(Hashmita Punjabi (Executive), KPMG
Real Estate sector, the second largest contributor to the economy, in the recent past has been facing sluggish growth, cash trap and various other issues.  The BJP Government has taken several steps in the right direction for creating positive atmosphere for the industry. The Government's initiatives are seeming creating positive vibes namely kick star of developing smart cities, increase in foreign direct investment. Despite these developments, many items of wish list are not getting fulfilled like industry or infrastructure status, which is a long pending demand of the sector as developers can then avail finances at cheaper rates from financial institutions that will spur economic growth, single window clearance that will fasten the development and foster confidence of buyers, removal of multiple levies on development activities like, service tax, stamp duty, VAT, etc. Rationalization and broad basing of Real Estate Development and Regulatory Bill to facilitate transparent processes and speedier development of projects without the “taboo” of one more regulator to be dealt with. 

Having said the above, the upcoming budget is looked upon by the industry for significant push in terms of project approvals, taxation policies, industry status reforms in the tax arena in the form of tax incentives and rationalisation of certain provisions of the Income-tax Act, which will help in reducing the demand-supply gap. 

Following are the some of the broad expectations from the Union Budget vis-a-vis realty sector.

Provisions relating to Real Estate Developers

•Removal of multiple taxation on the sector like service tax, VAT, stamp duty for the same products being developed and sold by the developers. These multiples taxes increases the cost of the product thereby impacting the affordability for the ultimate customers thereby dampening the vision of “Housing for all by 2022”.

•Tax holiday under section 80-IA(4)(iii) should be extended to the Industrial Parks notified till 31 March 2020 to foster industrial development and thereby supporting the make in India movement. Further, there should not be any restriction on the minimum number of units to be developed in the Industrial Park and the benefit should be allowed on part completion of the project also.  

•The tax benefit provided under section 80-IA to undertaking which develops or develops and operates or maintains and operates an Infrastructure Facility should also be extended to Integrated Township Projects by including the same within the definition of Infrastructure Facility or at least various facilities such as roads, water supply system etc. created after obtaining Government approvals be considered as infrastructure facility for the purpose of Section 80-IA deduction. It will motivate the Real Estate Developers to develop and promote large integrated townships thereby supporting smart cities initiative. This will also boost the development of infrastructure facilities like roads, sanitation facilities, educational and medical facilities etc. related to Integrated Townships.  

•Rationalizing and simplifying the taxation regime for Joint Development Arrangements ('JDAs') - The law should be amended to provide that tax liability under JDA should arise only on receipt of revenues (under revenue sharing arrangement) or on receipt of developed areas (under areas sharing model), quantification of taxation especially on area share model, JDAs should not be regarded as AOP for tax purposes, etc.

•There is an ambiguity prevailing around characterization of rental income as house property or business income. Such characterization should be clarified so as to ensure that uniform practices are followed across industry and litigation.

•The Finance Minister has committed to the revival of SEZs and the Infrastructure of the Country.  Towards this commitment, MAT exemption should be provided to SEZ developers and SEZ units.  It will boost the SEZ sector and result in revival of the same.  Further, MAT exemption should also be granted to the Infrastructure Companies, which will also result in the growth of the economy with rapid investment in infrastructure development.

•The provisions of section 43CA and section 50C dealing with deemed taxation based on stamp duty valuation for business assets should be done away with and any suspected understatement of consideration should be tackled by investigation mechanism.  Alternatively, section 43CA and section 50C should not be made applicable in certain situations like distress sale arising on sale by bank to recover its dues or for any other reason as is proved by the assessee before the tax authorities. 

•Specific exemption should be provided from levy of service tax on transfer of development rights and Joint Development Arrangements. Further, exempt transaction of long term lease (say more than 25 years) from the levy of service tax.

Provisions relating to REIT/InvIT

•Suitable modifications should be made to the amendment to section 2(42A) so as allow a period of 12 months for REIT/InvIT units to qualify as long term capital asset, in place of 36 months.  The very idea of having compulsory listing of REIT/InvIT is to create liquidity to encourage mobilizing small savings into the real estate/infrastructure sector. A larger holding periodicity to qualify as long term capital asset can discourage investors thereby impacting the very success of REIT/InvIT.

