MAT on SEZ: A Red Flag for Investors

The Minimum Alternate Tax (MAT) was introduced in 1987 to bring companies that paid no corporate taxes or very little tax, after taking advantage of the exemptions provided by the Income-Tax Act, into the tax net.Under the Special Economic Zone (SEZ) Act, more>>

Union Budget 2016


Impact on Direct Taxes

( Compiled by Jan Jose, Minnu Soben and Rebecca Elsa Maruthelil )

The thrust of tax proposals this year falls under nine categories;
  1. Relief to small tax payers.
  2. Measures to boost growth and employment generation.
  3. Incentivizing domestic value addition to help Make in India.
  4. Measures for moving towards a pensioned society.
  5. Measures for promoting affordable housing.
  6. Additional resource mobilization for agriculture, rural economy and clean environment.
  7. Reducing litigation and providing certainty in taxation.
  8. Simplification and rationalization of taxation.
  9. Use of Technology for creating accountability.
(1) Relief to small tax payers

  • Raise the ceiling of tax rebate under section 87A from Rs 2000 to Rs 5000 to lessen tax burden on individuals with income up to Rs5 lakhs. Thus, the effective slab rate will be Rs. 3 lakh.

  • Increase the limit of deduction of rent paid under section 80GG from Rs 24000 per annum to Rs 60000, to provide relief to those who live in rented houses.

  • Deduction of interest payable on capital borrowed for acquisition or construction of a self-occupied house property shall be allowed upto Rs. 2 lakh or actual if such acquisition or construction is completed within five years (previously 3 years). If not, the deduction is limited to Rs. 30,000.

  • Increase the turnover limit under Presumptive taxation scheme under section 44AD of the Income Tax Act from Rs 1 crore to Rs 2 crores to bring big relief to about 33 lakh small business people which frees them from the burden of maintaining detailed books of account and getting audit done.

  • Extend the presumptive taxation scheme with profit deemed to be 50 per cent, to professionals with gross receipts from 25 lakh to Rs 50 lakh under proposed section 44ADA.

  • (2) Boost employment and growth

    • New manufacturing companies incorporated on or after 1.3.2016 to be given an option to be taxed at 25 per cent + surcharge and cess provided they do not claim profit linked (Section 80-IA: 100% deduction in first five years and 30% in the next five years) or investment linked deductions (Section 35AD: Deduction for expenditure in Specified Business) and do not avail of investment allowance and accelerated depreciation.

    • Lower the corporate tax rate for the next financial year for relatively small enterprises i.e companies with turnover not exceeding Rs 5 crore (in the financial year ending March 2015), to 29 per cent plus surcharge and cess.

    • 100% deduction of profits for 3 out of 5 years for start-ups setup during April, 2016 to March, 2019. MAT will apply in such cases.

    • 10% rate of tax on income from worldwide exploitation of patents developed and registered in India by a resident.

    • Complete pass through of income-tax to securitization trusts including trusts of Asset Reconstruction Companies (ARCs). Income taxed in hands of the investor and not the trust. Securitisation trusts required to deduct tax at source.

    • Period for getting benefit of long term capital gain regime in case of unlisted companies is proposed to be reduced from three to two years.

    • Non-banking financial companies shall be eligible for deduction to the extent of 5 per cent of its income in respect of provision for bad and doubtful debts.

    • Determination of residency of foreign company on the basis of Place of Effective Management (POEM) is proposed to be deferred by one year.

    • Implementation of General Anti Avoidance Rules (GAAR) from 1.4.2017.

    • Deduction in respect of any sum payable by the assessee to the Indian Railways for the use of railway assets shall be allowed only on actual payment basis (Section 43 B (g)).

    • Any sum received or receivable, in cash or kind, under an agreement, for not carrying out any activity in relation to any profession as well as business ( Profession not covered earlier) , is income chargeable to income-tax under the head “Profits and gains of business or profession” under Section 28.

