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UNION BUDGET 2014-15 AN ANALYSIS

UNION BUDGET 2014-15 AN ANALYSIS. Mr. Sunil Kumar Partner. Contents. Economic Indicators Key Policy Announcements Tax Policy Statement Direct Tax proposals Indirect Tax Proposals Unresolved Tax Issues. Economic Indicators. Macro Economic Indicators 2013-14. Below 5% GDP growth

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UNION BUDGET 2014-15 AN ANALYSIS

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  1. UNION BUDGET 2014-15 AN ANALYSIS Mr. Sunil Kumar Partner

  2. Contents • Economic Indicators • Key Policy Announcements • Tax Policy Statement • Direct Tax proposals • Indirect Tax Proposals • Unresolved Tax Issues.

  3. Economic Indicators

  4. Macro Economic Indicators 2013-14 • Below 5% GDP growth • Inflation CPI 9.7% • Fiscal deficit 4.5% • Revenue Deficit 3.2% • Export growth 4.31% • Industrial growth 0.4%

  5. Revenue Growth & Share of Taxes • Gross Tax Revenue 11.8% • Indirect Tax • Customs 5.9% • Excise 1.7% • Service Tax 24.4% • Direct Tax • Corporation Tax 10.5% • Personal Income Tax 20.2%

  6. Tax to GDP Ratio • Gross Tax Revenue 10% • Indirect Tax • Customs 1.5% • Excise 1.5% • Service Tax 1.4% • Direct Tax • Corporation Tax 3.5% • Personal Income Tax 2.1%

  7. Tax to GDP Ratio

  8. Key Policy Announcements

  9. FOREIGN DIRECT INVESTMENTS • Composite cap of FDI in Defense manufacturing to be raised from 26% to 49% with full Indian management and control through the FIPB approval route. • Composite cap of FDI in the Insurance sector to be raised from 26% to 49% with full Indian management and control through the FIPB approval route. • Manufacturing units with FDI that are under the automatic route allowed to sell their products through retail, including e-commerce platforms, without any additional approval. • Urban Construction – Investment Parameters relaxed.

  10. INFRASTRUCTURE • 100 smart cities to be developed, sum of Rs. 70,600 million allocated. • National Industrial Corridor to be setup, sum of Rs. 1,000 million allocated. • Investment in NHAI and state roads of an amount of Rs. 3,78,800 million. • An Institution to provide support to mainstream PPPs called ‘3P India’ to be set up with a corpus of Rs. 5,000 million. INDUSTRY • A National Industrial Corridor Authority, having its head quarter at Pune to be set up. • 20 New Industrial Clusters to be set up.

  11. SPECIAL ECONOMIC ZONES • Government to take effective steps to revive and operationalize Special Economic Zones, to revive the Investors interest to develop better infrastructure. REVIVE MANUFACTURING AND TAX BUOYANCY

  12. Tax Policy Statement

  13. Tax Policy Statement • Improve Tax recoveries. • Stable & Predictable Tax regime. • Streamline Tax Administration. • Expand scope of non adversarial Dispute Resolution— • Settlement Commission • Authority for Advance Ruling (AAR) • No Retrospective Taxes though government has sovereign right to enact Retrospective legislation.

  14. Direct Tax Proposals

  15. Direct Tax Proposals INDIVIDUALS • No change in basic tax rates • No change in rate of surcharge for corporate or the individuals, HUFs, firms etc. • Education cess to continue at 3 percent. • Personal Income tax exemption limit raised by Rs. 50,000 i.e. from Rs. 2 lakh to Rs. 2.5 lakh in case of Individual taxpayers, below the age of 60 years and 2.5 lakhs to 3 lakhs in case of senior citizens. • Investment limit under section 80C of the Income Tax Act raised from Rs. 1 Lakh to Rs. 1.5 Lakh.

  16. Direct Tax Proposals (continued) • Public Provident Fund deposit ceiling raised from Rs. 1 Lakh to Rs. 1.5 Lakh. • Deduction limit on account of interest on loan in respect of self occupied house property raised from Rs. 1.5 lakh to Rs. 2 lakh. • Annual Savings of : • Rs. 15,450 on Income of Rs. 5 Lakh • Rs. 25,750 on income of Rs. 10 lakh • Rs. 36,050 on income of Rs. 20 Lakh as a result of higher basic exemption limit, Increased deduction limit u/s 80C and increased deduction for interest on home loan.

