Union Budget, 2015 – Direct Taxation

Indian Merchants’ ChamberC H Bhabha Memorial Endowment Public Meeting

March 2, 2015Presented by Ketan Dalal

Table of Contents

Mr. Jaitley speak

The BIG Picture - Hits and Misses

Impact for individual tax payers

Tax rates for corporates – overview

Incentives for manufacturing

Impact for Corporates

Some cross-border tax issues

Capital Markets impact

Other provisions

Move towards cheque economy

Slide 2March 2015

Mr. Jaitley speak…

March 2015Slide 3

“We are banking the unbanked”

“We are funding the funded”

“…the world is predicting that

it is India’s chance to fly”

“It is quite obvious that incremental change is not going to take us

anywhere. WE have to think in terms of a quantum jump.”

“Minimum Government and

Maximum Governance”

The BIG Picture – Hits and Misses

General• GAAR postponed beyond March 31,

2017• Move towards increased disclosures,

curbing black money and building a ‘cheque economy’

• Tax Administration Reform Commission (TARC) recommendations to be considered

• DTC buried

• Individuals• Savings incentivised• Abolition of wealth- tax; surcharge

increased

• Corporates• Promise to reduce corporate tax rate

to 25% over 4 years• Reduced tax rate of 10% for certain

cross border payments• Clarity on Offshore Transfers

• Silence on implementation of Income Computation and Disclosure Standards

• Reduction in rate of DDT/ credit for DDT

• Reduction in rate/abolition of MAT (especially for SEZ)

March 2015Slide 4

Impact for individual tax payers

• Personal taxes – No change in tax slabs / rates

• Abolition of wealth- tax

• Surcharge increased to 12% (from 10%) for income > Rs. 1 crore

- Maximum marginal tax rate increased to 34.61% from 33.99%

•Savings and Investment incentives

- NPS, tax free infrastructure bonds etc.

March 2015Slide 5

Impact for individual tax payers

•Non-taxable amount could be upto Rs. 5 lacs (approx.)

March 2015Slide 6

Particulars Existing Additional

Basic exemption limit 2,50,000 -

Deduction for investments 1,50,000 -

Additional deduction on NPS

- 50,000 *

Deduction for medical insurance

15,000 10,000

Exemption for transport allowance

9,600 9,600

Total 4,24,600 69,600

4,94,200

Marginal additional benefits extended, with greater flexibility for investments

* Taxable on withdrawal; Exempt-Exempt-Tax regime

Tax rates for corporates - overview

Particulars

Domestic Companies

Income > Rs. 1 crore <= 10 crore Income > Rs. 10 crore

FY 14-15 FY 15-16 FY 14-15 FY 15-16

Effective Corporate Tax 32.45 33.06 33.99 34.61

Minimum Alternative Tax 20.01 20.39 20.96 21.34

Dividend Distribution Tax 19.99 20.36 19.99 20.36

March 2015Slide 7

Tax rate for LLP (for income > Rs. 10 crore) increased from 33.99% to 34.61%

Basic tax rates unchanged, however change in effective tax rates due to increase in surcharge from 5%/10% to 7%/12%

Incentives for manufacturing

• Additional Investment allowance @ 15% and additional depreciation @ 35% for new units set up in notified backward areas in State of Andhra Pradesh / Telangana (special units)

- Available in addition to existing investment allowance provision

- Sunset clause – 31 March 2020

March 2015Slide 8

Special units Normal units

Investment in Plant & Machinery FY 2015-16

100 100

Investment allowance (32AC + 32AD)

30 (15+ 15) 15

Additional depreciation 35 20

Normal depreciation@15% 15 15

Total allowance for FY 2015-16 80 50

WDV as on March 31, 2016 50 (100-35-15)

65 (100-20-15)

Depreciation in FY 2016-17 (@15%)

7.5 9.75

Impact for Corporates

• Following changes introduced:

- Threshold for taxability defined (10 crore and 50%)

- Value of assets to be FMV

- Proportionate taxation

March 2015Slide 9

• Residency test changed from “control and management wholly in India” to “Place of Effective Management” (POEM)

- Place where key management and commercial decisions for business of entity as a whole are in substance made

Offshore transfers POEM

Part clarity on unintended

retrospective amendment

consequences

Relevance for shell and conduit outbound structures

Some cross -border tax issues

• Royalty and FTS rates reduced to 10% from 25%

- Accessing technology becomes easier

- Will reduce tax costs for Indian businesses

• Lower rate of tax on interest on certain cross border borrowings - extended by 2 years

March 2015Slide 10

Increased compliance on reporting requirements for payments to non-

residents

Capital Markets - impact

REITs/InvITs:• Sale of units by Sponsor during offer

for sale or post listing (subject to STT) - tax treatment now on par with investors

• Rental/ leasing income - pass through status – investors to be taxed

Unfinished agenda:

• MAT applicability on swap of SPV shares

• Capital gains tax on transfer of property

Slide 11March 2015

Alternative Investment Funds (AIFs):

• Categories extended

• ‘Pass through’ status to AIF category I and II with exceptions

• Dividend Distribution Tax not to apply on income distributed by the AIFs

• Mandatory to file return of income

REITs, AIFs and other amendments

Other amendments:

• Capital gains of FIIs / FPIs (excluding off-market short-term gains) excluded from MAT

• Consolidation if certain mutual fund schemes not regarded as transfer

Other provisions

• Deduction (30% of wages) for employment of new workmen

- Benefit extended to all assessees

- Limit reduced from 100 to 50 workmen

• GAAR postponed by 2 years

- Investments made before 1 April 2017, to be grandfathered

- However, judicial GAAR already exists!

March 2015Slide 12

Move towards cheque economy

• Bill for comprehensive new law to deal with black money – far reaching impact!

- Evasion of tax on foreign assets – upto 10 years imprisonment, 300% penalty, non-compoundable and no recourse to Settlement Commission

- Non-filing of return/filing without adequate disclosures – upto 7 years imprisonment

- Prosecution and Penalty exposure for entities, institutions, banks, individuals

• Increased focus on discouraging cash transactions e.g restricting cash advance for purchase of immovable property >= Rs. 20,000

• PAN mandatory for purchase/sale > Rs. 1 lac

March 2015Slide 13

Significant compliance burden; huge issue for expatriates

Some aspects addressed… but very much an unfinished agenda!

• Intent of non-adversarial regime vis-a-vis on ground administration

• Too much overlapping legislation and compliance burden

• Dispute resolution etc. is a long haul

March 2015Slide 14

Thank You!