Union Budget 2015: More stable and sustainable tax regime for corporates

Prashant Khatore

The FM has described this budget as laying down the road map for accelerating growth, enhancing investment and taking the benefit to the common man for improving quality of life through round-the-clock, round-the-year Government.

In the first full Union Budget presented under Modi Government, the FM highlighted the changes in the economic environment since this Government took over in terms of fall in inflation rate, decrease in current account deficit, GDP growth aiming toward two digits, foreign inflow resulting currency reserves and rupee becoming stronger. In an environment where the whole world is going through a financial crisis, India’s GDP growth is expected to accelerate to 7.4% making India the fastest growing large economy in the world.

The taxation has been described by FM as an instrument of social and economic engineering as tax collection helps in providing education, healthcare, housing and other basic facility which address the problem of poverty, unemployment and slow development. While making tax budget, the FM focused on curbing black money, growth through promotion of domestic manufacturing and ‘make in India’, good governance for business by simplification, welfare of middle class taxpayer and maximise benefits to the economy.

In order to simplify the tax regime, the key corporate tax proposals of the FM have been deferment of General Anti Avoidance Rules (GAAR), dropping of Direct Tax Code (DTC) in light of evolved jurisprudence, abolition of wealth tax, clearing doubts on indirect transfer of assets in India.

In continuation to the last Budget, the FM cleared the air on retrospective amendments and reassured the investors that the government was firm on its stand to provide a more stable and sustainable tax regime with less confusions and uncertainties.

As a measure to avoid dispute, the GAAR has been deferred for 2 years and would apply prospectively to investments made on or after April 1, 2017. The other measures are like increase in domestic transfer pricing threshold limit from Rs. 5 crore to Rs. 20 crore to reduce hassle for small taxpayer, not to treat Fund managers working in India to be Permanent Establishment (PE) for foreign investors.

In another intelligent move by the FM, wealth tax has been proposed to be abolished since the collections are very low as compare to costs. Instead, an additional surcharge of 2% has been proposed to be levied on super-rich with a taxable income of over Rs. 1 crore.

The new government reaffirmed its commitment to track down and bring back black money by proposing to introduce a Bill in this regard. Apart from black money outside India, the Government efforts are to control the black money floating in India. Though new law is not part of this finance bill, it was mentioned in the speech that the new law shall provide for harsher penalty and prosecution for concealment of income and assets and evasion of tax in relation to foreign assets. There will be rigorous provision for penalty (300%), imprisonment (upto 10 years), prosecution for non-filing or non-disclosure of foreign assets in return. The offences will be non-compoundable and taxpayers shall not be allowed to approach the Settlement Commission. The offence will also be covered in other laws so as to have a larger impact including confiscation of assets. The FM has also proposed to control cash transactions for this purpose by incentivising debit/credit card transactions.

As a step further toward promotion of domestic manufacturing and ‘make in India’, the FM proposed to reduce the corporate tax rate. India is being considered as having a high corporate tax regime but still enough taxes are not collected due to excessive exemptions. Accordingly, there is a need to adopt a policy of moving away from exemptions and moving towards lower tax rates. FM proposed to reduce the rate from 30% to 25% over next 4 years. However, for next year (i.e. FY 2015-16) no change in the rate is done.

To boost domestic and foreign capital, ‘Tax Pass Through’ status has been proposed to be granted to Funds as notified by SEBI so that tax is levied on the investors in the Funds and not on the Funds in most of the cases. To boost the infrastructure, the tax regime for Real Estate Investment Trust and Infrastructure Investment Trust has been further clarified. Further, in order to attract latest technology into India and rectify earlier Government’s aggressive position, the rate of income tax on royalty and fees for technical services has been proposed to be reduced from 25% to 10%.

It has been proposed that the foreign company may now be treated as resident for tax purposes in case it has place of effective management in India as against the earlier provision which require the whole management should be in India.

Further, it has been proposed that capital gain earned by FII will not be part of book profit for MAT purpose which may lead to ambiguity on position of other taxpayers who have capital gains but do have a requirement to prepare books of accounts.

To conclude, the budget has laid down the road map for inclusive India growth covering expectation of mass including very strong measures on black money, to bring India back on growth path. With key bills underway, alongwith current finance bill, the economic environment is expected to get significant boost.

Author is partner tax at EY India

Manish Bansal, Senior Tax Professional, EY contributed to the article

The views expressed in this article are personal to the author