The Finance Minister (FM) presented the Union Budget 2016 amidst global and domestic headwinds of economic slowdown, declining growth rates and slumping financial markets. The budget majorly focuses on bringing about macro-economic stability and prudent fiscal management, without compromising on growth.
As indicated by the FM in last year's budget speech, the government has started process of gradually phasing out various tax exemptions and incentives available to corporates in the Income-tax Act, 1961. The benefit of deductions for research is proposed to be limited to 150 per cent from April 1, 2017 and 100 per cent from April 1, 2020. Further, exemption available to new SEZ units under Section 10AA is proposed to be restricted to only those units which commence activity before March 31, 2020.
To boost growth and investment in the Indian economy and to balance out the impact of gradual phasing out of incentives, the corporate tax rate has been reduced from 30 per cent to 29 per cent for companies having total turnover of less than five crore rupees. New manufacturing companies incorporated on or after March 1, 2016 are being given an option to be taxed at 25 per cent (plus surcharge and cess), provided they do not claim any profit or investment based deductions/allowances and do not avail accelerated depreciation. The proposal gives boost to 'Make in India' initiative of the government.
The FM has proposed 100 per cent deduction of profits for 3 out of 5 years for start-ups setup during the period April 2016 to March 2019. Further, to encourage indigenous research & development activities and to make India a global research hub, a concessional taxation regime has been proposed for income from patents whereby only 10 per cent tax will be payable on income from worldwide exploitation of patents developed and registered in India.
The FM has addressed the issue of domestic tax evasion by providing a limited period compliance window for declaring black money from June 1, 2016 to September 30, 2016 in respect of undisclosed income pertaining to any Financial Year up to Financial Year 2015-16. The total tax leviable on such declaration shall be 45 per cent (30 per cent income-tax + 7.5 per cent surcharge + 7.5 per cent penalty). Additionally, the declarants will have immunity from prosecution.
A positive step is the proposed expansion of scope of e-assessments in 7 mega cities in the coming years. Under the new system, the cases selected for scrutiny will be scrutinised in an e-environment without personal hearings unless so warranted by the assessee himself or by assessing office for special reasons to be recorded.
Another welcome step is the constitution of High Level Committee to oversee fresh cases where tax officer proposes to assess the income in respect of indirect transfers by applying the retrospective amendment. It is further proposed to amend section 206AA of the Income-tax Act so as to provide that TDS shall not be deducted at a higher rate in case of non-residents not having PAN, subject to provision of alternate documentation in lieu of PAN. The FM has also proposed that Minimum Alternate Tax ('MAT') would not be applicable to foreign companies (which do not have a Permanent Establishment in India) with retrospective effect from 1 April 2001 (Assessment Year 2001-02 and subsequent years).
To bring into tax net income accruing to foreign e-commerce companies from India, it is proposed that any person making payment exceeding 1 lakh in a year to a non-resident, who does not have a permanent establishment, as consideration for online advertisement, will withhold tax at 6 per cent of gross amount paid, as Equalisation levy. Such levy however will apply only to B2B transactions.
Referring to the considerable number of disputes in quantification of disallowance of expenditure relatable to exempt income in terms of Section 14A of the Income Tax Act, the FM has proposed to rationalise the formula in Rule 8D governing such quantification. The said rule is being amended to provide that disallowance will be limited to 1 per cent of the average monthly value of investments yielding exempt income, but not exceeding the actual expenditure claimed.
India has been one of the most active members of the BEPS initiative. In terms of the OECD Report on Action 13 of BEPS Action Plan, the FM has introduced a mandatory three-tiered structure consisting of a master file, a local file and a country-by-country report, with a view to implement a standardised approach to transfer pricing documentation. These will be applicable if the consolidated turnover of the group is over 750 Million Euros. While the rules for Place of Effective Management have been deferred by one year, the FM has reiterated that General Anti Avoidance Rules (GAAR) will be implemented from April 1, 2017.
Overall, the FM has presented a balanced budget with a number of tax proposals which aims for dispute resolution, simplify and rationalise tax laws, bring about fiscal prudence and boost the country's growth.
(The author is Director, Deloitte Haskins and Sells LLP. Maitreyi Ganesh, Senior Associate, also contributed to the story.)