• Economy

• Direction of Fiscal Policy

• Direct Taxes – Corporate Tax

– International Tax

– FII & Investment Vehicles

– Personal Taxation

– Other Amendments

• Indirect Taxes – Service Tax

– Excise

– Customs

Agenda

2

Economy

Highlights • Decrease in inflation by 6 percentage points since 2013

• Decrease in CAD from 6.7% of GDP (Q3, 2012-13) to estimated

1% in coming fiscal year

• Stabilization of Rupee

• Decreasing long term interest rates

• Avg. 7.2% growth in real GDP after 12 quarter deceleration

• India ranked amongst the most attractive global destinations

(Rational Investor Ratings Index)

4

International Trade

0

5000

10000

15000

20000

25000

30000

2010 2011 2012 2013 2014

Total Exports Total Imports

5

• Increase in merchandise trade from US$ 195.1 billion in 2004-05 to 764.6 billion in 2014-15

• Manufactured goods constitute 63% of exports, followed by crude & petroleum at 20% and agricultural produce at 13%

• In 2014-15, trade deficit marginally increased by 1.6%

• Net foreign investment surged from US$ 7.8 billion in 2013-14 to US$ 38.4 billion in 2014-15

GDP and inflation GDP The growth in 2014-15 has been largely driven by domestic demand with hardly any external support to growth. The growth in exports is projected to be only 0.9% and the growth rate of imports, around (-0.5%)

Inflation After remaining high for a prolonged period, inflation is trending downwards.

6

Industrial Performance • In 2013-14, manufacturing

sector growth is estimated at 5.3% as compared to the (-0.7%) estimated under the 2004-05 series. The Advance Estimates (AE) for the year 2014-15 show industrial growth of 5.9% as per 2011-12 base year.

• In 2013-14, the services sector grew by 9.1% compared to 6.6% total GVA growth and 6.9% GDP growth at market prices.

7

Direction of Fiscal Policy

• Policy driven Proposals

• Broad Principles Applied – Measures to curb Black Money

– Revival of growth through Investment • Make in India

– Minimum Government & Maximum Governance • Simplification of Tax Laws

– Benefits to Middle Class taxpayers

– Swachchh Bharat Initiative

– Standalone Proposals

Tenets of Budget Proposals

9

• Jan Dhan Yojna

• JAM Trinity – Jan Dhan, Aadhar and Mobile – Direct Money Transfer

• 2022 – Amrut Mahotsav – 75 Years of Indian Independence

• Social Security for All Indians – especially poor – Pradhan Mantri Suraksha Bima Yojna

– Atal Pension Yojna – 50 % contribution by Govt.

– Jivan Jyoti Bima Yojna – 330 for Rs. 2.00 lacs cover

– Senior Citizens Welfare Fund

Other Non-Tax Proposals

10

• GST

• 42 % of divisible pool to the States, 62 % of total tax receipt of country of the whole

• MUDRA for funding the unfunded

• Trade Receivable Discounting System

• Comprehensive Bankruptcy Law

• NBFCs entitled under SARFAESI Act, 2002

• National Investment Infrastructure Fund

• Atal Innovation Mission

• Pre-existing approval mechanism

Other Economic Proposal

11

• Concealment of Income from foreign assets (FA) – Prosecutable non-compoundable offense with 10 years imprisonment

– No Settlement Commission eligibility

– Penalty of 300% of tax

• Non-filing of Return or inadequate info liable for prosecution with 7 years imprisonment

• Income taxable at maximum marginal rate

• Beneficial owner of FA to mandatorily file Return

• Predicate offense under Prevention of Money Laundering Act – Attachment of equivalent assets in India, if FA cannot be forfeited

• Would also be treated as offense under FEMA

Proposed Law on Black Money

12

• Cash dealings of more than INR 20,000 in Real Estate to attract penalty – Effective from June 1, 2015

