Budget 2014An overview of Finance Bill 2014

• Direct Taxes

– Personal Taxation

– Corporate Tax

– Real Estate Investment Trust

– Capital Gains

– NGOs

– Transfer Pricing

– Procedures

• Indirect Taxes

– Service Tax

– Excise

– Customs

Agenda

Personal Taxation

• No change in Basic Tax Rates

– No change in surcharge and cess also

• Basic Exemption limit increased by INR 50,000

– From INR 200,000 to INR 250,000

– In case of Senior Citizens, from INR 250,000 to INR

300,000

• Ceiling u/s. 80C increased to INR 150,000

– Pertains to Investment / Savings in PF, PPF, LIC,

Housing Loan repayment, NSC, etc.

Personal Taxation

4

• Scope of Section 80CCD expanded

– All employees other than Central Govt. employees can

join

• Until now employee joining after 1.4.2004 can only join

– Sub-limit of INR 100,000 introduced for contribution to

such Pension Scheme

• Interest on Housing Loan

– Limit of deductibility of interest increased to INR

200,000 from INR 150,000

• In respect of self occupied property

Personal Taxation

5

Corporate Tax

• DDT is to be paid on grossed-up amount

– 16.995% of distributable profit (i.e. dividend + DDT)

– Effective rate of DDT: 20.5% of Dividend

• Concessional rate tax @ 15% of foreign

dividend extended

– Section 115BBD was set to expire in March 31,

2014

– It has been extended permanently

Dividend Taxation

• Allowance of 15% of cost of new P&M

– In addition to the Depreciation allowance

– Introduced last year

• with Investment threshold of Rs. 100 crores for two years

– Investment threshold reduced to Rs. 25 crores in 1 year

– Deduction

• Available in the year of acquisition and installation

• Available for AY 2015-16 to AY 2017-18

– Earlier Scheme to have parallel operation

• However, benefit can be claimed only under one scheme

Investment Allowance

• Section 35AD - Two new businesses included

– Laying and operating a slurry pipeline for transportation of ire ore

– Setting-up and operating a semi-conductor wafer fabrication manufacturing unit

• No Double Deduction u/s. 35AD & 10AA

– Once deduction is claimed u/s. 35AD, no deduction u/s. 10AA for any year and vice versa

• Section 80IA benefit to power sector extended

– Sunset date for milestone extended to March 31, 2017

Incentives

• Disallowance for non-compliance of TDS

• Extended time allowed for deposit of TDS made

from payment to NR

– No disallowance if deposited by due date for Return

• All the amounts paid to residents are now covered

by Section 40(a)(ia)

– Hitherto salary was not covered

• Only 30% of the expenditure is disallowed

– Benefit not available in case of payment to NR

Section 40(a) Disallowance

• CSR Expenditure

– No automatic deduction u/s. 37(1)

• Not deemed to be spent wholly and exclusively for

business purpose

– If the expense is in the nature of Section 30 to 36,

it shall be governed by respective sections

CSR Expenditure

• Income Computation and Disclosure

Standards introduced

– CBDT formed a committee for formulating “Tax

Accounting Standards”

– Recommended 14 TAS in its report in August, 2012

– Committee recommended it should be called

Income Computation Standards

– Proposal accepted

– Primary objective is to give clarity to avoid litigation

Income Computation

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• Presumptive Taxation

– Differentiation of ‘heavy goods carriage’ and others removed

– Rs. 7,500 per month per goods carriage would be presumed income

• Advance forfeited without transfer of property is to be treated as income

– Not to be reduced from cost of acquisition\

• Section 73

– In case of company with business of trading in shares

• Transactions of sale and purchase of shares would not be deemed to be ‘speculative business’

• Loan or deposit acceptance and repayment – S. 269SS / 269T

– Payment through electronic clearing system would not trigger penalty

Other Changes

• Introduction of Advance Ruling for Resident

assessee

– threshold and modalities to be prescribed

• Proposal to expand scope of Settlement

Commission

– SC to remain once in a lifetime opportunity

• Direct Taxes Code

– Shall consider DTC 2014 along with Standing

Committee Report

Other Changes

14

For Investment in Real Estate and Infrastructure Sector

Business Trusts

• New concept of “Business Trusts” introduced for encouraging investments in real estate and infrastructure sector, defined as

– SEBI registered Real Estate Investment Trusts (‘REITs’) or Infrastructure Investment Trusts (‘InvITs’)

