The Aam Aadmi’s Budget?
Published on Mon, Feb 29,2016 | 19:13, Updated at Mon, Feb 29 at 21:19Source : Moneycontrol.com
As the Finance Minister presented Budget 2016, one thing was clear- the government is committed to boosting India’s rural economy and keen on addressing the issues plaguing infrastructure, banking and social sectors. On the tax front, there seem to be several changes as well with an added cess on services, an increased environment cess and a tax on the super-rich, to name a few. The Firm gets some reactions from the experts…
Vaibhav Sankla Director, H&R Block
The H’ble listed some focus areas before announcing his proposals on taxation. Some of the important focus areas were affordable housing, relief to small taxpayers, simplification of taxes, and creating a pension society.
One important point which may go unnoticed is that the Finance Minister did not increase the basic exemption limit. This is completely in sync with the government’s objective of widening of the tax payer base as increasing the threshold throws many taxpayers out of the tax net.
The FM is also promoting tax compliance by simplification of procedures and penalize the non-compliant. With that in mind, he has proposed one time settlement scheme for those who want to come forward and comply by paying 45% tax on undisclosed income.
Here’s a list of the key proposals-
It is proposed to reintroduce an additional Rs. 50,000 interest deduction under section 80EE for the first time home buyers. The important conditions are i) The loan amount should not exceed Rs. 35 lakhs, ii) The value of the house should not exceed Rs. 50 lakh, iii) The loan should be sanctioned during FY 2016-17, and iv) The taxpayer should not own any house at the time of sanctioning of the loan.
Currently, the interest deduction on a self-occupied house is restricted to Rs. 30,000 per year if the possession of the property is acquired after 3 years. Considering that the housing projects are getting delayed the threshold is now proposed to be increased to 5 years. With this, more homeowners would be able to claim the higher amount of deduction i.e. Rs. 200,000 on their housing loan interest.
Service tax exemption on houses less than 60 sq meters
100 per cent deduction for profits to an undertaking in housing project for flats upto 30 sq. metres in four metro cities and 60 sq. metres in other cities approved during June 2016 to March 2019 and completed in three years.
Relief to small taxpayers-
The FM said that 2 crore taxpayers in India report annual taxable income of up to Rs. 5 lakh. Currently, all such taxpayers get a relief of up to Rs. 2,000 from their income tax liability. It is proposed to increase the amount of this relief to Rs. 5,000.
The self-employed individuals (and wage earners who are not in receipt of HRA) can claim deuduction under section 80GG on their rental payment. However, the deduction is restricted to Rs. 2,000 per month. It is proposed this to Rs. 5,000 per month.
It is proposed to amend section 80CCD to provide that the amount received by the nominee of the employee covered under the NPS shall be tax exempt.
Simplification of taxes-
Presumptive taxation is a presumptive way of calculating income. Currently, the individual taxpayers (and HUFs and firms) having annual turnover of up to Rs. 1 crore can report their taxable income at 8% of their annual turnover. This eases their tax compliances significantly as they are not required to maintain detailed records. Further this also helps in reducing litigation. It is proposed to increase the threshold of annual turnover to Rs. 2 crores. With this, many more taxpayers can follow the simplified presumptive taxation regime
Additionally, it is proposed to extend the presumptive taxation even to professionals having annual revenue/turnover of up to Rs. 50 lakh. This would simplify tax compliance process for a number of self-employed professionals.
After the successful pilot of e-assessment, it is proposed to be introduced in 7 major cities. Section 2 is proposed to be amended to include a definition of the term ‘hearing’ which would include electronic communication.
Currently, withdrawals from NPS are fully taxable. This is one of the reasons why NPS has not gained much popularity amongst the taxpayers. It is proposed that the taxpayers can withdraw up to 40% corpus of the NPS without having to pay income tax thereon.
