The recently appointed Finance Minister of India, Mr. Arun Jaitley, faced with the various challenges of reviving the growth of the ailing Indian economy, ever ballooning fiscal deficit, high inflation and standing to fulfill the promises made by the newly elected NDA government in their election manifesto, appears to have maneuvered the way to spur growth and fulfill on the promises made, by delivering his maiden Union Budget 2014-2015 – first of the Narendra Modi led NDA Government, on the 10th July 2014, and thereafter presented the Finance (No. 2) Bill, 2014 before the Parliament.

As an annual event, we have hereby attempted to elucidate and analyze the major and important amendments proposed in the Direct Tax and Service Tax Laws, with their implications; and are sure that the same would be handy to you.

 As of date, these are proposals only, and if adopted by the Parliament and passed as Finance Act; will come into force for and from Assessment Year 2015-2016 relevant to Financial Year 2014-15, unless specifically provided otherwise.

Unlike the last full fledged Budget of the UPA Government, in this year, the major booster for all of us as taxpayers, as far the Direct Tax & Service tax proposals in the Finance Bill are concerned; is that the focus is towards broadening the tax base, rationalizing tax provisions so as to reduce litigation and, bring certainty and clarity to the taxpayers as regards the tax regime, with minimal unpleasant amendments in the fine print (he didn’t have many options though), all of which we have discussed with the respective proposed amendments herein below.

I.      DIRECT TAXES

Amendments proposed under the Income-tax Act, 1961 (hereafter referred to as “the Act”).

1. Basic Exemption Limit increased by Rs.50,000/- though Rates of Taxes, Surcharges and Education Cess unaltered:

Income thresholds, basic tax rates and Education Cess

The Basic Exemption Limits for Individual, HUF, AOP, BOI etc. is increased by Rs.50,000/-’while the rates of Basic Tax, Surcharge, Education Cess and Higher Secondary Education Cess (Education Cess and Higher Secondary Education Cess collectively referred to as ‘Education Cess’), have been kept unaltered for all Assessees.

The applicable Basic Exemption and Income Slabs as well as basic tax rates, are given in the below Table for your ready reference:

Assessee Basic exemption and Income Slabs
Total Income Tax Rate
All Individuals, HUF, AOP and BOI (except those stated below) upto Rs.2,50,000/- Nil
Rs.2,50,001/- to Rs.5,00,000/- 10% of income above Rs.2,50,001/-
Rs.5,00,001/- to Rs.10,00,000/- Rs.25,000/- plus 20% of income above Rs.5,00,001/-
Above Rs.10,00,000/- Rs.1,25,000/- plus 30% of income above Rs.10,00,001/-
   
Individuals, being resident, and above 60 years upto the age of 80 years upto Rs.3,00,000/- Nil
Rs.3,00,001/- to Rs.5,00,000/- 10% of income above Rs.3,00,001/-
Rs.5,00,001/- to Rs.10,00,000/- Rs.20,000/- plus 20% of income above Rs.5,00,001/-
Above Rs.10,00,000/- Rs.1,20,000/- plus 30% of income above Rs.10,00,001/-
 
Individuals, being resident, and age 80 years and above upto Rs.5,00,000/- Nil
Rs.5,00,001/- to Rs.10,00,000/- 20% of income above Rs.5,00,001/-
Above Rs.10,00,000/- Rs.1,00,000/- plus 30% of income above Rs.10,00,001/-

 This results in a situation that companies with taxable income of more than Rs. 1 crore (but less than Rs.10 crores) would pay tax at an effective rate of 32.445% (considering 5% surcharge and 3% Education Cess), while the non-company Assessees with taxable income above Rs.1 crore would pay tax at a higher effective rate of 33.99% (including Surcharge of 10% and Education Cess of 3%).

Though Mr. Jaitley has kept rates of Surcharge unaltered for all Assessees for Assessment Year 2015-16; this is in contrast to his predecessor’s statement in the last budget, where it was stated that increased surcharge shall only be for one year.

2. Conducive tax regime introduced for Real Estate Investment Trusts (‘REIT’) and Infrastructure Investment Trusts by granting pass through status:

The Indian infrastructure and the Public-Private Partnership model (‘PPP’) are currently in a challenging phase, with development of existing projects delayed, and diminishing attractiveness of new projects to private sector funds and strategic operators.

To meet these challenges, it is proposed to introduce two new categories of investment vehicles, namely Real Estate Investment Trust (REIT) & Infrastructure Investment Trust (‘INVIT’). The draft regulations in respect of these are issued by the Securities and Exchange Board of India (’SEBI’).

With the objective of bringing in certainty about the taxation aspects of these trusts, which in turn is expected to attract large scale investment in the Real Estate and Infrastructure sector, the concept of REIT & INVIT (collectively referred to as “Business Trust”) is proposed to be introduced in the Direct Tax laws.

These Trusts are primarily required to be registered, and listed on the recognized stock exchanges and would be regulated by SEBI.

The provisions relating to taxation of income in the hands of the Business Trust, the beneficiaries being unit holders and the Sponsor are introduced in a new Chapter XII-FA “Special Provisions relating to Business Trusts”.