  17. Direct Tax Proposals (continued) CORPORATES Tax Holiday / Incentive • Investment allowance of 15% to a manufacturing company that invests more that Rs. 250 million in any year in new plant and machinery. The benefit is available for 3 years i.e. for investments upto 31.3.2017. Earlier this benefit was available on an investment of 1,000 million and up to 31.3.2015. • Sunset date to claim tax holiday by power generating, distributing and transmitting companies extended to 31st March 2017. • Investment linked deduction u/s 35AD extended to two new sectors namely slurry pipelines for the transportation of iron ores, and semi-conductor wafer fabrication manufacturing units.

  18. Direct Tax Proposals (continued) • Concessional rate of 15 percent on foreign dividends without any sunset date to be continued. • The eligible date of borrowing in foreign currency extended from 30.06.2015 to 30.06.2017 for a concessional tax rate of 5% on interest payments. Tax incentive extended to all types of bonds instead of only infrastructure bonds. Others • Income and Dividend distribution tax to be levied on gross amount instead of amount paid net of taxes. • Advance Ruling made available to Domestic Companies subject to a threshold limit. • CSR expenditure not deductible u/s. 37 in computing taxable income.

  19. Direct Tax Proposals (continued) OTHER AMENDMENTS Transfer Pricing • Introduction of a Roll back provision in the Advanced Pricing Agreement(APA) scheme so that an APA entered into for future transactions is also applicable to international transactions under taken in previous four years in specified circumstances. • Introduction of Range concept for determination of Arm’s Length Price. • To allow multiple year data for comparability analysis under transfer pricing regulations.

  20. Direct Tax Proposals (continued) Income arising to foreign institutional investors through transaction in securities to be taxed as Capital Gains. • Foreign Institutional investors faced difficulty in characterization of their income as to whether it is capital gains or business income. • The gains were regarded as business income, attracting 40% tax • Fund managers remained outside India under the apprehension that his presence in India could have adverse tax consequences. • Experts opine that this could provide a boost to foreign investments into the capital market. • Amendment to take effect from 1st April 2015

  21. Direct Tax Proposals (continued) Mutual Funds • To remove tax arbitrage, rate of tax on long term capital gains increased from 10 to 20 percent on transfer of units of Mutual funds, other than equity oriented funds i.e. on debt mutual funds. • Period of holding in order to be classified as a long term capital asset, for debt oriented mutual funds, increased from 12 to 36 months.

  22. Direct Tax Proposals (continued) Tax Deducted at Source • Disallowance of expenditure on account of non withholding of tax on payments made to residents restricted to 30% as against 100% disallowed currently. • No disallowance of amounts paid/payable to non-residents from which taxes are withheld in the previous year and deposited till the due date of filing of tax return (brought at par with amount paid/payable to residents) • The scope of expenditure disallowable on account of non withholding of tax expanded to include all payments made to residents liable to withholding tax (e.g. salary, directors fees)

  23. Direct Tax Proposals (continued) KEY ISSUES Direct Tax Code, Bill Lapsed • Government to review the DTC in its present shape and take a view on the whole matter. Retrospective Taxation • No new Retrospective Tax to be done. • All fresh Cases relating to Retrospective Legislation of 2012 to be scrutinized by a High Level Committee before issuance of Notice. • Retrospective Legislation of 2012 on Vodafone not repealed.

  24. Indirect Tax Proposals

  25. Indirect Tax Proposals SERVICE TAX Negative List & Exemptions Pruned • sale of space or time for advertisements in broadcast media, extended to cover such sales on other segments like online and mobile advertising. Sale of space for advertisements in print media would remain excluded from service tax. Services provided by radio-taxis brought under service tax. • Services by air conditioned contract carriages to be taxed at an abated value of 40%. Services by non air conditioned contract carriages for purposes other than tourism, conducted tour, charter or hire continue to be exempt. • Services provided by radio taxis whether or not air conditioned to be taxed. Abatement available as available in case of rent a cab service. • Technical testing of newly developed drugs on human participants brought under service tax net.

