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Direct Tax.............................................................................................................................................................................................................. 1-14 |
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Indirect Tax......................................................................................................................................................................................................... 15-22 |
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2 February 2017 |
DIRECT TAX
TAX RATES Corporates The Finance Bill, 2017 (Bill) proposes to reduce the corporate tax rate from 30% to 25% for small and medium-sized enterprises having a turnover of up to INR 500 million in financial year, i.e. from 1 April to 31 March (FY) 2015-16. In other cases, the basic tax rates remain the same. Further, there is no change in surcharge and cess for companies. This amendment is proposed to be effective from FY 2017-18 onwards. Non-corporates For individuals, Hindu undivided families (HUFs), associations of persons (AOPs) and bodies of individuals (BOIs), there is no change in the income-slabs. The tax rate applied for the first taxable slab (income between INR 250,000 / 300,000 to INR 500,000) is proposed to be reduced from 10% to 5%. Currently, a surcharge at the rate of 15% is levied on individuals, HUFs, AOPs and BOIs having income exceeding INR 10 million. The Bill proposes to levy surcharge at the rate of 10% on individuals, HUFs, AOPs and BOIs having a total income between INR 5 million and INR 10 million. This amendment is proposed to be effective from FY 2017-18 onwards. CROSS-BORDER AND M&A SPACE Investors in Foreign Portfolio Investments (FPIs) exempt from Indirect Transfer Tax Currently, an offshore transfer of shares or interest in a foreign company or entity triggers capital gains tax in India (subject to certain exemptions) where the share or interest derives ‘substantial value’ from India. The Central Board of Direct Taxes (CBDT) vide Circular No 41 of 2016 (Circular) had recently issued certain clarifications on the application of these provisions to FPIs. Given that, no blanket exemption was provided to FPIs, stakeholders industry-wide had made representations to the Government explaining the issue of double taxation. This arose in cases where there were multiple layer structures through which investors invested in an FPI. Once the FPI had partially sold the shares of Indian company and up streamed the proceeds to its immediate investor, if the same had to be up-streamed to ultimate investor, there would be tax at each stage since each entity which redeemed the shares derived substantial value from Indian assets. Heeding to the representations made, the CBDT issued a subsequent clarification keeping the Circular in abeyance. The Bill proposes to introduce a clarification that lays to rest the concerns of FPIs on the applicability of the indirect transfer tax provision. The Bill has clarified that the scope of the indirect transfer tax provision shall not cover within its ambit, direct or indirect investments held by non-resident (NR) taxpayers in FPIs that are registered as Category-I or Category-II with the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014. FPIs registered as Category-I and Category-II include sovereign funds, Governmental agencies, international or multilateral organisations and broad based funds such as mutual funds, university funds, pension funds respectively. This proposed clarification provides the much-needed respite to FPIs, putting to rest the adverse impact caused by the Circular. While this legislative clarification is laudable and provides reprieve to the funds sector, the conspicuous exclusion of Category-III (residuary category that typically covers individuals, trusts, family offices, endowment funds, charitable trusts, foundations, corporate bodies etc.) registered as FPIs is a slight dampener. This amendment is proposed to be effective retrospectively from FY 2011-12 onwards. Masala Bonds spiced up In September 2015, the Reserve Bank of India permitted Indian companies to issue rupee denominated bonds (Masala Bonds) overseas as a measure to enable them to raise funds from outside India. In line with the announcement made by the Government vide a Press Release dated 29 October 2015, the Bill proposes to extend the concessional withholding tax rate of 5%, as currently applicable to foreign currency bonds, external commercial borrowings and rupee bonds issued to FPIs, to interest on Masala Bonds issued before 1 July 2020. This amendment is proposed to be retrospectively effective from FY 2015-16 onwards. Further, the Bill proposes that an offshore transfer of Masala Bonds, issued overseas, from one NR to another NR would not be regarded as a taxable transfer and thus, would not attract tax in India. This amendment is proposed to be effective from FY 2017-18 onwards. These proposals were long awaited and shall provide the necessary fillip to investments in Masala Bonds as a mode of raising capital. With the concessional withholding tax rate being extended, Masala Bonds would be placed on the same footing as other modes of foreign currency fund raising whether rupee denominated or foreign currency denominated. Sunset for Concessional Withholding Tax on Interest extended Currently, a concessional withholding tax rate of 5% applies, subject to prescribed conditions, to interest on (a) foreign currency loans and long-term bonds under Section 194LC of the (Indian) Income-tax Act, 1961 (IT Act), and (b) rupee denominated bonds and Government securities issued to FPIs under Section 194LD of the IT Act. The concessional withholding tax rate under Section 194LC applies where the borrowing is raised before 1 July 2017, and under Section 194LD in relation to interest payable before 1 July 2017. The Bill proposes to extend the sunset dates for these provisions from 1 July 2017 to 1 July 2020. This amendment is proposed to be effective from FY 2017-18 onwards. Relaxation to Offshore Funds with Onshore Management Generally, if a manager of an offshore fund were to be located in India, this would result in business connection or economic nexus in India, leading to an Indian tax incidence on the income of the offshore fund. In an attempt to boost onshore fund management activity, currently, the IT Act provides for the benefit of allowing onshore fund management activities without leading to the offshore eligible fund being regarded as an Indian tax resident or establishing an Indian ‘business connection’. The availability of this benefit however, is subject to satisfying the onerous investment and investor linked pre-requisites specified in the IT Act. One such pre-condition is a minimum corpus requirement of the fund having a monthly average of not less than INR 1 billion except in cases where the fund has been established or incorporated in the relevant year. To address the genuine concerns of funds which are in the process of winding up, the Bill proposes to exclude them from the abovementioned monthly corpus requirement. This is a welcome change and addresses the practical concerns raised by stakeholders. However, the status quo vis-à-vis the stringent investor and investment linked conditions for availing the benefit envisaged by this provision make it under-inclusive. This amendment is proposed to be effective retrospectively from FY 2015-16 onwards. Introduction of Secondary Adjustments Currently, the Indian transfer pricing provisions, do not require secondary adjustments to be carried out in case of a transfer pricing adjustment. The Bill proposes to introduce a provision mandating secondary adjustments, with the objective of removing the imbalance between cash account and actual profit of the taxpayer and to align the Indian transfer pricing norms with the guidelines prescribed by the Organisation for Economic Cooperation and Development (OECD). As per this provision, a taxpayer will be required to carry out secondary adjustment where the transfer pricing adjustment i.e. the primary adjustment has been made suo moto by the taxpayer in his return of income; or made by an assessing officer and accepted by the taxpayer; or is determined by an advance pricing agreement; or is made as per the safe harbour rules; or is arising as a result of resolution of an assessment by way of mutual agreement procedure. Further, if as a result of a transfer pricing adjustment, there is an increase in the total income or reduction in the loss of a taxpayer, the excess money, being the difference in the arm’s length price determined by the tax authorities and the price at which the transaction is undertaken, available with the associated enterprise is to be repatriated into India within the prescribed time limit. If such excess money is not repatriated within the prescribed time limit it shall be deemed to be an advance made by the taxpayer to such associated enterprise and interest on such advance is to be computed in the prescribed manner. However, secondary adjustment shall not be carried out if the amount of transfer pricing adjustment in a FY does not exceed INR 10 million and the transfer pricing adjustment is made in respect of a FY commencing on or before 1 April 2015. This amendment is proposed to be effective for FY 2017-18 onwards. Treaty Definitions to Override Currently, there is rampant litigation on conflicting interpretations of terms that are defined both under the treaties / agreements entered into with foreign jurisdictions, as well as under the IT Act. This is because tax authorities seek to invoke the definition of a term in the IT Act if such a definition is wider than the definition provided in the relevant treaty. The Bill proposes to clarify that if a term is defined in a treaty, then the definition under the IT Act will not be relevant. If a term is not defined in the treaty, only then it will have the meaning assigned to it under the IT Act. This amendment is proposed to be effective from FY 2017-18 onwards. Conversion of Preference Shares into Equity Shares tax neutral Finally putting to rest the long-standing debate in this regard, the Bill clarifies that conversion of preference shares would be exempt from the rigours of capital gains tax, thus bringing it in line with the treatment of conversion of debentures into equity shares. It is proposed that the cost of the equity shares will be same as the cost of the preference shares. Further, for ascertaining the period of holding of equity shares, the period for which preference shares were held before their conversion will also be included. The amendment is proposed to be effective from FY 2017-18 onwards. More clarity regarding Sale of Shares of Private Companies The Finance Act, 2012 provided for applicability of a concessional tax rate of 10% to NRs transferring unlisted securities, held as long-term capital assets. There was uncertainty regarding applicability of the concessional rate to shares of a private limited company as it was doubtful if the same could be treated as ‘securities’. To address this uncertainty, the Finance Act, 2016 clarified that the above provision will apply to shares of a company in which the public is not substantially interested (say, a closely held company). However, this clarification was made effective from FY 2016-17. The availability of this concessional rate between FY 2012-13 to FY 2016-17 remained uncertain. The Bill proposes to clarify that the amendment introduced by the Finance Act, 2016 will apply retrospectively from FY 2012-13. BOOST TO REAL ESTATE SECTOR Incentives for Real Estate Developers Currently, Section 80-IBA of the IT Act allows taxpayers engaged in the business of developing and building housing projects, a 100% deduction of profits, subject to the fulfilment of certain conditions. This incentive was introduced in furtherance of promoting the ‘Affordable Housing Scheme’. In order to provide a further impetus to this scheme, the Bill proposes to relax the following conditions under Section 80-IBA: Ø The reference of unit to determine the area of a residential unit comprised in the housing project will be carpet area as against the present reference of built-up area; Ø The condition that the size of residential units should not exceed 30 square meters will not apply if the project is located within 25 kms from the municipal limits of metro cities; and Ø The time period for completion of the housing project will be extended from 3 years to 5 years from the date of its approval. This amendment is proposed to be effective from FY 2017-18 onwards. Joint Development Agreements (JDAs) – Taxation clarified In the context of JDAs between the owner of an immovable property (Property) and the developer, the liability to pay tax for the owner arises in the year in which the possession of the Property is handed over to the developer for the development of a project. Generally, the land-owner receives consideration, partly in cash and partly in kind, which