The Union Budget 2015 seeks to attain a balance between growth and welfare measures.

Let us broadly assess the amendments/measures that have been proposed in this year’s budget for individual taxpayers:

Þ     Abolishment of Wealth Tax Act, 1957: Presently, an individual has to pay wealth tax, if the value of ‘net wealth’ exceeds INR30 lakh. Keeping in mind the relative revenue generated from this tax and administrative burden on the taxpayer and tax department, it has been now proposed to abolish this legislation. The requirement to furnish the same information is still on the taxpayers who are now required to make disclosure of such assets in the income tax return itself.

Þ     Extra surcharge on the super-rich: Though the income tax slab and tax rates for individuals remain unchanged, to balance the loss of tax due to the abolishment of wealth tax, an extra surcharge of 2 per cent has been levied in case of individuals whose total income exceeds INR1,00,00,000 per annum. Accordingly, the peak rate of tax for such individuals is proposed to be increased from the present 33.99 to 34.61 per cent.

Þ     Enhanced deduction/exemption limits

• Transport allowance: The earlier exemption limit of INR9,600 annually has been doubled to INR19,200 per annum. This should result in tax saving in the range of INR 989 per annum to ~ INR3,322 per annum (depending on which tax slab the individuals falls in).
• Health insurance premium and medical expenditure: With the rise in medical costs, the deduction in respect of payment of health insurance premium by a Hindu Undivided Family (HUF) for its members has been enhanced from INR15,000 per annum to INR25,000 per annum.  Expected tax savings are in the range of INR1,030 per annum to ~ INR3,461 per annum.

Similarly, deduction limit in case of resident senior citizens (age between 60 to 79 years) has been enhanced from INR20,000 per annum to INR30,000 per annum. Expected tax savings are in the range of INR1,030 per annum to ~ INR3,461 per annum. 

The government has recognised the fact that very senior citizens (age 80 years and above) are often not able to get health insurance coverage. Therefore, in case of such individuals, a deduction to the extent of INR30,000 per annum has been proposed on account of medical expenditure incurred for them. This could lead to tax savings in the range of INR6,180 per annum to ~ INR10,383 per annum.

• Contribution to the National Pension System (NPS)/Private Pension schemes: In order to promote social security and inculcate a savings habit among individuals, the government has enhanced the limit of deduction from the present INR100,000 per annum to INR150,000 per annum for contributions made to specified pension schemes.

Further, apart from an individual’s contribution to NPS, an additional deduction to the extent of INR50,000 per annum has been proposed. Expected tax savings are in the range of INR5,150 per annum to ~ INR17,305 per annum. 

• Medical treatment expenditure for self and dependents with disability/severe disability: The deduction limits for such expenditure have been raised from INR50,000 per annum to INR75,000 per annum for a person with disability. In cases of persons suffering from severe disability, the limits have been enhanced from INR100,000 per annum to INR125,000 per annum. The documentary requirements for obtaining such deductions have also been eased.

Þ     Sukanya Samridhi Account scheme: Introduced last year for the welfare of a girl child, contribution to the said scheme will now be eligible for deduction under the overall limit of INR150,000 per annum. Further, any accretion on deposits or withdrawal from such account will be exempt from tax.

Þ     Contribution towards Swachh Bharat Kosh, Clean Ganga Fund and National Fund for Control of Drug Abuse will be eligible for 100 per cent deduction under Section 80G of the Act.

Þ     Other measures impacting individuals:

• Post discussion with the stakeholders, the government has proposed to bring necessary amendments to enable employees to choose between Provident Fund (PF) or NPS
• Premature PF withdrawal (if amount exceeds INR30,000) by individual employees will be subject to tax deduction at source (TDS) at 10 per cent (including surcharges and education cess, as applicable) by PF authorities. In case such employees have not provided their Permanent Account Number (PAN), then TDS to be levied at the maximum tax rate applicable to the said individual.
• To have a check on the black money practice, the government is proposing to bring in an enabling legislation to provide for harsher implications for non – disclosure/inadequate disclosure of foreign assets by individuals, evasion of tax in relation to foreign assets, etc. 