The salient features about taxation of the new taxation regime are summarized hereunder:

  • Taxation in the hands of the Business Trust:

a)      Interest income of the business trust from SPV is accorded pass through treatment in the hands of the Business Trust and no withholding tax at the level of SPV.

b)      Withholding tax to be done by the Business Trust @ 5% from payment of interest component of income distributed to non-resident unit holders and 10% in case of resident unit holders.

c)      Dividend received by the Business Trust from SPV shall be exempt as it would be subject to dividend distribution tax at the level of SPV.

d)      Total income of the Business Trust would be taxed at maximum marginal rate i.e. 33.99% except for capital gains which would be taxed as per provisions of Section 111A and/ or 112, as the case may be.

e)      In case of external commercial borrowings by the Business Trust, TDS to be done at lower rate of 5% (plus applicable Surcharge & Cess) on interest payments to non-resident lenders as provided in section 194LC.

  • Taxation in the hands of the unit holders of Business Trust:

a)      Interest component of distributed income to unit holders taxable in hands of unit holders.

b)      The Dividend component of the income distributed to unit holders will also be exempt.

c)      The units of a Business Trust, when traded on a recognized stock exchange, would be subject to same levy of Securities Transaction Tax (‘STT’), and would be given the same tax benefits in respect of taxability of capital gains on sale of equity shares of a company i.e., Long Term Capital Gains, would be exempt from tax under section 10(38) and Short Term Capital Gains would be taxable @ 15% according to provisions of Section 111A.

  • Taxation in the hands of the sponsor:

a)      In case of capital gains arising to the sponsor at the time of exchange of shares in SPV with units of the Business Trust, the taxation of gains shall be deferred and taxed at the time of disposal of units of Business Trust by the sponsor.

b)      However, the preferential capital gains regime (consequential to levy of STT) available in respect of units of business trust will not be available to the sponsor in respect of such units at the time of disposal. Further, for the purpose of computing capital gain on such units, the cost of these units shall be equivalent to the cost of the shares exchanged by the sponsor. The holding period of shares held in SPV shall also be included in the holding period of such units.

(These amendments will take effect from 1st October, 2014).

3. Strengthening mechanism of Advance Pricing Agreement (‘APA’) owing to good response from the taxpayers:

The Finance Minister has proposed to strengthen the administrative set up of APA to expedite disposal of applications. The introduction of APA’s has brought in certainty and confidence to the Assessee’s entering into various international transactions with their foreign counterparts, as to the determination of arms length price of a particular transaction and how the Income Tax Department would perceive the same.

APA’s being binding on the Department and the Assessee, it has brought in certainty in transfer pricing matters, which would bring an end to high pitched demands on account of Transfer Pricing (‘TP’) adjustments due to difference of view between Assessee & Department. This becomes the starting point for endless litigation to the benefit of none, neither the Government nor taxpayers. In fact, the uncertain tax regime of India acts as deterrent for increased Foreign Investment and greater cross-border trade.

Under the existing provisions of section 92CC, the agreement entered into is valid for a period up to five years, as may be mentioned in the agreement.

However, it is now proposed to introduce the concept of “Roll Back” in the Indian Transfer Pricing regulations.

The “Roll Back” provisions refers to the applicability of the methodology of determination of ALP, or the ALP, to be applied to the international transactions which had already been entered into in a period prior to the period covered under an APA.

Providing of such a mechanism in Indian legislation would lead to reduction in large scale litigation which is currently pending or may arise in future in respect of the transfer pricing matters, besides bringing in certainty in tax regime.

It is proposed that an APA entered into for future transactions may also be applied to international transactions undertaken in previous four years in specified circumstances.

Further details, clarifications, regulations etc. in this respect are expected to be issued soon.

(This amendment will take effect from 1st October, 2014.)

4. Rationalization of definition of “Deemed International Transaction”:

Currently, section 92B(2) provides for deeming of a transaction between an enterprise and unrelated third party as a transaction between two associated enterprises subject to the condition that there exists a prior agreement in relation to the relevant transaction between the third party and associated enterprise or the terms of the relevant transaction are determined in substance between such third party and the associated enterprise.

However, it is now proposed to make provisions such that the relevant transaction shall be deemed to be an international transaction, where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not.

5. Rationalization of provisions regarding Disallowance of expenditure, due to non-deduction of Tax at Source (‘TDS’) from payments made to resident vendors:

Hitherto, in case of any expenditure on which TDS was required to be done but was either not done, or after deduction of tax, payment thereof to the Government treasury was not done within the time limit as prescribed; entire such expenditure was not allowed as an allowable expenditure in computing income of the Assessee. This resulted in additional tax outgo for the Assessee’s to the tune of one-third of the expenditure i.e. (considering tax @ 30% plus surcharge @10% and Cess @3%) as against TDS liability ranging between 1% to 10%. Thus, the amount of disallowance on account of non-deduction and/ or payment of TDS, currently is highly disproportionate.

With a view to rationalize these provisions and at the same time ensure due compliance from the Assessee’s, it is now proposed to restrict the disallowance of expenditure on account of non-deduction of tax at source or payment thereof to 30% of the expenditure. This would result in additional tax outgo only to the tune of around 9% which is more or less in range of TDS liability.

6. Rationalization of time limit for payment of tax deducted at source from payments made to non-residents, for allowability for expenditure:

 The existing provisions of section 40(a)(i) of the Act provide that certain payments such as interest, royalty and fee for technical services made to a non-resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time prescribed under section 200(1) of the Act.

However, in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return of income under section 139(1) of the Act.

However, in case of disallowance for non-payment of tax from payments made to non-residents, this extended time limit of payment up to the date of filing of return of income under section 139(1) is currently not available.

In order to provide similar extended time limit for payment of tax deducted from payments made to non-residents, it is proposed that the deductor shall be allowed to claim deduction for payments made to non-residents in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return under section 139(1) of the Act.