• PAN mandatory for purchase or sale exceeding INR 1 Lac

• CBDT & CBEC to collaborate data

• Third Party Reporting of certain cross border transactions

• New law on Benami Transaction Prohibition

Other Measures on Black Money

13

Direct Tax

• Gradual reduction in Corporate Tax Rate to 25% – To be carried out from FY 2016-17 in a span of 4 years

– Tax Rate for FY 2015-16 remains at 30%

• Scrapping of Direct Tax Code

• Deferral of GAAR

• Abolition of Wealth Tax

• Increase in “Super Rich” Surcharge by 2% – For every assessee, except foreign company, earning more than INR 1 crore

• No change in Personal Tax rates

• Avoid Sudden Surprises & Instability in Tax Regime

Major Announcements

15

Corporate Tax

• Additional Depreciation – 10% Available in subsequent year if asset put to use for less

than 180 days

• Incentives for investment in Backward area of Telangana / AP

– New unit set-up on or after April 1, 2015

– For new plant and machinery acquired and installed between April 1, 2015 and March 31, 2020

• Additional Depreciation: 35% instead of 20% • Investment Allowance: 15% - 35 AD

• No lower threshold for investment • In addition to 15% allowance available u/s. 35AC

• Subject to investment of Rs. 25 crore in previous year

Corporate Tax

17

• Minimum Alternate Taxes not applicable on – Following incomes and related expenses to be excluded from

calculation of book profits • Share of income of an AOP / (BOI ?) received by its corporate

member, which is exempt u/s 86

• Capital gains arising to FIIs (other than short term capital gains not liable to STT)

• Renewed controversy – Applicability MAT to foreign companies not having PE in India

• Domestic Transfer Pricing – Increase in threshold from INR 5 Crores to INR 20 Crores

Corporate Tax

18

International Tax

• Company to be considered Resident if – – An Indian Company; or

– Place of Effective Management, at any time during the year, is in India

• POEM defined as a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made

– Guiding principles for determination of POEM

• Impact of the words “at any time” during the year to be analyzed – Will even a single Board Meeting in India constitute POEM?

• World-wide Income of Residents chargeable to tax in India

Residency of Foreign Company

20

• Clarity proposed in case of indirect transfer – Shares would be deemed to derive its value substantially from assets in

India if the value of Indian assets: • > Rs 10 crores, and represent at least 50% of entity’s global assets

– Gross asset value to be considered

• Exemptions granted for certain indirect transfers – No management rights and control, and

– Voting power / share capital / interest < 5%

• Exemption from Indirect Transfer in demerger / amalgamation of foreign companies

• Reporting requirements with stringent penalties – Difficult for a company to monitor such transactions

Indirect Transfers

21

• Interest payable by a banking PE to its Non-Resident HO or any other PE

– Deemed to accrue or arise in India

– PE considered as a separate person

– This type of provision introduced for the first time in the Act

– Similar provisions not introduced for Royalty, FTS

• Tax rate for Royalty and FTS reduced from 25% to 10% – Hassle of TRC significantly resolved

– However, PAN must to apply 10%

• Foreign Remittance Reporting – Required irrespective of sum chargeable to tax

– Penalty of INR 1 lakh for failure to furnish or furnishing inaccurate information

22

Non-Resident Taxation

FII & Investment Vehicles

• Business Connection (BC)

– Mere presence of fund managers not to constitute BC

– Offshore Funds and Fund Managers to comply with stipulated conditions

– Offshore funds to file such information may be prescribed within 90 days of year end

– Relaxation not applicable for incomes which would otherwise be taxable

– Not to influence scope of total income of fund manager

Offshore Funds

24

• Conditions for Offshore Funds – Non Resident

– Resident of Treaty Partner

– Indian Resident Investment only up to 5%

– Min 25 members, who are not connected persons

– No member, along with connected persons, have more than 10% interest in Fund

– Aggregate participation interest of 10 or less members < 50%

– Not invest more than 20% of corpus in any entity

– Not to hold interest of more than 15% in any entity

– Monthly average of corpus of more than Rs. 100 crores

– Not to control or manage business in India

– Arm’s length remuneration to Fund Manager

Offshore Funds

25

• Conditions for Fund Manager – Not an employee of Fund or connected person

– Registered with SEBI

– Acts in ordinary course of business as Fund Manager

– Not entitled to more than 20% of the profits of the Offshore Funds

Offshore Funds

26

• Tax Pass through status for rental income earned by REITs – Currently, only interest, dividend and capital gains were considered pass-through