To conclude, in his second budget, the Finance Minister, has focussed on social security and health care needs of the common man by providing enhanced deduction/exemption limits. 

“The views and opinions herein are those of the authors and do not necessarily represent the views and opinions of KPMG in India. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.”

The Indian industry and foreign investors were eagerly awaiting the budget with high expectations of liberalization of foreign investment regulations, reduction of indirect taxes, harmonization of withholding taxes, tax incentives, etc.

The wait is over. The Finance Minister (FM) has unveiled his budget with the thrust clearly on the government’s flagship initiatives of ‘Make in India’ and ‘Skill India’. We have highlighted below some key corporate and international tax proposals announced by the FM.

Post retrospective amendment to the Income-tax Act in 2012, in the wake of the Supreme Court’s ruling in the case of Vodafone, global investor fraternity was expecting clarity and certainty vis-à-vis taxability of transfer of shares of a foreign company deriving substantial value from assets situated in India. Providing the much desired relief, the Finance Bill, 2015 (‘Finance Bill’) has proposed that indirect transfer would come under tax net if value of assets located in India exceeds INR100 million and it represents at least 50 per cent value of total assets of such foreign company. Further, capital gain chargeable to tax in India would be in proportion of Indian assets to global assets held by the foreign company whose shares are to be transferred. The government is expected to issue detailed rules on method of valuation, method to calculate proportionate tax, etc. Apart from the threshold stated above, an exemption from levy of tax would be granted to a transferor who neither holds right of control or management, nor has shares or voting power exceeding 5 per cent in the foreign company. The global investor fraternity was keenly awaiting aforesaid clarifications. This could go a long way in curbing frivolous litigation, and provide a stable tax regime.

As per existing laws, a foreign company is regarded as tax resident of India only if it is controlled and managed ‘wholly’ from India. In this regard, an important proposal is that a foreign company would be considered as ‘resident’ in India if the ‘place of effective management’ (POEM) of such a company at any time during the year is in India. POEM would mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. In case a foreign company is regarded as a tax resident of India, its global income would be subject to tax in India and various other tax compliances as applicable to residents would be applicable to the foreign company. While this concept is in line with internationally accepted principles, the use of the phrase ‘at any time during the year’ is a significant departure and is likely to create unintended situations e.g. even holding one board meeting by a foreign company in India could possibly result in the company being regarded as tax resident of India even though its usual place of effective management during the year is outside India. Having said that, the foreign company may take resort to a tie-breaker test under the respective tax treaty signed by India with the home country of the foreign company, where the phrase ‘at any time during the year’ is generally not used. This proposal may have a significant impact on various Indian companies having outbound investments in joint ventures and subsidiaries as well as in foreign companies which are partially managed or controlled by person(s) resident in India. 

Considering sentiments of global investors, the Finance Bill has further deferred the applicability of General Anti Avoidance Rules (‘GAAR’) by two years i.e. now, GAAR would be applicable from 1 April 2017. Further, there is a policy statement that GAAR would be applicable prospectively i.e. investments made up to 31 March 2017 would not be hit by GAAR provisions. A detailed circular in this regard is awaited. This move would further boost sentiments of global investors and brighten India’s image as a preferred investment destination.

In view of ease of doing business in India and simplifying tax procedures, the Finance Bill has abolished wealth tax (which was levied at 1 per cent on wealth exceeding INR3 million). In order to compensate the loss of revenue, the Finance Bill has proposed to levy an additional surcharge at 2 per cent on domestic companies and all non-corporate taxpayers having taxable income exceeding INR1 crore. However, foreign companies are spared from the aforesaid additional surcharge.

