Overall, this budget seems to be a workman like budget without any significant ideas. It seems that the deteriorating macro economic situation coupled with impending elections in 2014 may have crippled Finance Minister, P Chidambaram..S.R. Patnaik, Partner in the Direct Tax Division at Luthra & Luthra Law Offices shares his initial reaction to the Budget announced yesterday..Overall, this budget seems to be a workman like budget without any significant ideas. It seems that the deteriorating macro economic situation coupled with impending elections in 2014 may have crippled Finance Minister, P Chidambaram..On the positive side, the impetus being provided to the Infrastructure Sector is a very good move. The country’s infrastructure being in dire straits, it desperately required additional incentives and the FM did not disappoint..The other important move is to treat foreign investors holding less than 10% stake in an Indian company at par with FIIs. While one needs to see the actual fine print of the policy, it appears that the Scheme shall be significantly simplified..Some of the other amendments proposed in the Budget on Direct Taxes include the following:.Imposition of Commodities Transaction Tax on derivative trading: While this was widely expected, it is bound to impact the market since it will be applicable to sensitive transactions such as trading in precious metals and increase hedging costs..Tax Residency Certificate (TRC): Presently, submission of TRC containing prescribed particulars is a sufficient condition for availing benefits of the tax treaties entered into by India. However, the proposed amendment deems it a necessary but not sufficient condition to invoke treaty benefits. This may have a significant implication in case of all transactions entered into with non-residents as the tax authorities may challenge the availability of treaty benefits despite a valid TRC leading to increased litigation as well as investor apprehensions. .Additional tax on buy-back of shares by unlisted companies: This amendment would lead to a situation where an additional burden is placed on unlisted companies. Further, since this tax is not in the nature of a withholding tax, the company will not be able to avail credit in respect of these taxes. Further, akin to DDT payable by companies, this tax will not be eligible for any treaty benefits. However, this will be beneficial for the shareholders as the gains arising from the buy-back will not be taxed as capital gains in their hands, mimicking the DDT regime. .Increase in withholding tax on royalties / fees for technical services: This amendment proposes to increase the tax payable by non-residents on income in the nature of royalty and fees for technical services from the existing 10% to 25%. This would result in a significant increase in cost of operations for Indian companies who are dependent on technology from foreign technology providers because foreign technology providers generally would pass on the Indian tax liability to the Indian importer. However, in case the foreign collaborator is from a treaty country, then it may remain unaffected due to the overriding provisions of the treaty. Other foreign corporate who would have charged their Indian affiliates would now have to factor in this additional cost. .Immovable property transactions: Another surprise sprung by the budget was imposition of TDS of 1% on consideration for sale of immovable property above INR 50 lakh (except agricultural land) which was proposed to be introduced last year but was scrapped. This is targeted towards lowering tax evasion in case of large-value property deals to check pure investment linked transactions, it is likely to cause inconvenience to genuine property transactions..Further the budget has also effectively extended the provisions of Section 50C of the Act to immovable property which forms part of stock-in-trade. Earlier this was restricted to land and buildings which were in the nature of capital assets. This will significantly impact the real-estate sector which regularly engages in buying and selling of lands and building in the course of their business. .Industry incentives: Another incentive which has been modified by the government includes Section 80JJAA wherein allowances were extended to Indian companies having industrial undertakings engaged in manufacturing in respect of wages paid to new workmen. However, this has now been modified to provide that the deduction shall be available to Indian companies manufacturing goods in their factories. Under the Factories Act, 1948 a factory requires a workforce of only ten workmen and above and manufacturing processes are defined expansively. Therefore, while this amendment might appear to be restrictive in its ambit, the actual impact remains to be seen..Clarifications: Certain important clarifications have also been issued in the budget such as inclusion of penalty and interest in the tax dues which can be recovered from the directors of defaulting private companies and partners of LLPs apart from merely the tax. This is a good measure to bridge the gap in tax recovery..Some of the positive developments in the budget include the enabling provisions to file electronic wealth tax returns; concessional withholding tax rate of 5% on interest in case of certain rupee denominated long-term infrastructure bonds; pass through status to Category 1 Alternate Investment Funds as a Venture Capital Fund thus availing them exemptions from investment in venture capital undertakings; removal of the cascading effect in respect of dividends received by a domestic company from a similarly placed foreign subsidiary in respect of payment of DDT; continuation of the concessional 15% tax rate in respect of DDT payable of dividends received by a domestic company from a foreign subsidiary; and deduction on investment in new plant or machinery by manufacturing entities upwards of INR 100 crores in the next two financial years among other provisions. .However, at the same time, the FM has disappointed by not taking any concrete action on the following fronts: .Safe Harbour rules for IT Sector: The Indian Prime Minister had set up a panel to bring about clarity on taxation matters pertaining to development centres and the Information Technology (IT) sector. The four-member panel was headed by Shri N. Rangachary, former Chairman of the Central Board of Direct Taxes..The panel has addressed issues relating to the taxation of the IT sector such as the approach to taxation of Development Centres, tax