    • The accelerated depreciation provided under IT Act (80% on Renewable Energy distribution devices) will be limited to maximum 40% from 1.4.2017.

    • Benefit of deductions for Research (Section 35) would be limited to 150 per cent from 1.4.2017 and 100 per cent from 1.4.2020.

    • Benefit of section 10AA to new SEZ units will be available to those units which commence activity before 31.3.2020. (100% deduction of profit from export of goods or services in the first five years and 50% in the next five years.)

    • The weighted deduction under section 35CCD for skill development (150% of such expenditure towards any notified skill development projects) will continue up to 1.4.2020.

    • Job creation:

      Deduction under Section 80JJAA of the Income Tax Act will be available to all assesses who are subject to statutory audit under the Act. The minimum number of days for which they should be employed during the year is proposed to be reduced from 300 to 240 days. No deduction will, however, be admissible in respect of employees whose monthly emoluments exceed 25,000. Also, no deduction will be admissible in respect of employees for whom the Government is paying the entire Employee Pension Scheme contribution.

      The existing provisions contained in section 80JJAA of the Income-tax Act provide for a deduction of an amount equal to thirty per cent of additional wages paid to the new regular workmen employed in any previous year by an Indian company in its industrial undertaking engaged in manufacture or production of article or thing. The deduction is available for three assessment years including the assessment year relevant to the previous year in which such employment is provided.

    (3) Measures for moving towards a pensioned society

    • Withdrawal up to 40 per cent of the corpus at the time of retirement to be tax exempt in the case of National Pension Scheme (NPS). Annuity fund which goes to legal heir will not be taxable.

    • In case of superannuation funds and recognized provident funds, including EPF , principal portion continues to be tax free. Only 60 per cent of the interest that accrues on contributions to employees' provident fund (EPF) made after April 1st, 2016 will be taxed. This 60 per cent will also be tax exempt if it is invested in a pension annuity schemes.

    • Limit for contribution of employer in recognized Provident and Superannuation Fund of Rs 1.5 lakh (Rs. 1 lakh before) per annum for taking tax benefit.

    • Government of India will pay contribution of 8.33 per cent for of all new employees enrolling in EPFO for the first three years of their employment. The burden from employer is now taken over by Govt. Budget provision of Rs 1000 crore for this scheme. Salary upto 15,000 per month.

    (4) Promoting affordable housing

    • 100 per cent deduction for profits to an undertaking in housing project for flats upto 30 sq. metres in four metro cities and 60 sq. metres in other cities, approved during June 2016 to March 2019 and completed in three years. MAT to apply.

    • Deduction under section 80 EE for additional interest of Rs 50,000 per annum (total of Rs. 1.5 lakh) for loans up to Rs. 35 lakh sanctioned in 2016-17 for first time home buyers, where house cost does not exceed Rs 50 lakh.

    • It is proposed to provide that standard deduction of 30% under section 25A (sections 25A+ 25 AA + 25 B) shall be allowed against the amount received in the year of receipt on account of unrealised rent/ arrears of rent while computing the house property income.

    • Distribution made out of income of SPV (Special Purpose Vehicles) to the REITs (Real Estate Investment Trusts) and INVITs (Infrastructure Investment Trusts) having specified shareholding will not be subjected to Dividend Distribution Tax.3

    (5) Additional resource mobilization for agriculture, rural economy and clean environment.

    • Additional tax at the rate of 10 per cent of gross amount of dividend will be applicable to an assessee, being an individual, Hindu undivided family or a firm, resident in India in case of dividends declared, distributed or paid by a domestic company in excess of Rs 10 lakh per annum.

    • Surcharge to be raised from 12 per cent to 15 per cent on persons, other than companies, firms and cooperative societies having income above Rs 1 crore.

    • Tax to be collected at source at the rate of 1 per cent on purchase of luxury cars exceeding value of Rs ten lakh and purchase of goods and services in cash exceeding Rs two lakh. Farmers and notified class of persons will have an option of giving a form by which TCS will not be charged.