is deferred until the completion of the project. Thus, taxing the entire consideration in the year of transfer itself (irrespective of completion or termination of the project) creates a cash crunch in the hands of the owner. To avoid this hardship, the Bill proposes the following amendments to the IT Act: Ø If an individual or an HUF (Specified Transferor) transfers the Property under a JDA, capital gains tax will be chargeable only in the year in which the ‘certificate of completion’ (CoC) has been issued, provided that they do not transfer their share in the project prior to the receipt of CoC; and Ø For the purposes of computation of capital gains tax, the stamp duty value on the date of issue of CoC and any consideration received in cash by the Specified Transferor will collectively be considered as the consideration arising out of transfer of the Property. This amendment is proposed to be effective from FY 2017-18 onwards. The Bill further proposes to introduce a new section, whereby any monetary consideration paid to a Specified Transferor under a JDA will be subject to withholding tax at the rate of 10%. While this proposal is a positive step, land owners other than individuals and HUFs (say firms, companies) have not been provided any relief in this regard. Reliefs for Real Estate Developers holding House Property as Stock in Trade Currently, the IT Act, subject to certain exemptions, levies tax on a taxpayer if it owns immovable properties (which are not occupied for business or profession purposes) on a notional basis, irrespective of the fact that such immovable property has been let out. The Bill proposes a relaxation from charge of notional rent for 1 year from the date of completion of construction of property. This amendment is proposed to be effective from FY 2017-18 onwards. Reduction of Holding Period of Immovable Property Currently, in order for an immovable property viz., land and building, to qualify as a long-term capital asset, the same has to be held for a period of more than 36 months. The Bill proposes to reduce the abovementioned holding period to 24 months. This will indeed propel the real estate market by increasing mobility of assets. This amendment is proposed to be effective from FY 2017-18 onwards. A MIXED BAG FOR START-UPS Longer Gestation Period recognised Under Section 80IAC of the IT Act, a 100% tax holiday is available to eligible start-ups for any 3 consecutive years out of a 5-year period, beginning from the year in which such start-up was incorporated. The Bill proposes to extend this period from 5 years to 7 years as most start-ups do not generate profits in their initial years. While this is a welcome proposal, a rationalisation of the definition of an “eligible start up” and an exemption from applicability of Minimum Alternate Tax (MAT) would have further bolstered the Indian start-up landscape. This amendment is proposed to be effective from FY 2017-18 onwards. Carry Forward and Set-Off of Loss for Start-Ups Currently, the IT Act provides that in case of substantial change in shareholding of a company (beyond 49%) in which the public are not substantially interested, tax losses incurred in any prior year shall not be available for carry forward and set off against the income. The Bill proposes to provide that losses incurred by eligible start-ups can be carried forward and set-off against the income of a year provided all the shareholders of such eligible start-up who held shares in the start-up when losses were incurred, continue to hold the shares on the last day of the year in which losses are claimed for set off, and such losses were incurred during the period of 7 years from the date of incorporation. This amendment is proposed to be effective from FY 2017-18 onwards. PLUGGING THE CHARITY LOOPHOLES Inter-Charity Corpus Donations no longer regarded as valid application of Income Currently, a charitable organisation is permitted to make donations to other charitable organisations only out of its current year income in order for such donation to be treated as a valid application of its income for charitable or religious purposes. The Bill proposes to further restrict the scope of inter-charity donations by specifically providing that donations by a charitable entity towards the corpus of another charitable entity will not be regarded as an application of its income for charitable or religious purposes. Therefore, the income used to make such donations will not be tax exempt. This will have the effect of plugging the practice of rotating funds within sister concerns of charitable entities and accumulating them for indefinite periods. The intention seems to be to increase the use of funds collected by charitable organisations for the very purpose for which they are formed. This amendment is proposed to be effective from FY 2017-18 onwards. Change of Charitable Objects to require Fresh Registration The Bill also proposes that if a charitable entity registered in terms of Sections 12A and 12AA of the IT Act subsequently adopts new objects or undertakes modifications of its original objects which do not conform to the conditions of its registration, it shall be required to obtain fresh registration from the tax authorities. This is expected to have the effect of clamping down on charitable entities that often modify their objects to undertake activities in the nature of trade, commerce or business, thereby abusing their tax exempt status, which was originally granted only for certain charitable purposes. This amendment is proposed to be effective from FY 2017-18 onwards. Cost of acquisition of Assets transferred on Winding Up of Charitable Operations clarified The Finance Act, 2016 imposed an additional income-tax in the nature of an ‘exit tax’ on the accreted income of a charitable entity if it converted into or merged with a non-charitable entity, or failed to transfer all its assets to another charitable entity upon its dissolution. ‘Accreted income’ for this purpose referred to the amount by which the aggregate fair market value (FMV) of the total assets of the charitable entity, as on the specified date, exceeded its total liabilities computed in accordance with the method of valuation as prescribed. The Bill clarifies that where tax has been paid on the capital gains arising from the transfer of an asset held by a charitable entity in respect of which accreted income has been computed, the cost of acquisition of such asset to the transferee entity shall be deemed to be the FMV of the asset taken into account for computation of the accreted income. This amendment is proposed to be effective retrospectively from 1 June 2016. NO RESPITE FROM MAT YET BUT PROVISIONS RATIONALISED Credit Period extended Currently, as per Section 115JB of the IT Act, a company is required to pay MAT in case the tax payable by a company otherwise is less than 18.5% of its adjusted book profits. While MAT continues to apply, the Bill proposes to extend the period for which credit of MAT can be claimed from 10 to 15 years. A similar benefit has been extended to non-corporate taxpayers in respect of Alternate Minimum Tax credit. Further, the Bill also proposes the manner in which foreign tax credit would need to be adjusted while determining MAT credit. This amendment is proposed to be effective from FY 2017-18 onwards. Alignment of MAT provisions with Ind AS Presently, MAT liability is computed based on the financial statements prepared in accordance with the Indian Generally Accepted Accounting Principles (GAAP). Given that a new set of Indian Accounting Standards (Ind AS) has replaced the existing Indian GAAP for certain companies, there was a need for alignment of MAT provisions with the new Ind AS. Ind AS, in essence, is based on the principle of ‘fair value concept of assets and liabilities’. The Bill proposes to provide clarity by introducing a specific regime for computation of MAT liability for Ind AS compliant companies in the year of adoption and thereafter, and provides for certain adjustments such as changes in revaluation surplus, consequences of demerger, etc. This amendment is proposed to be effective from FY 2016-17 onwards. MEASURES TO CURB TAX-AVOIDANCE Avoiding Misuse of Exemption from Long-term Capital Gains Tax Currently, the IT Act provides that long-term capital gains arising on transfer of listed equity shares of a company or a unit of equity oriented fund (collectively, Securities) are exempt from tax provided Securities Transaction Tax (STT) is paid on such transfers. In order to prevent the misuse of this provision, the Bill proposes that the benefit of this provision will be available only where STT has been paid even at the time of acquisition of the Securities sought to be transferred. However, the proposed amendment will be subject to exceptions as may be notified in order to protect genuine cases. This amendment is effective from FY 2017-18 onwards. Fair Value basis Taxation on Transferor of Unquoted Shares In order to ensure that the transfer of shares of an unlisted company is undertaken at fair value and there is no understatement of the sales consideration, the Bill proposes to introduce a new section 50CA in the IT Act. Section 50CA provides that if a taxpayer transfers shares of an unlisted company for a consideration which is less than the FMV determined as per a method to be prescribed, then the FMV will be deemed to be the consideration for the purpose of computation of capital gains tax. This amendment is proposed to be effective from FY 2017-18 onwards. Fair Value basis Taxation on Recipient of any Property Currently, Section 56(2) of the IT Act provides that: Ø If an individual or HUF receives (i) any property without or for inadequate consideration, and if the FMV of such property exceeds INR 50,000; (ii) cash in excess of INR 50,000, then the difference between the FMV and the price paid for the property or the cash in excess of INR 50,000 is considered as income in the hands of the recipient individual or HUF. Property is widely defined as jewellery, immovable property, shares, drawings, paintings, sculptures, bullion, art work, shares and securities and archaeological collections (Property). Ø If a closely held company or a firm receives shares of another closely held company free of cost or for inadequate consideration, the difference between the FMV of such shares and payment made by the recipient firm or company is considered as income in its hands. It was noted that taxpayers other than individuals, HUFs, closely held companies and firms were not covered under Section 56(2). Additionally, its applicability to closely held companies and firms was limited to transactions with respect to shares of a closely held company. The Bill proposes to widen the ambit of Section 56(2) to apply to all persons (such as listed companies, AOPs, BOIs, etc.) when they receive any Property for a consideration below the prescribed FMV or cash in excess of INR 50,000. This amendment is proposed to be effective from FY 2017-18 onwards. Thin Capitalisation Norms introduced India is at the forefront of implementing the OECD’s Base Erosion and Profit Shifting (BEPS) Project. To this end, the Bill proposes to implement Action Plan 4 of the BEPS Project, which provides for restriction on claiming of interest expenditure on loan / debts taken from an associated enterprise (AE) by introduction of a new Section 94B in the IT Act. Proposed Section 94B provides that if an Indian company or a permanent establishment of a foreign company in India (collectively, Borrower) has borrowed money from its NR AE towards which it pays interest exceeding INR 10 million, then the ‘excess interest’ cost will not be eligible for deduction from the profits of the Borrower. Loans which have been extended to the Borrower by a third-party lender on the implicit or explicit guarantee of its NR AE will also be covered under this provision. ‘Excess interest’ is defined to mean an amount of total interest paid or payable which exceeds 30% of earnings before interest, taxes, depreciation and amortisation of the Borrower, or interest actually paid or payable to the NR AE, whichever is lesser. This section will not be applicable to the Borrower engaged in the business of banking or insurance. However, if the interest is not eligible for deduction in a particular year, the same can be carried forward for 8 FYs from the FY in which the interest cost was not eligible for deduction and the same shall be allowed to the extent of maximum allowable interest expenditure for the relevant year. The amendment is proposed to be effective from FY 2017-18 onwards. CASH TRANSACTIONS DISCOURAGED, DIGITAL PAYMENTS ENCOURAGED Disallowance of Capital Expenditure incurred In Cash Currently, the IT Act provides that except in certain circumstances, revenue expenditure incurred in cash exceeding the prescribed monetary threshold is not allowed as a deduction. However, there is no similar provision disallowing any capital expenditure incurred in cash. The Bill proposes that payments exceeding INR 10,000 for the acquisition of any asset or