In order to rationalize the corporate tax regime in India and to make the domestic industry competitive globally, the FM announced reduction of basic corporate tax rate from existing 30 per cent to 25 per cent over the next four years. However, it was announced that various corresponding tax exemptions available to corporate taxpayers would also be reduced. It is imperative to note that basic corporate tax rate for FY 2015-16 has remained unchanged at 30 per cent (the reduction in tax rate is likely to commence from FY 2016-17).

India has witnessed several start-ups flourishing in recent times. In order to facilitate technology inflow to small businesses / start-ups at a lower and competitive cost, Finance Bill, 2015 has provided for reduction in rate of income tax on royalty and fees for technical services earned by non-residents from existing 25per cent to 10 per cent. This is a welcome step.         

India Inc. was expecting a rollback of DDT / MAT for the SEZ developers / units located in SEZs. The industry was expecting that the incentives which were committed by the government at the time of introduction of the SEZ policy would be restored. If nothing more, at least rate of DDT / MAT for these taxpayers should have been reduced.  However, there is disappointment on this front as there is no proposal for any relief to SEZ developers / units.

With a view to encourage generation of employment, additional deduction equal to 30 per cent of additional wages paid to new regular workmen employed in a factory, is proposed to be extended to non-corporate taxpayers.  Further, it also proposed that this benefit would be allowed to units employing 50 new workmen instead of existing limit of 100.  

Overall, Budget 2015 seems like a progressive budget and has definitely set the tone for major economic reforms in many ways by not only refraining from introduction of arbitrary retrospective amendments but also by introducing a slew of measures to bolster flagship initiatives like ‘Ease of doing business’, ‘Make in India’ and ‘Digital India’. Budget 2015 also reflects and reassures the government’s commitment towards providing a stable tax regime and may certainly put India back on the map as a preferred investment destination for foreign as well as domestic investors.

The views and opinions herein are personal. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.

The Finance Minister seems to have weighed in expectations from different sections of the economy and society, and presented a budget that is commendable. In the area of taxation,  some welcome changes have been made and suitable clarifications provided.    Given the favourable position enjoyed by the Indian economy today, globally, some of the income-tax amendments could infuse a positive sentiment in the mergers and acquisitions space in the Indian market.  From an M&A perspective, following are some key amendments in the Income-tax Act, 1961 (‘IT Act’) introduced in the Budget 2015.

Test of residence for a company

Under the provisions of Section 6 of the IT Act, a company is said to be resident in India if either it is an Indian company, or during a given year the control and management of its affairs is situated ‘wholly in India’.  A company incorporated outside India could easily avoid becoming a resident by merely holding a board meeting outside India.  Further, this loophole could also facilitate creation of shell companies outside India which may be effectively controlled from India.  Accordingly, to remove this anomaly and align the test of corporate residency with the internationally recognised concept of place of effective management (‘POEM’), Budget 2015 has amended Section 6 to provide that a company shall be resident in India if its POEM at any time in a year, is in India.  POEM is defined to mean a place where key management and commercial decisions necessary for conduct of business are, in substance, made.  Accordingly, it would now be quintessential to ensure, especially in outbound investment structures (where Indian companies have subsidiaries outside India and may be accustomed to taking some of their crucial decisions in India), that entire decision making w.r.t a foreign company is undertaken completely outside India.

Clarification on indirect transfer

On the much debated Vodafone case and Explanation 5 to Section 9(1)(i) dealing with taxability of transfer of share/interest of a foreign company/entity that derives value (directly or indirectly) substantially from assets located in India ( ‘indirect transfer provisions’), Budget 2015 has provided some much awaited clarifications.  The clarifications have been provided vide two further explanations: Explanations 6 and 7. 

