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Budget 2015-2016 : 'Dream Budget'?

Published on Sat, Feb 28,2015 | 15:41, Updated at Mon, Mar 02 at 17:50Source : Moneycontrol.com 

Budget 2015 has introduced several measures, inter alia, addressed towards ease of doing business, manufacturing, predictability of tax, infrastructure, poverty alleviation and financial inclusion. Is this a budget for the middle class or one for India Inc? Has the Finance Minister managed to pull off the ultimate balancing act between populism and fiscal prudence and keep all stakeholders happy? To answer all these questions and many more, The Firm gets some quick reactions and perspectives from the experts.

Nishith Desai, Founder & Managing Partner, Nishith Desai Associates

Truly, a ' Dream Budget'. Great for foreign investors from a regulatory and tax perspective. Removal of difference between FPI and FDI, tax pass through for AiF, elimination of MAT for FPIs, no existence of PE in India for foreign managers, reduction in corporate tax rate to 25%, reversal of tax on foreign tech transfer from 25% to 10%, reformation of REIT regime, deferment of GAAR, refinement of indirect transfer tax and removal of archaic Wealth Tax makes this truly a 'Dream Budget'.

Sonu Iyer, Partner & Human Capital Leader, EY  

The budget presented by the FM today demonstrated a fine balance between populism and Fiscal prudence. Harsh and definitive measures to monitor black money are very welcome.

Richard Rekhy, CEO, KPMG

The Finance Minister has come out with a pragmatic Budget which is directionally focused at achieving growth and keeping the fiscal prudence in mind.  The Focus is on Ease of Doing Business in India and increased infrastructure spends.  Measures like New Bankruptcy legislation, startup entrepreneur’s funds, GST rollout by FY 2016, deferral of GAAR will definitely support the cause of Ease of Doing Business in India.

Mr. Nihal Kothari, Executive Director, Khaitan & Co.

Finance Minister has indicated his strong commitment to introduce Goods and Service Tax by 1st April 2016 to create Indian common market and eliminate cascading effect of taxes on indigenous manufacture of goods and services. This process has been initiated by increasing the service tax rate from 12.36% to 14%, merging the Education Cess in Excise and Service Tax rates and pruning negative list of services. In the process services will become more expensive.

To promote indigenous manufacture, inverted duty structure has been corrected by reducing customs duty of 22 input items. Measures like relaxing the time limit for availing CENVAT credit from 6 months to 1 year and expediting service tax and excise registration will facilitate ease of doing business.  

Samir Kanabar, Tax Partner, EY

For the Infrastructure sector, the announcements are quite pragmatic. Covering Sovereign risk, National Infrastructure Fund, Plug and Play, Corporatization of Ports, utilization of savings on oil prices for infrastructure, etc demonstrates commitment to invest by Govt and boost entrepreneurial confidence for private or foreign players to invest.  It’s a paradigm shift and a whole new architecture has been drawn to give a big push to infrastructure sector.

Harish HV, Partner, Grant Thornton India LLP

“The budget was broadly in line with expectations and can be termed as direction setting budget for the Indian Economy giving stability and direction to policy and tax proposals.  There are a number of measures addressed towards predictability of tax, infrastructure, poverty, financial inclusion, ease of doing business & manufacturing and creating institutional frameworks which are bold and welcome.

The tax has also taken bold steps towards black money parked in overseas destinations and we hope similar measures would be taken for domestic black money which is probably a larger problem.

There are a lot of follow-up actions promised and a significant amount of fine print that seems to be there in the tax proposals which hopefully do not give major shocks.

The increase in service tax will impact all sections and would add to the burden of cost to all sections of the society.”

Harishanker Subramaniam, Partner & Indirect Tax Leader, EY

Budget on expected lines from indirect tax perspective – clear affirmation of GST in April 2016, addressing inverted duty structure by reducing basic customs duty on inputs, intermediates and reduction in SAD to incentivise manufacturers. Increase in service tax rate to 14% and pruning of negative list as a precursor for GST, Cenvat credit time limit increased from 6 months to 1 year.

