Our Budget expectations once again come to fruition

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Every year 'Taxmann' predicts and suggests various substantive and procedural changes to taxation laws based on judicial litigations, prevalent uncertainties and change in the business environment. We met several expectations for Union Budget 2014-15 and 2015-16 which were published in [2014] 47 taxmann.com 120 (Article) and [2015] 61 taxmann.com 143 (Article).

This year also we have released our #Budgetexpectations in [2016] 67 taxmann.com 45 (Article). It is to our credit that many of our expectations came to fruition in the Union Budget 2016 as well.

The following is a comparative study of the changes suggested by us viz-a-viz changes proposed in the Finance Bill, 2016:

3Expectations from Budget 2016-17

1. (a) Dividend income and share in profit of a firm should not be treated as exempt income for Section 14A disallowance as these incomes always suffer economic taxation.

(b) Section 14A disallowance should not exceed amount of total expenditure claimed under any provision of the Act.

2. As per section 206AA, where the deductee does not furnish the PAN, tax shall be deducted at source at higher rates. Such provision is also applicable to non-residents.

3. Section 244A was inserted to ensure that the assessee was duly compensated by the payment of interest for monies legally belonging to him and wrongfully retained by the Government.

4. It was recommended that the age-old threshold limits of TDS should be increased. Further, it was recommended that TDS rates should also be rationalized keeping in view the restructuring of the Income-tax rates over the past decade.

5. Section 28(va) was inserted by the Finance Act, 2002 to tax the non-compete fee paid to a person to prevent him from carrying out any activity in relation to any business.

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6. At present, presumptive taxation scheme is meant only for persons engaged in business. Professionals are deprived of taking advantage of such scheme. Hence, it is suggested that the presumptive taxation scheme should be introduced for professionals as well.

7. The Government of India has announced 'Start-up India' initiative for creating a conducive environment for start-ups.

Thus, following tax incentives were proposed for Start-ups:

(a) Exemptions may be proposed in respect of a capital gain arising in respect of investment made in the Start-up eco-system.

(b) Profits of Start-up may be exempted from income-tax for a period of 3 years. The exemption may be available subject to non-distribution of dividend by the Start-up;

(c) Consideration received by a start-up for issuing shares at a price higher than its fair market value may not be taxable as income from other sources in the hands of start-up under section 56(2)(viib) of the Income-tax Act.

8. It was recommended that relief from applicability of MAT should be allowed to foreign companies if they do not have PE in India.

This is in line with CBDT's Instruction No. 18/2015, Dated 23-12-2015

5Proposals in Finance Bill, 2016

1. Finance Minister, Mr. Arun Jaitley, in his budget speech said that quantification of expenditure relatable to exempt income in terms of section 14A led to number of disputes. Accordingly, he proposed to rationalize the formula in Rule 8D governing such quantification of expenditure on exempt income.

2. It is proposed to amend section 206AA to provide that withholding tax at higher rate shall not apply in case of non-resident subject to conditions as may be prescribed.

3. It has been proposed that where refund arises out of self-assessment tax, such amount shall also be eligible for interest from the date of furnishing of the return or payment of tax, whichever is later, up to the date on which the refund is granted.

4. Threshold limits of TDS on various payments have been proposed to be increased and TDS rates have also been proposed to be revised.

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5. The Finance Bill, 2016 has proposed to amend the provisions of Section 28(va) to cover within its ambit the compensation paid for restrictive covenant in relation to any profession.

6. A new Section 44ADA is proposed to be inserted for computing professional income on presumptive basis at 50% of gross receipts. Professionals can take benefit of such presumptive Scheme if their receipts do not exceed 50 lakh rupees.

7. (1) 100% exemption of profits: A new section 80-IAC is proposed to be inserted to provide for a deduction of up to 100% of the profits derived by an eligible start-up from a business involving innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. The deduction can be availed for three consecutive assessment years out of five years at the option of assessee.

(2) Capital Gain exemptions: The following sections have been proposed to be amended to provide exemption from capital gain to the start-ups.

♦ Section 54GB proposes that long-term capital gains arising from transfer of residential property of individual or HUF shall not be charged to tax if such capital gain is invested in shares of an eligible start-up.

♦ A new Section 54EE is inserted to provide for exemption up to Rs. 50 lakhs for long-term capital gains invested in units or funds set-up by Government to promote start-ups.

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8. The Finance Minister has proposed a retrospective clarificatory amendment that the provisions of MAT would be applicable to the foreign companies with retrospective effect from April 1, 2001, if:

(a) the foreign company is a resident of a country with which India has a DTAA and such company does not have a PE in India; or

(b) the foreign company is a resident of a country with which India does not have a DTAA and such company is not required to seek registration under any law for the time being in force relating to companies.

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