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« Direct Tax »
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Direct Tax implications & analysis
March, 01st 2016

The Union Budget 2016 is primarily driven with the objective of accelerating start ups, investment and growth as well as reducing litigation. The growth of GDP has now accelerated to 7.6% for the current financial year and makes India – the next economic hotspot globally. The fiscal deficit for FY 2016-17 is expected to be contained at 3.5% of GDP which resembles a high level of fiscal discipline.

Ø The Direct Tax Dispute Resolution Scheme 2016 – Overwhelming Response Expected

The Budget contains “The Direct Tax Dispute Resolution Scheme 2016” which would permit the taxpayers whose appeals are pending before the first appellate authority to pay the tax and interest up to the date of assessment where disputed tax is up to Rs. 10 lakh. In cases where disputed tax exceeds Rs. 10 lakh, 25% of the minimum penalty leviable shall be payable. There will be no penalty or prosecution, not even interest for the period after assessment. The total disputed amount in litigation is estimated at Rs.5.50 lakh crores with over 3 lakh cases. I expect an overwhelming response to this scheme as this is a golden opportunity for tax payers who have pending litigation to resolve the same due to interest remission for the period after assessment, long drawn litigation, relief from recovery and penalty proceedings and cost of litigation.

Ø The Income Declaration Scheme 2016 – 45% Rate Too High?

The Budget contains “The Income Declaration Scheme 2016” which will provide a window to the taxpayers who have not paid full taxes in the past to ensure compliance by paying 45% of declared income as tax and penalty. This will result in no further interest or penalty or prosecution. The scheme will be open from June 2016 to September 2016 and will be subject to specified conditions.

In my view, this would be successful only the rate of 45% is reduced to the proposed maximum marginal rate of 35.535% {(30%+15% surcharge thereon)+3% cess}. In the case of similar compliance window earlier in this year for the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, a rate of 60% of the income or assets disclosed was specified and the scheme did not generate the desired response. It is also necessary that the computation mechanism is pragmatic and in the case of assets acquired in earlier years, the cost of acquisition is taken as the basis and not the current value. This is particularly true in the case of assets such as gold or shares or immovable property which may be have been acquired in earlier years at a much lower cost.

Ø Burying the Retro Amendment Ghost – Vodafone Resolved?

In the case of tax disputes due to retrospective changes of law (such as Vodafone for indirect transfer of shares), it is proposed to permit the settlement of dispute subject to the payment of tax which will ensure complete immunity from interest, penalty and prosecution. It may be pointed that in many cases, the amount of interest and penalty is now more than the tax amount itself. This can help restore the confidence of international investors and would be a serious statement of commitment to reduce litigation and conveying a message that we have a tax regime that “listens”. This will help us bury the ghost of retrospective amendments which have tarnished India’s image with global investors.

Ø Corporate Tax Rates – Widespread Disappointment

In last Budget 2015, it was announced that the corporate tax rates will be lowered over the next 4 years from 30% to 25%, However, the corporate tax rate has remained unchanged except for specific manufacturing companies set up after April 1, 2016 (i.e. 25% plus applicable surcharge and cess) and specified small companies having annual turnover of less than Rs. 5 core (i.e. 29% plus applicable surcharge and cess), although MAT shall be applicable to them. In turn, it has proposed phased elimination of deductions and exemptions including sunset clause for setting up of SEZ units.

MAT and DDT rate remains unchanged at 21.3416% {(18.5%+12% surcharge)x3% cess} and 20.358% {(15%+12% surcharge)x3% cess with grossing up} respectively. It is also proposed to tax any income by way of dividend in excess of Rs. 10 lakh in the case of an individual, Hindu undivided family (HUF) or a firm who is resident in India at 10% on gross basis. As a result, the corporate sector would feel disappointed at the continuing high tax rates.

Ø Deferral of POEM and likely Deferment of ICDS – Welcome Moves

The determination of residency of foreign company on the basis of Place of Effective Management (POEM) is proposed to be deferred by 1 year. This is a welcome move. It is hoped that the Income Computation and Disclosure Standards (ICDS) would also be deferred as per recommendation of the Eswaran Committee. This will ensure that we do not have a fresh spate of litigation over these untested propositions.

Ø Employment Generation Likely to be Boosted – Deduction under Section 80JJAA Extended to Service sector

It is proposed to broaden and liberalize the scope of the employment generation incentive available under Section 80JJAA of the IT Act. The deduction will be available, not only to assessees deriving income from the manufacture of goods in a factory but, to all assessees who are subject to statutory audit under the IT Act. Thus, a deduction of 30% of the emoluments paid to such employees can be claimed for 3 years. The minimum number of days for which they should be employed during the year is proposed to be reduced from 300 to 240 days. No deduction will, however, be admissible in respect of employees whose monthly emoluments exceed Rs.25,000. Also, no deduction will be admissible in respect of employees for whom the Government is paying the entire EPS contribution. This shall boost employment opportunities in the economy.

This is a great initiative since the service sector now contributes over 55% of the GDP and has high employment generation propensity. This coupled with the government announcement to bear 8.33% of the contribution to EPF for the first 3 years employees drawing remuneration up to Rs.15,000 per month should really aid in the new employment generation.

Ø Withdrawals from Fresh Contributions to Recognized Provident Funds/ Pension Funds and National Pension Scheme Partially Taxable

Under the existing provisions of the Income-tax Act, tax treatment for the National Pension System (NPS) referred to in section 80CCD is Exempt, Exempt and Tax (EET). It is proposed that withdrawal up to 40% of the corpus at the time of retirement shall be tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognized provident funds, including employees provident Fund, 40% of corpus created out of contributions made on or from 1.4.2016 shall be tax exempt upon withdrawal. It may be pointed out that presently withdrawals from recognized Provident Funds are generally exempt from tax altogether whereas withdrawals from NPS are taxable entirely. It may be pointed out that the Public Provident Fund (PPF) withdrawals shall continue to be exempt.

This has certainly been a matter of disappointment since a vast number of employees have been contributing to the recognized provident funds which have been a form of social security in India.

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