– Units of REITs and InvIT to be listed on recognized Stock Exchange

• REITs are investment vehicles in form of Trusts for investment in revenue generating assets in real estate, construction sector

– Introduced by Consultation Paper by SEBI on 10-10-2013

– Investments in Completed, Revenue Generating Assets

– Regular distributions to unit-holders

– Easy avenues for exit for sponsor or developer

– Liquidity and Easy exit for investors due to listing of units

– Generally managed by Professional Managers

– Frameworks for REITs exist in USA, Singapore, Japan, Australia, France, UK

Introduction of Business Trusts

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• InvITs are investment vehicles for financing infrastructure sector

projects.

– Introduced by SEBI through Concept Paper dated 20-12-2013

– Financing / Refinancing structures to boost infrastructure sector projects

– Frameworks in USA, Singapore, Hong Kong

• SEBI Regulations yet to be finalized. Consultative paper already

published

• Corresponding amendments required under FEMA to enable

investments in REITs and InvITs

Introduction of Business Trusts

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Taxation of Business Trusts

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Nature of Income Business Trust Unit-Holders

On Income arising to Business Trust and Distribution thereof to unit-holders

Interest from SPV • Exempt under Section

10(23FC)

• Taxable as interest income (Sec.

115UA)

• Liable to tax withholding @5% for non-

residents and 10% for residents (Sec.

194LB)

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

Dividend Income • Exempt under Section

10(34)

• Exempt under Section 10(23FD)

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

On Transfer of units of Business Trust

Capital Gains • Not Applicable • LTCG - Exempt under Section 10(38)

(subject to certain exception for

sponsor) & STCG – Tax @ 15% [111A]

• SPV means Indian Company where Business Trust holds controlling interest or percentage of shareholding or

interest specified by SEBI regulations

• Transfer of investments in SPV by Developer to Business Trust in

consideration of units of Business Trust

– Exempt from Capital Gains under Section 47

• Capital Gain on subsequent transfer of units taxable

– Cost of shares of SPV to be cost of acquisition of unit (Sec. 49)

– Period of Holding of units to include period of holding of shares of SPV

so transferred

– Long Term Capital Gains on subsequent transfer of units not eligible for

exemption under Sec. 10(38)

Transition Provisions for Developers

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Capital Gains

• Section 54 / 54F

– Deduction restricted to only one new residential house

– Benefit only if investment is in India

• Section 54EC

– Investment restriction of INR 50L per FY retained

– Further restriction introduced

• Investment in certain bonds from capital gains arising from

transfer of asset(s) during current and subsequent year

cannot exceed INR 50L

Capital Gains

• Indirect Transfers

– No changes proposed

– High Level Committee to scrutinize fresh cases of taxation of indirect transfers due to retrospective amendments

• Longer period to qualify for LTCG

– 12 month period eligibility restricted only to listed securities and equity oriented funds

• Unlisted shares will have to be held for 36 months to qualify as LTCG

• Income of FII to be classified as Capital Gains

– Clarification to avoid significant issues on characterization of income

• Section 112 – Tax at10% without Indexation

– Benefit restricted to only listed securities (other than unit)

Capital Gains

NGOs

• Approval of the Trusts U/s. 12 AA to be effective retrospectively

• Depreciation not to be available on assets, investment on which considered as application

• % of Government Funding to be prescribed to qualify a Hospital / Educational Institution as “substantially financed by the Government” U/s. 10 (23C)

• Section 10 (23C) and section 11 made mutually exclusive

NGOs

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Transfer Pricing

• Deemed international transaction

– Transaction between two non-associated

enterprise deemed as ‘international transaction’ if

the same is influenced by associated enterprise

– Condition introduced that at least one of the

enterprises should be non-resident

• Roll back of Advance Pricing Agreement - APA

– Roll back up to 4 years permitted in case of similar

transactions in earlier year

Transfer Pricing

• Multiple Year Data

– Significantly important as currently benchmarking

has inherent limitation due to lack of data

• Concept of Range

– Globally accepted concept being introduced in

India

– Would help the MNCs to comply with TP

Regulations in different jurisdictions simultaneously

TP Rationalization

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Procedures

• Section 194DA: TDS on payment under life insurance policy @ 2%

– No TDS on payment up to INR 1L in a FY

– No TDS on amount exempt u/s. 10(10D)

