Union Budget 2014 is an earnest commencement to the economic agenda laid down by the government signifying the intent of kick starting capital spending both in public & private sector. It is heartening to see the budget in pursuit of fiscal prudence with a focused objective to simplify tax administration in order to advance the ease of doing business. BDO India LLP brings an overview of key changes from a tax and regulatory perspective and its impact on the economic trajectory.
Text of Union Budget 2014 - An Overview
Budget Overview 2014 1 FOREWORD The much awaited Union Budget 2014 was presented in the Parliament. At the beginning of his speech, the Finance Minister made a few significant observations: u The Budget is the most comprehensive action plan u It is only the beginning u There is a need to revive growth in Manufacturing and Infrastructure u Fiscal Prudence is paramount Hence, the Budget 2014 needs to be examined in the backdrop of these observations: The specific announcements which could be potential game changers: u Increase in FDI limit in Defence and Insurance sectors from 26% to 49% u Reduction of minimum FDI thresholds in Real Estate; Construction based limit reduced from 50,000 sq mtrs to 20,000 sq mtrs and investment limits reduced from USD 10 mn to USD 5 mn u Allowing banks to raise long term resources for Infrastructure Funding without any pre-emption for CRR/SLR u Tax pass-thru status to Real Estate Investment Trust as well as new category of entity called Infrastructure Investment Trust u Increased Plan Capital Expenditure by 26% over last year Importantly, each one of these steps can kick start investment cycles to heat up the growth engine. The predictable announcements include: u Change in personal taxation threshold u Increase in savings/investment limit under section 80-C of the IT Act. u Reduction of investment allowance eligibility amount from INR 1 bn to INR 0.25 bn. The statements of intent that need to be watched very closely: u The intent to overhaul subsidy regime coupled with a New Urea Policy and the need to correct nutrient balance u Fiscal deficit target of 3% for fiscal year 2016-17 and aspiration of 4.1% for fiscal year 2014-15 u Focus on industrial corridors and 100 smart cities u Need to re-focus (read dilute) NREGA schemes u Viability Gap Funding (VGF) to Urban Projects by Central Government
Budget Overview 2014 2 u National market for farm products and dilution of state level APMC mechanism u INR 1 bn funding for project report on river linking project In course of time, some of the above will help tackle the fiscal targets and inflation. The Budget has also announced steps to make the Tax Regime predictable and favorable. There were some disappointments which were contrary to expectations: u Retrospective amendment to section 9 of the IT Act for indirect transfers (Vodafone case) has not been repealed and recommendations of Dr Shome Committee not dealt with u Challenges in the GAAR regime and its implementation not addressed u In spite of making right noises about GST & DTC, the Budget stopped short of defining timelines for implementation Overall, considering that the FM was constrained to come up with major policy document in 45 days; the budget is a very good directional exercise. A sustained momentum coupled with other policy and administrative steps can create the right framework for a bolder Union Budget, 2015-16 and act as a major catalyst in nudging the economy into a fast orbit! Milind Kothari Managing Partner BDO India LLP July, 2014
Budget Overview 2014 3 CONTENTS 1. BUDGET SNAPSHOT.......................................................................... 1 2. DIRECT TAX PROPOSALS.................................................................... 2 3. INDIRECT TAX PROPOSALS 3.1. GOODS AND SERVICES TAX.........................................................16 3.2.CUSTOMS..............................................................................16 3.3. CENTRAL EXCISE.....................................................................29 3.4. SERVICE TAX AND CENVAT CREDIT...............................................44 3.5. COMPLIANCE CHART................................................................57 4. FDI PROPOSALS.............................................................................59 5. GLOSSARY OF TERMS.......................................................................60
Budget Overview 2014 1 1. BUDGET SNAPSHOT Direct Tax u Tax rates remain unchanged u Tax pass-thru status for REIT and IIT u Extension of tax holiday for power sector u Roll back Mechanism introduced for APA schemes u Income of Foreign Portfolio Investor to be characterised as capital gains Indirect Taxes u Rationalisation of tax provisions to reduce litigations u Peak rate of Customs Duty, Central Excise Duty and Service Tax remains unchanged to support economic growth u BCD on multiple products reduced to boost domestic manufacturing and to arrest the issue of inverted duties u Scope of Advance Rulings and Settlement Commission enhanced u Service Tax amendments to provide for smooth transition towards GST implementation