•Suitable amendments should be introduced so as to exempt the transfer of asset being immovable property directly to the REIT /InvIT from tax, at the time of such exchange. 

•Dividend Distribution Tax (DDT) at the SPV level may lead to multiple levels of tax. This makes the business tax structure tax inefficient. So DDT should be removed on SPV paying dividend to REIT in order to provide full transparency.

•Amendment should also be made to exempt the levy of MAT from transfer of shares of SPVs and properties to REIT/InvIT on exchange.

Provisions relating to Individuals

•The deduction for interest on housing loan under section 24 of INR 200,000 should be enhanced to atleast INR 300,000 to encourage home-buyers to invest in real estate and increase the demand in the market.

•Further, the deduction under section 80C for principal repayment of housing loan should be increased from the existing limit of INR 150,000 or the principal repayments should be considered for a separate / standalone tax exemption (rather been clubbed under Section 80C of the Act)..  

•Alternatively, the deduction may be allowed for the entire purchase price (upto certain limit say Rs. 50 lacs) paid for FIRST House to individual while computing their income.  Such deduction can be spread over a period of 5 years.

The Finance Minister should consider the above suggestions/demands of the industry as also bring out business friendly policies which would enhance the effectiveness of the developers and will also boost the sector as well as the economy as a whole.

Budget 2016 is a potential opportunity for our Finance Minister to achieve multiple objectives from a transfer pricing perspective - promoting growth, improving the ease of doing business in India and meeting India's commitments to the BEPS Action Plans. In this context, here are my expectations and aspirations as to what Budget 2016 should deliver on this agenda. 

• Alignment with BEPS Actions

Since the BEPS Actions were announced in October 2015, Senior Government officials have reiterated that India is aligned with the OECD's work on BEPS being an active contributor and will introduce appropriate amendments in its transfer pricing provisions. Accordingly, a highly anticipated expectation is around amendments emanating from the OECD's BEPS Action Plans. These are likely to include:

o New Transfer Pricing Documentation Standards

It is widely expected that the new documentation requirements will now be aligned with the OECD BEPS Action 13 on Transfer Pricing Documentation and Country-by-Country Reporting. Accordingly, Budget 2016 is likely to introduce the following changes in this area, most likely with effect from April 1, 2016:

-Indian MNCs: Comply with the three layered documentation requirement i.e., a Master file, Local file, and Country-by-Country reporting or CbCR template. The CbCR template is expected to apply only to large taxpayers, i.e, taxpayers having an annual consolidated group turnover of around INR 5,500 Cr which is likely to impact around 200 Indian MNCs. 

-Foreign MNCs: Provide the Master File (maintained by the Parent centrally) and the Local File. 

Budget 2016 should also provide an intent relating to the structural set-up of the risk assessment wing of the CBDT and the mechanism for automatic exchange of CbCR data with other jurisdictions and a reiteration that the CbCR data will be used by tax authorities only for risk assessment, and not as an audit tool. This will give comfort around the confidentiality and “appropriate use” safeguards that foreign investors want to anxiously see. 

o Intangibles

The BEPS Action Plans 8-10 on Aligning Transfer Pricing Outcomes with Value Creation provide a more contemporary definition of intangibles, vis-à-vis the definition that was introduced in the Indian law in 2012. The BEPS' definition stresses on two functional aspects of intangibles - capability of being owned or controlled, and being valuable (i.e., their use or transfer w0uld involve a compensation in arm's length circumstances). We expect an alignment of the Indian definition with this. 

• Improve the ease of doing business 

o Restricting scope of Domestic TP provisions 

To ensure application of domestic transfer pricing provisions in spirit, and to balance the cost/benefit of administering the provisions, domestic transfer pricing provisions should be restricted only to entities enjoying tax holidays.

o Reducing the TP compliance burden

Budget 2016 could relax transfer pricing compliance requirements in a few situations, as under to ease the compliance burden:

-Foreign companies earning incomes from Indian affiliates, but which are not taxable in India under the provisions of Indian domestic laws or India's tax treaties

-Foreign companies earning incomes taxed at gross basis in India, for which their Indian affiliates have already undertaken transfer pricing compliances 

o Certainty on advertising expenses

The controversy on marketing intangibles for Indian subsidiaries of foreign MNCs, primarily in the FMCG and Pharma sectors still remains unresolved despite High Court rulings in Sony Ericsson and Maruti Suzuki. There is no clarity, at the audit level, on the treatment of such expenses for transfer pricing purposes.  Budget 2016 should announce a roadmap to provide certainty on this issue during audits as well as APAs. 