Currently, withdrawals from Employees Provident Fund (EPF) are completely tax exempt if certain conditions are met. This makes EPF more attractive to the taxpayers. Therefore, to make its taxability at par with that of NPS, it is proposed that only 40% of the withdrawals from EPF shall be made tax exempt. However, this shall be applicable only to contributions made from April 2016. Amounts relating to prior contributions shall continue to be 100% tax exempt. Further, employees drawing up to Rs. 15,000 per month would be able to continue to make completely tax free withdrawals. Similar changes are proposed for approved Superannuation Schemes.
Section 17 is proposed to be amended to provide for increased exemption on employer’s contribution to approved superannuation fund from Rs. 1 lakh to Rs. 1.5 lakh
Surcharge on the income tax is proposed to be increased from 12% to 15% for taxpayers with annual taxable income over Rs.1 crore. This means that super rich would pay approximately 1% more income tax as their effective tax rate increases from 34.6% to 35.6%.
Currently, dividend income is completely tax exempt in the hands of the shareholders as the company distributing the dividends has to pay a dividend distribution tax. Section 115BBDA is proposed to be introduced to provide for 10% income tax on gross amount of dividends for taxpayers whose annual dividend income exceeds Rs. 10 lakh.
Section 206C is proposed to be amended to provide for tax collection at source for purchase of luxury cars valued at more than Rs. 10 lakh or on cash purchases of goods/services of more than Rs. 2 lakhs. This measure is introduced to develop a tracking mechanism of those who spend high amounts but still do not report their income or underreport their income.
Period for getting benefit of long term capital gain regime in case of unlisted companies is proposed to be reduced from three to two years.
Section 47 is proposed to be amended to provide that mutual fund consolidations not to be treated as transfers. No capital gains on consolidation of the mutual fund schemes.
A new section 54EE is proposed to be introduced for provision of exemption from long term capital gains if the gains are reinvested in notified funds.
Rajeev Dimri Leader, Indirect Tax, BMR & Associates
Budget announcements seem well directed with focus on rural economy, infrastructure spending, social welfare schemes and ‘digital’ initiatives. Rationalization of indirect tax and duty structures for various sectors such as IT hardware, defence, mineral and petrochemical, aviation to name a few, with a view to encouraging Make in India initiative is a welcome move. Overall, coverage of various sectors of the economy was comprehensive with focus on keeping the Government spending within acceptable limits of fiscal prudence.
On the taxation front, the focus on dispute resolution through creation of new tribunal benches, alternative settlement schemes and commitment to refrain from retrospective taxation going forward was encouraging and progressive. However, their efficacy would need to be evaluated based on the fine print of the associated regulations. While no firm commitment on Goods and Services Tax (GST) timelines was made, the industry expectation was to align existing central indirect tax regime with the proposed GST framework. Withdrawal of miscellaneous cesses and rationalization of CENVAT credit mechanism appear to be small steps in this direction. However, introduction of new cesses in addition to those introduced in the previous year, run contrary to that expectation and appears regressive.
On the whole, there is an estimated net increase in tax revenue by almost Rs. 20,000 crores. The sectors contributing to the incremental taxes and resultant impact on the economy as a whole will be keenly watched.
Gokul Chaudhri - Leader, Direct Tax, BMR & Associates
The Union Budget is pragmatic and sensible with well-defined objectives. For small tax payers, select measures have ensured lower tax burden. For new manufacturing enterprises an attractive rate of 25 percent corporate tax and for startups a tax holiday for 3 years as promised. The overall rate cut for corporate tax has eluded.
There were worries that capital gains and dividend taxation would be adversely impacted. The FM has wisely balanced the provisions by limiting the change only for dividends exceeding Rs 10 Lakh being taxable at a rate of 10 percent in hands of shareholders. In a way, well off shareholders will have dividends at an effective cost of 30 percent.
The macro-economic stability has been reassured with fiscal deficit sensibly in control and quality spending on roads, rail and public infrastructure. The PPP model is being revived with new legislative measures and the nation was assured that ease in business continues with the proposed changes in tax and corporate laws. The ghost of retrospective taxation arising from indirect transfer provision may get buried finally with the framework of settlement that has been proposed along with a one time window for tax amnesty and tax litigation settlement being proposed for wider set of tax payers. The FM has sought to deliver on a rather wide and bold agenda within the limits of fiscal prudence.