part thereof otherwise than by an account payee cheque drawn on a bank, account payee bank draft or the use of an electronic clearing system through a bank account shall be ignored while computing the ‘actual cost’ of an asset which is eligible for depreciation. A similar amendment is proposed in relation to any capital expenditure under Section 35AD of the IT Act, which provides for investment-linked deduction for certain capital expenditure and revenue incurred by specified businesses. This amendment is in line with the Government’s objective of discouraging cash transactions for capital expenditure. With this amendment, any capital expenditure incurred in cash will not be eligible for tax breaks such as depreciation and will not be included in the computation of capital gains. This amendment is proposed to be effective from FY 2017-18 onwards. Introduction of Penalty on Cash Receipts Currently, if a person receives INR 20,000 or more on account of a loan taken or deposit or in relation to transfer of immovable property otherwise than by an account payee cheque, an account payee bank draft or use of an electronic clearing system through a bank account, such person may be liable to pay a penalty equivalent to the sum received. The Bill proposes to introduce a similar penalty on any person who receives INR 300,000 or more (a) in aggregate from a person in a day; (b) in respect of a single transaction; or (c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee, cheque, an account payee bank draft or use of an electronic clearing system through a bank account. The penalty shall be equivalent to the amount received. However, no penalty shall be leviable if the recipient shows good and sufficient cause for such contravention. This proposal may have a significant impact and could go a long way in achieving a cashless economy. This amendment is expected to be effective from FY 2016-17 onwards. Lower Tax Rate for Cashless Turnover under Presumptive Taxation Scheme Currently, a presumptive taxation scheme is available for certain eligible taxpayers, according to which 8% of their total turnover or gross receipts is deemed to be their total income, subject to tax. The Bill proposes to reduce the aforesaid percentage of deemed total income from 8% to 6% if the turnover or gross receipts are received by account payee cheque or account payee bank draft or use of an electronic clearing system through a bank account. The existing rate of 8% shall continue to apply for those businesses which generate receipts of turnover through any other mode. This is a welcome move that is in line with the Government’s stated objective of promoting digital transactions and encouraging small unorganised businesses to accept digital payments. This amendment is proposed to be effective from FY 2016-17 onwards. DISPUTE RESOLUTION Big Relief against taxing Time Barred Assessments Section 197(c) of the Finance Act, 2016, which is a part of the Income Declaration Scheme in effect removed the limitation period for reopening of assessment proceedings in relation to unaccounted income chargeable under the IT Act in cases where a voluntary declaration was not made. Any undisclosed income or asset acquired out of such income could be taxed in the year in which the tax authorities issue an assessment or reassessment notice irrespective of the time barring provision. The constitutional validity of this provision which permitted re-initiation of time barred assessments was being debated. Consequently, there were a lot of representations against this provision and with a view to address this, the Bill proposes to omit the said clause retrospectively from the date of its introduction (i.e. 1 June 2016). Assessment, Re-Assessment and Re-Computation revised
Change in Structure of Authority for Advance Rulings (AAR) The Bill proposes to merge the AAR for income-tax, central excise, customs duty and service tax. Also, currently only a retired judge of the Supreme Court of India is eligible for appointment as a Chairman of the AAR. The Bill proposes to amend the qualification criteria by allowing a former High Court Chief Justice or a High Court judge (who has served as a High Court judge for at least 7 years) to become a Chairman. To ensure smooth functioning and to avoid a scenario of the AAR coming to a standstill, it is also proposed that if the Chairman is unable to discharge his functions owing to absence, illness, etc. or if his office is vacant, the Vice-chairman will discharge the functions of the Chairman. This has been done to address the huge pendency of cases at the AAR, especially since the relevant provisions of IT Act require the AAR to pass an order within 6 months. This amendment is expected to be effective from FY 2016-17 onwards. LAST BUT NOT THE LEAST Taxability of Transfer of Carbon Credits The taxability of payments received for transfer of carbon credits is ambiguous under the IT Act. There have been some rulings where Courts have held such payments to be in the nature of revenue receipts and hence, taxable while some rulings have held these payments to be capital receipts and hence, not taxable. The Bill proposes to introduce a new section dealing with taxability of payments received on transfer of carbon credits. As per the new section, such payments would be taxable at the rate of 10% without deduction of any expenses which may have been incurred in this regard. This amendment is proposed to be effective for FY 2017-18 onwards. Re-setting of Base Year for Cost Basis and Indexation Currently, taxpayers have an option to take the higher of FMV of an asset as on 1 April 1981 or its actual cost of acquisition as the cost basis for computing capital gains. Indexation enables taxpayers to adjust the cost basis of a capital asset by accounting for inflation. Presently, the base year for indexation is 1 April 1981. Recognising the difficulties faced by taxpayers due to the base year being so old, the Bill proposes to shift the base year from 1 April 1981 to 1 April 2001 for the computation of capital gains and for indexation purposes. This is a welcome move as taxpayers will get the benefit of appreciation until 1 April 2001. Further, it may be easier to have assets valued as on 1 April 2001 given that data for 1 April 1981 may not be readily available. This amendment is proposed to be effective from FY 2017-18 onwards. Dividends - Taxpayer Base widened Until the amendment introduced by Finance Act, 2016, dividends were exempt from tax in the hands of the recipient shareholder where the company declaring dividend had paid Dividend Distribution Tax. Pursuant to the said amendment, in the case of resident shareholders being individuals, HUFs and firms receiving dividends in excess of INR 1 million, the same were made taxable at the rate of 10%. The Bill proposes to widen the taxpayer base in this regard by making the tax applicable to all resident taxpayers, except domestic companies, and certain specified funds and institutions. This amendment is proposed to be effective from FY 2017-18 onwards. Deduction of Tax on Rent Currently, only individuals or HUFs who are liable for tax audits are required to deduct tax at source at the time of credit or payment of rent to a resident beyond a certain monetary threshold limit. The Bill proposes to broaden the scope of tax deduction at source by making it mandatory for even those individuals and HUFs that are not liable for tax audits to deduct tax at source at the rate of 5% before paying rent to a resident in excess of INR 50,000 for a month or part of a month during the relevant FY. Tax shall be deducted at the time of payment or credit of rent for the last month of the relevant FY or the last month of tenancy, if the property is vacated during the year. This amendment is proposed to be effective from 1 June 2017. Scope of Domestic Transfer Pricing Provision whittled down Currently the IT Act provides for domestic transfer pricing provisions whereby certain domestic transactions valued above the de minimis threshold of INR 200 million on an aggregate basis require taxpayers to comply with arms’ length pricing and report to the tax authorities in prescribed formats specified in the IT Act. One such category of transactions covered by the aforesaid provision is expenditure in respect of which payment has been made to a ‘related party’ as defined in the IT Act. ‘Related parties’ for the purposes of domestic transfer pricing are defined for each category of taxpayers. The term includes persons with substantial interest in the taxpayer, or in a position of control over the taxpayer, for instance, a director of a company or partner of a firm or an individual who has not less than 20% beneficial ownership of shares or profit of the taxpayer’s business or profession. The Bill proposes to exclude in toto the expenditure in respect of which a payment has been made by the taxpayer to a ’related party’. While this amendment is aimed at reducing the compliance burden on taxpayers and is a significant step towards ease of doing business, the tax officers will continue to have recourse to review transactions, especially those aimed at avoiding tax under the General Anti-Avoidance Rules. This amendment is proposed to be effective for FY 2016-17 onwards. Penalty on Incorrect Certification Currently, while there are provisions under the IT Act to penalise a taxpayer for furnishing incorrect information, there are no provisions to penalise the person responsible for certifying such incorrect information. The Bill proposes to insert a new Section 271J, to provide that if any accountant, merchant banker or registered valuer furnishes incorrect information in a report or certificate as furnished under the IT Act, the tax authorities may direct such person to pay INR 10,000 for each such report or certificate by way of penalty. However, if the person proves that there was reasonable cause for such failure, no penalty shall be leviable. The purpose of introducing such a provision is to ensure that persons furnishing a report or certificate will undertake due diligence before issuance of the same. This amendment is expected to be effective from FY 2016-17 onwards. INDIRECT TAXØ In line with the budget announcements towards a unified tax administration, the Authority for Advance Rulings (AAR) specifically constituted for dealing with indirect tax matters has been proposed to be combined with the AAR constituted under the IT Act. Ø Procedural amendments have been proposed in relation to advance rulings as follows: · A member of Indian Revenue Service (Customs and Central Excise) would be the revenue member of the AAR. · The statutory fee is proposed to be increased from INR 2500 to INR 10000. · The time period available to the new AAR for passing orders has been increased from the current 90 days to 6 months. · Pending disputes would be transferred to the new AAR from the date of enactment of the Bill. Ø Provisions relating to settlement of disputes before the Settlement Commission are proposed to be amended. · Co-noticees can approach the Settlement Commission only when the main applicant has also approached the Settlement Commission. This will help settle disputes on the locus standi to approach the Settlement Commission. The exact contours of the proposed amendment are circumspect as rules in this regard are awaited. · The Settlement Commission has been granted the power to recall its orders for rectifying apparent errors. However, as per the current legal position, rectification resulting in enhancement of duty liability of the applicant is not permitted. Central Excise law Ø The standard basic excise duty (BED) remains unchanged at 12.5%. Ø The concessional BED rate remains unchanged at 2% and 6% (with or without CENVAT credit). Change in effective rates of Central Excise