Girish Vanvari, National Head of Tax, KPMG

Announced in the backdrop of strong domestic macroeconomic fundamentals and soaring expectations, Budget 2015 is a fine inclusive balancing act.  The Budget boldly resorts to a higher fiscal deficit of 3.9% to enable provision for increased outlays on various rural initiatives, socio economic schemes, infrastructure needs and more so enhanced allocations to states as per the fourteenth Finance commission recommendations.  As far as tax proposals are concerned, the Budget lays down a clear roadmap for implementation of GST  and attempts to deal with Black money in a credible manner .  Deferral of GAAR by 2 years and its applicability to investments made thereafter, reduction of tax rates for royalties and technical services to 10%, non applicability of MAT to FIIs, clarity on taxation of REITs , invits and AIFs are welcome steps. A roadmap for a futuristic tax regime of lower corporate rates and phasing out of exemptions over the next four years   heralds an era of a transparent tax regime of no surprises.   The lack of fiscal space did not permit meeting of the popular expectations of increase in slabs and housing interest deduction for individuals or abolition or reduction of MAT for SEZs and infra companies.  But all in all, a fine balancing inclusive futuristic budget.  

Gokul Chaudhri, Leader, Direct Tax, BMR & Associates LLP

Finance Minister has delivered a progressive and to a large extent helpful Union Budget that has materially delivered on investor expectations on key tax aspects – firstly bringing a much needed benign trend for corporate tax to 25 percent over 4 years, reaffirmation of GST for coming financial year, and deferral of General Anti Avoidance Regulations.  The fine print of the bill will be important to know if the effective tax rate stands amended this year as surcharges having been raised and the road map for exemptions and tax holidays to be eliminated needs to be studied.”

“Abolition of ineffective wealth tax and final burial of the Direct Taxes Code removes needless regulations – clearly a bold message to discard the bad legacy. The accompanying promises for implementation of the recommendation of the Tax Administrative Reforms Commission, cleaning up of the rules for sensible indirect transfers regulations, lowering of the royalty tax withholding rates to competitive levels and indicative clarification on dividend distribution taxes will bring much needed clarity and certainty in the tax laws.  By proactively legislating that there will be no Minimum Alternate Tax on select category of investors, amending the provisions to remove impediments for Real Estate Investment Trusts and defining rules for “no permanent establishment” on presence of fund managers, potential dispute and litigation has been avoided, and capital flows and investment has been welcomed.”

“The crack down on illegal holding of assets and income outside India, was expected, but the emphasis and aggression of the Finance Minister on this subject is clearly to address the political constituency that there will be incentives for investors and material adverse consequences for evaders. The hoped clarity on taxation of e-commerce continues to elude.

Satya Poddar, Tax Partner – Policy Advisory Group, EY

Reconfirmation of the GST implementation on April 1, 2016 is a welcome news.

The divergence of excise duty rate (12.5%) and service tax rate (14%) is going to recreate complexity associated with different tax rates and should have been avoided, especially if it is for only a short period of 1 year until the introduction of GST.

Increase in the service tax rate to 14% suggests that the GST rate would not be the one single rate of 12% recommended by the 13th Finance Commission.  It could now well be in the range of 20%+, which implies substantial exemptions from the GST base.

Divergence between the corporate tax rate (25%) and the top personal tax rate (34.6%) is also an important issue.  Even though the corporate tax rate is reduced, the combined effective rate, including the DDT, would now be closer to the top personal tax rate of 34.6.

Vijay Iyer, Transfer Pricing Leader, EY

From a transfer pricing perspective the increase in threshold for domestic TP compliance is a very positive move. It would help to reduce the compliance burden for taxpayers and would absolve a lot of small and medium enterprises from the pain of domestic TP compliance.

