CFO Connect magazine
Tax Partner, EY
Partner (Indirect Tax), EY
When Arun Jaitley, the newly elected Finance Minister of India, announces the budget in July 2014, he will be the cynosure of all eyes. His budget speech will be closely followed by the international trade community, economists, tax experts and industry stalwarts alike.
After all, this budget has a lot of expectations riding on it. India Inc. expects the budget to be an indicator of the Modi government's future outlook to the country's economy. The budget would be closely watched and examined on various counts given the pro industry, pro- development and pro-people image of the government. Certainty in the tax regime, especially with respect to retrospective amendments, and a quicker and more efficient dispute resolution would be the key to restoring the confidence of investors.
Some of the key tax changes that India Inc. is eagerly anticipating in the budget are:
Large scale litigation on account of retrospective amendments has shaken the faith of international investors and the industry is expecting the government to change the law to nullify the effect of retrospective amendments made in the previous budgets.
Amendments in the tax law overturning pro-assesse court rulings had not only undermined the judicial process but also added to the uncertainty of investors. Deletion of such amended tax laws would go a long way in restoring the faith of investors.
Corporate Social Responsibility
While the uncertainty and controversy around the Companies Act 2013 surges with every new notification by the government, the corresponding stir created by it in the Income-tax Act is also a cause of worry.
Corporates expect the government to consciously make an effort to come up with a budget reconciling the provisions under these two critical statutes. For instance, whereas the Companies Act stipulates a compulsory CSR expense of 2 per cent of average net profits for certain corporates, the Income-tax Act does not give a corresponding clarification regarding deductibility of such expense. A clarification on this aspect would be welcomed by the corporate sector.
The auto industry would hope that the excise duty relief extended in the interim-Budget of February 2014 to cars, two-wheelers and commercial vehicles would continue to find favour with the new FM
Incentivising the infrastructure sector
Various provisions of the Income tax Act incentivising investment into nation building sectors like power, hotels, and infrastructure in general have a sunset clause which limits the benefit to undertakings set up prior to a certain cut-off date.
Extending the time limit of such provisions by five to ten years, instead of one year at a time, which was done till now, would provide certainty in the minds of investors. It would help corporates plan their investments better and also attract new players to the infrastructure sector.
The intention of the government at the time of introducing the SEZ law was that both the developers and units of the SEZ, would not be subject to tax. However, at present, both MAT and DDT is being levied on the developers and units, resulting in a backdoor entry being created by the government for taxing these entities.
Where the MAT/ DDT provisions are diluted or made inapplicable, it would help garner further investments in the capital intensive infrastructure sector.
Share issue to holding companies
Given the dramatic depreciation of the rupee over the past couple of years, a rapid influx of Foreign Direct Investment is the need of the hour. However, the massive transfer pricing adjustment made recently in the case of a global oil and gas giant for the issue of shares to its holding company, has raised alarm bells amongst investors. Investors are looking for some clarifications from the government on this issue. Where the government clarifies that share issue transactions would not be subject to the rigours of transfer pricing, it would help in soothing investor sentiment towards India.
Overseas business restructuring
Where an Indian company has investments in a foreign company and such foreign company merges/demerges into another foreign company; such transfer is typically exempt from tax in the foreign country. However, there are no specific provisions under the Income-tax Act, which exempt the Indian investor from tax on such exchange of shares arising from an overseas merger or demerger.
Corporates are looking forward to exemption from tax on such exchange of shares.
While the law provides for exemption from service tax on specified works contract such as in relation to airports, railways, similar benefits have not been extended to power sector, public transport sector etc.
Amendments to the definition of royalty
The retrospective amendments to the definition of royalty introduced vide the Finance Act 2012, are currently not in line with internationally accepted principles. For example, the present definition of royalty even covers purchase of off-the-shelf software and passive use of servers located in a foreign country.