Mukesh Butani - Managing Partner, BMR Legal
It’s a balanced budget with an overarching theme of realizing inclusive and staggered economic growth, without stepping down on the path of fiscal prudence. Amongst positives, focus on infrastructure development, fixing distressed asset concerns of financial sector, employment generation through indigenization stand out. Bankruptcy code and a framework for commercial dispute settlement under PPP framework are the two most significant regulatory reforms rolled out.
Amongst tax proposals, budget is rife with new taxes – eg, tax on super-rich, and levy of additional cess on services; doubling of clean environment cess. While reduction in corporate tax rate for MSMEs is encouraging, FM’s holding back across the board reduction in tax rate, perhaps constrained by budgetary compulsions. Exempting Project SPVs from dividends distribution tax accords nearly a complete pass through status to REITs and ARCs; this proposal ought to enhance competitiveness of REITs as the preferred pooling vehicle for investment in real estate /infrastructure sector.
A lot of other positives – eg, the Budget buries the bogey of retrospective tax, and provides one time opportunity for settlement of past disputes; implementing outcomes of BEPS in the form of equalization levy cess in B2B digital transactions of 6 percent shall help garner revenues. From indirect tax standpoint, inverted duty structure for IT industry in addition to reducing customs duty on inputs and raw materials is aimed to encourage domestic manufacturing and job creation.
The Budget rolls out a host of administrative reforms by way of fixing loopholes and measures to improve taxpayers’ experience, and that is definitively a step in the right direction to evolving taxpayers’ service focused administration. Improvised dispute resolution shall encourage settlement of languishing tax disputes and help unclog dispute resolution mechanism. One time window for voluntary disclosure by delinquent taxpayers finds its way back into legislation, and it’s encouraging to see the FM not propose a prohibitive penalty on disclosure.
Raju Kumar - Tax Partner – Oil & Gas, EY
Vision for growth of Indian oil and gas industry is being created by incentivising gas production from deepwater, ultra deepwater and high pressure-high temperature areas and offering calibrated marketing freedom for new discoveries which are yet to commence commercial production. An appropriate implementation of the proposal to incentivise deepwater, ultra deepwater areas is expected to help in improving self-sufficiency through enhanced domestic production besides bringing in foreign investment and state of the art technologies which are required for exploitation of these areas. However, the proposal to discontinue tax holiday on commercial production of mineral oil for blocks starting production on or after 1.4.2017 could prove to be a disincentive since the blocks offered in NELP rounds were promised a 7 year tax holiday. Marketing freedom to new discoveries should help companies optimise production and create a competitive landscape for the users.
Paresh Parekh -Tax Partner, Retail & Consumer Practice, EY
“Focus on rural economy including MGNREGS is likely to be positive for consumer companies in a medium to long term. Also, there is enough impetus for new manufacturing / FMCG companies by way of reduced tax rate and by way of permitting FDI in marketing of food products produced in India, etc. Also, retail sector which generates lot of employment is likely to benefit through proposals like Government contribution to EPF for first 3 years of employment, tax break for new employee wages, presumptive taxation limit increase, model shop and establishment bill to permit 7 day working, etc. However, additional service tax by way of 0.5% Krishi Kalyan Cess is likely to further increase retail sector costs in absence of GST which still remains a dream”
Sachin Menon - Partner and Head - Indirect Tax, KPMG
It seems the focus of the budget is to address the fundamental issues plaguing agriculture, infrastructure (Roads, Rail, power), banking and social sectors. The government expenditure in these sectors would kick start economic activity in the midterm. While there has been no major policy announcement like GST, a number of measures have been taken from an ease of doing business perspective in the form of rationalization of Credit rules, introducing provisions for faster dispute resolution, etc.
Also, in line with the Make In India initiative, changes have been made in customs and excise duty rates on certain inputs to reduce costs and improve competitiveness of certain domestic industries like Information technology hardware, capital goods, defence production, etc.