• Section 194LC

– Concessional rate of 5% extended to borrowings up to June 30, 2017

– Also, made applicable to all long term bonds

– PAN not applicable for payment of interest on bonds

• 206AA applicable on other borrowings

• Order u/s. 201 for TDS default can be passed until 7 years from end of FY of payment / credit

– Until now, it was 2 years where return is filed and 6 where it is not filed

Tax Deducted at Source

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• Return is to be verified instead of ‘sign and verify’

– To enable verification manually or electronically

• Following entities to mandatorily file tax return if income exceeds basic exemption (without Sec. 10 exemption)

– Mutual Fund

– Securitization Trust

– Venture Capital Company / Fund

• REIT & Infra Investment Trust to mandatorily file Tax Return

Return

30

• Explicit power of survey for TDS / TCS matters

– Actually for curtailing powers of the TDS Survey Parties

• Power to call for information to prescribed authorities to verify information in its possession.

• Reference to Valuation Officer

– For referring the matter, AO need not be satisfied about correctness or completeness of the books

– Can be made for valuing any asset, property or investment

– Valuation Officer to value based on material provided by taxpayer and need to provide opportunity to taxpayer if other basis used

– Report to be submitted within 6 months

– Time taken in this is to be excluded in computing time frame for assessment u/s. 153 & 153B

Assessment

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• Demand Notice u/s. 156 valid until completion of last appeal or other proceedings

– Recovery can be made based on that even after disposal of appeal, etc.

– No fresh demand notice required to be issued

– Recovery can be made immediately

• In case of increase in demand in appeal, Demand Notice for only differential amount

• In case of reduction in demand, intimation to the assessee and not to be recovered

• Interest to commence from expiry of period mentioned in the original notice

• Provisional Attachment to continue till 6 months from the date of completion of assessment, re-assessment (originally only for 2 years)

Recovery of Demand

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• AIR now changed to Statement of Financial Transaction or reportable Account

– Reporting financial institutions added to the list

– To inform within 10 days of any inaccuracy in the information

– obligation to carry out due diligence for identification of reportable account

• 271FAA – Penalty provision for SFTRA

– Failure to carry out due diligence

– Knows about inaccuracy of information at the time of filing but does not inform

– Comes to know about inaccuracy after filing but fails to inform

– Flat Penalty of Rs. 50,000

Annual Information Return

33

Indirect Tax

Abstract of Receipts(Rs. in Crores)

Tax

Revenue

2012-13

Actual

2013-14

Budget

Estimates

2013-14

Revised

Estimates

2014-15

Budget

Estimates

Customs 165,344.22 187,308.00 175,056.00 201,819.00

Excise 176,535.40 197,553.95 179,537.34 207,110.00

Service Tax 132,600.94 180,141.00 164,927.00 215,973.00

Total 484,482.56 565,092.95 519,520.34 624,902.00

Abstract of Receipts

Abstract of Receipts

-

50,000.00

1,00,000.00

1,50,000.00

2,00,000.00

2,50,000.00

2012-2013Actual

2013-2014Budget

Estimates

2013-2014Revised

Estimates

2014-2015Budget

Estimates

Custom

Excise

Service Tax

Revenue forgone – Excise & Customs ( Rs. In Crores)

Particulars 2012-13 2013-14

(Provisional)

Excise 209,940 195,679

Customs 260,008 266,197

0

1,00,000

2,00,000

3,00,000

Excise Customs

2012-13

2013-14

Revenue forgone – Export Promotion (Rs. In Crores)

-

10,000

20,000

30,000

40,000

50,000

On IncentiveSchemes On Exemption

Schemes

2012-13

2013-14(Provisional)

Type 2012-13 2013-14

On Incentive Scheme 9,984 14,382

On Exemption Scheme 45,027 45,786

Total 54,911 60,168

Details 2012-13

Estimated

2012-13

Revised

2013-14

Provisional

Area based exemptions applicable

in the North Eastern states,

Uttarakhand, Himachal Pradesh,

Jammu & Kashmir

18,500 16,631 17,999

Others 187,688 193,309 177,680

Total 206,188 209,940 195,679

Revenue Forgone Excise (Rs. In Crores)

Service Tax

• Remains unchanged at 12% Plus Cess

Rate

Legislative Changes

• Deletion from negative list

– The service tax presently leviable on sale of space or for time for advertisement in broadcast media, radio television etc is further extended to internet website, out of home media & all other Medias except print media.

