Modi government has delivered a pragmatic Budget 2014
Tax Partner, EY
Senior Tax Professional, EY
Having been in power for only close to 45 days, the Modi Government has delivered a Budget which certainly is pragmatic given the current condition of the Indian economy and the macro-economic challenges inherited of controlling the fiscal deficit, rising inflation, unpaid subsidies, etc. Overall, the emphasis of the FM was on governance, boosting the investors confidence by providing mechanisms to obtain tax certainty and reduce litigation while also promising an end to retrospective amendments during his tenure and manoeuvring the economy to a high growth trajectory by incentivising investments in the manufacturing and infrastructure sector.
On the corporate direct tax front, there is a strong thrust on providing avenues to companies to resolve past tax disputes in India through the APA 4 year roll-back which is very relevant to close the growing number of transfer pricing disputes and an enhancement of the scope of the settlement commission under which a lifetime opportunity would be provided to the taxpayers for settling their tax disputes. However, one would have to wait for the detailed mechanism and procedure to analyse the effectiveness of this reform as the same is currently not spelt out in the Finance (No 2) Bill 2014. Moreover to obtain certainty in tax matters, the Authority of Advance Rulings (AAR) will now be open for resident taxpayers as well which is a welcome sign for the corporates. Further, recognising the current delays in obtaining such certainty which has been a concern highlighted by corporates, there is a proposal to increase the number of AAR benches for quick tax resolution.
The FM's commitment on not introducing retrospective amendments should send out a positive signal to the investors that they can look forward to a more stable tax regime in India. While there was certainly hope that the past retrospective amendment on indirect transfer tax may be reversed, he has chosen to walk the mid-path by stating that all fresh litigation arising out of the retrospective amendment made in 2012 would be evaluated by a high level CBDT committee to address the concerns of the corporates for judicious resolution of the ongoing high-pitched tax disputes.
The introduction of a specific tax regime for Real estate investment trusts (REITs) & Infrastructure Investment Trust (IIT) is a welcome move by the FM. It will boost the investments in the real estate sector as the government has provided more clarity on the same.
The manufacturing sector which had recorded a worrisome growth rate averaging to 0.2 per cent per annum in 2012-13 and 2013-14, needed tax incentives such as extension of tax holidays, extension of investment allowance scheme, removal of MAT on SEZ units, etc to provide the much needed positive sentiment for drawing-in investments and generating employment. The FM has provided certain tax sops to incentivise investment, by allowing a deduction of 15% of cost of new investment in plant and machinery to manufacturers, if the cost exceeds Rs 25 crores (which was currently Rs 100 crores). The FM has also added two new sectors under the investment-linked deduction scheme to encourage investment in the semi-conductor wafer fabrication manufacturing and laying and operating of slurry pipelines for transportation of iron ore. .
The extension of providing tax holiday to power sector if the units begins to generate power upto 31 March 2017 (presently it is upto 2014) would encourage much needed fresh investments in the power sector.
However, non-removal of power sector, infrastructure sector and units located in SEZ units from MAT would affect the above mentioned benefits provided by the FM.
The FM has altered the mechanism of computing the dividend distribution tax ('DDT') by providing for grossing up of dividend declared to compute the effective DDT of 15% which would indirectly reduce the retained earnings of the corporates by approx. 2.7%.
To incentivise low cost long-term foreign borrowings by Indian companies, it is proposed to extend the concessional rate of 5% withholding tax to borrowings made before 1 July 2017 and will also extend to long terms bonds apart from loans and long-term infrastructure bonds.
To ensure further FDI inflows, reforms has been proposed in terms of raising the sectoral cap in defence and insurance sector from existing 26% to 49% with full Indian management and control under the approval route. Further, the FM has announced that manufacturing companies having FDI will be allowed to sell its products through retail trading e-commerce platforms without any additional approval. The promotion of FDI in these sectors would assist in augmenting foreign technology and expertise along with creating employment opportunities in India.
In conclusion, the Budget sends some positive signals of ushering India back onto a high growth path while requesting corporates to await further positive changes in times to come in terms of new laws such as DTC and GST.