• India Growth story

o Wider access to Bilateral APAs 

Contrary to the internationally accepted position, presently, the Indian APA program does not permit Bilateral APAs with countries (Germany, Korea Singapore etc) which do not have Article 9(2) in their tax treaty with India - investors from these countries are unable to use the bilateral APA route to get upfront certainty on transfer pricing issues. India should allow this option to improve bilateral trade with these countries. 

o Attractive safe harbors 

The current safe harbors for captive software / ITES companies are very high to be attractive, especially considering the lower rates being agreed in recent APAs. Making the existing safe harbors attractive by reducing the rates as well as reducing the four categories (IT/ITES/R&D/KPO) into two will act as an enabler to promote the growth of captives especially the smaller captives who find the cost and uncertainty of the Indian transfer pricing regime cumbersome to consider India viable. Introducing safe harbors for interest payable on foreign currency loans availed by Indian subsidiaries from their overseas group companies would also help improve inflow of funds into the country. 

o Start-up India

The recently announced Start-up in India campaign aims to make finance available easily to start-ups and to simplify red tape for them. With the Government's stated focus on promoting start-up culture in the country, Budget 2016 could innovate and relax transfer pricing documentation and compliance requirements for start-ups and small taxpayers. These could potentially be in the form of much-needed increased threshold for compliances for this category.

Transfer pricing risks and uncertainty over the last few years have impacted India's growth story and perception about the operating environment. Recent administrative and policy measures have created confidence in the global investor community leading to high expectations and aspirations for this budget. I sincerely hope that Budget 2016 will continue the Government's direction on improving the ease of doing business and providing impetus to the India growth story! 

* The author has been assisted by Gaurav Shah (Associate Director, PwC). 

With the adoption of the BEPS package, OECD and G20 countries laid the foundations of a modern international tax framework under which profits would be taxed where economic activity and value creation occurs. It is now time to focus on implementation of the recommended changes in a consistent and coherent manner. The OECD recognizes that countries are sovereign and measures may therefore be implemented in different manners. It is however expected that countries will seek consistency and convergence when deciding upon implementation of the measures. These measures range from new minimum standards to revision of existing standards, common approaches which will facilitate the convergence of national practices and guidance drawing on best practices. Implementation measures would therefore involve revisions to the OECD TP Guidelines, changes to bilateral tax treaties, including through the multilateral instrument, as well as domestic tax law changes. Given the extent and nature of the implementation measures, it may not be possible (or even required) to address all the areas of implementation by introducing legislative provisions in the Finance Bill, 2016.. The Finance Minister's Budget speech can however be expected to outline Government's priorities for BEPS implementation in India.

BEPS actions such as preventing tax treaty abuse, transparency through country-by-country reporting (CbCR) and improving dispute resolution are likely to be priorities for the Government and also constitute the BEPS “minimum standards”. In addition, aligning TP outcomes with value creation, enhanced TP documentation, preventing base erosion through excessive financial payments and taxation of the digital economy are also likely to be addressed. One should also not be surprised if proposals for mandatory disclosures in accordance with Action 12 as introduced, even though the same does not constitute a “minimum standard”.

Implementing BEPS measures for preventing tax treaty abuse or for improving dispute resolution under tax treaties may not require any legislative changes. The former is likely to be implemented through the Multilateral Instrument, while the latter would require changes in some of India's administrative practices relating to MAP and APAs [e.g. granting MAP access even in the absence of Article 9(2), time limits for MAP resolution etc.]. It is unlikely that the Government would accept mandatory binding MAP arbitration for international tax dispute resolution. The minimum standard only requires India to make its position known on arbitration. With regard to CbCR implementation, it is expected that the Government would broadly adopt the model legislation provided by the OECD. Along with CbCR implementation it is likely that the Government would consider implementing other recommendations of Action 13 relating to enhanced TP documentation. This measure can also be implemented by making amendments to the existing TP rules relating to documentation and may not warrant a legislative amendment.