Business Trusts

27

Nature of Income Business Trust Unit-Holders

Interest from SPV • Exempt under Section 10(23FC)

• Taxable as interest income (Sec. 115UA) • Liable to tax withholding @5% for non-

residents and 10% for residents (Sec. 194LB)

Rental Income earned by REITs from SPV

• Exempt u/s 10(23FCA) • Taxable as interest income (Sec. 115UA) • Liable to tax withholding 10% for

residents (Sec. 194I) and at rates in force for non-residents (Sec. 194LBA)

Capital Gains • Taxable • Exempt under Section 10(23FD)

Dividend Income • Exempt under Section 10(34)

• Exempt under Section 10(23FD)

Other Income • Taxable at MMR • Exempt under Section 10(23FD)

• Transfer of units of Business Trust acquired against shares of SPV by Sponsor – Currently, taxable as normal Capital Gains

– Now subjected to STT • STT payable at the time of sale of units in the Initial Offer

• 0.2% of the value payable by seller

• Exempt in case of Long Term Capital Gain

• Taxable @ 15% in case of Short term gain

Business Trusts

28

• Category I & II AIF shall be tax pass-through entities

• AIF to be taxable only for its income from business and profession

• Unit holders of AIF to be chargeable to tax for incomes of AIF in form of interest, dividend, capital gains

• Income of AIF credited to unit holder to be taxed under same Head and same proportion

• TDS @ 10% for income of AIF payable to unit holder

• Taxable on accrual basis

• AIF to file such information in such format as may be prescribed

Alternative Investment Funds (AIF)

29

Personal Taxation

• No change in Basic exemption limits and Tax Rates

• Wealth Tax proposed to be abolished – In place of Wealth Tax, Surcharge on Individuals with income > INR 1

crore increased from 10% to 12%

• Sukanya Samriddhi Account Scheme for Girl Child – investments in the Scheme by parent or legal guardian eligible for

deduction under section 80C

– Interest and withdrawals from the scheme exempt from tax

– Effective from AY 2015-16

• New Rules to be announced for determining period of stay in India of Indian Citizens being Member of Crew of Indian Ships

Personal Taxation

31

• Limit of Deduction of Health Insurance Premium u/s 80D enhanced – Up to 60 Years – INR 25,000 from INR 15,000

– 60 to 80 Years – INR 30,000 from INR 20,000

– 80 Years & Above – INR 30,000 from INR 20,000 [Medical expenditure if no Policy opted]

– Limit separately applied for (i) Self & Family; and (ii) Parents

• Deductions u/s 80DD and 80U with persons suffering from disability enhanced

– Persons with Disability – INR 75,000

– Persons with severe disability – INR 125,000

• Enhanced Exemption u/s. 80CCC – Deduction on contribution to pension funds increased from INR 1 Lac to INR 1.5

Lacs

Personal Taxation

32

• Additional deduction under Section 80CCD – Contribution to National Pension Scheme allowed up to INR 150,000

• Subject to limit of 10% of salary / GTI

– Additional deduction of INR 50,000 • Limit of 10% of salary / GTI Not Applicable

• Not covered within overall limit of INR 150,000

• Deduction u/s 80DDB for medical expense on certain chronic and protracted diseases

– Medical prescription for treatment mandatory

– Deduction to very senior citizens enhanced from INR 40,000 to INR 80,000

• Possible to file Form 15G / 15H for non-deduction of TDS on receipts under life insurance

• TAN not mandatory for certain individuals deducting TDS (to be notified)

Personal Taxation

33

Other Amendments

• Consolidation of Mutual Funds made Tax Neutral – Corresponding amendments in relation to Holding

Period, Cost of Acquisition, etc.