7. Deduction in respect of specified business allowable either under Section 35AD extended to two new businesses – Provisions inserted to ensure that relief allowed either under Section 35AD or Section 10AA, not both:

The existing provisions contained in section 35AD, inter alia, provide a deduction in respect of any expenditure of capital nature incurred, other than expenditure incurred on the acquisition of any land or goodwill or financial instrument, wholly and exclusively for the purposes of any specified business carried on by the Assessee during the previous year in which such expenditure is incurred.

Further, to boost investment in the critical sectors, it is proposed to include “ the laying and operating a slurry pipeline for the transportation of iron ore” and “setting up and operating a semi-conductor wafer fabrication manufacturing unit” in the definition of “specified business”.

It is proposed to provide that the date of commencement of operations for availing investment linked deduction in respect of the above two new specified businesses shall be on or after 1st April, 2014.

It is also proposed to amend section 35AD and Section 10AA appropriately by providing that, if deduction is availed in one of the Section for such specified business, no deduction shall be allowed under the other section in respect of such specified business in the same or any other assessment year.

To ensure that the capital asset on which investment linked deduction has been claimed is used for the purposes of the specified business for a specific time period, it is also proposed to provide that such asset shall be used only for the specified business, for a period of eight years.

In case any such asset is used for purpose other than the specified business, then the total amount of deduction so claimed and allowed in one or more previous years, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32, as if no deduction under said section 35AD was allowed, shall be deemed to be income of the Assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.

8. Expenditure on Corporate Social Responsibility (‘CSR’) not deductible under Section 37(1):

It is clarified that any expenditure incurred by a Company on the activities relating to CSR referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an allowable expenditure incurred by the Assessee for the purposes of the business or profession for the purpose of section 37(1).

However, it is clarified that the CSR expenditure which is of the nature described in section 30 to section 36 shall be allowed deduction under those sections subject to fulfillment of conditions, if any, specified therein.

9. Investment Allowance of 15% for acquisition and installation of new plant and machinery by manufacturing company – benefit extended to companies making investment of more than Rs.25 crores in Plant & Machinery:

To support and to provide incentive to smaller and medium manufacturing companies, it is proposed to extend to a company engaged in the business of manufacture or production of any article or thing, an allowance of 15% of the actual cost of new assets acquired and installed, if actual cost of the new assets acquired and installed during any previous year exceeds Rs.25 crores.

Further, Assessees eligible to claim deduction under the existing threshold limit of Rs.100 crore for investments made in Financial Years 2013-14 and 2014-15, would continue to be eligible to claim deduction even if its investment in the Financial Year 2014-15 is below the proposed new threshold limit of investment of Rs. 25 crores.

10. Extension of sunset date under Section 80-IA for power sector:

In order to provide further time to the undertakings to commence eligible activity to avail the tax incentive, it is proposed to extend the terminal date for a further period up to 31st March, 2017 i.e. till the end of the 12th Five Year Plan.

11. Company having principal business of trading in shares – Not deemed to be speculation business for set off or carry forward of losses:

The existing provisions regarding set-off of Loss of speculation business cannot be set off or carried forward and set off against the non-speculation business loss

Further, Explanation to section 73 provides that in case of a company deriving its income mainly under the head business (other than a company whose principal business is business of banking or granting of loans and advances), and where any part of its business consists of purchase or sale of shares such business shall be deemed to be speculation business for the purpose of this section.

In addition to the exceptions given in the explanation as existing now, it is now proposed to exclude from this deeming provision, companies whose principal business is trading in shares.

Thus, where the principal business of any company is trading in shares, such business of purchase and sale of shares would not be regarded as a speculation business. Therefore, any loss from such a business will not be treated as speculative loss.

12. Eligible transaction of trading in commodity derivatives not considered as speculative transaction, if Commodities Transaction Tax is paid:

The existing provisions of section 43(5) define the term speculative transaction and it also excludes certain category of transactions as speculative transactions.

It is now clarified that, eligible transaction in respect of trading in commodity derivatives carried out in a recognized association and chargeable to Commodities Transaction Tax under Chapter VII of the Finance Act, 2013 shall not be considered to be a speculative transaction.

13. Simplification & Increase in rate of presumptive income in transport business:

The existing provisions of section 44AE provide for presumptive taxation in the case of an Assessee who is engaged in the business of plying, hiring or leasing goods carriages and not owning more than ten goods carriages at any time during the previous year.

Considering the erosion in the real values of the amount of specified presumptive income due to inflation over the years and also in order to simplify this presumptive taxation scheme, it is proposed to provide for a uniform amount of presumptive income of Rs.7,500 for every month (or part of a month) for all types of goods carriage without any distinction between Heavy Goods Vehicle (‘HGV’) and vehicle other than HGV, as was done hitherto.

14. Bringing certainty in taxation of Income of Foreign Portfolio Investors (FPIs) in India:

In the present Budget, the Finance minister has clarified that income of FPI’s in India would be assessed as Capital Gains/ (Loss) and not as Business income. Thus, uncertainty and apprehensions of the FPI’s as regards to taxability of their income earned in India through Portfolio Investment, comes to an end.

15. Long term capital Gain on sale of units of Mutual Fund (other than equity oriented) @20%:

As per the existing provisions of section 112, where the tax payable in respect of any income arising from transfer of a long-term capital asset, being listed securities or unit or zero coupon bond exceeds ten per cent of the amount of capital gains without indexation adjustment, then such excess shall be ignored.

It is now proposed to increase the rate of tax on long term capital gains arising from transfer of units Mutual Funds, other than equity oriented funds, from 10% to 20%.