Perceived abuse of the arms-length standard was at the heart of the BEPS initiative. That has been tackled through changes to the OECD TP Guidelines. The Report on Actions 8-10 largely aligns with India's view of allocating profits in line with value contribution. The changes to the OECD TP Guidelines can be expected to have effect even without legislative changes because of the “soft law” status of the guidelines. Nevertheless, given the extensive changes to the OECD TP guidelines as a result of Actions 8-10, the Government should consider modifying the TP rules to reflect the revised and updated OECD guidance. 

India's approach to implementation of BEPS actions on “Limiting Interest Deduction” and the “Digital Economy” needs to be seen. While on one hand it is recognized that excess interest deduction on cross-border financing can contribute to base erosion, at the same time there is a need to strike a balance with the need to attract inward investment in capital intensive projects. Given that the Action is a “common approach”, there may be some flexibility on the timing of implementing this measure.  If, however, the Government implements this measure it is likely to adopt a “fixed ratio” rule that would limit net interest deductions claimed by an entity to a fixed percentage of EBITDA.

BEPS risks which stand exacerbated by the digital economy have been a concern for India. While the OECD/ G20 countries have agreed to monitor developments and analyse data that will become available over time to address Digital Economy taxation, the Action 1 report also suggests that countries could introduce provisions in their domestic tax law as additional safeguards against BEPS, provided they respect existing treaty obligations. The Government may seek inspiration from unilateral measures such as the UK's Diverted Profits Tax (DPT) and Australia's Multi-national Anti-avoidance law (MAAL) to consider options for digital economy taxation. Adoption of domestic tax law measures would require further calibration of the options identified the Action 1 report in order to provide additional clarity as well as to ensure consistency with existing international obligations.

Along with the anticipated BEPS measures, one should also consider the amendment made by the Finance Act, 2015 introducing place of effective management (POEM) as a test for residency. The Explanatory Memorandum to the Finance Bill, 2015 explaining the amendment indicates that the amendment was driven by a possible BEPS concern under the liberal erstwhile threshold for residency. It would be important for the Government to review this provision along with the other BEPS proposals and provide greater clarity and even consider deferring the implementation of the POEM rule along with other BEPS measures.

The BEPS project reflects the view that current international tax standards have not kept pace with changes in global business practices. It also sets out that the gaps in the interaction of domestic tax rules of various countries, the application of bilateral tax treaties to multi-jurisdictional arrangements and the rise of the digital economy have led to weaknesses in the international tax system. The BEPS final reports include recommendations for significant changes in key elements of the international tax architecture. International tax changes stemming from the OECD BEPS project will transform the global tax environment. India is fully committed to implementing a number of BEPS recommendations which may get implemented over a period of time through legislative amendments as well as changes to rules and administrative procedures. The 2016 Union Budget would hopefully set out a road map and provide a direction for this implementation.

Vijai Jayaram (Senior Manager) & Arihant Dugar (Deputy Manager), Deloitte Haskins & Sells LLP)
The financial bottom-line and shareholder return on investment have long been the main drivers for corporates, until the concept of Corporate Social Responsibility and corporate citizenship emerged as an alternate priority for consideration. A few corporates have been supporting CSR from quite a long time; the Companies Act, 2013 has made it mandatory for a large section of companies to follow suit. While all these corporates equip themselves to conform to these provisions - there is still one question in everybody's mind - tax!

Corporate Social Responsibility (“CSR”) provisions at present 

Certain companies have been 'mandated' to spend 2 per cent of their three-year average net profit [before taxes; as calculated in accordance with the provisions of section 198 of the Companies Act, 2013 [(“the Companies Act”)] on CSR. These companies are also required to disclose the CSR activities and the amount spent on it in their annual reports. 

Schedule VII of the Companies Act prescribes activities towards which CSR expenditure should be incurred, which include eradicating hunger, poverty and malnutrition, livelihood enhancement, promoting gender equality and women empowerment, working towards protection of national heritage, rural development projects, slum area development, etc.