– Service tax is proposed to be levied on Radio Taxi or Radio cab whether or not air conditioned [Section 66D(o)(vi)] Addition to exemption list

• Section 73 – Recovery of tax

– Central Excise Officer will now be forced to determine the amount of Service Tax due within:

• 6 months from the date of the notice where it is possible to do so in respect of limitation specified as 18 months in sub-section 1

• Within 1 year from the date of the notice in respect of cases other than the above

Legislative Changes

• Changes in Service Tax Payable under RCM

– The Service Tax in respect of Service provided by recovery agent to a banking company or a financial institution or a non-banking financial company is payable 100% by service recipient. This is effective from 11th July, 2014.

– The services provided by director to the body corporate are also covered under RCM in addition to service provided by director to the company.

• Exemption Withdrawn

– The existing exemption in respect of Services by way oftechnical testing or analysis of newly developed drugs,including vaccines and herbal remedies, on humanparticipants by a clinical research organization approved toconduct clinical trials by the Drug Controller General of India

– The exemption in respect of services of renting of immovableproperty made by an educational institution.

– The exemption in respect of passenger transportationprovided by air conditioned contract carriage. As a result anyservice provided for transport of passenger by air conditionedcontract carriage will attract Service Tax.

– Exemption in respect of services provided by Radio Taxi.

Legislative Changes

• Exemptions proposed

– Services provided by operators of the Common Bio-medical WasteTreatment Facility to a clinical establishment by way of treatment ordisposal of bio-medical waste or the processes incidental.

– The transportation, by rail or a vessel, of cotton, ginned or baledcovered in clause 20.

– To transportation, by Goods Transportation Agency, of chemicalfertilizer, organic manure and oil cakes covered in clause 21.

– The services in respect of life micro-insurance product as approved bythe Insurance Regulatory and Development Authority, having maximumamount of cover of fifty thousand rupees.

– The services provided to the educational institutions in respect oftransportation of students catering services including mid-day meal,security or cleaning & housekeeping services.

Legislative Changes

• Partial Reverse Charge

(w.e.f 01st October, 2014)

Legislative Changes

Name of Service Existing Revised(i) in respect of services provided or agreed to

be provided by way of renting of a motor

vehicle designed to carry passengers on non

abated value to any person who is not engaged

in the similar line of business

Service Provider

Service Recipient60%

40%

50%

50%

• Service Tax credit has been allowed for input services of renting of motor car in similar line of business i.e. Sub Contractor providing services to main Contractor.

• Similarly tour operator service providers are also allowed to avail credit for service tax paid by other tour operator for providing services

Credit of Service Tax

Legislative Changes

• Change in Rate of Interest payable on delayed payment of service tax:

– Presently, flat rate of interest at 18% p.a is payable on delayed payment of service tax. The revised rates as under are applicable from 01St October, 2014.

Period of delay Rate of simple interest

Up to six months 18%

More than six months

and up to one year

18% for the first six months of delay and 24%, for the

delay beyond six months.

More than one year 18%. for the first six months of delay; 24 %for the

period beyond six months up to one year and 30%

for any delay beyond one year

• Changes in Service Tax Rules:

– Presently, the service tax payable in excess of Rs.1Lac is payable

electronically (through internet banking). After revision all payments

of service tax are to be paid electronically (through internet

banking).

– The ceiling of Rs. 1 Lac is removed. This is effective from 1st

October, 2014.

• Changes in Point Of Taxation Rules:

– Amendment in Rule 7 The service tax payable under RCM, will

became payable from date of payment or first day that occur

immediately after three months from the date of invoice. Hence the

period of six month is now reduced to three months. This is effective

from 1st October,2014.

Regulation Changes

• Change in Service Tax Valuation Rules

– The service portion in respect of services provided under the works

contract in respect of the finishing and other services is increased

from 60% to 70%. This is effective from 1st October,2014.

• Changes in Place of Provision Rules

– The definition in Rule 2 of the term “intermediary” is amended such

that services provided by intermediary for supply of goods will be

subjected to service tax (Commission Agent).