    • Securities Transaction tax in case of 'Options' is proposed to be increased from .017 per cent to .05 per cent.

    • Equalization levy of 6 per cent of gross amount for payment made to non- residents (does not have a permanent establishment) exceeding Rs 1 lakh a year in case of B2B transactions.

    (6) Reducing litigation and providing certainty in taxation.

    • Income Disclosure Scheme
      Domestic taxpayers can declare undisclosed income or such income represented in the form of any asset by paying tax at 30 per cent, and surcharge at 7.5 per cent (Krishi Kalyan surcharge) and penalty at 7.5 per cent, which is a total of 45 per cent of the undisclosed income.

      Declarants will have immunity from prosecution. Income Disclosure Scheme from 1st June to 30th September, 2016 with an option to pay amount due within two months of declaration.


    • New Dispute Resolution Scheme to be introduced. No penalty in respect of cases with disputed tax up to Rs 10 lakh. Cases with disputed tax exceeding Rs 10 lakh to be subjected to 25 per cent of the minimum of the imposable penalty. Any pending appeal against a penalty order can also be settled by paying 25 per cent of the minimum of the imposable penalty and tax interest on quantum addition.

    • One time Dispute Resolution scheme for cases ongoing under retrospective amendment: Under the Direct Tax Dispute Resolution Scheme, 2016, person may also make a declaration in respect of any tax determined in consequence of or is validated by an amendment made with retrospective effect in the Income-tax Act, 1961 or Wealth-tax Act, 1957, as the case may be, for a period prior to the date of enactment of such amendment and a dispute in respect of which is pending as on 29.02.2016, subject to their agreeing to withdraw any pending case lying in any Court or Tribunal or any proceeding for arbitration, mediation etc. Consequently, they can settle the case by paying only the tax arrears in which case liability of the interest and penalty shall be waived.

    • At present the Income-tax Officer has discretion to levy penalty at the rate of 100% to 300% of tax sought to be evaded. Penalty rates to be reduced to 50 per cent of tax in case of underreporting of income and 200 per cent of tax where there is misreporting of facts.

    • Disallowance will be limited to 1 per cent of the average monthly value of investments yielding exempt income, but not exceeding the actual expenditure claimed under Rule 8D of Section 14A of Income Tax Act. Previously, no deduction was allowed in respect of expenditure incurred by the assesse in relation to income which does not form part of Total Income.

    • Time limit of one year for disposing petitions of the tax payers seeking waiver of interest and penalty.

    • Mandatory for the assessing officer to grant stay of demand once the assesse pays 15 per cent of the disputed demand, while the appeal is pending before Commissioner of Income-tax (Appeals).

    (5) Additional resource mobilization for agriculture, rural economy and clean environment.

    • For non-residents providing alternative documents to PAN card, higher TDS not to apply.

    • New TDS rates;

    • Present Section

      Heads

      Existing Threshold Limit (Rs)

      Proposed Threshold Limit(Rs)

      192A

      Payment of accumulated balance due to an employee in EPF

      30000

      50000

      194BB

      Winnings from Horse Race

      5000

      10000

      194C

      Payments to Contractors

      Aggregate annual limit of 75,000

      Aggregate annual limit of 1,00,000

      194LA

      Payment of Compensation on acquisition of certain Immovable Property

      200000

      250000

      194D

      Insurance commission

      20000

      15000

      194G

      Commission on sale of lottery tickets

      1000

      15000

      194H

      Commission or brokerage

      5000

      15000




      Present Section

      Heads

      Existing Rate of TDS (%)

      Proposed Rate of TDS (%)

      194DA

      Payment in respect of Life Insurance Policy

      2

      1

      194EE

      Payments in respect of NSS Deposits

      20

      10

      194D

      Insurance commission

      10

      5

      194G

      Commission on sale of lottery tickets

      10

      5

      194H

      Commission or brokerage

      10

      5

      194K

      Income in respect of Units

      To be omitted w.e.f 01.06.2016

       

      194L

      Payment of Compensation on acquisition of Capital Asset

      To be omitted w.e.f 01.06.2016

       


    • Interest at the rate of 9 per cent p.a against normal rate of 6 per cent p.a for delay in giving effect to Appellate order beyond ninety days will be paid by Govt.