  26. Indirect Tax proposals (continued) Exemptions granted • Service tax exempted on loading, unloading, packing, warehousing, transportation of  cotton, whether ginned or baled. • Exemption available to specified micro insurance schemes (approved by IRDA) expanded to cover all life micro-insurance schemes where the sum assured does not exceed Rs. 50, 000 per life insured. • Services provided by Indian tour operators to foreign tourists in relation to a tour wholly conducted outside India exempted. CENVAT credit for rent a cab and tour operators allowed to promote tourism. • For safe disposal of medical and clinical wastes, services provided by common biomedical  waste treatment facilities exempted.

  27. Indirect Tax proposals (continued) Procedural Amendments • Differential interest rate regime has been prescribed for delayed payment of service tax ranging for 18% to 30% as against the current rate of 18%. • Reverse charge mechanism extended to cover services provided by directors to body corporates & services provided by agents to Banks, Financial institutions & NBFC’s. • In case of Appeals, mandatory pre-deposit needs to be made to the extent of 7.5% of the amount involved (at the first stage of appeal) & 10% (at the second stage) subject to a cap of Rs. 100 million. • Benefit of Advance Ruling extended to include Resident Private Companies.

  28. Indirect Tax proposals (continued) EXCISE DUTY Amendments to the Central Excise Act, 1944 & rules there under • Section 35F substituted with a new section to prescribe a mandatory fixed pre deposit of 7.5% of the duty demanded or penalty imposed or both for filing appeal with the commissioner (Appeals) or the Tribunal at the first stage and 10% of the duty demanded or penalty imposed or both for filing second stage appeal before the tribunal. The amount of pre deposit payable would be subject to a ceiling of Rs. 100 million • Section 35(1B) is being amended so as to increase the discretionary powers of the tribunal to refuse admission of appeals from the existing Rs. 50,000 to Rs. 2 Lakh.

  29. Indirect Tax proposals (continued) • Section 32E(1) amended to allow filing of applications before Settlement Commission in cases here the applicant has not filed the returns after recording the reasons for the same. • Scheme of Advance Ruling is being extended to Resident Private Limited companies. (Notification 18/2014 - Central Excise and 52/2014 – customs) • Central Excise Valuation Rules, 2000 amended to provide that in cases where excisable goods are sold below the manufacturing cost and profit and there is no additional consideration, value for the assessment of duty shall be deemed to be transaction value. (Notification- 45/2000 and 20/2014)

  30. Indirect Tax proposals (continued) Amendments to the first schedule to the Central Excise Tariff Act, 1985 • Consumer Goods • Excise duty reduced from 12 to 6 % on foot wear exceeding Rs. 500 per pair but not exceeding Rs. 1000 per pair. Foot wear below Rs. 500 per pair would continue to remain exempted. • Concessional excise duty of 2% without CENVAT credit and 6% with CENVAT credit is being extended to gloves specially designed for use in sports. • An Additional excise duty of 5% levied on aerated waters containing added sugar.

  31. Indirect Tax proposals (continued) B. Energy Sector • Central Excise duty on Branded Petrol is being reduced from Rs. 7.50 per litre to Rs. 2.35 per litre. C. Renewable Energy • Excise duty reduced from 12% to Nil on forged steel rings used in the manufacture of bearings of wind operated electricity generators. • Full exemption from excise granted in respect of machinery, equipments required for setting up solar projects. • Full exemption from excise duty provided on machinery, equipments required for setting up of compressed bio gas plant.

  32. Indirect Tax proposals (continued) D. Health • Excise duty on Cigarettes increased by 72% for cigarettes of length not exceeding 65mm and by 11 to 21% on cigarettes of other lengths. Similar increase are proposed on cigars, cheroots and cigarillos. • Basic Excise duty increased from 12 to 16% on pan masala, from 50 to 55% on unmanufactured tobacco and from 60 to 70% on jarda scented tobacco, guthka and chewing tobacco. E. Electronics • Excise duty on Metal Core PCB and LED driver for use in manufacture of LED lights and fixtures and LED lamps is being reduced from 12/10 % to 2 %. • Excise duty on recorded smartcards increased to a uniform rate of 12%.

