The 2014 Union Budget Analysis

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July 2014

BUDGET ANALYSIS

2014-2015

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DIRECT TAXES

Budget Highlights 2014-2015 | 3

KEY AMENDMENTS

KEY DIRECT TAX AMENDMENTS

Roll back of APA’s

upto four previous

years on

finalization;

transfer pricing

changes

No deduction for

CSR expenditure

Changes to

disallowance of

expenses for

non withholding of

taxes

No sunset clause for

15% tax on foreign

dividends

Higher holding

period for

unlisted shares

New deduction

for specified

business

No GAAR deferral

(applies from FY

2015-16)


ADVANCE PRICING AGREEMENT - ROLL BACK

Amendment Implication

Proposed roll-back of

Advance Pricing

Agreement (“APA”)

provisions

• The Finance (No 2) Bill, 2014 [“Finance Bill”] has

proposed ‘roll back’ of Advance Pricing Agreement

(“APA”) provisions

• Prior to this amendment, the APA would have been

applicable to prospectively to the agreed term

which is not exceeding five years

• Now, the regulations provide for the acceptance of

the APA terms for 4 years prior to the initial year in

the agreed APA

• Effectively, on acceptance of APA, the tax payer

can eliminate Transfer pricing litigation for 9 years

(4 pre + 5 post)

Much sought amendment would provide relief to companies and help reduce

litigation in the field of transfer pricing




Transfer pricing

proposals

• Range concept for determining ALP, instead of

arithmetic mean approach (mean will be used in

absence of comparables’ data)

• Allowing multiple year data for comparability

analysis instead of single year only

• Transactions between a the assesse and an

unrelated domestic party deemed to be

“international transaction” if there exists pre-

arrangement between overseas related party and

the unrelated domestic party

• Amendments not in the Finance bill – expected to

be moved soon

Transfer pricing law brought on line with best practices




Advance Ruling and

dispute resolution

• AAR mechanism to include residents within its

scope, subject to thresholds

• Scope of Settlement Commission to be expanded

to include dispute resolutions, as a one-time

opportunity

• Amendments not in the Finance bill – expected to

be moved soon

Helps dispute resolution


EXPENSES INCURRED FOR CSR ACTIVITIES


Clarity on

deduction of CSR

expenditure

• No deduction under section 37 on CSR expenditure.

CSR expenditure defined as deemed not to incurred

‘for the purpose of business or profession”

• As per the Companies Act, 2013 specified companies

are required to expend 2 percent of their profits towards

CSR activities.

• Non allowance of CSR expenditure to lead to an

additional tax cost

• The other deduction section, ie section 30 to 36 also

require expenditure to be “for the purpose of business

or profession” and therefore the claim may be an issue

• Section 80G deductions should continue to be available

for CSR on fulfillment of 80G conditions

Expenditure incurred for CSR activities not to be allowed as a deduction


DIVIDENDS RECEIVED FROM FOREIGN

COMPANIES


Concessional rate of

tax on dividend

received from foreign

companies

• Sunset clause on concessional rate of 15 percent

on dividends received from foreign companies (>26

percent stake ) done away with

Earlier provisions had a sunset clause of

March 2014 - This has now been removed

Incentive to Indian Company to repatriate from its foreign associate

companies


DEDUCTION OF CAPITAL EXPENDITURE

INCURRED FOR SPECIFIED BUSINESS


Section 35AD

amended to provide

deduction for capital

expenditure to semi-

conductor wafer

fabrication

manufacturing units

• Semi-conductor wafer fabrication manufacturing

unit termed as “specified business” and extended

an investment based deduction

• The investment in the form of capital expenditure

would be allowed in the year of acquisition

• Acceleration of the deduction claim which would

otherwise be allowed as a deduction through

depreciation claim

Incentive to the semi conductor industry which is capital intensive


INVESTMENT ALLOWANCE UNDER

SECTION 32AC


Section 32AC

amended to

incentivize

investment in

manufacturing sector

by SMEs

• The scope of investment allowance has been

enhanced, by reducing the threshold limits of

procurement of new assets from Rs 100 crores

rupees to Rs 25 crores

• Available for investment up to to FY 2016-17

• Earlier threshold of Rs 100 crores too high for small

and medium enterprises (“SMEs”)