Moreover, as per the existing provisions the holding period for Short Term Capital Asset in the case of a share held in a company or any other security listed in a recognized stock exchange in India or a unit of the Unit Trust of India or a unit of a Mutual Fund or a zero coupon bond, is twelve months or less.

It is now proposed to amend the criteria of holding period for treating an asset as Short Term Capital Asset, as under:

  • For share in Company (listed) – 12 months;
  • For share in Company (unlisted) – 36 months;
  • For other unlisted securities – 36 months;
  • For other listed securities (including units of Business Trust) – 12 months;
  • For unit of Mutual Fund (equity oriented) – 12 months;
  • For unit of Mutual Fund (other than equity oriented) – 36 months;
  • For zero coupon bond – 12 months.

16. Plugging of loop hole to prevent misuse of Section 54EC:

With the objective to the curb misuse of time limit under Section 54EC, for investment within six months from the date of transfer, it is now proposed that investment made in Specified securities during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.

For instance, in case of an asset sold in say January 2014, the time limit for investment u/s.54EC would be till July 2014. Therefore, certain Assessee’s had in past taken benefit of investment of Rs.50,00,000/- in Financial year ending on March 31 2014 as well as invested certain amounts in next year till July 2014 so as to avail exemption in excess of Rs.50,00,000/- which was not the intention of the legislature. Thus, the aforesaid amendment is proposed to be introduced to curb the practice of claiming exemption in excess of Rs.50 lakhs which was not intended by the legislature.

17. Investment in one residential house in India for claiming exemption under Section 54 or Section 54F:

To plug loophole of Assessee’s claiming exemption in respect of more than one Residential House and also in respect of Residential House located outside India, it is proposed that for claiming exemption either under section 54 or section 54F, the investment in purchase or construction of one residential house situated in India is a requisite condition.

18. Capital Gains arising from transfer of asset under compulsory acquisition:

Currently, Section 45(5) provides that capital gain arising from compulsory acquisition of an asset shall be deemed to be chargeable in the year in which compensation is received by the Assessee.

However, there was uncertainty as to the year in which compensation received on account of any interim order of the court etc. is to be charged to tax.

To settle this, it is now proposed to tax compensation received due to an interim order, in the year in which final order of the court or other authority is made.

19. Treatment of advance money received for transfer of capital asset, amended:

The existing provisions contained in section 51 provide that where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the Assessee in respect of such negotiations which did not result in transfer of the asset shall be deducted from the cost of the asset or the written down value or the fair market value, as the case may be.

Now, it is proposed that forfeited amount shall be chargeable to income-tax immediately under the head “Income from Other Sources”. Consequently cost of the asset would no longer be required to be reduced by such amount.

20. Widening of tax base for calculating Alternate Minimum Tax:

The existing provisions of section 115JC provide that where the regular income tax payable by a person, other than a company, for a previous year is less than the alternate minimum tax for such previous year, the person would be required to pay income tax at the rate of 18.5% (plus applicable Surcharge & Cess) on its Adjusted Total Income (‘ATI’).

In order to include the investment linked deduction claimed under section 35AD in computing ATI, it is now proposed to provide that total income shall be increased by the deduction claimed under section 35AD for purpose of computation of ATI. However, the amount of depreciation allowable under section 32 shall, be reduced in computing the ATI.

21. Dividend received by Indian companies from Specified foreign companies continued to be taxed @ 15%:

Section 115BBD provides for concessional rate of tax at 15% (plus applicable Surcharge & Cess) on dividend received by Indian companies from foreign companies in which they hold atleast 26% equity stake, up till Assessment Year 2014-15.

It is proposed to extend this benefit in Assessment 2015-16 also without any sunset date.

22. Tax on distribution of Dividend by Companies and tax on distribution of Income by Mutual Funds to be grossed up:

It is now clarified that for the purposes of calculating Dividend Distribution Tax u/s.115-O the amount of Dividend shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits.

This would result in an increase in the effective rate of tax on dividend distribution from 16.995% at present, to 20.475%.

Similarly, it is also proposed to provide that the rate of ‘Income Distribution Tax’ u/s. 115-R payable by a Mutual Fund, on distribution of income to unit holders of other than equity oriented Mutual Fund, is now required to be grossed up based on the prescribed rate for different categories of Mutual Funds.

(These amendments will be effective from 1st October, 2014.)

23. Rationalization of taxation regime in the case of charitable trusts and institutions:

The provisions of sections 11, 12, 12A, 12AA and 13 constitute a complete code governing the grant or withdrawal of registration and its cancellation, providing exemption to income, and also the conditions under which a charitable trust or institution needs to function in order to be eligible for exemption. They also provide for withdrawal of exemption either in part or in full if the relevant conditions are not fulfilled.

To ensure strict compliance with the conditions and provisions of relating to charitable trusts and institutions which have been granted special exemptions under Sections 11 to 13, and to check mischief, the following amendments are proposed:

  • Where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 (other than that relating to exemption of agricultural income).
  • Similarly, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 (except the exemption in respect of agricultural income).
  • For calculating application of income no deduction or allowance shall be allowed by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.

24. Cancellation of registration of the trust or institution in certain cases:

The existing provisions provide that Commissioner can cancel the registration only under two circumstances, as under:

(a)    If the activities of a trust or institution are not genuine, or;

(b)   If the activities are not being carried out in accordance with the objects of the trust or institution.

Therefore, the powers of Commissioner to cancel registration are severely restricted.

