Global Tax Alert | 18 February 2014

India presents 2014-15 Interim Budget

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Executive summary

On 17 February 2014, India’s Finance Minister (FM) presented the Interim Budget for 2014-15 in the Parliament. This Tax Alert provides the key highlights of the Interim Budget.

The Interim Budget was presented against the backdrop of the economy experiencing inflationary tendencies and sluggish growth. In keeping with the convention in presenting an interim budget, amendments have not been proposed to the tax laws. However there have been some changes to the indirect tax rates, with the intention to provide a stimulus to the manufacturing sector, in particular.

On the direct taxes front, the absence of amendments in the tax law has consequences such as the tax holiday period for the power sector and the concessional tax rate of 15% on dividends received from an overseas subsidiary will come to an end on 31 March 2014.

On the regulatory front, some steps have been envisaged to deepen and strengthen the Indian financial and commodity derivative markets. The FM also made certain policy announcements, which may be considered for implementation by the Government in due course, if considered appropriate.

On the economy front, the FM announced that fiscal deficit for FY 2013-14 will be at 4.6% of GDP, which is within the budgeted ceiling of 4.8%, representing a reduction in the current account deficit and some moderation in the inflation rate compared to last year.

Detailed discussion

Direct tax proposals

No change in the tax rates

The existing income tax rates for tax year 2013-14 will continue for tax year 2014-15. The corresponding surcharge and cess will also continue. In addition, the rates of income tax, surcharge and cess for computing “advance tax” payable and tax deducted at source for the tax year 2014-2015 remains unchanged from what is presently prevailing for tax year 2013-2014.

Tax holiday for the power sector comes to an end

The Income-tax Act (ITA) was amended by the Finance Act 2013 (FA 2013) to extend the tax holiday for undertakings engaged in power generation, transmission or distribution if it begins to generate power or starts transmission or distribution before 31 March 2014 or undertakes substantial renovation and modernization of the existing network of transmission or distribution lines before 31 March 2014. This being an interim budget, no further extension has been proposed. Therefore, it is necessary to see whether the regular budget to be presented post the general elections would have provisions to extend this tax holiday.

Concessional tax rate of 15% on dividends received from foreign subsidiary not available after 31 March 2014

The FA 2013 had extended the concessional taxation rate of 15% on dividends received from a foreign company (where the Indian company holds 26% or more of equity capital) to the period up to 31 March 2014. This has not been extended further and hence dividends earned from 1 April 2014 onwards would be subject to the regular tax rates.

New approach on tax benefits for funding scientific research

The ITA allows deductions for expenditure on scientific research, on satisfaction of certain conditions. A new approach for funding and tax benefits has been proposed by the FM in his speech. A Research Funding Organization (RFO) is planned to be set up that would fund research projects selected through a competitive process. Contributions to RFO would be eligible for tax benefits. At this stage, this is only a proposal and for this to be implemented changes to the ITA need to be made. These changes are envisaged to be carried out when the regular budget is introduced.

DTC to be put up for public discussion

The FM in his speech has also said that he intends to place the proposed Direct Taxes Code (DTC) which was envisaged to comprehensively replace the ITA on the website for public discussion with the expectation that it would be passed in 2014-2015.

Indirect tax rate changes

Excise duty

There is no change in the basic excise duty rate of 12%. In order to stimulate growth in the capital goods and consumer goods sectors, excise duty has been reduced from 12% to 10% in respect of machinery, mechanical appliances, electrical equipment and other goods falling under Chapter 84 and 85 of the Central Excise Tariff Act, 1985, for the period up to 30 June 2014.

Relief has been provided to the automobile sector by proposing reductions in the basic excise duty rates for the period up to 30 June 2014, as follows:

Rate Movement (%)

Items

From

To

Small cars, motor cycles, scooters and commercial vehicles including vehicles intended to be used as ambulances, hybrid motor vehicles, road tractors for semi-trailers having an engine capacity of more than 1800 cc

12

8

Sports Utility Vehicles (SUVs)

30

24

Large and mid-segment cars having engine capacity up to 1500 cc

24

20

Large and mid-segment cars having engine capacity above 1500 cc

27

24

Excise duty rates on chassis and trailers have also been reduced.

The excise duty on mobile handsets has been reduced to 6% with CENVAT credit or 1% without CENVAT credit, in order to boost domestic production.

The above changes are effective from 17 February 2014.

Customs

The basic customs duty remains unchanged.

Customs duty on specified types of non-edible industrial oils and its fractions, fatty acids and fatty alcohols has been reduced to 7.5% to encourage domestic production of soaps and oleo chemicals.

The countervailing duty in lieu of Excise (CVD) exemption which was earlier available on specified machinery imported for road construction, has now been withdrawn.

The above changes are effective from 17 February 2014.

Service tax

There is no change in the basic service tax rate of 12%.

Due to an interpretation issue, some doubts were raised as to whether the tax exemption for specified services in relation to agricultural produce was confined only to paddy or whether it can be extended to rice as well. The issue has been put to rest as the activities of loading, unloading, packing and warehousing of rice have been specifically exempted from service tax.

Services provided by cord blood banks by way of preservation of stem cells and other services in relation to such preservation have been exempted from the levy of service tax.

Key policy announcements

The following steps have been envisaged to deepen and strengthen the Indian financial commodity derivative markets:

  • Comprehensively revamp the ADR/GDR scheme and enlarge the scope of depository receipts
  • Liberalization of rupee denominated corporate bond market
  • Deepen and strengthen the Currency Derivatives Market to enable Indian companies to fully hedge against foreign currency risk
  • Create one record for all financial assets of every individual.
  • Enable smoother clearing and settlement for international investors looking to invest in Indian bonds
  • Amend the Forward Contracts (Regulation) Act to strengthen the regulatory framework of the commodity derivatives market

Implications

As this is an interim budget, there have been no significant changes made to the tax laws. The existing income-tax rates along with the applicable surcharge and cess would continue to apply until changes are carried out as part of the regular budget, which is expected to take place in July 2014.

The indirect tax cuts as announced in the interim budget would hopefully provide an impetus to consumption and result in higher growth of the manufacturing sector, particularly the automobile sector which is reeling under cost pressures and going through an unprecedented negative growth.

The FM has also stated that more inquiries have been initiated into accounts held by Indian entities in no tax or low tax jurisdictions indicating that anti-tax evasion enforcement would continue.

The DTC which was envisaged to replace the existing ITA is expected to be placed on the website for public discussion with the FM expressing a hope that it would be passed in 2014-2015 along with GST laws. Steps have also been envisaged to deepen and strengthen the Indian financial and commodity derivative markets.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India), Mumbai
  • Sudhir Kapadia
    +91 22 6192 0900
    sudhir.kapadia@in.ey.com
Ernst & Young LLP (India), Hyderabad
  • Jayesh Sanghvi
    +91 40 6736 2078
    jayesh.sanghvi@in.ey.com
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
  • Nachiket Deo
    +44 20 778 30862
    ndeo@uk.ey.com
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
  • Gagan Malik
    +65 6309 8524
    gagan.malik@sg.ey.com
Ernst & Young LLP, Indian Tax Desk, New York
  • Tejas Mody
    +1 212 773 4496
    tejas.mody@ey.com

EYG no. CM4182