There is no doubt that active involvement of corporates in CSR activities would provide a shot in the arm to the entire CSR agenda and would lead to betterment of society at large. However, what dampens sentiments is that this expenditure is generally not tax deductible. 

The Finance Act 2014 clarified that the expenditure incurred on CSR activities is not for the purpose of business and, hence, cannot be allowed as a deduction in  computing taxes  under the residuary provisions of section 37(1) of the Income-tax Act, 1961 (“the IT Act”). Tax deduction for CSR expenditure is currently allowed only if it falls under other sections of the IT Act, i.e. section 35AC (expenditure on eligible projects or schemes), section 35CCA (payments for rural development), etc. 

There has been a constant stream of arguments - both for and against by various forums/corporates - for allowing tax deduction of CSR spends. The objective of this article is not to advocate why CSR spends should be generally allowed as tax deductible expenditure, but to highlight that if not a general deduction, corporates must be allowed to avail other specific tax benefits under the IT Act. One such key instance is the tax benefits conferred under section 35AC of the IT Act.

Expenditure on eligible projects or schemes

Section 35AC was introduced in the IT Act in the year 1991, for promoting social and economic welfare of, or the uplift of, the public. The idea was to encourage taxpayers carrying on a business or profession to be entitled to deduct, while computing their taxable profits from any business or profession, the expenditure incurred in financing any eligible project or scheme for promoting social and economic welfare of, or the uplift of, the public. 

The qualifying expenditure would consist of payments made to a public sector company, a local authority or an approved association or an institution for being used for any such eligible project or scheme. Additionally, companies are permitted to incur expenditure directly on any such project or scheme and claim the benefit of 100% tax deductibility (of both capital and recurring expenditure).

As per the relevant rules, various activities such as construction of school buildings primarily for children belonging to the economically weaker sections of the society; construction and maintenance of bridges, public highways and other roads; promotion of sports; pollution control; any programme that promotes road safety, prevention of accidents and traffic awareness; any programme of conservation of natural resources or of afforestation; etc. and any other programme for uplift of the rural poor or the urban slum dwellers, as the National Committee may consider fit for support, are covered under this section. 

A National Committee of eminent persons has been constituted, in accordance with the rules prescribed in the IT Act, for recommending approval for such projects or schemes, which would then be notified by the Central Government for this tax concession. 

In terms of the process involved, a company would first need to meet the various eligibility criteria/ conditions - especially in relation to the nature of the CSR activities. Thereafter, an application would need to be made to the National Committee (i.e. the administering body), who would duly review the application, interview the applicant and make a reasoned decision. This decision would in turn need to be ratified by the Central Government, before the company can claim tax deduction. Thus, as is evident, this section enables only claims of genuine CSR expenses, given the level of scrutiny and process involved. 

This beneficial provision has encouraged various taxpayers to actually kick-start their journey to meeting social contributions. NGOs and corporates alike have been spending on eligible projects or schemes which have had dual benefits of meeting social welfare objectives (for the benefit of society) and of course incentivize the company itself, via tax deduction. 

Central Board of Direct Taxes (CBDT) plans to phase out deductions 

What is disheartening is that the benefit of section 35AC may not be available from financial year 2017-18 onwards - per the proposal/ statement recently released by the CBDT, in order to align with the Government's stated objectives of lowering corporate tax rates and phasing out tax deductions (which were initially announced by the Finance Minister in Budget 2015). 

Most would agree that the 'mandatory' CSR spends of 2% was in itself pinching, along with the denial of tax deduction under general/ residuary provisions. Now, when the CBDT is planning to curtail this special deduction as well, it could be a major setback to the industry. 

Why revoke benefits under section 35AC

If one goes through the Budget Speech of 2015, one wouldn't fail to notice that the Finance Minister mentioned that though the corporate tax rate is 30%, the effective corporate tax rate in India is 23% - this leads to India being called a high tax jurisdiction, but the country does not even receive the benefit of the same due to excessive exemptions. Accordingly, the Finance Minister said that the process of reduction of corporate tax rate from 30% to 25% has to be necessarily accompanied by rationalization and removal of various kinds of tax exemptions and incentives for corporate taxpayers, which incidentally account for a large number of tax disputes.

While, at first, this looks like a rational and sensible step, what most of us fail to see is that this could be counter-productive in encouraging corporates to spend towards social and rural programmes. 

