proposals have been proposed for setting up industrial undertakings on or after 1 April 2015 in the backward areas of Andhra Pradesh and Telangana to increase manufacturing activities in India. Such undertakings will be eligible to claim not only additional depreciation at the rate of 35% but also additional investment allowance of 15% on new plant and machinery acquired and installed during the period 1 April 2015 to 31 March 2020. The additional investment allowance will be available over and above the existing deduction available under section 32AC of the Act.

Additional Depreciation

Further, it is proposed that in respect of claim of additional depreciation in the manufacturing and power sector, where new plant and machinery is put to use for less than 180 days in the year of acquisition, unutilized additional depreciation will be allowed to carry forward to the succeeding year. This amendment is made effective prospectively from financial year 2015-16. Hence, it is possible that it may not put an end to the pending litigations prior to financial year 2015-16. It is therefore necessary to see how Courts interpret this amendment and the impact it will have on the pending litigations in view of certain favorable judicial pronouncements.

Deduction for employment of new workmen

Encouraging employment generation has received considerable attention in the Budget. It proposes to amend section 80JJAA of the Act and extend the benefit to all taxpayers having manufacturing units and not restricting to corporate taxpayers only. This will now enable even the non-corporate taxpayers to claim deduction under section 80JJA. Threshold relating to number of new regular workmen to be employed has been reduced from 100 to 50. However, no deduction will be allowed if the factory is acquired by way of transfer from any other person or as a result of any business re-organization.

Minimum Alternate Tax (MAT)

Currently, a company which is a member of an AOP is liable to MAT on such share as well. However, the Budget now proposes that companies share in the AOP will be excluded in the computation of book profits and bringing them at par with a partner of a firm, whose share in the profits of the firm is exempt as per section 10(2A) and no MAT is applicable on such profit of the partner. This is a welcome move for the Companies having a share in the AOP. However, controversy on the applicability of MAT in case of foreign companies claiming treaty benefits or foreign companies earning capital gains with no presence in India (other than FIIs) is left unattended.

Royalties and Fees for Technical Services (FTS)

Another welcoming provision for the companies is the reduction in tax rate on income by way of Royalty and FTS in case of non-residents from 25% to 10%. This will reduce the hardship faced by small entities due to the existing high rate of tax of 25%.

Place of Effective Management (PoEM)

The Finance Minister has introduced the concept of PoEM while determining the residential status of the Company under section 6 of the Act. PoEM of the foreign company in India even for a part of the year could result in residence based taxation on its global income and application of all the provisions of the Act including MAT. However, this may not be welcomed by the foreign companies having branch in India, foreign subsidiaries having parent company in India, etc.

Though some of the above amendments may be a welcome measure for the corporate taxpayers, it needs to be seen how the Bill is finally enacted after considering the suggestions made by various stake holders in the ensuing period.