# Subject to conditions * Amended retrospectively with effect from 1 January 2017 µ Exemption available till 30 June 2017 Ø BED on cigars and cheroots, cigarillos, cigarettes, etc. has been increased. Ø Additional duty of excise on non-filtered and filtered cigarettes has been increased between a range of 43% to 47%. Additional excise duty on chewing tobacco, ‘jarda’ scented tobacco, etc. has been enhanced from 10% to 12%. Ø Rate of excise duty payable per machine per month under the compounded levy scheme for pan masala, unmanufactured tobacco, chewing tobacco and ‘jarda’ scented tobacco has been enhanced. Ø Exemptions available on ‘point-of-sale’ (POS) devices and parts thereof have been extended until 30 June 2017. Ø Exemption under Notification No. 12/2012 dated 17 March 2012 (as amended) has been made available to the following goods, provided that CENVAT credit on inputs, input services and capital goods is not availed:
Legislative changes in the rules (with effect from 2 February 2017) Ø Corresponding changes have been made in the duty ratios and illustrative figures given in the forms required under the Pan Masala Packing Machines (Capacity Determination and Collection of Duty) Rules, 2008 and Tobacco Packing Machines (Capacity Determination and Collection of Duty) Rules, 2010. Ø Rule 21 of Central Excise Rules, 2002 has been amended to provide for a time limit of 3 months, which may be further extended by 6 months, for granting remission of duty. Clarifications Ø It has been clarified that Export Oriented Units (EOUs) are entitled to avail exemption benefits on inputs procured domestically or imported (subject to the fulfilment of prescribed conditions) and that the bar under Section 5A of the Central Excise Act, 1944 is only with regard to excisable goods manufactured by an EOU and cleared to a domestic tariff area. Customs Law Legislative changes Ø Concept of ‘beneficial owner’ has been proposed. · Beneficial owner is a person on whose behalf goods are imported or exported or who exercises effective control over import or export of goods. Accordingly, there is a proposal to amend the definitions of ‘importer’ and ‘exporter’ to include beneficial owners. · The proposed amendment may result in a situation wherein the importer and the beneficial owner are jointly and severally liable. Ø The proposed amendments aim to set up specific ‘foreign post offices’ and ‘international courier terminals’ for imports through post and courier respectively. Ø Refund of customs duty paid (under self-assessment mechanism or reassessment) in excess prior to clearance of imported goods has been given legislative sanction. This amendment has been proposed to reflect the judgment of the Delhi High Court in Aman Medical Products v Commissioner of Customs[1]. This amendment also exempts the assessee from unjust enrichment. Ø Henceforth, the person-in-charge of the conveyance is required to submit: (i) passenger and crew arrival manifest; and (ii) passenger name record information to the Customs Authorities. The proposed amendments are likely to increase compliance obligations of persons-in-charge of conveyances. Ø Currently, Countervailing Duty (CVD) on subsidised articles can be imposed when the subsidy is for a limited number of persons, but the exemption from CVD can be granted on fulfillment of certain conditions viz., that the subsidy should be for research / for disadvantaged regions in the exporting country / for adapting to new environmental requirements. The Bill now proposes for CVD on subsidised articles to be levied, irrespective of the purpose behind the subsidy. Customs Duty rates Ø The standard rate of Basic Customs Duty (BCD) of 10% remains unchanged. Ø The standard rate of CVD equivalent to Central Excise Duty of 12.5% has also been retained in the present budget. Ø The standard rate of Additional Customs Duty (SAD) of 4% also remains unchanged. Export Duty Rate Changes
Import duty rate changes
* Subject to conditions # Exemption available only till 30 June 2017 Proposed changes in rates / exemptions Ø All machinery (including those required for testing and quality control) and components, required for: · initial setting up of fuel cell based system for generation of power or for demonstration purposes; or · balance of systems operating on bio-gas or bio-methane or by-product hydrogen have been granted a concessional rate of BCD at 5% (peak rate: 10% / 7.5%) and CVD at 6% (peak rate: 12.5%), subject to fulfilment of stipulated conditions. Ø In line with the digitisation initiatives of the Central Government, exemption from full customs duty including CVD and SAD have been introduced on the import of Micro ATM, fingerprint reader / scanner, iris scanners and miniaturised POS card reader. Further, parts required for the manufacture of these goods are also exempt subject to certain conditions. The sunset date for the CVD exemption is 30 June 2017. Ø All parts required for the manufacture of LED lights or lamps or fixtures including LED lamps have been granted (subject to certain conditions) a concessional rate of BCD at 5% and CVD at 6%. The sunset date for the concessional rate of CVD is 30 June 2017. Ø All inputs for use in the manufacture of LED driver and Metal Core Printed Circuit Board (MCPCB) for LED lights or fixtures including LED lamps have been granted (subject to certain conditions) a concessional rate of BCD at 5%. Ø Import of exempted goods by the oil and petroleum industry can be disposed off by the importer by paying duty on depreciated values, subject to compliance with certain conditions. Ø Concessional rate of BCD on anthraquinone and 2-ethyl anthraquinone is proposed to be available only if they are used for the manufacture of hydrogen peroxide. Ø The limit of duty free import of eligible items for manufacture of leather / synthetic footwear or other leather products for use in such manufacture and export has been enhanced from 3% to 5% of the FOB value of the goods exported in the previous year. Ø Exemption from BCD on goods imported through postal parcels, packets and letters was available where customs duty payable was less than INR 100. This de-minimis threshold for customs duty exemption henceforth applies where the CIF value does not exceed INR 1000 per consignment. Ø Concessional rate of customs duty on import of ball screws, linear motion guides and CNC systems for use in the manufacture of CNC Lathes or Machining Centres has been extended to include all types of CNC machine tools falling under headings 8456 to 8463, subject to certain conditions. Service Tax Ø The effective rate of service tax remains unchanged at 15%. Services withdrawn from negative list (effective from the enactment of the Bill) Ø Services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption. However, the exemption has been restored by inclusion of the said entry in mega exemption notification. Exemptions (effective from 2 February 2017) Ø Exemption on services provided by Indian Institutes of Management by way of two year full time residential post graduate programmes in management extended to non-residential programmes. Ø Services provided to the Government by way of transport of passengers by air embarking from or terminating at a Regional Connectivity Scheme Airport (RCSA), against consideration in the form of viability gap funding exempted for 1 year from the date of commencement of operations of the RCSA. Retrospective Exemptions (effective from the enactment of the Bill) Ø Life insurance services provided by the army, naval and air force group insurance funds to its members have been exempted retrospectively for the period from 10 September 2004 to 1 February 2016 with enabling provisions for filing refund application for service tax paid during such exempted period. Further, such services have been prospectively exempted with effect from 2 February 2017. The exemption for the interim period from 2 February 2016 to 1 February 2017 appears to have been inadvertently missed. Ø One time upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable for grant of long-term lease of industrial plots (30 years or more) by State Government industrial development corporations/ undertakings to industrial units have been exempted with effect from 1 June 2007 till 21 September 2016 with enabling provisions for filing refund application for service tax paid during such exempted period. Amendment to Service tax (Determination of Value) Rules, 2006 (Valuation Rules) Ø Rule 2A of the Valuation Rules is proposed to be amended with retrospective effect from 1 July 2010 to clarify that service portion in execution of works contract would not include value of land or undivided share of land. Ø The amendment also proposes that in cases where the actual value of services is not determinable, service tax would be payable on the prescribed percentage of the total amount charged representing notional value for services for different periods subject to conditions provided therein. Ø This amendment has the effect of negating the decision of the division bench of Hon’ble Delhi High Court in Suresh Kumar Bansal v the Union of India[2] wherein it was inter alia held that no service tax could be charged under ‘Construction of complex Services’ in case of composite construction agreements (involving sale of undivided share in the land), entered into by the builders/ developers with home buyers prior to grant of completion certificate for lack of statutory machinery provisions to arrive at the value of the service component therein. Other Amendment Ø Research and Development Cess Act, 1986 to be repealed with effect from 1 April 2017. As a result, service tax would be payable at full rate on import of technology. CENVAT Credit Amendment to CENVAT Credit Rules, 2004 (CCR) which would come into effect from 2 February 2017; Ø Rule 6, sub-rule (3D) has been amended as follows: · For determining the proportionate reversal under Rule 6(3A), the value of services by way of extending deposits, loans or advances against consideration in the form of interest or discount would be included in the value of exempted services and total services for a banking company and a financial institution including a non-banking financial company. Ø Sub-rule (4) has been introduced in Rule 10 of CCR to provide for a period of 3 months, which may be further extended by 6 months by Principal Commissioner, for disposal of transfer of CENVAT credit application. This rule allows transfer of credit in case of transfer of business or merger. While this amendment fixes the time limit for disposal of transfer application, it now requires mandatory approval for transfer of CENVAT credit, which may have a working capital impact. |
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NEWSFLASH
UNION BUDGET 2017-18
Contents
Direct Tax.............................................................................................................................................................................................................. 1-14
Indirect Tax......................................................................................................................................................................................................... 15-22
2 February 2017
DIRECT TAX
BUDGET SCORE CARD
Investors in FPIs (Cat I & II) exempt from indirect transfer tax
Reduction in corporate tax rate applicable to SMEs
Incentivising Debt Capital
- Masala Bonds – offshore transfer exempt and 5% withholding tax on interest extended
- Sunset of 1 July 2017 extended to 1 July 2020 for interest on ECBs, foreign currency and rupee bonds
Boost to real estate sector and start ups
MAT – alignment with Ind AS and credit period extended
Conversion of preference shares into equity shares clarified
Resetting of base period for indexation to 1 April 2001
Taxability of Carbon Credits clarified
Cash transactions discouraged, Digital payments encouraged
Applicability of domestic transfer pricing relaxed
Thin capitalisation norms introduced
Secondary adjustments introduced in transfer pricing regulations
Fair valuation basis taxation widened
TAX RATES
Corporates
The Finance Bill, 2017 (Bill) proposes to reduce the corporate tax rate from 30% to 25% for small and medium-sized enterprises having a turnover of up to INR 500 million in financial year, i.e. from 1 April to 31 March (FY) 2015-16. In other cases, the basic tax rates remain the same. Further, there is no change in surcharge and cess for companies.
This amendment is proposed to be effective from FY 2017-18 onwards.
Non-corporates
For individuals, Hindu undivided families (HUFs), associations of persons (AOPs) and bodies of individuals (BOIs), there is no change in the income-slabs. The tax rate applied for the first taxable slab (income between INR 250,000 / 300,000 to INR 500,000) is proposed to be reduced from 10% to 5%.
Currently, a surcharge at the rate of 15% is levied on individuals, HUFs, AOPs and BOIs having income exceeding INR 10 million.
The Bill proposes to levy surcharge at the rate of 10% on individuals, HUFs, AOPs and BOIs having a total income between INR 5 million and INR 10 million.
This amendment is proposed to be effective from FY 2017-18 onwards.
CROSS-BORDER AND M&A SPACE
Investors in Foreign Portfolio Investments (FPIs) exempt from Indirect Transfer Tax
Currently, an offshore transfer of shares or interest in a foreign company or entity triggers capital gains tax in India (subject to certain exemptions) where the share or interest derives ‘substantial value’ from India. The Central Board of Direct Taxes (CBDT) vide Circular No 41 of 2016 (Circular) had recently issued certain clarifications on the application of these provisions to FPIs. Given that, no blanket exemption was provided to FPIs, stakeholders industry-wide had made representations to the Government explaining the issue of double taxation. This arose in cases where there were multiple layer structures through which investors invested in an FPI. Once the FPI had partially sold the shares of Indian company and up streamed the proceeds to its immediate investor, if the same had to be up-streamed to ultimate investor, there would be tax at each stage since each entity which redeemed the shares derived substantial value from Indian assets. Heeding to the representations made, the CBDT issued a subsequent clarification keeping the Circular in abeyance.