• Global Depository Receipt (GDR) – Currently, GDR capital gains & dividend taxed at 10%

– Now, unlisted and private companies can also issue GDR

– Proposed to amend section 115ACA to limit beneficial tax rate of 10% to ESOPs issued by listed companies

• with equity shares as underlying asset

Capital Gains

35

• 100% deductions on donations u/s 80G to – Swachh Bharat Kosh and Clean Ganga Fund w.e.f. AY

15-16

– National Fund for Control of Drug Abuse w.e.f. AY 16-17

• Deduction u/s. 80JJAA – 30% of additional wages for 3 Years

– Also extended to non-corporate assesses having manufacturing units

– Threshold of new regular workmen reduced from 100 to 50

Other Amendments

36

• Salary TDS: Proof to be submitted to employer for tax computation to determine TDS

• TDS applicable on the following – 10% on withdrawal of accumulated balance from Employee PF

– Interest paid by a co-operative bank

– Interest on Recurring deposit

• TDS on interest – Bank-wise threshold vis-à-vis earlier Branch-wise threshold

– Compensation as per Motor Accidents Claim Tribunal on payment basis

• TDS Exemption to Transporter restricted to only small transporters (eligible for Sec. 44AE)

• Deductors / Collectors to be notified for which TAN wont be necessary

TDS / TCS

37

• “Yoga” considered as Charitable Activity

• If aggregate receipt from other object of general public utility < 20% of Total Receipts, it shall be considered as charitable purpose.

– Such activity – in the course of actual carrying out of such objects

• In case of application of income < 85%, mandatory to file declaration.

• In case of failure of application of income for specified purposes, mandatory to provide statement in the prescribed manner.

Charitable Trust

38

• Assessment Proceedings – Notice issued u/s 148

• sanction by JCIT or higher required even in case of first assessment

– Section 153C expanded to cover persons whose information found during search

• Search of X, books of Y contains information of Z – now even Z is covered

– Revisionary powers expanded / clarified • Instances specified which would deem an order erroneous

• Penalty for concealment in MAT cases

Procedures

39

Indirect Tax

Service Tax

• Revised Rate 14%

• Cess Abolished

• Credit balances lying in Cess account orphaned

• 2% Swachh Bharat surcharge will be levied at a future date. Effective rate then will be 16%

Rate

42

Legislative Changes • Amendments of taxability

– Deletion from negative list • All services are now taxable after removal of Government support

services from negative list • Process or manufacture of liquor is now also taxed under services

category. This will directly impact the jobworker of this product • Admission to entertainment or amusement facility where the charges

are above Rs. 500/-. Example movies

• Section 67 – Valuation

– All reimbursable expenditure or cost incurred and charged by service provider.

– Any amount retained by distributor or selling agent of lottery

– Rates of taxes under Rule 6 (sub rule 7, 7A, 7B and 7C)of Service tax rules have been changed with effect from the date of notification of the finance bill.

43

• Service Tax Rules – Definition for Chargeability

– ‘Aggregator’ is one who owns and manages a web based software application, This could be targeted towards cloud service providers. Flip Kart/ Snap Deal/ Amazon

– Similarly the term ‘brand name’ or ‘trade name’ defined [clause (bca) inserted]. The term is given a very wide meaning. Anything that connects the service with the provider without actually connecting the name of the provider with the service.

– Service Tax is payable by the aggregator. Effective from 1-3-2015. [Clause (AAA) inserted].

Legislative Changes

44

Legislative Changes - RCM Service provided

by Type of service

Service Tax payable Effective date

Provider Recipient Manpower supply

and security service

Existing service

- 100% 01-04-2015

Any service provided

aggregator New Service 100%# - 01-03-2015

Mutual fund agents &

distributors New Service 100% 01-04-2015

Agents of lottery distributor

New Service 100% 01-04-2015

Security Services Existing 100% 01-04-2015

#where the aggregator has no physical presence, a representative will be appointed for payment of tax .