    • Exclude the deposit certificates issued under the Gold Monetisation Scheme, 2015 from the definition of capital asset. Thus, exempted from Capital gains tax

    Impact on Indirect Taxes

    (Compiled by Evamol Saji, Reshma Ivan and Vaishnavi Sudarsan)

    Major Industries affected:
    • Cigarette Industry
    • Cigarette prices are expected to rise for the fifth consecutive year as the excise duty on all tobacco products other than beedi was hiked by 10% - 15%. As a result, cigarette prices are expected to rise by 8 - 9%. The announcements are likely to affect the sales volumes of companies like ITC Ltd, Godfrey Phillip etc in the coming financial years.

    • Automobile industry
    • The budget proposed Infrastructure cess in the range of 1-4% is to be levied on cars across categories. Citing that the pollution and traffic situation in Indian cities is a matter of concern, the FM proposed to levy a cess, of 1 percent on small petrol, LPG and CNG cars, 2.5 percent on diesel cars of certain capacity and 4 percent on other higher engine capacity vehicles and SUVs. No credit of this cess will be available nor credit of any other tax or duty be utilized for paying this cess.

      It is proposed that the seller shall collect the tax at the rate of 1% from the purchaser on sale of motor vehicle of the value exceeding 10 lakh rupees. The changes proposed create a bleak scenario for SUV market leaders like Mahindra & Mahindra, Tata Motors etc. The decision triggered a sharp fall in stocks of auto makers.

    • Textile Industry
    • Excise on branded readymade garments with retail price of Rs. 1,000 or more was raised to 2% without input tax credit or 12.5% with input tax credit. Additionally the tariff value for excise or CENVAT purposes has been raised from 30 to 60 percent of the retail sale price. These may have an unfavourable impact on the industry as a whole.

    • Jewellery Industry
    • Customers will have to shell out more for gold and diamond jewellery as the budget has imposed excise duty of 1% without input credit or 12.5% with input credit on all jewellery other than silver ornaments. This is expected to hurt the industry.

    • Oil Industry
    • India will now levy a cess at the rate of 20% on domestically produced crude oil, calculated ad valorem, as against the present rate of Rs 4,500 per tonne providing a big relief to explorers like ONGC and Cairn India.

    • Aviation Industry
    • Excise duty on aviation and turbine fuel has been raised from 8% to 14%. Additionally, it has been proposed to levy Krishi Kalyan Cess on all taxable services. These may lead to an increase in the cost of air travel.

      Under the New Baggage Rules, 2016, duty free baggage allowance carried by an international passenger when coming to India has been increased from Rs. 45,000 to Rs. 50,000 per person w.e.f 1st of April, 2016. This incremental allowance would result in savings in customs duty for international passengers.

    Budget Proposals in Indirect Taxes:

    Service Tax
    Krishi Kalyan Cess:
    • Exemption from service tax for Annuity services provided by National Pension Scheme and services provided by Employees Provident Fund Organisation to employees.

    • Exemption of service tax on services provided under Deen Dayal Upadhyay Grameen Kaushalya Yojana and services provided by Assessing Bodies empanelled by Ministry of Skill Development & Entrepreneurship in order to promote efforts towards employment generation.

    • Exemption of Service tax on general insurance services provided under Niramaya’ Health Insurance Scheme launched by National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disability.