The Bill proposes to introduce a clarification that lays to rest the concerns of FPIs on the applicability of the indirect transfer tax provision. The Bill has clarified that the scope of the indirect transfer tax provision shall not cover within its ambit, direct or indirect investments held by non-resident (NR) taxpayers in FPIs that are registered as Category-I or Category-II with the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014. FPIs registered as Category-I and Category-II include sovereign funds, Governmental agencies, international or multilateral organisations and broad based funds such as mutual funds, university funds, pension funds respectively.
This proposed clarification provides the much-needed respite to FPIs, putting to rest the adverse impact caused by the Circular. While this legislative clarification is laudable and provides reprieve to the funds sector, the conspicuous exclusion of Category-III (residuary category that typically covers individuals, trusts, family offices, endowment funds, charitable trusts, foundations, corporate bodies etc.) registered as FPIs is a slight dampener.
This amendment is proposed to be effective retrospectively from FY 2011-12 onwards.
Masala Bonds spiced up
In September 2015, the Reserve Bank of India permitted Indian companies to issue rupee denominated bonds (Masala Bonds) overseas as a measure to enable them to raise funds from outside India.
In line with the announcement made by the Government vide a Press Release dated 29 October 2015, the Bill proposes to extend the concessional withholding tax rate of 5%, as currently applicable to foreign currency bonds, external commercial borrowings and rupee bonds issued to FPIs, to interest on Masala Bonds issued before 1 July 2020. This amendment is proposed to be retrospectively effective from FY 2015-16 onwards.
Further, the Bill proposes that an offshore transfer of Masala Bonds, issued overseas, from one NR to another NR would not be regarded as a taxable transfer and thus, would not attract tax in India. This amendment is proposed to be effective from FY 2017-18 onwards.
These proposals were long awaited and shall provide the necessary fillip to investments in Masala Bonds as a mode of raising capital. With the concessional withholding tax rate being extended, Masala Bonds would be placed on the same footing as other modes of foreign currency fund raising whether rupee denominated or foreign currency denominated.
Sunset for Concessional Withholding Tax on Interest extended
Currently, a concessional withholding tax rate of 5% applies, subject to prescribed conditions, to interest on (a) foreign currency loans and long-term bonds under Section 194LC of the (Indian) Income-tax Act, 1961 (IT Act), and (b) rupee denominated bonds and Government securities issued to FPIs under Section 194LD of the IT Act.
The concessional withholding tax rate under Section 194LC applies where the borrowing is raised before 1 July 2017, and under Section 194LD in relation to interest payable before 1 July 2017.
The Bill proposes to extend the sunset dates for these provisions from 1 July 2017 to 1 July 2020.
This amendment is proposed to be effective from FY 2017-18 onwards.
Relaxation to Offshore Funds with Onshore Management
Generally, if a manager of an offshore fund were to be located in India, this would result in business connection or economic nexus in India, leading to an Indian tax incidence on the income of the offshore fund. In an attempt to boost onshore fund management activity, currently, the IT Act provides for the benefit of allowing onshore fund management activities without leading to the offshore eligible fund being regarded as an Indian tax resident or establishing an Indian ‘business connection’. The availability of this benefit however, is subject to satisfying the onerous investment and investor linked pre-requisites specified in the IT Act. One such pre-condition is a minimum corpus requirement of the fund having a monthly average of not less than INR 1 billion except in cases where the fund has been established or incorporated in the relevant year.
To address the genuine concerns of funds which are in the process of winding up, the Bill proposes to exclude them from the abovementioned monthly corpus requirement.
This is a welcome change and addresses the practical concerns raised by stakeholders. However, the status quo vis-à-vis the stringent investor and investment linked conditions for availing the benefit envisaged by this provision make it under-inclusive.
This amendment is proposed to be effective retrospectively from FY 2015-16 onwards.
Introduction of Secondary Adjustments
Currently, the Indian transfer pricing provisions, do not require secondary adjustments to be carried out in case of a transfer pricing adjustment.
The Bill proposes to introduce a provision mandating secondary adjustments, with the objective of removing the imbalance between cash account and actual profit of the taxpayer and to align the Indian transfer pricing norms with the guidelines prescribed by the Organisation for Economic Cooperation and Development (OECD).
As per this provision, a taxpayer will be required to carry out secondary adjustment where the transfer pricing adjustment i.e. the primary adjustment has been made suo moto by the taxpayer in his return of income; or made by an assessing officer and accepted by the taxpayer; or is determined by an advance pricing agreement; or is made as per the safe harbour rules; or is arising as a result of resolution of an assessment by way of mutual agreement procedure.
Further, if as a result of a transfer pricing adjustment, there is an increase in the total income or reduction in the loss of a taxpayer, the excess money, being the difference in the arm’s length price determined by the tax authorities and the price at which the transaction is undertaken, available with the associated enterprise is to be repatriated into India within the prescribed time limit. If such excess money is not repatriated within the prescribed time limit it shall be deemed to be an advance made by the taxpayer to such associated enterprise and interest on such advance is to be computed in the prescribed manner.
However, secondary adjustment shall not be carried out if the amount of transfer pricing adjustment in a FY does not exceed INR 10 million and the transfer pricing adjustment is made in respect of a FY commencing on or before 1 April 2015.
This amendment is proposed to be effective for FY 2017-18 onwards.
Treaty Definitions to Override
Currently, there is rampant litigation on conflicting interpretations of terms that are defined both under the treaties / agreements entered into with foreign jurisdictions, as well as under the IT Act. This is because tax authorities seek to invoke the definition of a term in the IT Act if such a definition is wider than the definition provided in the relevant treaty.
The Bill proposes to clarify that if a term is defined in a treaty, then the definition under the IT Act will not be relevant. If a term is not defined in the treaty, only then it will have the meaning assigned to it under the IT Act.
This amendment is proposed to be effective from FY 2017-18 onwards.
Conversion of Preference Shares into Equity Shares tax neutral
Finally putting to rest the long-standing debate in this regard, the Bill clarifies that conversion of preference shares would be exempt from the rigours of capital gains tax, thus bringing it in line with the treatment of conversion of debentures into equity shares. It is proposed that the cost of the equity shares will be same as the cost of the preference shares. Further, for ascertaining the period of holding of equity shares, the period for which preference shares were held before their conversion will also be included.
The amendment is proposed to be effective from FY 2017-18 onwards.
More clarity regarding Sale of Shares of Private Companies
The Finance Act, 2012 provided for applicability of a concessional tax rate of 10% to NRs transferring unlisted securities, held as long-term capital assets.
There was uncertainty regarding applicability of the concessional rate to shares of a private limited company as it was doubtful if the same could be treated as ‘securities’.
To address this uncertainty, the Finance Act, 2016 clarified that the above provision will apply to shares of a company in which the public is not substantially interested (say, a closely held company). However, this clarification was made effective from FY 2016-17. The availability of this concessional rate between FY 2012-13 to FY 2016-17 remained uncertain.
The Bill proposes to clarify that the amendment introduced by the Finance Act, 2016 will apply retrospectively from FY 2012-13.
BOOST TO REAL ESTATE SECTOR
Incentives for Real Estate Developers
Currently, Section 80-IBA of the IT Act allows taxpayers engaged in the business of developing and building housing projects, a 100% deduction of profits, subject to the fulfilment of certain conditions.
This incentive was introduced in furtherance of promoting the ‘Affordable Housing Scheme’.
In order to provide a further impetus to this scheme, the Bill proposes to relax the following conditions under Section 80-IBA:
The reference of unit to determine the area of a residential unit comprised in the housing project will be carpet area as against the present reference of built-up area; The condition that the size of residential units should not exceed 30 square meters will not apply if the project is located within 25 kms from the municipal limits of metro cities; and The time period for completion of the housing project will be extended from 3 years to 5 years from the date of its approval.
This amendment is proposed to be effective from FY 2017-18 onwards.
Joint Development Agreements (JDAs) – Taxation clarified
In the context of JDAs between the owner of an immovable property (Property) and the developer, the liability to pay tax for the owner arises in the year in which the possession of the Property is handed over to the developer for the development of a project.
Generally, the land-owner receives consideration, partly in cash and partly in kind, which is deferred until the completion of the project. Thus, taxing the entire consideration in the year of transfer itself (irrespective of completion or termination of the project) creates a cash crunch in the hands of the owner.
To avoid this hardship, the Bill proposes the following amendments to the IT Act:
If an individual or an HUF (Specified Transferor) transfers the Property under a JDA, capital gains tax will be chargeable only in the year in which the ‘certificate of completion’ (CoC) has been issued, provided that they do not transfer their share in the project prior to the receipt of CoC; and For the purposes of computation of capital gains tax, the stamp duty value on the date of issue of CoC and any consideration received in cash by the Specified Transferor will collectively be considered as the consideration arising out of transfer of the Property.
This amendment is proposed to be effective from FY 2017-18 onwards.
The Bill further proposes to introduce a new section, whereby any monetary consideration paid to a Specified Transferor under a JDA will be subject to withholding tax at the rate of 10%.
While this proposal is a positive step, land owners other than individuals and HUFs (say firms, companies) have not been provided any relief in this regard.
Reliefs for Real Estate Developers holding House Property as Stock in Trade
Currently, the IT Act, subject to certain exemptions, levies tax on a taxpayer if it owns immovable properties (which are not occupied for business or profession purposes) on a notional basis, irrespective of the fact that such immovable property has been let out.
The Bill proposes a relaxation from charge of notional rent for 1 year from the date of completion of construction of property.
This amendment is proposed to be effective from FY 2017-18 onwards.
Reduction of Holding Period of Immovable Property
Currently, in order for an immovable property viz., land and building, to qualify as a long-term capital asset, the same has to be held for a period of more than 36 months.
The Bill proposes to reduce the abovementioned holding period to 24 months. This will indeed propel the real estate market by increasing mobility of assets.
This amendment is proposed to be effective from FY 2017-18 onwards.
A MIXED BAG FOR START-UPS
Longer Gestation Period recognised
Under Section 80IAC of the IT Act, a 100% tax holiday is available to eligible start-ups for any 3 consecutive years out of a 5-year period, beginning from the year in which such start-up was incorporated.
The Bill proposes to extend this period from 5 years to 7 years as most start-ups do not generate profits in their initial years.
While this is a welcome proposal, a rationalisation of the definition of an “eligible start up” and an exemption from applicability of Minimum Alternate Tax (MAT) would have further bolstered the Indian start-up landscape.
This amendment is proposed to be effective from FY 2017-18 onwards.