In order to rationalize the provisions relating to cancellation of registration of a trust, it is proposed to provide that where a trust or an institution has been granted registration, and subsequently it is noticed that its activities are being carried out in such a manner that,-

  1. its income does not ensure for the benefit of general public;
  1. it is for benefit of any particular religious community or caste (in case it is established after commencement of the Act);
  1. any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or
  1. its funds are invested in prohibited modes,

then, the Principal Commissioner or the Commissioner may cancel the registration if such trust or institution does not prove that there was a reasonable cause for the activities to be carried out in the above manner.

(This amendment will take effect from 1st October, 2014.)

25. Applicability of the registration granted to a trust or institution to earlier years:

In order to provide relief to trusts and remove hardship in genuine cases, it is proposed to amend section 12 A of the Act to provide that in case where a trust or institution has been granted registration under section 12AA of the Act, the benefit of sections 11 and 12 shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration, if the objects and activities of such trust or institution in the relevant earlier assessment year are the same as those on the basis of which such registration has been granted.

Further, it is also proposed that no action for reopening of an assessment under section 147 shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not obtained the registration under section 12AA for the that assessment year.

26. Anomaly in manner of computation of tax payable in respect of Anonymous Donations, now corrected:

In order to correct the anomaly in manner of computation of tax payable on Anonymous Donations, the balance tax chargeable on total income of an Assessee is proposed to be worked out after reducing from total income, amount which has been taxed at 30%.

27. Levy of Penalty under section 271G by Transfer Pricing Officers:

The existing provisions of section 271G provides that if any person who has entered into an international transaction or specified domestic transaction fails to furnish any such document or information as required by section 92D(3), then such person shall be liable to a penalty which may be levied by the Assessing Officer or the Commissioner (Appeals).

It is now proposed to include Transfer Pricing Officer (“TPO”) as an authority competent to levy the penalty under section 271G in addition to the Assessing Officer and the Commissioner (Appeals).

28. Increase in investment limit under Section 80C from Rs.1,00,000/- to Rs.1,50,000/-:

Currently, section 80C of the Income-tax Act,1961 provides for deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc. to an individual or a Hindu undivided family to the tune of Rs.1,00,000/-.

This limit is proposed to be increased to Rs.1,50,000/- from Assessment Year 2015-16 onwards.

29. Restriction in deduction allowable under Section 80CCD to Rs.1,00,000/-:

Under the existing scenario, an individual, employed by the Central Government or by any other employer on or after 1st January, 2004, who has in the previous year paid or deposited any amount in his account under a notified pension scheme, is eligible to a deduction of such amount not exceeding ten per cent of his salary.

It is now proposed that deductions under section 80CCD shall not exceed Rs.1,00,000/-.

30. Deduction for Interest on loan taken for acquiring self occupied house property raised from Rs.1,50,000 to Rs.2,00,000/-:

It is proposed to amend the second proviso to clause (b) of section 24, so as to increase the limit of deduction on account of interest in respect of self occupied house property from Rs 1,50,000 to Rs 2,00,000.

31. TDS to be done from payments made to residents under the life insurance policy which are not exempt:

It is proposed to deduct tax at source @2% from payments made to residents under a life insurance policy, which are not exempt by virtue of Section 10(10D).

Further, it is also proposed that no deduction shall be made where the aggregate amount of such payments to the payee during the Financial Year is less than Rs. One Lakh.

32. Mutual Funds, Securitization Trusts and Venture Capital Companies (‘VCC’) or Venture Capital Funds (‘VCF’) to file return of income:

As per the existing provisions, Mutual Fund or securitization trust or VCC or VCF are not obligated to furnish their return of income under section 139 of the Act. Instead they are required to furnish a statement giving details of the nature of the income paid or credited during the previous year and such other relevant details as may be prescribed.

It is now proposed that if the total income in respect of which such fund, trust or company is assessable, without giving effect to the provisions of section 10, exceeds the maximum amount which is not chargeable to income-tax, it would be required to furnish a return of such income of the previous year.

33. Interest under Section 220 payable from the end of the period mentioned in first notice of demand:

It is proposed to insert a new sub-section to provide that where any notice of demand has been served upon an Assessee and any appeal or other proceeding, as the case may be, is filed or initiated in respect of the amount specified in the said notice of demand, then, such demand shall be deemed to be valid till the disposal of the appeal by the last appellate authority or disposal of the proceedings, as the case may be.

Further, it is also provided that where as a result of appeal or other proceeding, the amount on which interest was payable under this section had been reduced or increased, increased, the Assessee shall be liable to pay interest under sub-section (2) from the day immediately following the end of the period mentioned in the first notice of demand, till the day on which the amount is paid.

34. Acceptance or repayment of loans and deposits through Electronic Mode not prohibited:

It is now proposed to provide that any acceptance or repayment of any loan or deposit by use of electronic clearing system through a bank account shall not be prohibited under the said sections if the other conditions regarding the quantum etc. are satisfied.

35. Rationalization of provisions relating processing of TDS returns and time limit for passage of Order under section 201:

In order to bring clarity in the matter relating to filing of correction statement, it is proposed to amend section 200 to allow the deductor to file correction statements. Consequently, it is also proposed to amend provisions of section 200A for enabling processing of correction statement filed.

Currently, the processing of TDS statement is done in the computerized environment and mainly focuses on the transactions reported in the TDS statement filed by the deductor. Therefore, there is no rationale for not treating the deductor as Assessee in default in respect of the TDS default after two years only on the basis that the deductor has filed TDS statement as TDS defaults are generally in respect of the transaction not reported in the TDS statement.

It is therefore proposed to remove the time limit of two years for passing an order under section 201(1).