45

• Amendments to Taxability (Contd) – Exemption Withdrawn

• Services provided to government, Local Authority or a government authority by a way of construction, erection, Commissioning, Installation, completion, fitting out, repairs, maintenance, renovation, or alteration.

• Services by way of construction, erection, commissioning or installation of original works pertaining to an airport and port.

• Services by an artist by way of performance in folk or classical art forms of music, dance or theatre in excess of Rupees one Lac

• Services by way of transportation by way of road, rail or vessel of foodstuff (except food grain including flours, pluses and rice) ,.

• Services by MF, AMC and lottery selling agents • Services by way of making telephone calls

Legislative Changes

46

Legislative Changes • The Chit fund is now chargeable to tax and hence this is consequential.

(Foremen of chit fund shall have the same meaning as is assigned to the term foremen as defined in clause (j) in section 2 of chits fund act, 1982. [Clause 23A])

• With removal of various services by and for the government from negative list the definition of ‘Government’ in introduced.

• The lottery selling services are now under service tax and as a consequence the Lottery distributor or selling agent is defined..

• The term ‘Service’ would include the consideration charged for –

– Conversion by cash or any other from one currency to other. Money changer.

– By lottery distributor or selling agent

– By foremen of chit fund for conducting or organising a chit in any manner.

47

• Amendments to Taxability (Contd) – Exemptions proposed

• Ambulance services by clinical establishment. • Life insurance service provided by way of Varishtha Pension Bima

Yojna. • Service provided by a Common Effluent Treatment Plant operator. • Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail

packing, labelling of fruits and vegetables. • Service provided by way of admission to a museum, zoo, national park,

wild life sanctuary and a tiger reserve. The same services provided by Govt. or local authority are already covered by the Negative List.

• Service provided by way of exhibition of movie by the exhibitor (theatre owner) to the distributor or an association of persons consisting of such exhibitors as one of its members.

• Service by way of right to admission

Legislative Changes

48

• Amendments to Taxability (Contd) (w.e.f 01st April 2015)

Legislative Changes

Name of Service Existing abatement Rate

Revised abatement Rate

Transportation of Goods and passenger

a. By Rail 30% 30%

a. By Road – Provided by Goods Transporter 25% 30%

a. By vessels 40% 30%

(Provided CENVAT Credit for Input, Input service and Capital Goods are not availed.)

Transportation of passenger by Air for classes other than economy

60% 40%

Service provided by Chit Fund 30% 0%

49

• Penalty (U/s.76) in cases not involving fraud or collusion or wilful misstatement or suppression of facts or contravention of any provision of act or law shall be following –

– Not exceeding 10% of service tax

– No penalty, if service tax and interest is paid within 30 days from issuance of notice u/s.73(1)

– Penalty shall be payable at reduced rate of 25% if service tax, interest and reduced penalty is paid within 30 days of such order.

– In circumstances service tax amount is reduced in any appellate proceeding, then penalty shall also stand reduced then in such circumstance penalty shall be payable at reduced rate of 25%, if service tax, interest and reduced penalty is paid within 30 days of such order.

Legislative Changes

50

• Penalty (U/s. 78) In cases involving fraud or collusion or willful misstatement or suppression of facts or contravention of any provision of act or law with intent to evade service tax shall be –

– 100% of service tax involved

– Benefit of reduced penalty of 15%, in case if service tax, interest and reduced penalty is paid within 30 days from service of notice.

– Penalty shall be payable at reduced rate of 25%, if service tax, interest and reduced penalty is paid within 30 days of such order.

– In circumstances service tax amount is reduced in any appellate proceeding, then in such circumstance penalty shall be payable at reduced rate of 25%, if service tax, interest and reduced penalty is paid within 30 days of such order.