Samir Gandhi, Partner, Deloitte Haskins & Sells
While on TP , increase in threshold limit for application of domestic transfer pricing from Rs 5 Cr to 20 Cr is welcome, one would have expected some more refinements in this aspect e.g. application of domestic transfer pricing  only in cases where transactions are not tax neutral – transactions between a tax holiday entity & non- tax holiday entity.  In all other cases, it will not apply.
 
Considering that transfer pricing disputes are of significant concern and where one cannot yet say that India has reached the ‘SWEET SPOT’ –  we have some distance to travel in this area.

It would have been very positive if there would have been a proposal to reduce the TP disputes by setting up a mechanism where tax payer & tax authority can agree for a WORKABLE ANSWER & not necessarily a RIGHT OR WRONG ANSWER
 
Transfer pricing disputes are complex & fact based and it can be best resolved via such a settlement mechanism rather than in tribunals and courts. The scheme can provide for waiver of penalty and interest and there won’t be any further appeal by either tax payer or tax authority.

July 2014 Budget well intended provisions on introduction of range, multi-year analysis and roll back for APAs could not be implemented so far as the necessary frame work and rules are yet to be notified.

Introduction of concept of range and multi-year analysis will reduce the transfer pricing disputes significantly. While retrospective in Indian tax laws is always received with negative connotations, retrospective application to the above concepts of range and multi-year analysis to pending disputes at various appellate forums can contribute to settle the disputes in a fair and reasonable manner and importantly within a short time frame.

While APA and MAP options to resolve transfer pricing disputes have worked well there is dire need to increase the staff strength at the above cells to accelerate the excellent work done so far by the revenue authorities in this area. This can again lead to prevention and resolution of TP disputes.

The government sent a very positive signal by not only accepting the Bombay High Court judgment on the matter of issue of shares but also added to the sentiment by directing the filed officers not to make similar adjustment for the current assessment years for the tax year ending on 31 March 2011. Similar guidance or directions from Board of Taxes on the issues of marketing intangibles, management charges and royalties can further boost the sentiments of the corporate sector.

There were some expectations that the government will outline India’s positions on OECDs - BEPS Actions Plan. The High Power Committee set up by the Finance Minister in the Budget of 2014 needs to play a more active role by involving all stakeholders on an ongoing basis under BEPS action plan and other emerging international tax (e.g. ecommerce taxation) and transfer pricing (e.g. country by country reporting) issues so as to avoid any disputes during assessments . This can also give a sense of participation to tax payers and add to collaborative efforts by all stake holders to make the“Make in India” campaign successful.

Aseem Chawla, MPC Legal

The Union Budget, 2015 recently delivered by the Finance Minister, does indicate adoption of a reformatory approach by the Government. Macro economic reforms have been the highlight of the Union Budget 2015, with expected GDP of 7.4% and Current Account Deficit of 1.3% of GDP.

The Modi led Government has demonstrated seriousness about bringing back black money in the instant budget. The proposal for introduction of a comprehensive law to deal with money stashed overseas is indeed a bold step, including provisions such as, offences being non-compoundable, non- eligibility to approach the Settlement Commission, penalty being levied at 300% of the tax evaded etc.

A notable highlight of the Direct Tax Proposals is the rationalization of the provisions dealing with taxation of indirect transfer, wherein, certain safeguards have been inserted. However, the much expected proposal for doing away with the retrospective amendment on indirect transfer didn’t see the light of the day.

Whilst corporate tax rates are proposed to be reduced from 30% to 25% in the next four years, the same shall be made good by withdrawal of certain exemption provisions. This proposal does seem to be a measured step aimed towards reducing disputes arising due to tax exemption claims as well as boosting corporate sentiments.

Other significant proposals include abolishment of wealth tax, levy of increased surcharge of 12% on the super rich, reduction of the tax rates specified for royalties and fees for technical services from 25% to 10%, rationalization of provisions of MAT on Foreign Institutional Investors etc.

Overall, the Union Budget 2015 may be viewed as a wholesome budget which is a positive step towards growth and progress of the country.

Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP

“Overall, it is a positive set of proposals from an indirect tax standpoint with focus on the larger GST reform agenda and certain near term measures to address industry issues.  There is a definitive move towards GST implementation, with emphasis on multiple themes in the budget speech like make in India, ease of doing business, realignment of tax rates and cesses with a repeated focus on implementation of the tax reform from April 1, 2016.  Near term measures to address issues around accumulation of tax credits, inverted duty structure, time limit for availing credits, maintenance of documentation online including digital invoices are steps in the right direction.  There is a welcome urgency and a roadmap for bringing back black money into the mainstream, thereby providing possible buoyancy to indirect tax revenue collections.”

“However, much of the reforms process outlined in the budget proposals needs to be realized through tangible steps over the year.  It remains to be seen how reforms unfold and take shape in terms of GST implementation and TARC recommendations.  Impact on prices would be interesting to watch with budget proposals withdrawing service tax exemptions on construction of airports and ports, government services, increase in service tax rates and higher additional duties on petrol and diesel.”

Haigreve Khaitan, Managing Partner, Khaitan & Co

“At first blush, it seems to be a positive and well thought out budget with a long term vision in mind. The overarching theme seems to have been to attract foreign investment into India and tackle the menace of undisclosed overseas assets and income. Some key concerns such as GAAR, taxation of indirect transfer of assets and MAT seem to have been addressed, albeit partially. The move to lower corporate tax rates while curbing exemptions is also a welcome measure. Overall, this Budget may well be the catalyst that shall fuel a faster growth trajectory for the economy.”

Daksha Baxi, Executive Director, Khaitan & Co.

I would give a thumbs-up to this budget, which has, in substance covered and taken care of almost all the issues to a greater extent. The FM needs to be commended for his ingenuity in the manner in which he has addressed the major issues.  Some of the provisions which I have found very encouraging are as follows:

•         The Finance Minister and through him, the PM has passed the test today, through the historic budget speech that the FM made in the Indian Parliament.

•         There is hardly any recommendation made by all the stakeholders, which has not been addressed

•         On the Direct tax side, the FM has rightly recognised the need to give 4 year road map to enable businesses to do their long term planning. He has proposed to bring down the corporate tax rate to 25% over the next 4 years, starting next fiscal year. Correspondingly, he proposes to remove all exemptions and deductions, which distort the actual collection of corporate tax and lead to avoidable litigation.

•         No reduction in tax rates for individual tax payer but increased a host of exemptions and announced that those concessions and exemptions will continue to be available.  These help put more money in the hands of the individuals, to increase spending power and savings. By this he has achieved dual purpose: spur demand and increase availability of retail saving for investments.

•         Further, he has increased avenues of investment for retail saving by promising to deepen bond market through Public Debt Management Agency  and announcement of other funds where retailers can invest

•         GAAR has been deferred by 2 years and its applicability will be prospective, i.e. from 1 April 2017. All domestic and more importantly, foreign investors now have time to prepare themselves for GAAR. Though we hoped for it to be postponed by 5 years, this is acceptable, especially if the Govt also adopts the recommendations of the TARC reports and cleans up tax administration in the mean while.

•         Reduction of withholding tax rate on royalties and fees for technical services from 25% to 10% should bring a lot of cheer to industries across sector where intellectual property of all kinds, technology and technical expertise is required for establishment of high quality businesses in India.

•         The FM has put to rest all speculations with regard to the Direct Tax Code Bill by saying that all major proposals therein have been incorporated in the Income Tax Act, 1961 and there is significant jurisprudence under the Income Tax Act, and there is no merit in going ahead with the DTC.

•         For levy of capital gains tax on indirect transfer of Indian asset (Vodafone type transactions) he has said that this is getting cleaned up in the detailed provisions which are expected to be in the Finance Bill and it is hoped that the concerns are properly addressed.