  33. Indirect Tax proposals (continued) CUSTOM DUTY Amendments to the Customs Act, 1962. • Section 129E substituted with a new section to prescribe a mandatory fixed pre deposit of 7.5% of the duty demanded or penalty imposed or both for filing appeal with the commissioner (Appeals) or the Tribunal at the first stage and 10% of the duty demanded or penalty imposed or both for filing second stage appeal before the tribunal. The amount of pre deposit payable would be subject to a ceiling of Rs. 100 million. • Section 129A(1) amended so as to increase the discretionary powers of the tribunal to refuse admission of appeals from the existing Rs. 50,000 to Rs. 2 Lakh. • Increase in Baggage allowance for inbound travelers from Rs. 35,000 to Rs. 45,000.

  34. Indirect Tax proposals (continued) Amendments to the first schedule to the Customs Tariff Act, 1975 A. To address inverted duty structure: • Basic custom duty reduced on — • Crude glycerin from 12.5% to 7.5% and crude glycerin used in the manufacture of soaps from 12.5% to Nil. • Steel grade limestone and steel grade dolomite from 5% to 2.5%. • Battery waste and battery scrap from 10% to 5%. • Coal tar pitch from 10% to 5%. • Specified inputs for manufacture of spandex yarn from 5% to nil.

  35. Indirect Tax proposals (continued) B. To encourage new investment in Chemicals and Petrochemicals sector: • Basic custom duty reduced on — • Reformate from 10% to 2.5%. • Ethane, propane, ethylene, propylene, butadiene and ortho-xylene from 5% to 2.5%. • Methyl alcohol and denatured ethyl alcohol from 7.5% to 5%. • Crude naphthalene from 10% to 5%.

  36. Indirect Tax proposals (continued) C. Boost to Electronics sector: • Basic custom duty imposed at 10% on specified telecommunication products that are outside the purview of the Information Technology Agreement. • Education cess imposed on imported electronic products to provide parity between domestically produced goods and imported goods. • All Inputs/Components used in the manufacture of personal computers exempted from 4% special additional duty. • PVC sheet and ribbons used in the manufacture of smart cards exempted from 4% special additional duty.

  37. Indirect Tax proposals (continued) D. Promote Renewable Energy: • Basic customs duty reduced from 10% to 5% on forged steel rings used in the manufacture of bearings of wind operated electricity generators. • Exemption from special additional duty on parts and components required for the manufacture of wind operated electricity generators. • Concessional basic customs duty of 5% on machinery and equipment required for setting up of compressed biogas plants (Bio-CNG). • Exemption from basic customs duty on specified inputs for use in the manufacture of EVA sheets and back sheets and flat copper wire for the manufacture of PV ribbons.

  38. Unresolved Tax Issues

  39. Unresolved Tax Issues Goods & Service Tax The Finance Minister expressed hope to resolve the following areas within this year: • Apprehension amongst the states on surrendering their taxation jurisdiction. • Unpaid Compensation to States for revenue loss. • Legislative scheme for GST by year end. Demand notices under Retrospective legislation to continue • Only fresh cases to be first referred to a high level committee / CBDT for review. No measures for pending litigations at Commissioner(A) / ITAT / CESTAT / HC / SC – Tax demands for Rs. 40 lakh million.

  40. Mr. Sunil KumarPartner sunil.kumar@rsplaw.inwww.rsplaw.net Thank You!

  41. New Delhi OfficeRS&P House, P-24 Green Pak Extension, New Delhi 110016, India T. +91 (11) 4747 1414 E. new.delhi@rsplaw.in Mumbai Office 204-207, Krishna Chambers, 59 New Marine Line, Churchgate, Mumbai 400020, India T. +91 (22) 4096 1000 E. mumbai@rsplaw.in Hyderabad Office 614, Babukhan Estate, Basheer Bagh, Hyderabad 500001, India T. +91 (40) 4210 2424 E. hyderabad@rsplaw.in Bangalore Office 401, Prestige Meridian II, 30, Mahatma Gandhi Road, Bangalore 560001, India T. +91 (80) 4113 1900 E. bangalore@rsplaw.in

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