Explanation 6 lays down the threshold limits for triggering the indirect transfer provisions.  It provides that indirect transfer provisions would be triggered if on the ‘specified date’ value of such assets located in India exceed INR 10 crore and represent at least 50 per cent of value of all assets owned by such foreign company/entity.  Value of assets would be computed without reduction of any liabilities in respect thereof.   ‘Specified date’ means a) last date of accounting period preceding date of transfer of share/interest or b) date of transfer if book value of assets of such foreign company/entity as on date of transfer exceeds book value as on last date of accounting period preceding date of transfer by 15 per cent.  The rules for computing such book values are yet to be prescribed and one may also need to take cognizance of the methodology involved therein in order to compute the corresponding Indian tax liability. 

On the other hand, Explanation 7 provides that indirect transfer provisions shall not apply to a case where non-resident transferor transfers outside India any share/interest in a foreign company/entity owning directly or indirectly assets situated in India and such non-resident transferor does not, at any time during 12 months preceding such date of transfer, ‘control’ the foreign company/entity directly owning assets situated in India.  ‘Control’ has been defined in terms of management rights or greater than 5% voting rights/interest/share capital.      

Further, Explanation 7 provides that in case all assets owned by such foreign company/entity are not situated in India, then the income arising to a non-resident transferor from transfer outside India of shares/interest in such foreign company/entity shall be deemed to accrue/arise in India to the extent it is reasonably attributable (in the prescribed manner) to assets located in India.  Needless to say, the threshold limits under Explanation 6 would need to be satisfied w.r.t assets situated in India in order to trigger indirect transfer provisions for computing such proportionate income in hands of a non-resident transferor.

A corollary to the indirect transfer provision was group restructurings and reorganisations involving shares of such foreign company deriving value from assets situated in India.  It has now been clarified in a newly inserted clause (viab) in Section 47 that such shares being transferred in a scheme of amalgamation (from amalgamating foreign company to amalgamated foreign company) shall not be subject to capital gains tax under the IT Act, provided at least 25% shareholders in the amalgamating foreign company continue to remain shareholders in the amalgamated foreign company and such transfer of shares does not attract any capital gains tax in the country of incorporation of the amalgamating foreign company.  Similar exemption has been provided (vide newly inserted clause (vicc) in Section 47) vis-à-vis a scheme of demerger involving transfer of shares in such foreign company deriving value from assets situated in India subject to the condition that at least three-fourth in value shareholders in a demerged foreign company continue to remain shareholders in the resulting foreign company and such transfer of shares does not attract any capital gains tax in the country of incorporation of the demerged foreign company.    Such exemption already exists in Section 47 of the IT Act for shares in an Indian company held by a foreign company which get transferred by virtue of an overseas amalgamation/demerger between foreign companies, and hence it was only rational to extend such exemption to shares of a foreign company deriving substantial value from assets located in India. 

However, the law is yet to clarify one major anomaly which could be seen in such overseas restructuring.  Under the IT Act, any transfer of shares of the amalgamating company by a shareholder under a scheme of amalgamation in consideration of shares in an Indian amalgamated company is not treated as ‘transfer’ for computing capital gains.  On the other hand such exemption does not exist for a foreign shareholder of a foreign amalgamating company transferring his shares therein under a scheme of amalgamation in consideration for shares in a foreign amalgamated company.  While the law has exempted from capital gains transfer of Indian shares between foreign companies under the scheme of amalgamation/demerger (explained above) and has now extended such exemption to transfer of shares of foreign company deriving substantial value from assets situated in India under the scheme of amalgamation/demerger (also explained above), there is no specific exemption qua transfer of shares in such foreign amalgamating company by a foreign shareholder under such overseas scheme of amalgamation in consideration for shares in an amalgamated foreign company.  This would be relevant to the extent that the shares in such foreign amalgamating company (owning shares in a foreign company deriving  substantial value from assets situated in India) could also be deemed to have been situated in India by virtue of the indirect transfer provisions, and hence any transfer of shares therein by a foreign shareholder (even under a scheme of amalgamation) would be subject to Indian capital gains tax provisions unless specifically exempted from the definition of ‘transfer’. 