On the flip side, instead of abolishing Swatch Bharat cess to as a precursor to GST, an additional new cess by the name Krishi Kalyan Cess is proposed to be levied @ 0.5% on all taxable services (whose credit would be admissible for payment of output cess), taking gross service tax to 15% from 1 June 2016 onwards. The widely expected increase in service tax rate to 16% did not figure in the budget proposals.
Last but not the least, as against the industry expectation as regards concrete announcement on roadmap for GST, no specific timeframe has been committed by the FM , may be because it is beyond his control.
Girish Vanvari – Partner and Head - Tax, KPMG
Budget 2016, an incremental move in the backdrop of global uncertainty. Maintaining a fiscal deficit of 3.5% a very credible step for the financial markets, robust outlays for infrastructure, agriculture, rural and socio economic schemes, however, one can argue that more could be provided for recapitalization of Banks. No change in capital gains tax regime for listed stocks a positive for the stock exchange, however an additional tax 10% on dividends in excess of 10 lakhs and increase in STT on options a dampener for the markets. No change in individual slabs, POEM deferral, GARR confirmation, Action point on BEPS master file and country by country report, road map to reduction to lower tax rates and phase out of exemptions along expected lines. Introduction of Amnesty scheme can be questioned. Further, many provisions to build confidence with the tax payers with a view to reduce litigations and commitment to no retrospective amendment. All in all, in the backdrop of the prevailing global scenario, Budget 2016 a good pragmatic balancing act.
• Maintaining the fiscal deficit of 3.5% a credible signal to the global investors and good news for the bonds markets
• Higher allocations to rural programs such as MNREGA, Swach Bharat etc, a big flip to Rural demand
• Budget 2016 Focus on nine pillars of growth, a pragmatic approach to inclusive growth.
Abdul Majeed – Partner, Price Waterhouse
There are slew of measures in the budget to kick start the investment activity in the economy such as creation of demand in the rural economy and capitalisation of nationalised banks which should help in easing liquidity. Budget also has few incentives to put more money in the hands of small tax payers. Increased investments in the infrastructure, incentive to promote environment friendly vehicles (EFV) and investment in the rural economy should help few segments of automotive industry such as tractors, two wheelers and EFV. However, increase in tax on luxury vehicles, rise in infrastructure cess from 1 to 4% as well as withholding taxes on bigger vehicles will have negative impact on passenger vehicles.
Abhishek Goenka. Partner - Direct Tax, PwC India
The third budget speech of the NDA government clearly demonstrates their efforts for making ‘housing for all’ a reality. Tax holiday has been introduced on affordable housing projects approved until March 2019. In order to encourage demand for housing, the Budget seeks to incentivise first home buyers by providing additional deduction on interest paid on loan. Exemption from service tax on construction of affordable housing projects is another positive step in this regard. In order to bring in the tax regime for REITs in India at par with the global regime, exemption from DDT has finally been introduced. While the budget 2016 does bring in some positive news, considering the situation of the sector, there was higher expectation towards bringing reforms for growth of the sector.
Siddharth Shah - Partner, Khaitan & Co
1. There appears to be a bit of disappointment for the AIF industry. The much anticipated removal of 10% withholding tax on distribution by AIFs doesn't seem to have found its place in the announcement. Of course fine print is awaited to see if this has been addressed there.
2. Clear emphasis on trying to more comprehensively deal with stressed and distressed assets. This could lead to creation of a tremendous opportunity for specialised private equity players to play in this space.
3. Tax exemption on capital gains earned on investments in notified start-ups and funds should further encourage capital allocations to early stage venture capital and Angel funds. This should encourage more entrepreneurship in the country.
4. The FPIs may have some disappointment as the dividend tax has made its way back. While there was a fear that there may be an extension of term for Long Term Capital Gains on listed shares to 2 to 3 years, subject to any surprises in the fine print, that remains unchanged which is a good news.