•         While he has clarified non-applicability of MAT to the capital gains realised by FPIs, the question of applicability of MAT to other foreign companies with Indian source income remains to be addressed, it is hoped that the Finance Bill has details to address this. Otherwise it may be interpreted that MAT has always been intended to apply to foreign companies. This would be negative to say the least.

•         The FM has recognised the inability of the Government to bring the black money stashed abroad, back to India in absence of specific legislation. Introduction of law which will give the government ability to cease or confiscate Indian assets for the moneys lying in foreign accounts illegitimately, should certainly address this issue.

•         For the first time, government has provided strongly against black money by providing for criminal prosecution, imprisonment to offenders and 300% penalty on tax avoided.

•         Non-disclosure of foreign assets, beneficial interest and accounts would also lead to imprisonment. Such  harsh measures should act as significant deterrent to keeping the illegal monies outside India

Encouraging and facilitating transactions through credit and debit cards and dis incentivising cash transactions should help in curbing generation of domestic black money, though the details of these provisions need to be examined.

Pallavi Singhal, Partner, Tax and Regulatory Services, PwC India

The underlying theme outlining the Budget is to provide a stable, predictable and non-adversarial tax regime. First step in this direction is the reduction of corporate tax rate from 30% to 25% in a phased manner over the next 4 years. This would also be accompanied by phasing out the array of tax exemptions. Moreover, wealth tax levy has been dispensed with.

To provide certainty, remove ambiguity and reduce the scope of litigation, certain concrete amendments have been made.  In line with the Government’s intent to mitigate disputes which was exhibited by its decision not to appeal against the recent decisions in the case of Vodafone and Shell, amendments have been brought in the indirect transfer taxation provisions by prescribing a monetary threshold of 50% of the total value of the assets to be located in India to tax the gains aligned to existing jurisprudence on the matter. Further, it is proposed to exclude the following from the ambit of indirect transfer taxation:

•    transactions by small shareholders (non-controlling interest of less than 5%) and
•    in respect of companies where the value of Indian assets is less than INR 10 crores.

To reduce multiplicity of litigation it is proposed that the tax authorities be empowered to defer filing of appeals when a question of law on identical facts is pending before Supreme Court to import the ratio of the decision to the dispute. The deferral of GAAR till April 2017 with investments made before April 2017 grandfathered, would enable reasonable implementation which could have otherwise led to litigations. Other notable but important amendments include proposals to provide for detailed mechanisms to claim foreign tax credit by Indian Companies, exclusion of FII’s from MAT,  and clarity that mere presence of a fund manager in India does not create a permanent establishment (subject to other conditions) of an offshore fund in India.

Separately, on the tax policy and administration aspect, the uncertainty around implementation of GST has been put to rest by stating the intent to implement it by 1 April 2016.  Also, proposed Direct Tax Code has been scrapped given that the key proposals in DTC have already been incorporated in the Income-tax Act. Procedural and structural reforms to the tax administration suggested by the Tax Administration Reforms Commission are proposed to undertaken to make the department more tax payer friendly.

The current Budget is a step in the right direction towards ameliorating the adverse investor sentiments. It is hoped that the intent is translated into positive results which would put the Indian economy firmly on the growth trajectory.

Sanjay Sanghvi, Partner, Khaitan & Co.
 
Overall, a positive budget with clear vision and demonstration of commitment to have non-adversial tax regime in India to facilitate economic growth, foreign investment and ease of doing business in India.  Two – three big ticket items – deferral of GAAR by two years; fair reasoning that Direct Taxes Code (DTC) is not really needed as current tax regime already has most of the provisions of DTC and suitable clarifications on Indirect Transfer of Indian Assets.  One would need to see in the fine print of the Finance Bill whether the highly controversial issue of applicability of MAT to foreign companies has been addressed as widely expected.  The re-assurance of the Finance Minister on the floor of Parliament is that India is committed to not retrospectively amend tax laws and to have a stable and practicable tax regime will clearly set a tone of next phase of India’s economic growth under the leadership of the Prime Minister Mr Narendra Modi.