Cost of acquisition of capital asset acquired on demerger in hands of a resulting company

Section 49 of the IT Act deals with cost of acquisition w.r.t certain modes of acquisition and provides that in certain cases of transfer of capital asset (e.g. parent to subsidiary or vice versa or under scheme of amalgamation) the cost of acquisition of such capital asset shall be deemed to be cost for the previous owner who acquired it.  However, it did not specifically cover transfer of capital asset under a scheme of demerger (exempt under Section 47 from capital gains).  In the absence of such specific provision qua demerger, there was ambiguity in the law around the cost of acquisition of capital assets (say, shares/investments) acquired by a resulting  company under the scheme of demerger, especially in the event of subsequent sale of such capital asset by the resulting company.  Budget 2015 has specifically covered transfer of capital asset under the scheme of demerger under Section 49(1) and accordingly the position is now clear that cost of acquisition of such capital asset in hands of the demerged company would be the cost in the hands of the resulting company.   Consequential to such amendment, the period of holding for such capital asset (under Section 2(42A) of IT Act) would also be counted from the date the demerged company acquired it. 

Rationalisation of MAT provisions

Companies are subject to minimum alternative tax (‘MAT’) provisions governed by Section 115JB of the IT Act.  MAT is not payable on share of profit from a partnership firm.  Such share of profit is specifically exempt from tax in hands of partners of a firm under Section 10(2A) of the IT Act.  Accordingly, a company being a partner in a firm would not be subject to MAT on its share of profit from the firm.  However, similar exemption did not exist in Section 115JB vis-à-vis share of a member of AOP in income of AOP.  Similar share of profit from a partnership firm, such share in income of AOP is also specifically exempt from tax in hands of member of AOP under Section 86 of the IT Act.  A company being a member of AOP would not be taxed on its share of income of AOP but is as of now subject to MAT on such income.  Accordingly, with a view to rationalise MAT provision, similar exclusion is also made from ‘book profits’ for share of income from AOP for companies. 

It is also clarified that capital gains income arising in the hands of Foreign Institutional Investors (‘FII’) for transactions done on the stock exchange (i.e. on which securities transaction tax is paid) would also be excluded from MAT.  While this clarification is benevolent, it does open a Pandora’s box on views surrounding applicability of MAT provisions to a foreign company.  Based on this amendment, tax authorities could argue that MAT always applied to foreign companies unless specifically exempt from MAT (as has now been done for FII’s for a specific stream of income).  This is an unintended consequence and ought to be taken in the right spirit by tax authorities in sync with the idea of a ‘non-adversarial tax regime’.   Needless to say, a clarification in law during the year on this subject would be welcome.

From a mergers and acquisitions angle, while the clarifications on indirect transfer provisions are a welcome change, some key expectations, such as ‘control’ being capped at 5% voting power instead of the suggested 24%, specific exemptions for listed foreign company/entity deriving value from assets located in India, etc. are yet to be addressed and would augur well for overseas mergers and acquisitions.  Similarly, clarification on capital gains tax exemption for foreign shareholders transferring shares in foreign companies under the scheme of amalgamation would also be extremely helpful in removing ambiguities and fostering a stable tax regime for investors.  We hope these would be addressed in times to come with the same pragmatic approach that has gone into Budget 2015.

The Union Budget 2015 (‘Budget’) was presented by the government on 28 February. The government has communicated its plans for the next fiscal year, how to combat fiscal deficit, thoughts on providing fillip to the manufacturing sector in India to aid the success of the ‘Make in India’ initiative, tax reforms such as Goods and Services Tax (‘GST’), and other such policy announcements.

In the past few years, especially after the 2008 recession, indirect taxes have proved to be an effective tool for spurring growth, and not merely a contributor to the tax revenues of the government. 

Amongst other tax proposals, the Finance Minister (‘FM’) announced significant changes with regard to the various indirect tax laws.