Do taxpayers need deduction or incentives for spending on social programmes? The answer is a big yes! Most of us would agree that the urban and rural divide is ever increasing - the poor are becoming poorer and the rich are becoming richer. In such situations, encouraging spends on social and rural programmes is what the Government can immediately do and achieve. Thus, rather than removing beneficial sections such as 35AC, the Government should target other sources to fill in this gap. 

On the one hand, the CBDT / Government wants to “rationalize” tax exemptions and incentives - by removing section 35AC from the IT Act; on the other hand, there has been no news regarding benefits enjoyed by charitable trusts and similar organizations - presumably, they are here to stay. The difference between charitable trusts and corporates undertaking social welfare activities (under the aegis of section 35AC) is hard to fathom. 

Make no mistake, among incentives which are planned to be phased out - such as profit-linked investments, weighted deductions etc., section 35AC does not fit among them. The difference between these other incentives and section 35AC is that the latter is targeted at encouraging corporates to spend towards promoting social and economic welfare of, or the uplift of, the public. One must also not forget that this is a mandatory requirement imposed by the Government. Further, it is important to note that section 35AC is a provision which has been present for more than 2 decades in the IT Act, and requires due approval from a body of experts, before tax deduction can be claimed.

This, in itself, is sufficient reason for the Government / CBDT to not withdraw the benefits of section 35AC; and would definitely go a long way to encourage corporates to spend more towards society. While the overall intent of the Government is appreciable, a few tweaks here and there may not be amiss, so that all stakeholders receive their dues. 

Kartik Solanki (Director), PwC
Over the years, the CENVAT credit scheme, which was introduced to remove the cascading effect of taxes has been plagued with issues and litigations. The coming budget is a great opportunity for the Finance Minister to streamline and make amendments in the CENVAT credit scheme with multifold objectives of (a) bring clarity in the legislation and avoid litigations, (b) support the industry and (c) move towards GST regime. 

With this objectives in mind, here are some of the issues which the Finance Minister can address in the coming union budget: 

Accumulated credit of education cess ('EC') and secondary and higher education cess ('SHEC') 

The EC and SHEC levy was abolished from 1^st March, 2015 for manufacturers and 1^st June, 2015 for service providers respectively. The Government has made some amendments to allow the credit of EC and SHEC e.g. in respect of goods received by service providers after the date on which the EC and SHEC levy was abolished. However, till date, no amendments are made to allow utilization of accumulated credit of EC and SHEC on the cutoff date against the excise/service tax liability of a manufacturer/service provider. If one goes by the decisions taken by the CBEC in the Tariff Committee, it seems to have been decided that the accumulated credit of EC and SHEC would lapse. It is hoped that the decision would be reconsidered and suitable amendments would be made in the budget, enabling utilization of such accumulated credit to pay excise duty/service tax. 

Allow the credit of Swachh Bharat Cess (SBC)

A lot of representations are already made to allow the credit of SBC paid on various input services against the SBC liability on output services. Given that the non-availability of credit of input SBC is resulting in cascading and effective burden of SBC on services becomes significantly higher, when one considers the impact of SBC paid on input services, it is hoped that the credit of SBC paid on input services should be available for setting off against the SBC liability of a service provider, similar to the provisions applicable to EC and SHEC in past.

Allow claim of CENVAT credit without time limits

Presently, the CENVAT credit is allowed to be claimed only within one year from the date of the relevant document. In many cases, this restriction results in loss of CENVAT credit for the industry. It is hoped that the restriction would be removed.

Another time limit in CENVAT Credit rules pertains to making payment to the service provider within three months of the date of invoice. In case, the service receiver does not make payment within this time, he is required to reverse the CENVAT credit already claimed and reclaim it only after making payment to the service provider. This results in quite cumbersome record keeping requirements for service recipient. Since service provider would have already paid service tax at the time of issuing invoice, the interest of the Government is protected in any case. Hence, it is suggested to remove this restriction.