Budget Overview 2014 2 2. DIRECT TAX PROPOSALS 2.1 Corporate Tax u Investment Allowance for Medium Size Manufacturing Companies The Finance Bill proposes to extend the benefit of investment allowance for manufacturing companies under section 32AC of the IT Act. It is proposed that a deduction of 15% of the cost of new assets acquired and installed after April 1, 2014 but before April 1, 2017 would be available, provided the cost of new assets is INR 250 mn or more during a fiscal year. The said amendment is extension of the investment allowance introduced vide Finance Act, 2013. Accordingly, the following situations could arise: For fiscal year 2014-15: If cost of new assets exceeds INR 1 bn, relief could be claimed under the present law or the proposed amendment, provided that the relief in either case would not exceed 15% of the cost of the new assets. If the cost of the new assets exceed INR 250 mn but does not exceed INR 1 bn, relief could be claimed under the proposed amendment. For fiscal years 2015-16 and 2016-17: Relief could be claimed under the proposed amendment, provided the cost of new assets acquired and installed during a particular fiscal year exceeds INR 250 mn. It needs to be noted here that unlike the present law, the amendment does not provide for aggregation of investments made in the previous years and the investment threshold is to be considered qua a particular fiscal year. The amendment is aimed at encouraging investment in plant and machinery by Medium and Small Medium Enterprises in the manufacturing sector, by providing additional tax reliefs on such investments. u Disallowance of Corporate Social Responsibility Expenditure The Finance Bill proposes to add an Explanation to section 37(1) of the IT Act wherein it has been clarified that the expenditure incurred for meeting CSR obligations under the new Company Law would not be treated as expenditure incurred for the purpose of business. The above amendment will take effect from fiscal year 2014-15. The new Company Law mandates specified corporates to spend certain percentage of their profits on activities relating to CSR. However, as per the proposed amendment, such expenditure would not qualify as deductible expenditure unless the same is in the nature of specific deductible expenditure prescribed under section 30 to 36 of the IT Act. This will increase the cost of undertaking CSR and may dissuade the corporate from fulfilling their responsibility.
Budget Overview 2014 3 u Loss on Purchase / Sale of Shares by Company Engaged in Trading of Shares It is proposed to amend the Explanation to section 73 of the IT Act, wherein loss incurred on purchase / sale of shares by a company whose principal business is of trading in shares, shall not be considered as a speculation loss. The above amendment will be effective from fiscal year 2014-15. Presently, any company deriving income primarily from business and profession, where part of business involves purchase and sale of shares, such business of purchase/sale of shares is deemed to be speculation business. Therefore such loss from purchase/sale of shares constituted speculation loss, which could not be set off against any other non- speculative income. However, as per Explanation to section 73 of the IT Act, these provisions are not applicable to a company whose gross total income consists mainly of income which is chargeable under the heads Income from House Property, Capital Gains and Income from Other Sources and to a company whose principal business is that of banking or granting of loans and advances. Taking a cue from this provision, the Tax Officers treated loss from purchase/ sale of shares as speculation loss even in cases where the Assessees were engaged in the business of trading in shares. The amendment proposes to rationalise the operation of this section by excluding a company whose primary business is purchase / sale of share. u Concessional Tax Rate for Foreign Sourced Dividend Income It is proposed to extend the benefit of concesional rates of 15% under section 115 BBD of IT Act to dividends received by Indian companies from foreign subsidiaries for the fiscal year 2014-15 and subsequent years. To indian companies This amendment is aimed at encouraging corporate Assessees to repatriate money earned by subsidiaries outside India. u Amended Calculation of Dividend and Income Distribution Tax Section 115-O and section 115R of the IT Act have been proposed to be amended with effect from October 1, 2014 to modify the method of computing tax on distribution of profits / income. For the purpose of computing the distribution tax, the tax on distribution of profits / income shall now be grossed-up. Effectively, the amendment shall entail additional tax burden of approximately 3% on the distributable surplus.
Budget Overview 2014 4 2.2 Transfer Pricing u Deemed Internati