In order to align the time limit provided under section 201(3)(ii) and section 148, it is proposed that time limit provided under section 201(3)(ii) for passing order under section 201(1) shall be extended by one more year i.e. seven years from the end of financial year in which payment/ credit is made, to cover defaults relating to TDS which comes to the notice during search/reassessment proceeding in respect of previous year which is not covered under section 201(3)(ii) of the Act but covered under section 148 of the Act.

36. Penalty for providing inaccurate information in the statement of financial transaction or reportable account by financial institution:

With a view to facilitate effective exchange of information in respect of residents and non-residents, it is proposed to provide for furnishing of statement by prescribed reporting financial institution in respect of a specified financial transaction or reportable account to the prescribed income-tax authority.

In case any reportable financial institution furnishes inaccurate particulars in the statement of financial transaction or reportable account, then it may be subject to levy of penalty of Rs.50,000/- under circumstances stated in Section 271FAA.

37. Direct Tax Code (‘DTC’):

In his Budget five years ago, the then Finance Minister announced the introduction of the Direct Taxes Code (‘DTC’) and a draft of the same was also circulated for comments and discussion. Thereafter, there have been revisions and variations therein based on inputs from various lobbies.

After considering reports from of the Standing Committee on Finance and the views expressed by the stakeholders, a revised Code was placed in the public domain in March, 2014 for comments. The Finance Minister has stated that the current Government shall consider the comments received from the stakeholders, review the DTC in its present shape and take a view in the whole matter.

38. Retrospective amendments:

The Finance Minister has said the NDA Government would not ordinarily bring about any retrospective amendments to create fresh liability. As regards pending litigation as on date due to retrospective amendments brought in by Finance Act, 2012, Mr. Jaitley has said that these matters are at various stages of litigation and would come to a logical end.

Further, the Finance Minister has stated that fresh cases arising out of retrospective amendments of 2012 would be scrutninsed by High Level Committee constituted by CBDT before any action is initiated.

The Finance Minister has promised to the investors, to provide a stable and predictable tax regime which would be investor friendly and spur growth.

39. Other proposals:

Besides major Direct tax proposals summarized above, the Finance Minister has also mentioned about the following in his Budget Speech:

  • To introduce range concept for determination of arm’s length price to align Transfer Pricing regulations in India with the best available practices;
  • To allow use of multiple year data for comparability analysis under transfer pricing regulations;
  • To enable resident taxpayers to obtain an advance ruling in respect of their income tax liability above a defined threshold.

II.   INDIRECT TAXES – SERVICE TAX:

Keeping in background, the roll-out of GST in near future; this time around the Finance Minister has rather not meddled much and kept changes at minimum to prepare the economy for the smooth transition to the new levy. These are discussed with the respective proposed amendments herein below.

1. Roll out of Goods and Services Tax (‘GST’):

In his Speech last year, the then Finance Minister proposed to set-apart a sum of Rs.9,000 crores as Central Sales Tax compensation for the states, and urged them to help the centre in roll-out of GST, though he did not announce a road map for implementation thereof, as the support of the states was not forthcoming.

However, the Finance Minister in his Speech this year has given an indication of roll – out of GST and he targets to approve the legislative scheme for introduction of GST during this year.

2. Rate of Service Tax:

With the overall objective of preparing the economy for a smooth transition to GST, widening the tax base and enhancing compliance, it is continued to tax services at the current rate of 12% (as well as Education Cess of 3% thereon) with a view to bring in stability in the Service tax regime. More so, having regard to the constraints Indian economy is going through including the battle against inflation and achieving the desired growth with inclusive development; there was hardly any room for raising the tax rates.

Thus, the effective rate of Service Tax would remain unchanged @12.36%.

3. Negative List pruned:

With the object of broadening the tax base, the list of services in the Negative List is proposed to be reduced by bringing the following services within the ambit of taxation of services, which were hitherto outside the levy of Service tax:

  • sale of space or time for advertisements in broadcast media, extended to cover such sales on other segments like online and mobile advertising, except advertisements in print media;
  • services provided by radio taxis or radio cabs, whether or not air-conditioned.

4. Withdrawal of Exemptions:

In order to widen the tax base, the following exemptions are proposed to be withdrawn by appropriate amendments in the Mega Exemption Notification No.25/2012-ST, effective from 11th July 2014:

  • Technical testing or analysis services of newly developed drugs, including vaccines and herbal remedies on human participants;
  • Air-conditioned contract carriages for transportation of passengers;
  • Services provided by way of renting of immovable property to educational institutions.

However, if the aggregate value of taxable service provided in a financial year, in above cases does not exceed Rs. 10 Lakh, the benefit of threshold exemption will be available in terms of Notification 33/2012-ST.

5. Review of Exemptions:

Apart from withdrawing certain exemptions, the Finance Minister has proposed to rationalize the following exemptions:

  • Services provided to government/ local authority:

The exemption in respect of services provided to Government or local authority or governmental authority, will be limited to services by way of water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation.

However, effective from 1st April 2013, even such charitable organizations would be covered by the threshold exemption of Rs.10 lacs per year.

  • ‘Auxiliary Education services’ provided to educational institutions:

Many doubts have been raised and clarifications have been sought regarding the scope and meaning of term ‘auxiliary educational services’,

To bring clarity, it is proposed to delete the concept of ‘auxiliary educational services’ and specify in the notification, the services which will be exempt when received by the educational institutions.

Accordingly, following services received by an eligible educational institution are being exempted from service tax:

(i)           transportation of students, faculty and staff;

(ii)         catering service including any mid-day meals scheme sponsored by the Government;

(iii)       security or cleaning or house-keeping services in such educational institutions; and

(iv)       services relating to admission to such institution or conduct of examination.