5. The reduction in period of holding from 3 years to 2 years for unlisted shares brings some cheer to VC and PE funds as well as investors as this also helps in terms of exits or restructuring on investments. This should also help M&A activity too.
Daksha Baxi, ED at Khaitan & Co
Tight rope walking in the budget is visibly seen. The devil or the angel is going to be in the fine print, but here are some comments on listening to the Budget speech:
• The commitment to keeping to the fiscal discipline of deficit of 3.5% of GDP is laudable but the question remains how they will manage it. Hence the credibility of this may be suspect
• Slightly socialistic overtone of the budget, dotted with some relief measures for industry
• The special lower income tax regime of 10% on income from licensing of patents developed and registered in India is a major push to the innovation box and should spur and inspire locating of intellectual property in India and reduce the outflow of IP from India. This is a major initiative, accepted on the recommendation of the knowledge based industries
• Ducking the fear of change in long term capital tax regime and on the contrary reducing the holding period for unlisted shares to 2 years from 3 year period is a good compromise and should be seen in positive light
• Deferring application of POEM for determination of residence of foreign companies is a significant relief, especially for Indian companies having overseas subsidiaries and should give them sufficient time to re-organise their affairs
• Special measures announced for agriculture sector coupled with certain additional taxes on the higher income should be seen by the masses to confirm the government’s commitment to better the lives of farmers
• While the total outlay on infrastructure has been pegged to be the highest so far, it remains to be seen if this will act as an incentive to kick-starting investment decisions in the country
• Some amount of relief to the small tax payers is coupled with 10% additional tax on dividend income above Rs 10 lakhs and additional surcharge of 3%, increasing the rate of surcharge for higher income to 15%. This may have some negative impact on the equity infusion in companies
• The asset reconstruction sector would get a boost on account of complete pass through of income-tax to securitization trusts including trusts of ARCs
• Making distribution of income by SPVs to REITs and INVITs having specified shareholding will not be subjected to DDT, which should be seen in positive light
• Despite not-so encouraging response to the Black Money Law, it is interesting to see that the government is looking to unearth domestic undisclosed income by offering immunity to taxpayers to come clean. Undisclosed income represented in the form of any asset can be legalised by paying a tax of 30%,surcharge of 7.5% and penalty pegged at a low rate of 7.5%,aggregating to a 45% tax rate with immunity from prosecution can be seen as encouraging
Dinesh Kanabar - CEO, Dhruva Advisors
The levy of Equalization Tax on digital transactions is quite interesting. What is provided is that payments for online advertising and other specified transactions will attract a 6% withholding tax where the recipient does not have PE in India. Coupled with a reverse Service Tax levy, this will make online advertising expensive. More interestingly, this levy is a new tax outside of the Income Tax Act, which may make credit of taxes overseas impractical.
Sunil Shah, Deloitte Haskins & Sells
The Budget has taken a step forward in rationalizing the tax regime through sunset provisions for certain exemptions and deductions. It will also give a boost to manufacturing and to SMEs through the reduction in tax rates. Start ups will be encouraged by the 3-year tax holiday and capital gains exemption for investors.
The special patent regime is an innovative idea and will encourage indigenous research and development.
The rules for place of effective management have been deferred by one year in response to representations by stakeholders. This will give time to companies to make adjustments to align with the rules.
The proposals such as stay of demand, easing of TDS requirements, the alternative facility for non-residents who do not have PAN, the procedure for e-assessment and time limits for passing effect orders will facilitate a taxpayer-friendly environment and in turn the objective of ease of doing business.
Hemal Zobalia - Partner, Deloitte Haskins & Sells
Though there will be no change proposed for FY 2016-17, FM’s mention that General Anti-Avoidance Regulations (GAAR) will be introduced as planned from 1st April 2017 is an important announcement.
Pratik Shah - Partner, Indirect Tax, SKP
GST, the much-awaited indirect tax reform of India, has failed to find a mention in Budget 2016. Such silence on GST sends a disconcerting signal to Trade and Industry about its implementation.”