Carry Forward and Set-Off of Loss for Start-Ups
Currently, the IT Act provides that in case of substantial change in shareholding of a company (beyond 49%) in which the public are not substantially interested, tax losses incurred in any prior year shall not be available for carry forward and set off against the income.
The Bill proposes to provide that losses incurred by eligible start-ups can be carried forward and set-off against the income of a year provided all the shareholders of such eligible start-up who held shares in the start-up when losses were incurred, continue to hold the shares on the last day of the year in which losses are claimed for set off, and such losses were incurred during the period of 7 years from the date of incorporation.
This amendment is proposed to be effective from FY 2017-18 onwards.
PLUGGING THE CHARITY LOOPHOLES
Inter-Charity Corpus Donations no longer regarded as valid application of Income
Currently, a charitable organisation is permitted to make donations to other charitable organisations only out of its current year income in order for such donation to be treated as a valid application of its income for charitable or religious purposes.
The Bill proposes to further restrict the scope of inter-charity donations by specifically providing that donations by a charitable entity towards the corpus of another charitable entity will not be regarded as an application of its income for charitable or religious purposes. Therefore, the income used to make such donations will not be tax exempt.
This will have the effect of plugging the practice of rotating funds within sister concerns of charitable entities and accumulating them for indefinite periods. The intention seems to be to increase the use of funds collected by charitable organisations for the very purpose for which they are formed.
This amendment is proposed to be effective from FY 2017-18 onwards.
Change of Charitable Objects to require Fresh Registration
The Bill also proposes that if a charitable entity registered in terms of Sections 12A and 12AA of the IT Act subsequently adopts new objects or undertakes modifications of its original objects which do not conform to the conditions of its registration, it shall be required to obtain fresh registration from the tax authorities.
This is expected to have the effect of clamping down on charitable entities that often modify their objects to undertake activities in the nature of trade, commerce or business, thereby abusing their tax exempt status, which was originally granted only for certain charitable purposes.
This amendment is proposed to be effective from FY 2017-18 onwards.
Cost of acquisition of Assets transferred on Winding Up of Charitable Operations clarified
The Finance Act, 2016 imposed an additional income-tax in the nature of an ‘exit tax’ on the accreted income of a charitable entity if it converted into or merged with a non-charitable entity, or failed to transfer all its assets to another charitable entity upon its dissolution. ‘Accreted income’ for this purpose referred to the amount by which the aggregate fair market value (FMV) of the total assets of the charitable entity, as on the specified date, exceeded its total liabilities computed in accordance with the method of valuation as prescribed.
The Bill clarifies that where tax has been paid on the capital gains arising from the transfer of an asset held by a charitable entity in respect of which accreted income has been computed, the cost of acquisition of such asset to the transferee entity shall be deemed to be the FMV of the asset taken into account for computation of the accreted income.
This amendment is proposed to be effective retrospectively from 1 June 2016.
NO RESPITE FROM MAT YET BUT PROVISIONS RATIONALISED
Credit Period extended
Currently, as per Section 115JB of the IT Act, a company is required to pay MAT in case the tax payable by a company otherwise is less than 18.5% of its adjusted book profits. While MAT continues to apply, the Bill proposes to extend the period for which credit of MAT can be claimed from 10 to 15 years.
A similar benefit has been extended to non-corporate taxpayers in respect of Alternate Minimum Tax credit. Further, the Bill also proposes the manner in which foreign tax credit would need to be adjusted while determining MAT credit.
This amendment is proposed to be effective from FY 2017-18 onwards.
Alignment of MAT provisions with Ind AS
Presently, MAT liability is computed based on the financial statements prepared in accordance with the Indian Generally Accepted Accounting Principles (GAAP).
Given that a new set of Indian Accounting Standards (Ind AS) has replaced the existing Indian GAAP for certain companies, there was a need for alignment of MAT provisions with the new Ind AS. Ind AS, in essence, is based on the principle of ‘fair value concept of assets and liabilities’.
The Bill proposes to provide clarity by introducing a specific regime for computation of MAT liability for Ind AS compliant companies in the year of adoption and thereafter, and provides for certain adjustments such as changes in revaluation surplus, consequences of demerger, etc.
This amendment is proposed to be effective from FY 2016-17 onwards.
MEASURES TO CURB TAX-AVOIDANCE
Avoiding Misuse of Exemption from Long-term Capital Gains Tax
Currently, the IT Act provides that long-term capital gains arising on transfer of listed equity shares of a company or a unit of equity oriented fund (collectively, Securities) are exempt from tax provided Securities Transaction Tax (STT) is paid on such transfers.
In order to prevent the misuse of this provision, the Bill proposes that the benefit of this provision will be available only where STT has been paid even at the time of acquisition of the Securities sought to be transferred. However, the proposed amendment will be subject to exceptions as may be notified in order to protect genuine cases.
This amendment is effective from FY 2017-18 onwards.
Fair Value basis Taxation on Transferor of Unquoted Shares
In order to ensure that the transfer of shares of an unlisted company is undertaken at fair value and there is no understatement of the sales consideration, the Bill proposes to introduce a new section 50CA in the IT Act.
Section 50CA provides that if a taxpayer transfers shares of an unlisted company for a consideration which is less than the FMV determined as per a method to be prescribed, then the FMV will be deemed to be the consideration for the purpose of computation of capital gains tax.
This amendment is proposed to be effective from FY 2017-18 onwards.
Fair Value basis Taxation on Recipient of any Property
Currently, Section 56(2) of the IT Act provides that:
If an individual or HUF receives (i) any property without or for inadequate consideration, and if the FMV of such property exceeds INR 50,000; (ii) cash in excess of INR 50,000, then the difference between the FMV and the price paid for the property or the cash in excess of INR 50,000 is considered as income in the hands of the recipient individual or HUF.
Property is widely defined as jewellery, immovable property, shares, drawings, paintings, sculptures, bullion, art work, shares and securities and archaeological collections (Property).
If a closely held company or a firm receives shares of another closely held company free of cost or for inadequate consideration, the difference between the FMV of such shares and payment made by the recipient firm or company is considered as income in its hands.
It was noted that taxpayers other than individuals, HUFs, closely held companies and firms were not covered under Section 56(2). Additionally, its applicability to closely held companies and firms was limited to transactions with respect to shares of a closely held company.
The Bill proposes to widen the ambit of Section 56(2) to apply to all persons (such as listed companies, AOPs, BOIs, etc.) when they receive any Property for a consideration below the prescribed FMV or cash in excess of INR 50,000.
This amendment is proposed to be effective from FY 2017-18 onwards.
Thin Capitalisation Norms introduced
India is at the forefront of implementing the OECD’s Base Erosion and Profit Shifting (BEPS) Project. To this end, the Bill proposes to implement Action Plan 4 of the BEPS Project, which provides for restriction on claiming of interest expenditure on loan / debts taken from an associated enterprise (AE) by introduction of a new Section 94B in the IT Act.
Proposed Section 94B provides that if an Indian company or a permanent establishment of a foreign company in India (collectively, Borrower) has borrowed money from its NR AE towards which it pays interest exceeding INR 10 million, then the ‘excess interest’ cost will not be eligible for deduction from the profits of the Borrower. Loans which have been extended to the Borrower by a third-party lender on the implicit or explicit guarantee of its NR AE will also be covered under this provision.
‘Excess interest’ is defined to mean an amount of total interest paid or payable which exceeds 30% of earnings before interest, taxes, depreciation and amortisation of the Borrower, or interest actually paid or payable to the NR AE, whichever is lesser.
This section will not be applicable to the Borrower engaged in the business of banking or insurance.
However, if the interest is not eligible for deduction in a particular year, the same can be carried forward for 8 FYs from the FY in which the interest cost was not eligible for deduction and the same shall be allowed to the extent of maximum allowable interest expenditure for the relevant year.
The amendment is proposed to be effective from FY 2017-18 onwards.
CASH TRANSACTIONS DISCOURAGED, DIGITAL PAYMENTS ENCOURAGED
Disallowance of Capital Expenditure incurred In Cash
Currently, the IT Act provides that except in certain circumstances, revenue expenditure incurred in cash exceeding the prescribed monetary threshold is not allowed as a deduction. However, there is no similar provision disallowing any capital expenditure incurred in cash.
The Bill proposes that payments exceeding INR 10,000 for the acquisition of any asset or part thereof otherwise than by an account payee cheque drawn on a bank, account payee bank draft or the use of an electronic clearing system through a bank account shall be ignored while computing the ‘actual cost’ of an asset which is eligible for depreciation.
A similar amendment is proposed in relation to any capital expenditure under Section 35AD of the IT Act, which provides for investment-linked deduction for certain capital expenditure and revenue incurred by specified businesses.
This amendment is in line with the Government’s objective of discouraging cash transactions for capital expenditure. With this amendment, any capital expenditure incurred in cash will not be eligible for tax breaks such as depreciation and will not be included in the computation of capital gains.
This amendment is proposed to be effective from FY 2017-18 onwards.
Introduction of Penalty on Cash Receipts
Currently, if a person receives INR 20,000 or more on account of a loan taken or deposit or in relation to transfer of immovable property otherwise than by an account payee cheque, an account payee bank draft or use of an electronic clearing system through a bank account, such person may be liable to pay a penalty equivalent to the sum received.
The Bill proposes to introduce a similar penalty on any person who receives INR 300,000 or more (a) in aggregate from a person in a day; (b) in respect of a single transaction; or (c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee, cheque, an account payee bank draft or use of an electronic clearing system through a bank account. The penalty shall be equivalent to the amount received. However, no penalty shall be leviable if the recipient shows good and sufficient cause for such contravention.
This proposal may have a significant impact and could go a long way in achieving a cashless economy.
This amendment is expected to be effective from FY 2016-17 onwards.
Lower Tax Rate for Cashless Turnover under Presumptive Taxation Scheme
Currently, a presumptive taxation scheme is available for certain eligible taxpayers, according to which 8% of their total turnover or gross receipts is deemed to be their total income, subject to tax.
The Bill proposes to reduce the aforesaid percentage of deemed total income from 8% to 6% if the turnover or gross receipts are received by account payee cheque or account payee bank draft or use of an electronic clearing system through a bank account. The existing rate of 8% shall continue to apply for those businesses which generate receipts of turnover through any other mode.
This is a welcome move that is in line with the Government’s stated objective of promoting digital transactions and encouraging small unorganised businesses to accept digital payments.
This amendment is proposed to be effective from FY 2016-17 onwards.
