Budget to be an indicator of the Government’s future tax strategy

Caucasian businessman using digital tablet in cafeThe Narendra Modi Government is expected to announce Budget on 28 February 2015, which is being closely watched by industry and trade. This will be its first full and perhaps most crucial budget against the economic backdrop of a still-nascent recovery in the economy and an even more nascent stage in investment and consumption.

India Inc. expects the budget to be an indicator of the Government’s future tax strategy to boost the Indian economy. Certainty in the tax regime, deferment of GAAR and a more efficient dispute resolution is likely to be key expectations across business.

Listed below are some of the key tax changes expected in the life sciences, retail and infrastructure and shipping sector:

Life Sciences sector

The Government should aim to provide a deduction on all R&D activities enabling improved flexibility in claiming benefits. Significant expenditure incurred on legal/consulting fees for filings in the US for NCE and ANDA, and preparations of dossiers, etc. should also qualify for weighted deduction.
The CBDT Circular disallowing expenditure on freebies to doctors is vague on scope of expenses and manner of administration, leaving the same to discretion of tax officers. The Government could seek to rationalize provisions by providing increased clarity for claim of such expenditure to avoid unnecessary litigation.

From an indirect tax perspective, one of the stumbling blocks for “Make in India” campaign to pass the test of business is the perennial issue of “inverted duty structure”.

Active Pharmaceutical Ingredients (raw material) attract excise duty @ 12.36% whereas the finished formulations attract excise duty @ 6.18% leading to accumulation of credit, which is a cost for this sector. This issue is yet to be resolved in spite of persistent follow up by the industry.

The industry has long been seeking waiver from levy of service tax on R&D/clinical trial services performed in India where the recipient of service is situated outside India. The service tax levy @ 12.36% has rendered the services costlier as compared to service providers located in other countries.

Retail sector

Currently, investment-linked benefits are provided only for specified businesses such as setting up and operating cold storage facility. To promote investments in infrastructure, such incentives should be extended to retailers investing in back-end infrastructure as part of business.

Moreover, profit-linked incentive for triggering employment opportunities is limited to industrial undertakings. Similar provision is required for the retail sector, which boasts of providing around 35 million job opportunities.
Costs associated with marketing, franchisee fees, advertising, sales promotion, and royalty are common in retail but often suffer prolonged transfer pricing litigation. To address this, the Government should provide clarifications on transfer pricing issues faced by retailers.

From an indirect tax perspective, this industry has been demanding rationalisation of inverted duty structure and promotion of domestic manufacturers. The inverted duty structure due to FTA is making Indian manufacturers uncompetitive.

For example, import of input used for LCD/ LED TV should be reduced to 0%, which currently attracts 10%/7.5% as the case may be whereas import of LED/LCD under FTA attracts 0%/3% BCD.

The apparel industry has also been facing the brunt of increased operating costs such as payment of service tax on renting of immovable property, which is not available as input service credit. A solution by way of plugging the credit leakage is also top on the agenda of expectations of the said industry.
Infrastructure/shipping sector

Infrastructure and shipping sector

Due to the complex interpretation of Indian tax laws, there is an ambiguity whether such modernisation/ expansion projects qualify as “new” infrastructure facility in order to be eligible for income-tax holiday. The Government should unequivocally clarify that such modernisation and expansion of brownfield projects are eligible for the income-tax holiday benefit. Another important aspect to be considered by the Government is providing income-tax holiday for all infrastructure projects, including sub-contracts emerging out of PPP concessions. Exemption to infrastructure companies from purview of MAT will be warmly welcomed.

Although Indian seafarers are given a special relief of 182 days, it is recommended that period of stay of sea fearers outside India be calculated on the basis of dates stamped on their passport/ CDC.

For instance, Indian ship going from India to Singapore goes through various Indian ports on its route before crossing coastal boundaries of India. In this case, number of days outside India, for Indian crew working on such Indian ship, gets counted only from the date when the Indian ship crosses coastal boundaries of India. However, the date on which the immigration stamp is embossed on the passport should be considered for determining number of days outside India, irrespective of time spent in Indian territorial waters.

For the infrastructure sector, the law provides for exemption from service tax on specified works contract such as in relation to airports, railways. However, similar benefits have not been extended to the power sector, public transport sector etc., leading to increased tax costs qua such projects. This sector will be closely watching the Budget for similar benefits.

Additionally, industry and trade would look forward to a GST road map from the Finance Minister in the Budget. While it appears that the GST Constitutional Amendment Bill will be passed in both houses of the Parliament during the Budget session, it would help to have the view of the Government on implementation of GST and the possible implementation date of GST in the Budget Speech of the FM.

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