India Financial Consultancy

Expectations from Union Budget 2016

The countdown for the Budget 2016 has begun. From average taxpayer to tax experts, all eyes are transfixed on the Union Budget 2016. It is to our credit that many of our predictions came true in the Union Budget.

This time also we have recommended substantive/procedural changes and various other matters which CBDT should clarify to end the controversy and to bring about certainty in the Income-tax laws.

Our expectations from the Union Budget, 2016

Union Budget likely to reduce corporate tax rate with rationalization of exemptions

On February 28, 2015 the Hon’ble Finance Minister, Mr. Arun Jaitley had proposed to reduce the corporate tax rate from 30% to 25% in his Budget Speech. Snippets from budget his speech are given hereunder:

“The basic rate of Corporate Tax in India at 30% is higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive. Moreover, the effective collection of Corporate Tax is about 23%. We lose out on both counts, i.e. we are considered as having a high Corporate Tax regime but we do not get that tax due to excessive exemptions. A regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion. I, therefore, propose to reduce the rate of Corporate Tax from 30% to 25% over the next 4 years.“

On the expected lines, the Finance Ministry on November 20, released following plan to bring down the tax rate from 30% to 25% over the next four years.

 1) Profit linked, investment linked and area based deductions will be phased out for both corporate and non-corporate taxpayers.

 2) The provisions having a sunset date will not be modified to advance the sunset date nor will the sunset dates provided in the Act be extended.

 3) In case of tax incentives with no terminal date, a sunset date of March 31, 2017 will be provided either for commencement of the activity or for claiming of benefit, depending upon the structure of the relevant provisions of the Act.

 4) There will be no weighted deduction with effect from March 31, 2017.

Thus, it is clear that corporate tax rate would be reduced and some tax exemptions will be rationalized in the ensuing budget 2016.

Tax incentives for start-ups

The Government of India has announced ‘Start-up India’ initiative for creating a conducive environment for start-ups. So, it is very likely that big announcements would be made in upcoming Budget 2016 to promote start-ups in India.

As per recent notification issued by the Ministry of Commerce and Industry, Government of India, an entity shall be considered as a ‘start-up’:

a) For a period of five years from the date of its incorporation/registration;

b) If its turnover for any of the financial years does not exceeded Rs. 25 crore; and

c) It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

However, any such entity formed by splitting-up or reconstruction of a business already in existence shall not be considered a ‘start-up’.

The tax incentives which could be proposed for Start-ups in Union Budget 2016 are as under:

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.

Disallowance under Section 14A should be reconsidered

a) Dividend income and share in profit of 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.

Such recommendations are in line with the report submitted by the Income Tax Simplification Committee headed by Hon’ble Justice R.V. Easwar.

Amendments needed in MAT provisions

Corporate India gleefully greeted the Budget 2015 when the Finance Minister announced the scaling down of corporate tax rate in the next 4 years to finally halt at 25 percent. In the backdrop of slowdown of economies across the globe, corporate India might be tempted to seek some tax benefits to spur growth in India by way of amendments to certain tax provisions, besides reduction in tax rates in the ensuring budget.

Such reduction in the corporate tax rate would not be able to achieve cherished objective of the corporate sector if such benefits are taken back by way of Minimum Alternative Tax. Thus, it is recommended as under:

a) Relief from applicability of MAT should be allowed to foreign companies if they do not have PE in India;

b) Interest under sections 234B and 234C should not be levied for default/deferment in payment of advance tax when the income is assessed under MAT provisions;

c) Unutilized MAT credit should be allowed to successor in cases of business reorganization;

d) Long-term capital gains exempt under Section 10(38) should be exempt from levy of MAT as well; and

e) No disallowances should be made under section 14A while computing book profit in terms of section 115JB.

Applicability of Section 206AA if tax rate under treaty is more beneficial

As per section 206AA where the deductee does not furnish the PAN, tax shall be deducted at source at higher of the following rates:

a) rate specified in the relevant provision of this Act; or

b) rate or rates in force; or

c) 20%.

As per provisions of Section 90, non-resident taxpayers (to whom provisions of DTAA are applicable) shall apply provisions of the Income-tax Act or DTAA whichever, is more beneficial to them. However, due to application of Section 206AA such non-residents are taxed at higher rate of 20% even if tax rates under treaty are beneficial. In certain judicial precedents it was held that section 206AA, being just a procedural section relating to recovery of tax, cannot override section 90(2) and upheld the TDS at rates as per DTAA.

Thus, this issue needs to be clarified in the ensuing Budget.

Transfer Pricing and Marketing intangibles

Marketing intangibles have been one of the most contentious issues in Indian Transfer pricing litigation history. With a number of game changing and landmark rulings rolled out in 2015, a level playing field has been created in the matter. However, there is still room for more clarity to be provided as the matter travels to The Supreme Court, for the multinationals to take steps to mitigate onerous litigation and tax exposure in the matter.