DISPUTE RESOLUTION
Big Relief against taxing Time Barred Assessments
Section 197(c) of the Finance Act, 2016, which is a part of the Income Declaration Scheme in effect removed the limitation period for reopening of assessment proceedings in relation to unaccounted income chargeable under the IT Act in cases where a voluntary declaration was not made. Any undisclosed income or asset acquired out of such income could be taxed in the year in which the tax authorities issue an assessment or reassessment notice irrespective of the time barring provision.
The constitutional validity of this provision which permitted re-initiation of time barred assessments was being debated. Consequently, there were a lot of representations against this provision and with a view to address this, the Bill proposes to omit the said clause retrospectively from the date of its introduction (i.e. 1 June 2016).
Assessment, Re-Assessment and Re-Computation revised
Proceedings
Applicable from
Current Provision
Proposed Amendment (with effect from 1 April 2017)
Assessment
FY 2017-18
33 months (from the end of the relevant FY)
30 months (from the end of the relevant FY)
FY 2018-19
33 months (from the end of the relevant FY)
24 months (from the end of the relevant FY)
Re-assessment
After 1 April 2019
9 months (from the end of the FY in which notice is issued)
12 months (from the end of the FY in which notice is issued)
Filing of a revised return
FY 2017-18
Earlier of:
24 months (from the end of the relevant FY); or completion of the assessment
Earlier of:
12 months (from the end of the relevant FY); or completion of assessment
Change in Structure of Authority for Advance Rulings (AAR)
The Bill proposes to merge the AAR for income-tax, central excise, customs duty and service tax.
Also, currently only a retired judge of the Supreme Court of India is eligible for appointment as a Chairman of the AAR. The Bill proposes to amend the qualification criteria by allowing a former High Court Chief Justice or a High Court judge (who has served as a High Court judge for at least 7 years) to become a Chairman.
To ensure smooth functioning and to avoid a scenario of the AAR coming to a standstill, it is also proposed that if the Chairman is unable to discharge his functions owing to absence, illness, etc. or if his office is vacant, the Vice-chairman will discharge the functions of the Chairman.
This has been done to address the huge pendency of cases at the AAR, especially since the relevant provisions of IT Act require the AAR to pass an order within 6 months.
This amendment is expected to be effective from FY 2016-17 onwards.
LAST BUT NOT THE LEAST
Taxability of Transfer of Carbon Credits
The taxability of payments received for transfer of carbon credits is ambiguous under the IT Act. There have been some rulings where Courts have held such payments to be in the nature of revenue receipts and hence, taxable while some rulings have held these payments to be capital receipts and hence, not taxable.
The Bill proposes to introduce a new section dealing with taxability of payments received on transfer of carbon credits. As per the new section, such payments would be taxable at the rate of 10% without deduction of any expenses which may have been incurred in this regard.
This amendment is proposed to be effective for FY 2017-18 onwards.
Re-setting of Base Year for Cost Basis and Indexation
Currently, taxpayers have an option to take the higher of FMV of an asset as on 1 April 1981 or its actual cost of acquisition as the cost basis for computing capital gains. Indexation enables taxpayers to adjust the cost basis of a capital asset by accounting for inflation. Presently, the base year for indexation is 1 April 1981.
Recognising the difficulties faced by taxpayers due to the base year being so old, the Bill proposes to shift the base year from 1 April 1981 to 1 April 2001 for the computation of capital gains and for indexation purposes. This is a welcome move as taxpayers will get the benefit of appreciation until 1 April 2001. Further, it may be easier to have assets valued as on 1 April 2001 given that data for 1 April 1981 may not be readily available.
This amendment is proposed to be effective from FY 2017-18 onwards.
Dividends - Taxpayer Base widened
Until the amendment introduced by Finance Act, 2016, dividends were exempt from tax in the hands of the recipient shareholder where the company declaring dividend had paid Dividend Distribution Tax. Pursuant to the said amendment, in the case of resident shareholders being individuals, HUFs and firms receiving dividends in excess of INR 1 million, the same were made taxable at the rate of 10%.
The Bill proposes to widen the taxpayer base in this regard by making the tax applicable to all resident taxpayers, except domestic companies, and certain specified funds and institutions.
This amendment is proposed to be effective from FY 2017-18 onwards.
Deduction of Tax on Rent
Currently, only individuals or HUFs who are liable for tax audits are required to deduct tax at source at the time of credit or payment of rent to a resident beyond a certain monetary threshold limit.
The Bill proposes to broaden the scope of tax deduction at source by making it mandatory for even those individuals and HUFs that are not liable for tax audits to deduct tax at source at the rate of 5% before paying rent to a resident in excess of INR 50,000 for a month or part of a month during the relevant FY.
Tax shall be deducted at the time of payment or credit of rent for the last month of the relevant FY or the last month of tenancy, if the property is vacated during the year.
This amendment is proposed to be effective from 1 June 2017.
Scope of Domestic Transfer Pricing Provision whittled down
Currently the IT Act provides for domestic transfer pricing provisions whereby certain domestic transactions valued above the de minimis threshold of INR 200 million on an aggregate basis require taxpayers to comply with arms’ length pricing and report to the tax authorities in prescribed formats specified in the IT Act. One such category of transactions covered by the aforesaid provision is expenditure in respect of which payment has been made to a ‘related party’ as defined in the IT Act. ‘Related parties’ for the purposes of domestic transfer pricing are defined for each category of taxpayers. The term includes persons with substantial interest in the taxpayer, or in a position of control over the taxpayer, for instance, a director of a company or partner of a firm or an individual who has not less than 20% beneficial ownership of shares or profit of the taxpayer’s business or profession.
The Bill proposes to exclude in toto the expenditure in respect of which a payment has been made by the taxpayer to a ’related party’. While this amendment is aimed at reducing the compliance burden on taxpayers and is a significant step towards ease of doing business, the tax officers will continue to have recourse to review transactions, especially those aimed at avoiding tax under the General Anti-Avoidance Rules.
This amendment is proposed to be effective for FY 2016-17 onwards.
Penalty on Incorrect Certification
Currently, while there are provisions under the IT Act to penalise a taxpayer for furnishing incorrect information, there are no provisions to penalise the person responsible for certifying such incorrect information.
The Bill proposes to insert a new Section 271J, to provide that if any accountant, merchant banker or registered valuer furnishes incorrect information in a report or certificate as furnished under the IT Act, the tax authorities may direct such person to pay INR 10,000 for each such report or certificate by way of penalty. However, if the person proves that there was reasonable cause for such failure, no penalty shall be leviable.
The purpose of introducing such a provision is to ensure that persons furnishing a report or certificate will undertake due diligence before issuance of the same.
This amendment is expected to be effective from FY 2016-17 onwards.
INDIRECT TAX
In line with the budget announcements towards a unified tax administration, the Authority for Advance Rulings (AAR) specifically constituted for dealing with indirect tax matters has been proposed to be combined with the AAR constituted under the IT Act. Procedural amendments have been proposed in relation to advance rulings as follows:
A member of Indian Revenue Service (Customs and Central Excise) would be the revenue member of the AAR. The statutory fee is proposed to be increased from INR 2500 to INR 10000. The time period available to the new AAR for passing orders has been increased from the current 90 days to 6 months. Pending disputes would be transferred to the new AAR from the date of enactment of the Bill.
Provisions relating to settlement of disputes before the Settlement Commission are proposed to be amended.
Co-noticees can approach the Settlement Commission only when the main applicant has also approached the Settlement Commission. This will help settle disputes on the locus standi to approach the Settlement Commission. The exact contours of the proposed amendment are circumspect as rules in this regard are awaited. The Settlement Commission has been granted the power to recall its orders for rectifying apparent errors. However, as per the current legal position, rectification resulting in enhancement of duty liability of the applicant is not permitted.
Central Excise law
The standard basic excise duty (BED) remains unchanged at 12.5%. The concessional BED rate remains unchanged at 2% and 6% (with or without CENVAT credit).
Change in effective rates of Central Excise
Goods Description
Existing Rate
New Rate
Catalyst for use in the manufacture of cast components of wind-operated electricity generators.# µ
12.5%
Nil
Resin for use in the manufacture of cast components of wind-operated electricity generators.# µ
12.5%
Nil
Membrane sheets and tricots / spacers for use in the manufacture of reverse osmosis (RO) membranes for household type filters.# µ
12.5%
6%
Solar tempered glass for use in the manufacture of :
solar photovoltaic cells or modules; solar power generating equipment or systems; flat plate solar collector; or solar photovoltaic modules and panels for water pumping and other applications.# µ
-
6%
Parts of solar tempered glass referred to above.# µ
12.5%
6%
All parts for use in the manufacture of Light Emitting Diode (LED) lights or fixtures, including LED lamps.# µ
12.5%
6%
Micro ATMs as per standards version 1.5.1 and parts thereof.# µ
12.5%
Nil
Fingerprint readers / scanners and parts thereof.# µ
12.5%
Nil
Iris scanners and parts thereof.# µ
12.5%
Nil
Miniaturised POS card readers for mPOS (other than mobile phones or tablet computers) and parts thereof.# µ
12.5%
Nil
Machinery, instruments, apparatus, appliances, transmission equipment and auxiliary equipment and components used for the initial setting up or demonstration of fuel-cell based systems for the generation of power.#
12.5%
6%
Machinery, instruments, apparatus, appliances, transmission equipment and auxiliary equipment and components used for manufacture of the balance of systems operating on biogas or bio-methane.#
12.5%
6%
Motor vehicles covered under 8702 90 21, 8702 90 22, 8702 90 28, 8702 90 29. *
27%
12.5%
# Subject to conditions
* Amended retrospectively with effect from 1 January 2017
µ Exemption available till 30 June 2017
BED on cigars and cheroots, cigarillos, cigarettes, etc. has been increased. Additional duty of excise on non-filtered and filtered cigarettes has been increased between a range of 43% to 47%. Additional excise duty on chewing tobacco, ‘jarda’ scented tobacco, etc. has been enhanced from 10% to 12%. Rate of excise duty payable per machine per month under the compounded levy scheme for pan masala, unmanufactured tobacco, chewing tobacco and ‘jarda’ scented tobacco has been enhanced. Exemptions available on ‘point-of-sale’ (POS) devices and parts thereof have been extended until 30 June 2017. Exemption under Notification No. 12/2012 dated 17 March 2012 (as amended) has been made available to the following goods, provided that CENVAT credit on inputs, input services and capital goods is not availed:
Chapter Heading
Description of goods
7105 or 7112
Waste and scrap of precious metals or metals clad with precious metals, arising in course of manufacture of goods.