Bijal Ajinkya, Partner, Khaitan & Co.

This Budget seems to be the voice of foreign investors, and shall be a welcome move to boost foreign investments in India. It is clear that the overarching theme of the Budget is to make India an attractive and tax friendly investment destination.  

FPI:

The Minimum Alternate Tax (‘MAT’) controversy which FPIs and erstwhile FIIs were recently embroiled with, is set to rest with the budget proposal to exempt FPIs and FIIs from MAT. This is a welcome move as the seemingly tax favorable regime which exempts long term capital gains tax on market trades, was a blush off with the imposition of MAT. This proposal would surely provide a further boost to the capital markets.

AIF:

In a welcome move to attract foreign investments in AIFs, the Budget announces no regulatory interface and an automatic route for investments.

The tax pass-through accorded to Category I and II AIFs is a big sigh of relief for investors and funds, who were embroiled in prolonged controversies on who pays the tax on income of such AIFs.

Interestingly the fine print suggests that the pass through is available only if the income of the AIF is not in the nature of ‘profits and gains from income or profession’. Hence, in spite of this announcement, AIFs will still be embroiled in litigation as to whether its income is business income or otherwise, as if the former, there would be no pass through available.

Unfortunately, even though a tax pass through has been offered a withholding tax of 10 percent on distributions has been levied. The withholding is irrespective of whether the income is taxable.  

This would also be a sigh of relief to the MAT paying investors who were paying double tax on the income from an AIF, in cases where the AIF offered the income to tax.  

Interestingly, silence on the taxability of Category III AIFs, leads to a contra juxtaposition on whether it is expected that tax be paid at the AIF level. The uncertainty as to whether the income is business income or capital gains continues Category III AIFs.

Offshore Funds:

In order to facilitate reverse brain drain of the highly qualified fund managers who left the country in order to manage offshore funds in a tax efficient manner, the Budget proposes to clarify that the presence of the fund manager of an offshore fund in India, does not create the presence of a business connection in India. Neither would their presence be construed as making the offshore fund an Indian tax resident. Hence their presence in India would not lead to any negative tax implication for the offshore fund. This proposal would be a big boost to the fund industry, and we would expect a large quantum of such managers to relocate to India.  

In an ‘unfortunate miss’, though FPIs/FIIs have been carved out of the MAT implications, no such relief has been considered for offshore funds which do not fall within the FPI/FII category.

Manoj Purohit, Director, Walker Chandiok & Co LLP

Fund manager in India not to be construed business connection or permanent establishment of offshore funds

The FM has provided a much awaited relief to the fund managers envisaging to operate from India. The FM has proposed to exclude fund management activity carried out from India from the purview of ‘Business Connection’. This would ensure that mere presence of fund managers in India would not constitute taxable presence of the fund in India. The proposed clarity will bring India at par with the international standards.

The announcement of FM to have composite cap for investment through Foreign Portfolio Investors (FPI) and Foreign Direct Investment (FDI) will boost inflow of foreign funds in India with simplified processes. The sectors wherein 100% foreign investment is allowed under automatic route will remain unaffected.

Nihal Kothari, Executive Director, Khaitan & Co

The Union Budget 2015 -16 will put India on the cusp of high growth trajectory while continuing fiscal consolidation. Public investment in infrastructure will be accelerated to create this growth momentum.

It is heartening that the Government has reiterated its strong commitment to introduce Goods and Service Tax by 1st April 2016 which will create Indian common market and will eliminate cascading effect of taxes on indigenous manufacture of goods and services. In this process, Service Tax rate has been increased from 12.36% to 14% and negative list of services pruned. Education cess has been integrated in the Excise and Service Tax rates. In the process services will become more expensive.

To promote indigenous manufacture, inverted duty structure has been corrected by reducing customs duty of 22 input items. Measures like relaxing the time limit for availing CENVAT credit from 6 months to 1 year and expediting service tax and excise registration will facilitate ease of doing business. 

 
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