treatment of onsite services of domestic software firms, and also the issue of finalizing the Safe Harbour provisions (announced in 2009) for transfer pricing purposes. The panel has submitted its report to the Finance Ministry..While the Finance Minister has stated that the report will be considered and rules on Safe Harbour will be issued by the end of March, 2013, there is no clarity as to the substantive implications of these rules since the Report has not been disclosed to the public for comments until today. .Shome Committee recommendations on GAAR: The Prime Minister had set up an Expert Committee on GAAR (“Shome Committee”) last year to undertake stakeholder consultations and finalize the guidelines for GAAR. While a few of the recommendations of the Committee were accepted such as deferment of the GAAR regime to AY 2016-17 and the application of GAAR being restricted to only transactions where the only purpose was tax avoidance as well as the constitution of the Approving panel to include a present/former High Court judge and an industry expert..However, several crucial recommendations of the Committee have not been incorporated. These include abolition of tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents; monetary threshold of Rs 3 crore of tax benefit to a taxpayer in a year for the applicability of GAAR provisions; avoiding treaty override where the tax treaty has inbuilt anti-avoidance provisions in the form of an LOB clause; validity of the Circular No. 789 of 2000 with respect to Mauritius wherein GAAR provisions should not apply to examine the genuineness of the residency of an entity set up in Mauritius, etc..This may add to the uncertainty regarding the impact of GAAR provisions and dilution of positive signals that the Shome Committee Report had intended to channel towards foreign investors. .Shome Committee recommendations on retrospective amendments: Finance Act, 2012 had introduced several far reaching retrospective amendments to the Income Tax Act, 1961 including overriding the Supreme Court’s decision in Vodafone. Owing to the concerns of the investors, the Shome Committee which was originally constituted to undertake stakeholder consultations on GAAR, was referred by the Prime Minister an additional issue, on the implications of the amendment on taxation of non-resident transfer of assets where the underlying asset is in India, in the context of all non-resident taxpayers. The Shome Committee had in its report had provided constructive suggestions which were largely pro-foreign investors..However, despite the critical nature of the retrospective amendments, it was surprising that there was no reference or any clarifications issued in respect of the amendments taking in consideration the feedback of the Shome Committee..On Service Tax front, some of the changes brought into the service tax regime include imposition of penalties on directors and officials of defaulting companies for specified offences in case of willful actions as well as introducing imprisonment as a form of punishment for service tax offences. At the same time, a new voluntary compliance scheme has been introduced where defaulters can voluntarily disclose their pending service tax dues from 2007 onwards and avoid penalties and interest.
Overall, this budget seems to be a workman like budget without any significant ideas. It seems that the deteriorating macro economic situation coupled with impending elections in 2014 may have crippled Finance Minister, P Chidambaram..S.R. Patnaik, Partner in the Direct Tax Division at Luthra & Luthra Law Offices shares his initial reaction to the Budget announced yesterday..Overall, this budget seems to be a workman like budget without any significant ideas. It seems that the deteriorating macro economic situation coupled with impending elections in 2014 may have crippled Finance Minister, P Chidambaram..On the positive side, the impetus being provided to the Infrastructure Sector is a very good move. The country’s infrastructure being in dire straits, it desperately required additional incentives and the FM did not disappoint..The other important move is to treat foreign investors holding less than 10% stake in an Indian company at par with FIIs. While one needs to see the actual fine print of the policy, it appears that the Scheme shall be significantly simplified..Some of the other amendments proposed in the Budget on Direct Taxes include the following:.Imposition of Commodities Transaction Tax on derivative trading: While this was widely expected, it is bound to impact the market since it will be applicable to sensitive transactions such as trading in precious metals and increase hedging costs..Tax Residency Certificate (TRC): Presently, submission of TRC containing prescribed particulars is a sufficient condition for availing benefits of the tax treaties entered into by India. However, the proposed amendment deems it a necessary but not sufficient condition to invoke treaty benefits. This may have a significant implication in case of all transactions entered into with non-residents as the tax authorities may challenge the availability of treaty benefits despite a valid TRC leading to increased litigation as well as investor apprehensions. .Additional tax on buy-back of shares by unlisted companies: This amendment would lead to a situation where an additional burden is placed on unlisted companies. Further, since this tax is not in the nature of a withholding tax, the company will not be able to avail credit in respect of these taxes. Further, akin to DDT payable by companies, this tax will not be eligible for any treaty benefits. However, this will be beneficial for the shareholders as the gains arising from the buy-back will not be taxed as capital gains in their hands, mimicking the DDT regime. .Increase in withholding tax on royalties / fees for technical services: This amendment proposes to increase the tax payable by non-residents on income in the nature of royalty and fees for technical services from the existing 10% to 25%. This would result in a significant increase in cost of operations for Indian companies who are dependent on technology from foreign technology providers because foreign technology providers generally would pass on the Indian tax liability to the Indian importer. However, in case the foreign collaborator is from a treaty country, then it may remain unaffected due to the overriding provisions of the treaty. Other foreign corporate who would have charged their Indian affiliates would now have to factor