7106
Strips, wires, sheets, plates, and foils of silver.
7113
Articles of silver jewellery, other than those studded with diamonds, rubies, emeralds or sapphires.
7114
Silver coins having a purity of 99.9% and above, bearing a brand name when manufactured from gold or silver respectively on which appropriate customs or excise duty has been paid.
Legislative changes in the rules (with effect from 2 February 2017)
Corresponding changes have been made in the duty ratios and illustrative figures given in the forms required under the Pan Masala Packing Machines (Capacity Determination and Collection of Duty) Rules, 2008 and Tobacco Packing Machines (Capacity Determination and Collection of Duty) Rules, 2010. Rule 21 of Central Excise Rules, 2002 has been amended to provide for a time limit of 3 months, which may be further extended by 6 months, for granting remission of duty.
Clarifications
It has been clarified that Export Oriented Units (EOUs) are entitled to avail exemption benefits on inputs procured domestically or imported (subject to the fulfilment of prescribed conditions) and that the bar under Section 5A of the Central Excise Act, 1944 is only with regard to excisable goods manufactured by an EOU and cleared to a domestic tariff area.
Customs Law
Legislative changes
Concept of ‘beneficial owner’ has been proposed.
Beneficial owner is a person on whose behalf goods are imported or exported or who exercises effective control over import or export of goods. Accordingly, there is a proposal to amend the definitions of ‘importer’ and ‘exporter’ to include beneficial owners. The proposed amendment may result in a situation wherein the importer and the beneficial owner are jointly and severally liable.
The proposed amendments aim to set up specific ‘foreign post offices’ and ‘international courier terminals’ for imports through post and courier respectively. Refund of customs duty paid (under self-assessment mechanism or reassessment) in excess prior to clearance of imported goods has been given legislative sanction. This amendment has been proposed to reflect the judgment of the Delhi High Court in Aman Medical Products v Commissioner of Customs[1]. This amendment also exempts the assessee from unjust enrichment. Henceforth, the person-in-charge of the conveyance is required to submit: (i) passenger and crew arrival manifest; and (ii) passenger name record information to the Customs Authorities. The proposed amendments are likely to increase compliance obligations of persons-in-charge of conveyances. Currently, Countervailing Duty (CVD) on subsidised articles can be imposed when the subsidy is for a limited number of persons, but the exemption from CVD can be granted on fulfillment of certain conditions viz., that the subsidy should be for research / for disadvantaged regions in the exporting country / for adapting to new environmental requirements. The Bill now proposes for CVD on subsidised articles to be levied, irrespective of the purpose behind the subsidy.
Customs Duty rates
The standard rate of Basic Customs Duty (BCD) of 10% remains unchanged. The standard rate of CVD equivalent to Central Excise Duty of 12.5% has also been retained in the present budget. The standard rate of Additional Customs Duty (SAD) of 4% also remains unchanged.
Export Duty Rate Changes
Goods Description
Existing Rates
New Rates
Aluminium ores including laterite (Tariff heading 2606 00 90)
15%
Import duty rate changes
Description of goods
Existing Rates
New Rates
BCD
CVD
SAD
BCD
CVD
SAD
Cashew nut, roasted, salted or roasted and salted
30%
45%
RO membrane element for household type filters
7.5%
10%
Membrane sheet and tricot / spacer for use in manufacture of RO membrane element for household type filters*
12.5%
6%#
Catalyst for use in the manufacture of cast components of Wind Operated Electricity Generator (WOEG)*
7.5%
12.5%
4%
5%
Nil#
Nil#
Resin for use in the manufacture of cast components of WOEG*
7.5%
12.5%
4%
5%
Nil#
Nil#
Populated circuit boards for use in manufacture of mobile phones*
Nil
2%#
Liquefied Natural Gas
5%
2.5%
o-Xylene
2.5%
Nil
2-Ethyl Anthraquinone*
7.5%
2.5%
Medium Quality Terephthalic Acid
7.5%
5%
Qualified Terephthalic Acid
7.5%
5%
Wattle extract
7.5%
2.5%
Myrobalan Fruit Extract
7.5%
2.5%
Vinyl Polyethylene Glycol for use in manufacture of Poly Carboxylate Ether*
10%
7.5%
Monofilament Yarn*
7.5%
5%
Solar tempered glass for use in manufacture of solar cells / panels / modules / collectors*
5%
Nil
Nil
6%#
Parts required for manufacture of solar tempered glass for use in solar cells / modules or the like*
12.5%
6%#
Hot rolled coils for use in manufacture of welded tubes and pipes falling under heading 7305 or 7306*
12.5%
10%
Co-polymer coated MS tapes / stainless steel tapes for use in manufacture of telecommunication grade optical fibres or optical fibre cables*
Nil
10%
Magnesium Oxide coated cold rolled steel coils for use in manufacture of cold rolled grain oriented steel falling under 7225 11 00*
10%
5%
Nickel and articles thereof under Chapter 75
2.5%
Nil
Clay 2 Powder (Alumax) for use in ceramic substrate for catalytic convertors*
7.5%
5%
Silver medallion, silver coins having silver content not below 99.9%
Nil
12.5%
* Subject to conditions
# Exemption available only till 30 June 2017
Proposed changes in rates / exemptions
All machinery (including those required for testing and quality control) and components, required for:
initial setting up of fuel cell based system for generation of power or for demonstration purposes; or balance of systems operating on bio-gas or bio-methane or by-product hydrogen
have been granted a concessional rate of BCD at 5% (peak rate: 10% / 7.5%) and CVD at 6% (peak rate: 12.5%), subject to fulfilment of stipulated conditions.
In line with the digitisation initiatives of the Central Government, exemption from full customs duty including CVD and SAD have been introduced on the import of Micro ATM, fingerprint reader / scanner, iris scanners and miniaturised POS card reader. Further, parts required for the manufacture of these goods are also exempt subject to certain conditions. The sunset date for the CVD exemption is 30 June 2017. All parts required for the manufacture of LED lights or lamps or fixtures including LED lamps have been granted (subject to certain conditions) a concessional rate of BCD at 5% and CVD at 6%. The sunset date for the concessional rate of CVD is 30 June 2017. All inputs for use in the manufacture of LED driver and Metal Core Printed Circuit Board (MCPCB) for LED lights or fixtures including LED lamps have been granted (subject to certain conditions) a concessional rate of BCD at 5%. Import of exempted goods by the oil and petroleum industry can be disposed off by the importer by paying duty on depreciated values, subject to compliance with certain conditions. Concessional rate of BCD on anthraquinone and 2-ethyl anthraquinone is proposed to be available only if they are used for the manufacture of hydrogen peroxide. The limit of duty free import of eligible items for manufacture of leather / synthetic footwear or other leather products for use in such manufacture and export has been enhanced from 3% to 5% of the FOB value of the goods exported in the previous year. Exemption from BCD on goods imported through postal parcels, packets and letters was available where customs duty payable was less than INR 100. This de-minimis threshold for customs duty exemption henceforth applies where the CIF value does not exceed INR 1000 per consignment. Concessional rate of customs duty on import of ball screws, linear motion guides and CNC systems for use in the manufacture of CNC Lathes or Machining Centres has been extended to include all types of CNC machine tools falling under headings 8456 to 8463, subject to certain conditions.
Service Tax
The effective rate of service tax remains unchanged at 15%.
Services withdrawn from negative list (effective from the enactment of the Bill)
Services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption. However, the exemption has been restored by inclusion of the said entry in mega exemption notification.
Exemptions (effective from 2 February 2017)
Exemption on services provided by Indian Institutes of Management by way of two year full time residential post graduate programmes in management extended to non-residential programmes. Services provided to the Government by way of transport of passengers by air embarking from or terminating at a Regional Connectivity Scheme Airport (RCSA), against consideration in the form of viability gap funding exempted for 1 year from the date of commencement of operations of the RCSA.
Retrospective Exemptions (effective from the enactment of the Bill)
Life insurance services provided by the army, naval and air force group insurance funds to its members have been exempted retrospectively for the period from 10 September 2004 to 1 February 2016 with enabling provisions for filing refund application for service tax paid during such exempted period. Further, such services have been prospectively exempted with effect from 2 February 2017. The exemption for the interim period from 2 February 2016 to 1 February 2017 appears to have been inadvertently missed. One time upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable for grant of long-term lease of industrial plots (30 years or more) by State Government industrial development corporations/ undertakings to industrial units have been exempted with effect from 1 June 2007 till 21 September 2016 with enabling provisions for filing refund application for service tax paid during such exempted period.
Amendment to Service tax (Determination of Value) Rules, 2006 (Valuation Rules)
Rule 2A of the Valuation Rules is proposed to be amended with retrospective effect from 1 July 2010 to clarify that service portion in execution of works contract would not include value of land or undivided share of land. The amendment also proposes that in cases where the actual value of services is not determinable, service tax would be payable on the prescribed percentage of the total amount charged representing notional value for services for different periods subject to conditions provided therein. This amendment has the effect of negating the decision of the division bench of Hon’ble Delhi High Court in Suresh Kumar Bansal v the Union of India[2] wherein it was inter alia held that no service tax could be charged under ‘Construction of complex Services’ in case of composite construction agreements (involving sale of undivided share in the land), entered into by the builders/ developers with home buyers prior to grant of completion certificate for lack of statutory machinery provisions to arrive at the value of the service component therein.
Other Amendment
Research and Development Cess Act, 1986 to be repealed with effect from 1 April 2017. As a result, service tax would be payable at full rate on import of technology.
CENVAT Credit
Amendment to CENVAT Credit Rules, 2004 (CCR) which would come into effect from 2 February 2017;
Rule 6, sub-rule (3D) has been amended as follows:
For determining the proportionate reversal under Rule 6(3A), the value of services by way of extending deposits, loans or advances against consideration in the form of interest or discount would be included in the value of exempted services and total services for a banking company and a financial institution including a non-banking financial company.
Sub-rule (4) has been introduced in Rule 10 of CCR to provide for a period of 3 months, which may be further extended by 6 months by Principal Commissioner, for disposal of transfer of CENVAT credit application. This rule allows transfer of credit in case of transfer of business or merger. While this amendment fixes the time limit for disposal of transfer application, it now requires mandatory approval for transfer of CENVAT credit, which may have a working capital impact.
[1] 2010 (250) ELT 30 (Del.)
[2] 2016 (43) S.T.R. 3 (Del)
[1] 2010 (250) ELT 30 (Del.)
[2] 2016 (43) S.T.R. 3 (Del)