By providing a timeline for the implementation of GST in 2016-17, the Budget has indicated a clear intention of the government on GST. The announcement of the FM that, GST would be implemented next year is an important positive step emanating from the Budget after the government achieved an important milestone of tabling the Constitution Amendment Bill in the Lok Sabha.  
GST, one of the most important indirect tax reforms of independent India,  would be a welcome step in mitigating the cascading effects of the present regime of multiple indirect taxes and would help in substantially widening the tax base. Accordingly, GST is expected to play a transformational role in the Indian economy and aid to put in place a leading indirect tax regime in India.
GST is expected to make business decisions tax neutral and may answer many of the lingering issues of Indian taxes like whether software is goods or service, meaning of a works contract, whether a sale is a pre-determined sale or a stock transfer, etc., and mitigate the existing efficiencies in the indirect tax regime.  In such a scenario, it becomes imperative for businesses to assess the impact individually and utilize the lead time to gear up business operations for a new indirect tax regime.
Given the proposed introduction of GST, the FM has announced various applications on several indirect taxes to facilitate the transition to GST, next year.
The current service tax rate of 12.36 per cent has been increased to 14 per cent subsuming the existing education cess of two per cent and higher and secondary education cess of one per cent. Further, a Swachh Bharat cess of two per cent has also been proposed to be levied on the service value.  Consequently, the effective service tax rate can be as high as 16 per cent including the Swachh Bharat cess, which is closer to the rate expected under the proposed GST regime.
As expounded by the FM in his Budget speech, Swachh Bharat is not only a programme to improve hygiene and cleanliness, but a movement to regenerate India.  Swachh Bharat has been one of the broad themes of the Budget with the overall objective of improving the quality of life and public health. Accordingly, the Swachh Bharat cess has been proposed to be levied by the government with this objective.

Similarly, with effect from 1 March 2015, the standard ad valorem rate of excise duty has been proposed to be enhanced from the present excise duty rate of 12 per cent to 12.5 per cent.  The existing education cess of two per cent and higher and secondary education cess of one per cent has also been exempted for the purposes of computation of levy of excise duty.

However, the existing education cess and higher and secondary education cess levied on imported goods as a component of customs duty would continue to be levied.

In addition, the negative list of services has been pruned to widen the tax base.  Consequently, from a date to be notified, from the date of the enactment of the Finance Act, 2015 (‘Act’), service tax would now be applicable on services provided by way of access to amusement facilities, entertainment events or concerts, pageants and non-recognized sporting events. 
However, to the complete surprise of the industry, service tax has been proposed to be levied on contract manufacturing/jobwork/bottling of liquor for human consumption.  This would have a significant impact for the liquor industry which would have the effect of double taxation of alcoholic products under both service tax as well as under the state excise.
The Budget has met significant expectations of the industry to reform the inverted duty structure faced by certain manufacturing sectors such as; power generation equipment, information technology products, etc. The aforesaid proposed amendment would help in thoroughly addressing the issue for domestic manufacturers and provide the necessary impetus by eliminating the additional tax costs incurred on account of the inverted duty structure.
The proposed amendments to reform the inverted duty structure would also boost the ‘Make in India’ initiative of the government for job creation through revival of growth, investment and promotion of domestic manufacturing.
A welcome amendment is the proposal to increase the time limit for taking Cenvat credit on inputs and input services from six months to one year.  The proposed amendment would significantly provide the industry with sufficient time to recoup the input tax credit that a business is entitled to. 
Ease of compliance for taxpayers has also been a significant expectation of the industry. The proposal that online time bound registrations for service tax and excise duty would be done in two working days, introduction of digitally signed invoices and maintenance of electronic records is a welcome step for ease of doing business in India.
Given that there is hope of revival of the Indian economy, the Budget presented by the FM has been positive and growth oriented for the industry.  From an industry perspective, the Budget has

been a forward looking, progressive and investor friendly, with documents providing policy directions for a simple and predictable indirect tax regime. 
* The views and opinions herein are those of the authors and do not necessarily represent the views and opinions of KPMG in India. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.”