Budget 2015: Of flowers and thorns

Linkedin-hero-banner_FinalUnlike in the last year’s longer speech, the Finance Minister (FM) chose to recite a couplet right in the beginning of his speech when he presented his Budget for 2015–16. He refers to the “flowers” this Government has been “showering” to improve the investment and business climate in India. On Tax policy in particular, the FM made two points. These are:

      • Measure to fight the scourge of black money
      • Endeavor to foster suitable tax policy and non-adversarial tax administration in the last nine months

Goods and Services Tax Act (GST): The FM made a firm commitment of implementing the GST from the announced date of 1 April 2016, which will be a significant enabler to growth and investment. He has increased the service tax rate to 14%, with an enabling provision of levying a further rate of 2% Swachh Bharat Cess. Furthermore, he has reduced exemptions, broadened the base, simplified the procedures and eased credit rules as a commitment to move towards a GST.

Corporate Tax: The FM made a surprise announcement of a roadmap of reducing the basic rate of corporate tax in India from 30% to 25% over the next four years to make it competitive vis-v-vis other major Asian economies. This will be accompanied by rationalization of various kinds of prevailing tax exemptions and incentives for corporate taxpayers. If implemented appropriately, this should result in increased certainty of tax, by avoiding disputes in interpretations of various tax exemption provisions and lead to improved after tax profits in the hands of corporations. However, in an equally surprising move, for Financial Year (FY) 2015–16, it appears that the corporate tax rate will actually increase for incomes exceeding INR1 crores as the surcharge thereon has increased from 10% to 12%. The increase in surcharge is explained to be in lieu of abolition of Wealth Tax. As a result, maximum marginal tax rate and tax rate for domestic companies with income in excess of INR10 crores is expected to go up to 34.608% from 33.99%.

Steps to tackle black money: The FM announced a first of its kind law on black money making concealment of income and assets and evasion of tax in relation to foreign assets a prosecutable offense with punishment of rigorous imprisonment of 10 years. He also announced a new and more comprehensive benami transaction prohibition law to curb domestic black money transactions and ensure confiscation of benami property besides prosecution.

Alternate Investment Funds (AIFs): Following international best practices, the tax pass through treatment has been provided for most categories of AIFs so that tax is levied on the investor of the funds and not on the funds per se. This is a welcome evolution from the circular issued by the Central Board of Direct Taxes (CBDT) a few months ago, which seemed to miss the point about pass through treatment altogether.

Real Estate Investment Trusts (REITs): The budget has provided the much needed clarity on whether long-term capital gains on transfer of units in REITs as part of IPO will be exempt. However, it appears that Minimum Alternate Tax (MAT) will continue to apply at the time of creation of REIT for a corporate sponsor as well as Dividend Distribution Tax (DDT). in case of special purpose vehicles (SPVs) investing in properties. Moreover, no tax exemption (deferral) is provided in case the sponsor transfers real estate to REIT. It remains to be seen whether this instrument will take off basis partial clarifications announced in this Budget.

There is a welcome announcement by the FM that Permanent Establishment (PE) norms will be modified to encourage offshore funds managers to relocate to India by not proposing to treat their presence as a PE in India. On a reading of the conditions, which need to be satisfied, it appears that such funds will be well advised to seek an advance ruling from the Authority of Advance Rulings (AAR) to get certainty. It is to be hoped that with the strengthening of AAR benches, we will begin to see quicker disposal of ruling requests than has been the case in the last couple of years.

General Anti Avoidance Ruling (GAAR): The applicability of GAAR has been postponed by two years and it is also been made clear that it will apply only prospectively on investments made on or after 1 April 2017. It is to be hoped that amendments to GAAR Rules will make this amply clear without too many conditions attached so as not to defeat the purpose of this clarification.

Tax on Indirect Transfers: One of the thorns from the previous Government is the retrospective applicability of tax on indirect transfers. The much needed clarification on prescribing the threshold limit for the rule to apply has now been provided at a fairly reasonable level of 50%, which is also recommended by the Shome Committee. However, it would have been better if this clarification would have been made applicable right from the time the original provision is made applicable rather than from 1 April 2016 to remove all doubts in this regard. Moreover, the retrospective applicability of the law itself still remains. It would have been far better if this too would have been clarified once and for all to end this controversy.

MAT on Foreign Institutional Investors (FIIs): An avoidable controversy has recently arisen in respect of demands made by Tax authorities to levy MAT on capital gains made by FIIs in India. This move seems to be against the intention of the MAT provision and the FM has done well to clarify that no MAT will be applicable on long-term capital gains made by FIIs. However, this should have been made applicable to all foreign companies (including foreign portfolio investors), which does not have presence in India and not just FIIs. Moreover, there is a need to clarify this on retroactive basis. Furthermore, by restricting the exemption to long-term capital gains, a motion may be created that MAT will apply to short-term gains made by FIIs, which will still be only a partial relief for them.

Inverted Duty Structure: A reduction in Basic Customs Duty, Central Excise Duty (CED) and Special Additional Duties (SAD) on raw material in case of certain industries, which were witnessing an inverted duty structure, has been introduced. This will boost manufacturing in India and reduce the cost of certain products and increase their demand.

Overall, the FM is justified in referring to the showering of various flowers across the tax policy spectrum. He could perhaps have made an enhanced endeavor to remove some of the legacy thorns in this budget itself. Having said this, he deserves to take a bow for walking a fairly bold path of stable tax policy regime and a clearly in the face legislative response to the scourge of black money.

This article was also published in Financial Express on 1 March 2015

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