• Additional 15 percent deduction in the year of

acquisition

• New threshold and would augur well for the SME

manufacturers

• Capex on computers would not be eligible since

these are already excluded in section 32AC

Capacity and capital expansion of SMEs encouraged by this amendment


UNLISTED COMPANY SHARES


Section 2(42A)

amended to enhance

the holding period of

shares of unlisted

companies

• Unlisted company shares to satisfy a higher

threshold limit of 36 months to be called a ‘long

term capital asset’

Earlier the limit was 12 months for a share. (Long

term capital gain after 12 month acquisition subject

to 20 percent tax)

All share transactions in the unlisted company

would now be subject to 30 percent tax ie short

term capital gain if within 36 months from the date

of acquisition. Also no indexation on short term

capital asset

Impacts group restructuring


KEY AMENDMENTS TO TDS PROVISIONS


WITHHOLDING TAX

PROVISIONS

• Non resident payments: Time available till the filing

of return of income to pay the withholding taxes and

claim payments made to non residents as a

deduction (brought on par with the provision for

resident payments)

• Resident payments: Quantum of disallowance

reduced to 30 percent instead of earlier 100 percent

of expenditure on which withholding of taxes is not

done/paid

• All payments to residents to come within the

purview of disallowance. Salaries were earlier not

subject to disallowance even in case non

withholding of taxes

• Period of limitation: Time limit to pass an order in

case of a TDS default extended to 7 years from the

end of the financial year of credit/payment for all

resident payments; earlier provisions had a 2 year

limit in case TDS returns we filed

INDIRECT TAXES

Overall

Government

priorities

Commitment displayed towards introduction of

GST

Finance Minister has also assured States

Governments that the union government “will be

more than fair in dealing with them”

However, no timeframe laid down for GST

implementation

Proposal to setup a High Level Committee for

ascertaining clarity in tax laws and issue appropriate

clarifications within two months

Various measures towards reducing litigation

Budget Analysis 2014-2015 | 14


SEZ notification amended

SEZ Notification no 12/ 2013 has been amended as under:

Time limit for issuance of Form A-2 specified as 15 working days from the

date of submission of Form A-1

Form A-2 to be effective from the date of verification of Form A-1 by the

Specified Officer of the SEZ, subject to the Form A-1 being submitted to

service tax department within 15 days of its verification. Where Form A-1 is

submitted after 15 days, Form A-2 shall be effective from the date of such

submission

Where form A-2 is not furnished by the SEZ developer/ unit within 3

months, the service provider would be required to pay service tax

Reasonable to say even for past period benefit should be available from

date of approval of Form A1

NASSCOM pre-budget recommendation

considered

One of the key issues represented by NASSCOM before CBEC in its

pre-budget memorandum


Online, mobile advertisements liable to service tax

Sale of space or time for advertisements across media (except print media)

deleted from negative list and brought under tax net

New levy extended to advertisements in internet websites, mobile

advertisements, out-of-home media, on film screen in theatres, bill boards,

conveyances, buildings, automated teller machines, tickets, commercial

publications, aerial advertising, etc

Sale of space for advertisements in print media continue to remain in

negative list of services

Print media to include books and newspapers as per press and

Registration of Books Act, 1867 (ie does not include commercial

catalogues)