It is recommended that following transfer pricing issues should be addressed to in the ensuing Finance Bill, 2016:

a) Whether AMP expense could be considered as an international transaction?

b) Whether Bright line test should be applied to identify excess AMP expenses?

c) Whether direct marketing, sales promotion and selling expenses should form part of AMP expense?

d) Aggregation of closely linked transactions in case of marketing intangibles.

DTAA benefit should be allowed on basis of self-declaration instead of TRC

Non-residents in India intending to avail benefit under the DTAA between India and any other country need to produce a certificate of his being resident, i.e., Tax Residency Certificate (‘TRC’) from the tax authorities of the country of which he is a resident. It poses a few challenges, which are given hereunder:

a) Many of the countries follow calendar year as the tax year. Therefore, when claiming benefit for the Indian fiscal year (from April 1 to March 31), TRCs for two tax years of that country would be required, which may not be available at the same time. Therefore, the tax benefit for the entire Indian FY may not be claimed together.

b) Many countries may not have any provision under their tax laws for issuance of TRC. It implies that the benefit under the tax treaty, which is otherwise available, cannot be claimed just because TRC is not issued by foreign country, although the individual qualifies as resident in the foreign country.

c) Obtaining TRC is time taking and is not an instant process. Foreign tax authorities need to review details furnished by an individual before issuing TRC. Also, many countries issue TRC only after the tax return for the year for which TRC is sought has been filed and processed by the tax authorities. A dilemma is often caused taxpayers whether to claim treaty benefit in India pending the receipt of TRC at the time of filing the Indian tax return. This is because requirement in the tax return forms to mention the TRC details

Thus, it would be a welcome move if the provisions of the Indian income-tax laws are amended to enable the individual to claim the DTAA benefit based on self-declaration or foreign tax return to avoid these challenges.

Interest on refund arising on excess payment of self-assessment tax

Section 244A of the Act, deals with the grant of interest on refund of any amount of tax, which becomes due to the assessee in terms of the provisions of the Act. The section was inserted in the statute as a measure of rationalization, to ensure that the assessee was duly compensated by the Government by way of payment of interest for monies legitimately belonging to him and wrongfully retained by the Government without any gaps.

Though section 244A starts with the words ‘refund of any amount of tax’, yet when we talk about eligibility of interest on amount of refund which is deposited by the taxpayers by way of self-assessment tax under section 140A, the same is highly debatable issue and has been a subject matter of litigation.

So, it is recommended to amend section 244A to allow interest on refund arising due to excess payment of self-assessment tax.

Clarity needed on taxability of Joint Development Agreements

For development of real estate, concept of joint development arrangement has emerged as a popular model wherein land owner and developer combine their resources and efforts. Under a typical joint development agreement, land owner contributes his land and enters into an arrangement with the developer to develop and construct a real estate project at the developer’s cost. Thus, land is contributed by the land owner and the cost of development and construction is incurred by the developer.

The land owner may get consideration in the form of either lump sum consideration or percentage of sales revenue or certain percentage of constructed area in the project, depending upon the terms and conditions agreed upon between them. In this manner, the resources and efforts of land owner and developer are pooled together so as to bring out the maximum productive results.

There is no clear cut guideline under the Income-Tax Act to determine the taxability of joint development agreements. Thus, guidelines prescribed by judicial precedents have to be considered to determine taxability of land owner and developer. However, divergent views have been expressed by the Courts on certain complex issues in case of Joint Development Agreements. It is expected that in the forthcoming Union Budget 2016-17 clarity may be brought out with respect to taxability of Joint Development Agreement.

Taxability of secondment arrangements

Under a typical secondment arrangement, the seconded employees/assignees are transferred to the host country entity (the Indian entity) to work on special assignments, which are generally technical or managerial in nature. For the period under secondment, the secondees work under the direction, control and supervision of the Indian entity. Through the seconded employees the investors are able to efficiently nourish their investments in India. However, there are no clear cut guidelines to determine taxability in secondment arrangements. Thus, the secondment agreements have led to legal wrangle’s between revenue and foreign entities.

The Indian Revenue alleges that that foreign entity ultimately exercises its powers and it is the real and economic employer of the secondees. Consequently, the foreign entity has a presence in Indian through its employees and thus has a service PE in India.

Furthermore, in situations where it is not possible to attract service PE, the revenue alleges that the reimbursement of salaries of secondees by the Indian entity is in the nature of ‘fees for technical services under the provisions of Indian tax laws/tax treaty.

It is recommended that in the forthcoming Finance Bill, 2016 the stand of revenue on taxability of sum paid under secondment agreements should be made clear. (more…)