51

Legislative Changes

• Penalty in respect of transitional period- – The amended provision of section 76 and 78 for reduced

amount of penalty shall apply to the cases where either no notice is served or notice is served or order is not passed before enactment of finance bill, 2015

• Consequential amendments are also made in section 73 Subsection 4A of section 73 and section 80 omitted and sub section 1B is being inserted to provide for recovery of service tax for amount self-assessed and declared in return but not paid.

• Similar amendments for rationalization of penalties payable under central excise and customs law are also made.

52

Legislative Changes

• Other Amendments

– Invoices can be issued with digital signature subject to conditions, procedure to be followed as may be notified.

– Records can now be preserved in electronic format and every page of record shall be digitally signed. Subject to condition and procedure as may be prescribed. Effective 01-03-2015.

Regulation Changes

53

Excise

• Increase in rate from 12.36% to 12.5% ad-valorem.

• Education cess and Higher & Secondary Higher Education Cess abolished.

• What is the fate of balance lying in the Cess account?

Rate

55

• The time limit for availing CENVAT credit is increased from present limit of six months to One year.

• Capital goods for generation of captive electricity can be directly sent to job worker.

• Job work - CENVAT Credit is now available immediately on receipt of goods in case of input/ Capital goods directly sent to job worker’s premises. Provided goods are received back within 180 days from job workers.

• CENVAT credit shall be allowed even if Capital goods sent to job worker premises for further processing, testing, repairs, reconditioning or manufacture of final products and are received back within two years from the date of their being sent.

• Credit of partial reverse charge will be allowed without linking it to the payment from 1-4-2015

CENVAT Credit Rules

56

• Rule 6 – Amendment made in rule to include the non-excisable

goods in the value of exempted goods for the purpose of reversal of duty attributable to exempted goods.

– The value of the non-excisable goods shall be the invoice value.

– where invoice value in not available, value shall be determined by using reasonable means consistent with the principal of valuation contained in excise Act and the rule made there under

CENVAT Credit Rules

57

• Rule 14 – The CENVAT Credit wrongly availed but not

utilized shall be recovered without interest

– The CENVAT Credit wrongly availed & utilized shall be recovered with interest and penalty

– Changes will be effective from 1st March 2015.

58

CENVAT Credit Rules

Legislative Changes • Daily Stock register may be maintained digitally (ERP)

• Digitally signed invoices can be issued

• CENVAT credit can be taken if the goods imported under the cover of a bill of entry are sent directly to buyer’s premises. However the invoice issued by the importer shall mention that goods are sent directly from the place or port of import to the buyer’s premises.

• Penalty for Delay in filing of various excise returns (ER-1, ER-4 , ER-6 & ER-5) is increased from rupees five thousand to one hundred per day subject to maximum of rupees twenty thousand per return.

59

Regulation Changes • Mandatory Filing of application online

• PAN based registration compulsory. Temporary registration will have to be PAN based within 3 months. Temporary registrations will be cancelled at the end of 3 months

• Registration application will be approved within 2 days

• Self attested copies of documents will be submitted at the time of Physical verification of premises. This changes the current process on its head.

• Transfer of business or acquisition (from bank or financial institution) of factory will require fresh registration

• These changes are applicable from 1st March 2015

60

Customs

• Amendment in Customs Tariff Act – SAD 4% on inputs of “Make in India” products is

reduced to NIL

– This is effective from 1st March 2015.

Legislative Changes

62

• There are numerous tariff changes which are designed to target the growth of infrastructure.

Tariff Changes

63

This presentation is prepared exclusively for the benefit and use of the clients of K. C. Mehta & Co. This should not be used as a substitute for professional advice. Reasonable care has been taken for ensuring the accuracy and the authenticity of the contents of the presentation. However, we do not take any responsibility for any error or omission contained therein on any account. It is recommended that the readers should take professional advice before acting on the same. The provisions contained in Finance Bill, 2015 are the proposals and are likely to undergo amendments while passing through the Houses of the Parliament before being enacted.