  • Exemption in relation to services by a hotel, guest house etc. on a declared tariff of less than Rs.1,000/- per day will apply irrespective of whether the place is commercial or non-commercial in nature. This exemption is being re-worded to bring out the intent clearly.

6. New Exemptions:

The Finance Minister has proposed to provide the following new exemptions, effective from 11th July 2014:

  • Services provided by life insurance business under all life micro-insurance schemes approved by the Insurance

Regulatory Development Authority, where sum assured does not exceed Rs.50,000/-;

  • Goods transport services for transport of organic manure by vessel, rail or road;
  • Services by way of loading, unloading, packing, storage or warehousing, transport by vessel, rail or road of cotton, ginned or baled;
  • Services provided by common bio-medical waste treatment facility operators to clinical establishments by way of treatment or disposal of bio medical waste, or processes incidental to such treatment or disposal;
  • Specialized financial services received by RBI from global financial institutions in the course of management of foreign exchange reserves, e.g., external asset management, custodial services, securities lending services, etc.;
  • Services provided by Indian tour operators to foreign tourists in relation to a tour wholly conducted outside India.

7. Retrospective Exemption to services provided by ESIC:

Service provided by Employees’ State Insurance Corporation (ESIC) during the period prior to 1.7.2012 exempted from Service tax.

8. Amendments in Valuation related aspects:

  • Service tax on service portion in Works Contracts:

In works contract valuation provisions, effective from 1st October 2014, there will be two slabs for computing taxable value (40% and 70%) instead of the existing three slabs (40%, 60% and 70%).

  • Taxable portion in respect of transportation service by vessels:

Effective from 1st October 2014, taxable portion for transport of goods by vessels will be computed at 40% of the contract value instead of 50%, at present.

  • Effective from 1st October 2014, Service tax on transport of passengers by a contract carriage other than a motor cab to be computed on 40% of the service value if no CENVAT has been availed by the service provider.
  • Radio taxi services shall be taxed on 40% of service value, if no CENVAT has been availed by the service provider.

9. Time limit for adjudication of cases specified, where possible:

The Finance Minister has prescribed time limit for completion of adjudication (between six months – one year) depending upon the nature of the matter.

10. Differential interest rate for delayed payment of Service tax

Up till now, Simple Interest @18% per annum was payable for delayed payment of Service tax dues till the date of payment thereof.

Effective from 1st October 2014, Differential interest rate regime has been prescribed for delayed payment of service tax ranging for 18% to 30%, as stated below:

Extent of delay Simple interest rate per annum
Up to six months 18%
From six months and up to one year 24%
More than one year 30%

 11. No waiver of Penalty in case of serious offences:

In order to prevent waiver of penalty, in cases involving suppression of facts, willful misstatement etc., the Finance Minister has proposed delete reference to first proviso to sub-section (1) of section 78 from section 80.

This would imply that in cases in which extended period of limitation of five years is invoked and suppression of facts etc. is established, levy of penalty u/s.78 would become mandatory without recourse for waiver of the same, which is currently available to the Assessee.

12. Pre-deposit of Service tax and penalty, if any, pre-condition for filing appeal to Commissioner (Appeals) or Tribunal:

Currently, Section 35F of the Central Excise Act, 1944 relating to pre-deposit of duty demanded or penalty levied is specifically made applicable to Service tax.

Currently, Section 35F of the Central Excise Act, 1944 requires pre-deposit of duty demanded or penalty on/ before filing an appeal before the Commissioner (Appeals) or the Customs, Excise and Service Tax Appellate Tribunal (‘CESTAT’). However, on application for Stay of Pre-deposit made by the Assessee causing undue hardship, the deposit of duty demanded may be dispensed with by the Appellate authority.

However, the Finance Minister has proposed to substitute existing Section 35F with a new section which prescribes a mandatory fixed pre-deposit of 7.5% of the duty demanded or penalty imposed or both, for filing appeal before the Commissioner (Appeals) or the CESTAT at the first stage and 10% of the duty demanded or penalty imposed or both, for filing the second stage appeal before the CESTAT. The amount of pre-deposit payable would be subject to a ceiling of Rs.10 Crores.

It is further clarified that, all pending appeals/ Stay applications would be governed by the statutory provisions prevailing at the time of filing such stay applications/appeals.

This implies that for all future appeals to be filed either before the Commissioner (Appeals) or CESTAT, pre-deposit as above, would be mandatory and the Appellate authority would not have any power to grant Stay of pre-deposit, as is being done hitherto.

13. Scope of reverse charge expanded and rationalized:

The Finance Minister has proposed to include the following services within the ambit of reverse charge mechanism, wherein service receiver would be the person liable to pay Service tax (effective from 11th July 2014):

a)      services provided by directors to body corporate;

b)      services provided by recovery agents to banks, financial institutions and NBFCs.

Further, it is also proposed that in case of renting of motor vehicle, portion of service tax payable by service provider and service receiver will be 50% each.