    • No Service Tax for houses built under 60 square metres. The following services are proposed to be exempt from 1st March 2016:
      1. han Mantri Awas Construction services under Housing For All (HFA) (Urban) Mission/ PradYojana (PMAY);

      2. Construction projects under “Affordable housing in partnership” component of PMAY, subject to carpet area of dwelling units of such projects not exceeding 60 square metres;

      3. Low cost houses up to a carpet area of 60 square metres per house in a housing project under any housing scheme of the State Government.

      The earlier rate of service tax of 5.6% is proposed to be made Nil.
    • Services provided by Insurance Regulatory and Development Authority (IRDA) of India and SEBI are being exempt from service tax w.e.f 1st April 2016.
    • Services provided by the Indian Institutes of Management (IIM) of as per the guidelines of Central Government to their students by way of 2 year full time Post Graduate Program in Management (PGPM) (other than executive development program), admissions to which are made through Common Admission Test conducted by IIMs, 5 year Integrated Program in Management and Fellowship Program in Management are being exempted from service tax with effect from 1st March 2016. In view of the fact that exemption was already available, the notification is merely clarificatory in nature.
    New Taxable Services:

    a) Service Tax on assignment of spectrum

    It has been proposed to amend The Finance Act 1994 in order to declare assignment by the Government of the right to use the radio-frequency spectrum and its subsequent transfer as a service. This clarifies the confusion as to whether it is to be treated as sale of intangible assets, whether spectrum fees paid will be eligible for depreciation under Section 32 or whether it will be in the nature of a 'licence to operate telecommunication business' eligible for deduction under Section 35ABB of the Act.

    b) Transportation of passengers by a stage carriage.

    The negative list entry relating to transportation of passengers by a stage carriage shall be omitted w.e.f. 1st of June, 2016. However, such services by non-air conditioned carriage will continue to be exempted. As a result, travel by air-conditioned carriage shall become costlier.

    c) Legal Services

    The Budget has withdrawn tax exemption given to lawyers and has proposed 14% tax on the services of a senior advocate to an advocate or a partnership firm and a person represented on an arbitral tribunal to an arbitral tribunal.

    d) Mono Rail and Metro Construction Works

    Construction, erection, commissioning or installation of works relating to monorail or metro (for contracts entered on / after 1 March 2016) w.e.f. 1 March 2016. Services of transport of passengers by ropeway, cable car or aerial tramways w.e.f 1 April 2016.

    e) Shipping

    The service tax on services provided by shipping companies by way of transportation of goods by a vessel from outside India up to the customs station in India will be 14% with effect from 1 June, 2016.

    Excise and Customs
    • Tobacco Products
      Excise duty on all tobacco products other than tobacco was increased from 10% to 15%.

    • Branded Readymade garments
      Excise on branded readymade garments with retail price of Rs. 1,000 or more was raised to 2% without input tax credit or 12.5% with input tax credit. Earlier, readymade garments were exempt from excise duty when the manufacturer did not claim input tax credit.
    • Refrigerated containers
      Basic custom and excise duty on refrigerated containers reduced to 5% and 6% from 10% and 15% respectively.

    • Jewellery
      Excise duty of 1% without input tax credit or 12.5% with input tax credit is proposed to be levied on articles of jewellery [excluding silver jewellery, other than studded with diamonds and some other precious stones] with a higher exemption limit of Rs.6 crores and Rs.12 crores respectively. Earlier, excise duty was not charged on jewellery.

    • Aviation and Turbine Fuel
      Excise duty on aviation and turbine fuel has been raised from 8% to 14%.

    • Mineral Water and Aerated Drinks
      Excise duty on mineral water and soft drinks is proposed to be increased from 18% to 21%. Prices of soft drinks and packaged water are said to go up by Rs. 1 – 2.

    • Mobile Phones
      Withdrawal of exemptions on chargers, adapters and batteries for supply to mobile phone manufacturers is expected to further push up the prices. Now it is proposed to levy duty at 2% without CENVAT credit or 12.5% with CENVAT credit. The prices of mobile phones, tablets may rise by 5%.