Where the scope of these provisions is restricted or even their retrospective applicability removed, it would mitigate a lot of hardship being caused to taxpayers at present.
Dividend from foreign subsidiaries
Since the past few budgets, the government has been taxing dividends received from foreign subsidiaries at a concessional rate of 15 per cent, on a year on year basis.
Where such concessional rate is permanently made part of the statute, it would encourage corporates to repatriate profits from their foreign subsidiaries.
Increase in the basic exemption limit and tax saving threshold
The common man is expecting the government to ease his burden by increasing the basic exemption limit to Rs 5 lacs and increasing the limit up to which tax saving investments can be made to Rs 2.5 lacs. This would also assist the government in raising funds at lower than market rates.
Reduction in litigation
The Dispute Resolution Panel had been set-up to reduce litigation with taxpayers. However, the experience thus far has been to the contrary. The government should make the DRP a quasi-judicial body which should be bound to follow the orders passed by the higher courts. This would give more confidence to the corporate sector and re-instil their faith in the Indian judicial system.
In addition to direct taxes, all ears would also be on the possible time line for implementation of GST, addressing states concerns on fiscal autonomy and the clichéd issue of compensation for revenue loss due to phasing out of the CST.
A booster dose by way of reduction in central excise duty and service tax would add to the wave of the 'Feel Good' factor for the industry at large.
In this backdrop, we list below a snap shot of the expectations from Budget 2014 from across sectors:
The auto industry would hope that the excise duty relief extended in the interim-Budget of February 2014 to cars, two-wheelers and commercial vehicles would continue to find favour with the new FM and reduction in the excise duty levy of large cars would be welcomed by the industry.
Life science sector
For the Pharma industry, Active Pharmaceutical Ingredients (raw materials) attract higher excise duty @ 12.36 per cent whereas the finished pharma formulations attract excise duty @ 6.18 per cent leading to accumulation of credit which is a cost to the company and a perennial concern for this sector. This issue remains unresolved in spite of consistent follow up by the industry. Hopefully this budget would offer relief to the pharma manufacturers on this.
The real estate sector would be hoping that the budget clarifies that no service tax is applicable on the transfer of development rights which is akin to a transfer of title in an immovable property to the developer
While the law provides for exemption from service tax on specified works contract such as in relation to airports, railways, similar benefits have not been extended to power sector, public transport sector etc. leading to higher tax costs qua such projects. This sector would be closely watching the budget for such extended benefits.
Real estate sector
The real estate sector would be hoping that the budget clarifies that no service tax is applicable on the transfer of development rights which is akin to a transfer of title in an immovable property to the developer.
Apart from the above, the industry in general also expects certain procedural relief from the new government.
Given the litigation pending in the CESTAT and heightened action by the revenue to trigger recovery actions even in cases where stay petitions are pending hearing, a specific change in law empowering the Tribunal to grant stay beyond 180/ 365 days is the need of the hour.
The definition of 'input service' as per the CENVAT Rules places restrictions on availment of Cenvat credit on various services which are per se essential for running the business (eg. setting up of factory/ office premises, services related to civil construction etc.). This definition has given rise to many interpretational issues with the field authorities denying credit on all legitimate business expenditure which have not been specifically provided for in the said definition due to deletion of the specific phrases "activities relating to business" and "setting up of premises" from the said definition. The industry is expecting a suitable amendment to the definition of "input service" so as to ensure that credit is availed on all services which have suffered service tax.
The negative list of service regime introduced w.e.f. 1 July 2012, has brought along with its own set of challenges to the industry. Testing and analysis services were covered under the recipient based category for export /import of service since 2011. However with the new set of rules, this position has changed to performance based category. This would imply that testing or analysis activity done in India on goods provided by an overseas recipient would be subject to service tax even if the recipient of the said services is located outside India and the consideration is received in foreign currency. It is on the industry's wish list that budget 2014 would bring relief by a suitable amendment in the Place of Provision of Service Rules, 2012.