Budget 2013: Impact of corporate tax proposals
Associate Director-Tax & regulatory services
Union Budget 2013-14 was keenly awaited by the Indian businesses and foreign investors alike, largely to see whether the Finance Minister ('FM') chalks out to implement the recommendations proposed by Shome and Rangachary Committees on taxability of indirect transfer, General Anti Avoidance Rules (GAAR) and transfer pricing to make sure a credible path for reforms process and provide impetus to Indian economy.
At the outset, setting up a tax administration reforms commission would be a good start to reform our tax system. Under the corporate tax, although there are no changes proposed to Income tax rates but the surcharge is proposed to increase from 5 to 10 % on domestic companies having income exceeding INR 10 crore. In case of foreign companies (if income exceeds INR 10 crores), surcharge will increase from 2 to 5 %. The effective tax rates are highlighted as under:
The effective rate of dividend distribution tax (DDT) is proposed to increase at 16.995% from 16.2225% on account of increase in surcharge.
On a similar line as DDT, a new tax at the rate of 20% is proposed to be levied on the consideration (in excess of issue price) paid by an unlisted company on buyback of its own shares. The benefit of reduced tax rate of 15% in respect of dividend received from foreign subsidiary is extended by a year. It has also been proposed that no DDT would be levied on the domestic company distributing such dividend (i.e. divided received from foreign subsidiary and subject to reduced rate of tax).
On international tax proposals, it is proposed to increase the rate of tax on 'royalty' and 'fees for technical services' to non-residents from 10 to 25 %. However, foreign company eligible to avail tax treaty benefits would be subject reduced rate of tax (which is usually in the range of 10%-15%) as per the respective tax treaty. It is also clarified that requirement of submission of tax residency certificate (TRC) which was introduced by Finance Act 2012 is a necessary but not a sufficient condition for claiming treaty benefits. Considering the proposal, taxpayers may need to exercise adequate caution on their investment/holding structure that involves the use of beneficial tax treaties such as Mauritius.
In line with his earlier announcement, changes have been made to modify GAAR provisions. GAAR has been deferred to April 1, 2016 and would now be applicable from AY 2016 - 2017 onwards. However, no clarifications are proposed on 'indirect transfer' in this budget.
|Total income||Effective tax rate|
|Domestic company||Foreign company|
|10,00,00,001 and above||33.99%||43.26%|
The colossal outlay and inclination of the Government towards power sector, renewable energy, handloom industry, textile industry, waste to energy production is specifically expressed in the Union budget. Tax incentives for power sector to continue for one more year.
On a welcome note for manufacturing companies, an additional investment allowance at the rate of 15% is proposed, if investment in plant and machinery would be INR 100 crore or more during the period 1.4.2013 to 31.3.2015.
A new tax provision is proposed where the business income, on account of 'transfer of immovable property held as stock-in-trade' would arise in the hands of taxpayer. This provision would trigger where the consideration for transfer of an asset being land or building or both, be less than the stamp duty value. In that case, similar to special provision of capital gain, the value determined for stamp duty purposes, shall be deemed to be the full value of the consideration for computing the business income.
In 2012, SEBI had prescribed the regulations for 'Alternative Investment Funds' (AIF). In order to provide the similar tax benefits as currently available to venture capital fund, it is proposed to extend pass through benefits to AIF, subject to the prescribed conditions.
Security transaction tax (STT) rates cut on equity futures to 0.01%. Further on the same lines as STT, commodity transaction tax (CTT) is proposed on commodities other than non agriculture produces at 0.01%.
Further it is proposed that TDS at the rate of 1% on the value of the transfer of immovable property (other than Agricultural land) where the consideration exceeds INR 50 lakhs to be levied.
(Views expressed here are personal)