    • Warehousing

      The importer of any goods in respect of which a bill of entry for warehousing has been presented shall execute a bond in a sum equal to thrice the amount of the duty assessed on such goods. Earlier it was twice the value of the goods.

      Any warehoused goods may remain in the warehouse-

      • (a) In the case of capital goods intended for use in any 100% Export Oriented Undertaking (EOU) or Electronic Hardware Technology park unit (EHT) or Software Technology Park unit (STP) or any warehouse wherein manufacture or other operations have been permitted till their clearance from the warehouse. Earlier the time period for warehousing such capital goods was 5 years.

      • (b) in the case of goods other than capital goods intended for use in any 100% Export Oriented Undertaking(EOU) or Electronic Hardware Technology park unit(EHT) or Software Technology Park unit(STP) or any warehouse wherein manufacture or other operations have been permitted under till their consumption or clearance from the warehouse. Earlier the time period for warehousing such goods was 3 years.

    • Warehouse can be set up at any places. Earlier it was possible to set up only in warehousing stations. The present amendment has removed the said concept of warehousing stations where alone the warehouses could be set up. The Principal Commissioner of Customs or Commissioner of Customs has been vested with the power to license a special warehouse, wherein, dutiable goods may be deposited. The Board may, by notification in the Official Gazette, specify the class of goods which shall be deposited in the special warehouse.

    Other cesses
    1. Infrastructure cess to be levied on cars
      Infrastructure cess in the range of 1-4% is to be levied on all types of cars. It was proposed to levy a cess, of 1 percent on small petrol, LPG and CNG cars, 2.5 percent on diesel cars of certain capacity and 4 percent on other higher engine capacity vehicles and SUVs. No credit of this cess will be available nor credit of any other tax or duty be utilized for paying this cess.

    2. Clean Environment Cess
      ‘Clean Energy Cess’ levied on coal, lignite and peat has been renamed to ‘Clean Environment Cess’ and the rate has also been increased from Rs.200 per tonne to Rs.400 per tonne. This will raise the price of power by about 20 paise per unit which will be passed on to the customers. It will also raise costs for other consumers like the steel sector and make green energy projects more viable.

    3. Oil Industries Development Cess
      Oil Industries Development Cess lowered. Will be levied at the rate of 20% on domestically produced crude oil, calculated ad valorem, as against the present rate of Rs 4,500 per tonne. The amendment is effective from date of assent to the Finance Bill, 2016.

    Administrative Changes
    1. Interest for delayed payment for tax/duties on customs, excise and service has been rationalized @ 15% p.a. Previously, interest rate for delayed payment of service tax was 18% if within 6 months, 24% within 1 year and 30% for beyond 1 year. Delay in payment of excise and customs duty has been reduced from 18% to 15%.

    2. It has been proposed to increase the existing normal period of limitation for issue of show-cause notices by 1 year under excise, customs and service tax effective from the enactment of Finance Bill, 2016. The change would allow tax authorities to have greater time for scrutinizing the taxpayer’s self-assessment. Earlier, the limitation period for customs and excise was 1 year and for service tax, the same was 1.5 years.

    3. An Indirect Tax Dispute Resolution Scheme, 2016 is being introduced to reduce the litigation currently lying before Commissioner (Appeals). Those seeking benefit would be expected to pay the amount of tax in dispute along with applicable interest and 25% penalty. This scheme will be available till 31st December, 2016. Once applied for, the scheme entails an immunity from further prosecution.

    4. Annual service tax and CENVAT returns will have to be filed by assessees above a prescribed threshold limit.

    With the implementation of the changes proposed in the budget, all activities including banking, air travel, eating out, and payment of bills is expected to become more expensive. Cars, cigarettes, branded garments, air travel will become more expensive, while footwear, solar lamps and routers are slated to be cheaper following a host of changes in the tax structure in the Budget for 2016-17.