in this additional cost. .Immovable property transactions: Another surprise sprung by the budget was imposition of TDS of 1% on consideration for sale of immovable property above INR 50 lakh (except agricultural land) which was proposed to be introduced last year but was scrapped. This is targeted towards lowering tax evasion in case of large-value property deals to check pure investment linked transactions, it is likely to cause inconvenience to genuine property transactions..Further the budget has also effectively extended the provisions of Section 50C of the Act to immovable property which forms part of stock-in-trade. Earlier this was restricted to land and buildings which were in the nature of capital assets. This will significantly impact the real-estate sector which regularly engages in buying and selling of lands and building in the course of their business. .Industry incentives: Another incentive which has been modified by the government includes Section 80JJAA wherein allowances were extended to Indian companies having industrial undertakings engaged in manufacturing in respect of wages paid to new workmen. However, this has now been modified to provide that the deduction shall be available to Indian companies manufacturing goods in their factories. Under the Factories Act, 1948 a factory requires a workforce of only ten workmen and above and manufacturing processes are defined expansively. Therefore, while this amendment might appear to be restrictive in its ambit, the actual impact remains to be seen..Clarifications: Certain important clarifications have also been issued in the budget such as inclusion of penalty and interest in the tax dues which can be recovered from the directors of defaulting private companies and partners of LLPs apart from merely the tax. This is a good measure to bridge the gap in tax recovery..Some of the positive developments in the budget include the enabling provisions to file electronic wealth tax returns; concessional withholding tax rate of 5% on interest in case of certain rupee denominated long-term infrastructure bonds; pass through status to Category 1 Alternate Investment Funds as a Venture Capital Fund thus availing them exemptions from investment in venture capital undertakings; removal of the cascading effect in respect of dividends received by a domestic company from a similarly placed foreign subsidiary in respect of payment of DDT; continuation of the concessional 15% tax rate in respect of DDT payable of dividends received by a domestic company from a foreign subsidiary; and deduction on investment in new plant or machinery by manufacturing entities upwards of INR 100 crores in the next two financial years among other provisions. .However, at the same time, the FM has disappointed by not taking any concrete action on the following fronts: .Safe Harbour rules for IT Sector: The Indian Prime Minister had set up a panel to bring about clarity on taxation matters pertaining to development centres and the Information Technology (IT) sector. The four-member panel was headed by Shri N. Rangachary, former Chairman of the Central Board of Direct Taxes..The panel has addressed issues relating to the taxation of the IT sector such as the approach to taxation of Development Centres, tax treatment of onsite services of domestic software firms, and also the issue of finalizing the Safe Harbour provisions (announced in 2009) for transfer pricing purposes. The panel has submitted its report to the Finance Ministry..While the Finance Minister has stated that the report will be considered and rules on Safe Harbour will be issued by the end of March, 2013, there is no clarity as to the substantive implications of these rules since the Report has not been disclosed to the public for comments until today. .Shome Committee recommendations on GAAR: The Prime Minister had set up an Expert Committee on GAAR (“Shome Committee”) last year to undertake stakeholder consultations and finalize the guidelines for GAAR. While a few of the recommendations of the Committee were accepted such as deferment of the GAAR regime to AY 2016-17 and the application of GAAR being restricted to only transactions where the only purpose was tax avoidance as well as the constitution of the Approving panel to include a present/former High Court judge and an industry expert..However, several crucial recommendations of the Committee have not been incorporated. These include abolition of tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents; monetary threshold of Rs 3 crore of tax benefit to a taxpayer in a year for the applicability of GAAR provisions; avoiding treaty override where the tax treaty has inbuilt anti-avoidance provisions in the form of an LOB clause; validity of the Circular No. 789 of 2000 with respect to Mauritius wherein GAAR provisions should not apply to examine the genuineness of the residency of an entity set up in Mauritius, etc..This may add to the uncertainty regarding the impact of GAAR provisions and dilution of positive signals that the Shome Committee Report had intended to channel towards foreign investors. .Shome Committee recommendations on retrospective amendments: Finance Act, 2012 had introduced several far reaching retrospective amendments to the Income Tax Act, 1961 including overriding the Supreme Court’s decision in Vodafone. Owing to the concerns of the investors, the Shome Committee which was originally constituted to undertake stakeholder consultations on GAAR, was referred by the Prime Minister an additional issue, on the implications of the amendment on taxation of non-resident transfer of assets where the underlying asset is in India, in the context of all non-resident taxpayers. The Shome Committee had in its report had provided constructive suggestions which were largely pro-foreign investors..However, despite the critical nature of the retrospective amendments, it was surprising that there was no reference or any clarifications issued in respect of the amendments taking in consideration the feedback of the Shome Committee..On Service Tax front, some of the changes brought into the service tax regime include imposition of penalties on directors and officials of defaulting companies for specified offences in case of willful actions as well as introducing imprisonment as a form of punishment for service tax offences. At the same time, a new voluntary compliance scheme has been introduced where defaulters can voluntarily disclose their pending service tax dues from 2007 onwards and avoid penalties and interest.