– Amendment in Rule 4 clarifies that the rule is not intended to apply

in the case of a service provided in respect of goods that are

temporarily imported into India for repairs and are exported after the

repairs without being put to any use in the taxable territory

Regulation Changes

Excise

• Basic Rate of Duty remains unchanged at

12% except duties on all products covered in

Chapter 84 and 85 reduced to 10% which is

valid upto 31st December 2014

Rate

Legislative Changes

• Amendment in Central Excise Act, 1944:

– New Section 15(A) & 15(B) are inserted so as to prescribe

that the third party sources shall furnish the periodical

information in the prescribed manner. Further penal

provisions are prescribed for failure to furnish the information.

– Assessee will now have to deposit mandatorily 7.5% of the

aggregate amount of the demand alongwith the stay

application and appeal to be filed to tribunal.

– In case of rebate of claim for export consignment it is to be

deposited at 10%. Consequential amendments are also

made in the Customs & Service Tax laws.

The deposit will not exceed Rs.10 Crores

– Presently the validity period of the stay is prescribed at six

months. The proposal is to remove this validity to reduce the

complications. This is consequent upon Tribunal taking view

in a recent pronouncement that the Stay gets automatically

vacated after 6 months.

– Presently the tribunal is given discretionary power not to

admit the appeal where the duty involved is upto Rs.50,000.

This limit is enhanced to Rs.200,000. Consequential

amendments are made in the customs laws

Legislative Changes

• Amendment in CENVAT Credit Rules:

– The Definition of the place of the removal of goods is clarified in newly inserted Rule 2(qa) of The CENVAT Credit Rules, 2004. It now includes:

– a factory or any other place or premises of production or manufacture of the excisable goods

– a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty

– a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory

• Amendment in Rule 4

– now introduces time limit for availing of CENVAT credit in respect of input service. The limit proposed is prescribed as six months from the date of the invoice. Earlier there was no specific time limit provided in the rules. This is an important amendment for availment of the CENVAT credit. Changes will be effective from 01st September, 2014.

Regulation Changes

• Amendment in Rule 12A (Cenvat Credit Rules)

– The said rule is amended to prohibit the transfer of the input credit of service

tax taken by large tax payers after 10th July,2014 from one unit to another

unit.

Regulation Changes

• Amendment in Central Excise Rules, 2002.

– Presently, the Excise duty in excess of Rs.1Lac is required to be paid electronically

(through internet banking). The amendment now proposes all payments of excise duty

to be paid electronically (through internet banking). The ceiling of Rs. 1Lac is removed.

This is effective from 1st October, 2014. [Rule 8(1B) inserted]

– Penalty at the rate of 1% per month prescribed for delay in payment of the Excise duty

beyond period of one month.[Rule 8(3A) substituted]

• Amendment in Central Excise (Determination of Value) Rules,

2000:

– The proviso is inserted in Rule 6 now allows the duty to be charged on price which is

less than the cost without any deemed value to be attributed to the transaction if it is not

the sole consideration for sale of such excisable goods and no additional consideration

is flowing directly or indirectly from the buyer to such assesse.

– The above amendment is made to overcome the incorrect interpretation made from the

decision of the honorable Supreme Court in the case of Fiat India Limited.

Regulation Changes

• There are numerous tariff changes which are

designed to target the growth of infrastructure.

Particularly solar power and agri processing,

electronic (LCD LED panels)

• Some of the changes are for rationalisation of

duties in relation to excise / VAT (GST?)

Tariff Changes

Customs

• Amendment made in section 46

– The proviso allowing manual bill of entry has been omitted.

– allowing filing Bill of Entry in advance for importation of goods

before the 30 days of the expected date of arrival of the

consignment by land.

• Amendment in Customs Tariff Act

– Section 8B is being amended so as to provide for the levy of

safeguard duty on inputs cleared into DTA “as such”, or are

used in manufacture of final products & cleared into DTA.

– This is effective from 11th July, 2014.

Legislative Changes

• There are numerous tariff changes which are

designed to target the growth of infrastructure.

Particularly solar power and agri processing,

electronic (LCD LED panels)

• Some of the changes are for rationalisation of

duties in relation to excise / VAT (GST?)

Tariff Changes

This presentation is prepared exclusively for the benefit and use of the clients of K. C. Mehta & Co. This

should not be used as a substitute for professional advice. Reasonable care has been taken for ensuring

the accuracy and the authenticity of the contents of the presentation. However, we do not take any

responsibility for any error or omission contained therein on any account. It is recommended that the

readers should take professional advice before acting on the same. The provisions contained in Finance

(No. 2) Bill, 2014 are the proposals and are likely to undergo amendments while passing through the

Houses of the Parliament before being enacted.