Service Tax on online and mobile advertisements

Effective after the after Finance Bill receives Presidential assent


Place of provision of service - Intermediary

services


Definition of

“intermediary

” amended to

include

intermediary

in goods

• Effective October 1, 2014, commission earned from overseas

suppliers for facilitating sale/ supply of goods shall be liable to

service tax based on the location of intermediary

• Significant impact on Indian subsidiaries involved in

facilitating sale of goods belonging to foreign principals

• Conversely, no tax payable by Indian manufacturers on

consideration paid to overseas agents involved in facilitating

sale of goods outside India

• Interpretative issues in respect of scope of intermediary,

where activity involves host of brand building and marketing

support

• Since “securities‟ are treated as goods for service tax

purposes, impact on brokerages to be analyzed

Debate on applicability of service tax on intermediaries of software

packages laid to rest


CENVAT credit changes


Time limit for availment of

CENVAT credit

• Effective September 1, 2014, service provider

to take credit on inputs and input services

within six months from date of invoice

• In effect, companies are required to make

payment to vendor within 3 months from

invoice date and avail CENVAT credit on

inputs and input services within six months

Re-availment of CENVAT

credit on realization of

export proceeds

• CENVAT credit reversed on account of non-

receipt of export proceeds within the specified

period or extended period can be re-availed, if

the export proceeds are received within one

year from the period so specified or extended

period


Point of taxation for recipient of service


Point of taxation in respect

of services for which service

tax is payable as a recipient

of service amended

• Point of taxation in respect of services for

which service tax is payable as a recipient of

service, will be the payment date or three

months from the date of invoice, whichever is

earlier

• Earlier, the point of taxation for such services

was the date of payment, if paid within six

months from date of the invoice or as per

general rule

• Change effective October 1, 2014


Pre deposit

Filing of stay applications done away with – going forward, mandatory

payment of pre-deposit at the time of filing appeals required as below:

o 7.5% of the duty demanded or penalty imposed or both for filing of

appeal before the Commissioner(Appeal) or the Tribunal at the first

stage

o 10% of the duty demanded or penalty imposed or both for filing second

stage appeal before the Tribunal

Amount of pre-deposit payable subject to a ceiling of Rs 10 crore

Above provisions shall not apply to appeals / stay applications filed up to

the date of Finance Bill receiving Presidential assent

Mandatory pre-deposit for filing appeal


Interest payable on delay

Extent of delay Simple interest rate per

annum

Upto 6 months 18%

> 6 months < 12 months First 6 months – 18%

Next 6 months – 24%

>12 months First 6 months – 18%

Next 6 months – 24%

Period beyond 1 year – 30%

Effective date of amendment – October 1, 2014 – 18% per annum

applicable upto such date

• Staggered manner of calculating interest for delay in payment of tax


Exemption from cess on CVD withdrawn

Exemption of cess on CVD pertaining to computers, laptops, printers,

keyboards, monitors, packaged software and other specified products

withdrawn

Effective rate of duty on import increased from 10% to 10.3%

Amendment brings the rate of duty on domestic manufacture and imports

on par, at 10.3%

Customs duty

Deemed manufacture provisions to apply to software

Activities such as labelling or re-labelling or declaration or alteration of

retail sale price deemed to be manufacture with respect to package or

canned software

Companies to obtain excise registration and follow multiple procedural

compliances as mandated


Impetus to domestic IT manufacturers

SAD exempted on all inputs / components for use in manufacture of

personal computers (laptops/ desktops) and tablet computers

Exemption subject to compliance of Customs (Import of Goods at

Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996

Significant relief to manufacturers as this resolves the issue of an inverted

duty structure that has been plaguing the industry

BCD at 10% imposed on specific non-ITA bound telecommunication

products – inputs and components for manufacture of these products,

continue to be exempt

Customs duty


This presentation provides general information and guidance as on date of

preparation and does not express views or expert opinions of BMR

Advisors

The presentation is meant for general guidance and no responsibility for

loss arising to any person acting or refraining from acting as a result of any

material contained in this newsletter will be accepted by BMR Advisors

It is recommended that professional advice be sought based on the

specific facts and circumstances

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The 2014 Union Budget Analysis

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