14. Amendments related to CENVAT Credit:

The Finance Minister has proposed the following amendments in respect of CENVAT Credit, as applicable to Service tax:

a)      Time limit for taking CENVAT Credit specified:

Effective from 1st September 2014, CENVAT credit on inputs and input services can be claimed only within a period of six months from the date of the invoice/ challans/ other specified documents;

b)      Service tax paid under full reverse charge eligible for CENVAT Credit even if invoice value not paid to service provider:

Effective from 11th July 2014, under reverse charge mechanism (except in case of partial reverse charge), CENVAT credit can be availed on payment of service tax. The condition to pay invoice value to the service provider has been dispensed with.

c)      CENVAT credit reversed on account of non-receipt of export proceeds, can be taken again:

Effective from 11th July 2014, CENVAT credit reversed on account of non-receipt of export proceeds can be taken again, if export proceeds are received within one year from the specified period.

d)      Rent-a-cab operator and tour operator:

Effective from 1st October 2014, Service tax paid by sub-contractor in the same line of business would be allowed as eligible credit to the main service provider to avoid double taxation, subject to certain conditions.

e)      Goods Transport Agency service (‘GTA’):

Effective from 11th July 2014, service receiver may avail abatement, without having to obtain non-availment of CENVAT Credit certificate from service provider.

f)       Effective from 11th July 2014, the transfer of credit by large taxpayer from one unit to another no longer permitted.

15. Amendments in Place of Provision of Services Rules, 2012:

The Finance Minister has proposed the following amendments in the Place of Provision of Services Rules, 2012 (effective from 1st October 2014):

a)      The term ‘intermediary’ will include a person who arranges or facilitates supply of goods or services (currently, the same was only applicable for services), and hence the place of provision of the same would be the place of the service provider;

b)      The place of provision for services of hiring of aircraft and vessels (other than yachts) up to a period of one month would be based on location of recipient (currently, the same is based on location of service provider);

c)      The place of provision of repair services for goods imported and exported after repair without being put to any use (other than which is required for such repair) would be based on location of service recipient.

16. Rationalization of Point of Taxation Rules, 2011:

With the objective of bringing certainty in the determination of point of taxation, in case of services covered under reverse charge mechanism, the Finance Minister has proposed to provide that point of taxation would be earlier of:

  • the payment date; or
  • three months from the date of invoice.

The amended point of taxation, as above would apply to invoices issued after 1st October 2014. A transitionary rule is proposed to be prescribed in the interim.

17. Procedure for claiming Service tax exemption by a SEZ, simplified:

The Finance Minister has simplified the procedure for SEZ’s to claim exemption, which would be effective from 11th July 2014. The summary of the changes are summarized as under:

  • The Central Excise Officer to issue Form A-2, within fifteen days from the date of receipt of Form A-1;
  • Exemption would be available from the date when list of service on which SEZ is entitled to upfront exemption is endorsed by the authorised officer of SEZ in Form A-1, provided Form A-1 is furnished to the jurisdictional Central Excise Officer within fifteen days of its verification. If furnished later, exemption would be available from the date on which Form A-1 is so furnished.
  • Pending issuance of Form A-2, exemption will be available subject to condition that authorization issued by the Central Excise officer will be furnished to service provider within a period of three months from provision of service.
  • As regards services covered under reverse charge, the requirement of furnishing service tax registration number of service provider is dispensed with.
  • A service shall be treated as exclusively used for SEZ operations, if the recipient of service is a SEZ unit or developer, invoice is in the name of such unit/developer and the service is used exclusively for furtherance of authorized operations in the SEZ.

18. Recovery mechanism further strengthened:

Section 87 of the Finance Act, 1994 provides modes of recovery of any Service tax, Interest or penalty etc. dues from a person.

It is now proposed, to include therein, the power to recover dues of a predecessor from the assets of a successor purchased from the predecessor, as it is available in Section 11 of the Central Excise Act, 1944.

19. Power to make Rules, amended:

Section 94 of the Finance Act, 1994 grants power to make rules for carrying out provisions of Chapter XVII-B.

It is proposed to amend this Section to obtain rule making power:

a)      to impose upon assessees, inter alia, the duty of furnishing information, keeping records and making returns and specify the manner in which they shall be verified;

b)      for withdrawal of facilities or imposition of restrictions (including restrictions on utilization of CENVAT credit) on a service provider or exporter, to check evasion of duty or misuse of CENVAT credit; and

c)      to issue instructions in supplemental or incidental matters.

(Compiled By Partners of ‘B. S. Shah & Co., Chartered Accountant’ Namely (i) Bhupendra Shah –B.Com., L.L.B. (SP.), A.C.S., F.C.A. (ii) N. Krishnakumar- B.Com., F.C.A., Grad CWA  and (iii) Shreyam Shah –B.Com. A.C.A.,DISA)

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Tags : Budget (1956) Budget 2014 (172)

0 responses to “Union Budget 2014-2015 – Highlights of Finance (No. 2) Bill, 2014”

  1. E Tax Consultants says:

    Dear All,

    Mail usd at ehelptax@gmail.com regarding all business Taxes and laws queries.

    Regards !

    E Tax Consultants !

  2. S K Namur says:

    whether an educational institution giving rent below rs.10 lacs pa shall be chageable service tax from July 10, 2014?

  3. S K Namur says:

    I want a clarification regarding Withdrawal of Exemptions of Service tax for Services provided by way of renting of immovable property to educational institutions.

    I belong to an education institution that given rent for Rs 6 lac p.a. shall we get exemption as the “aggregate value of taxable service provided in a financial year, in above cases does not exceed Rs. 10 Lakh, the benefit of threshold exemption will be available in terms of Notification 33/2012-ST”. Please note that the total rent received by the landowner company from all tenants may exceed Rs.10 lacs.

  4. Mohd Mehtab says:

    nice drafting via key points

  5. shivkumar says:

    Service tax rate on building rent ? 2015-2016 f.y.

  6. Harish says:

    Hi,

    Would like to know is there any amendment/circular related to exemption of premium under ESIC premium; if we already have the Group Mediclaim Policy for our employees.

    Regards
    Harish

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