CENVAT credit on provisions for diminution in value of inventories

As per rule 3(5B) of the CENVAT Credit rules, in case, the inputs are written off or a complete or partial provision is made for reduction in value of the inputs, the CENVAT credit pertaining to these inputs needs to be reversed and can be reclaimed when such inputs are actually used in manufacture of excisable goods or provision of taxable services. The objective for introduction of such provision was for restricting CENVAT credit on inputs which are lost due to shortage etc and consequently, not used in manufacture of goods/provision of services. However, the present wordings of the rule seems to be covering the situations even when only a part of the inventory value is written off or a provision is made to comply with accounting norms of inventory valuation. This is not the intention and a clear explanation/proviso should be added in the rule to specifically exclude the situations of write off/ provisions made to comply with accounting norms. 

CENVAT credit on outward transport

Much has been written on the issue of availability of CENVAT credit on outward transportation. The recent Supreme Court judgment in case of Ispat Industries has again stirred up the debate on availability of CENVAT credit on outward transportation. To bring clarity, it is suggested to specifically provide in the CENVAT Credit rules that any cost which is included in the assessable value of excisable goods/value of taxable services should be made eligible for CENVAT Credit.

Inter-unit transfer of credits for the companies registered as Large Taxpayer Units('LTU')

Upto 2014, the companies registered as LTU were allowed to utilize the accumulated CENVAT credit in one unit against excise/service tax liability in another units. This helped the companies to manage the working capital better by avoiding the accumulation of CENVAT credit in some units, while paying duty/tax in cash in other units. It is hoped that this facility is restored in this budget, else the purpose of the LTU scheme is defeated.

Restrictive definitions of inputs, input services and capital goods

Presently, there are various inputs, capital goods and input services which are used by the industry for running the businesses. However, due to the restrictive definitions under CENVAT Credit rules, the industry is unable to claim the credit of excise duty/service tax paid on some of the goods/services which are essential to run the business. Some of the relevant instances are service tax paid on transportation of employees to and from the factories/premises for provision of services or the CENVAT credit on telecom towers or services received for setting up factory/premises of service provider. It is not possible to efficiently conduct the business without many goods/services which are considered ineligible under present provisions. Given that the costs of such goods and services form part of the assessable value for payment of excise duty/value of taxable services, there is no reason to deny credits on such goods and services. It is hoped that the definitions of inputs, input services and capital goods would be suitably amended.

India has a population of around 1.25 billion people of which nearly half are in the income earning age of 25-65 years. That is easily 600 million people. Hence it is quite a mystery that despite that kind of population size and despite being the world's third largest economy (in terms of purchasing power parity), there are just about 35 million individuals who pay tax. That's less than 3% of the total population. Various reports indicate that 40% of USA's population pay taxes. Startling, to say the least, if one compares absolute numbers.

Needless to say, there are quite many reasons for such a low tax base - exemption to agriculture income being a major contributor, what with over 50% of the population engaged directly or indirectly in the agriculture sector.

Of the roughly 35 million people who pay tax, almost 90% are situated below the Rs.500,000 slab.

Take the emaciated tax base on one hand and on the other hand the ongoing global economic crisis, successive monsoon failures and the need for huge spending on industrial and social infrastructure, is there really a case to lays out one's expectations from the Finance Minister in respect of individual tax payers? I am also painfully aware that every Rs.1,000 of tax relief will cost the exchequer around Rs. 35 billion in revenue forgone.

However, hope springs eternal in the human breast and it is in tough times like these that even the smallest act of generosity can lift spirits to no end. As one of those 35 million tax payers, I must put forth my wishlist, be ready for the worst but still hope for the best.

The salaried class are perhaps the easiest group to tax and hence have my greatest sympathy. [The fact that I belong to this class myself has very little to do with this.] I respectfully plead before the FM to bring the Standard Deduction back. We had it once, it was snatched away and we hanker for it. Having had the pleasure of it for a few years and then the pain of being deprived of it later on, I find myself humming “koi lauta de mere beete huye din…” If I could get away with it, I would love to belt out to our beloved FM - “ek standard deduction ki keemat tum kya jaano Arun babu…..”

Then come the folks who took loans (one the basis of their salary slips) for housing projects that have got stalled or are hugely delayed for no fault of theirs. [The fact that I have taken a loan and the project is delayed by more than three years again has very little to do with this.] It is public knowledge that a huge number of housing projects are delayed. In that situation, to lose out on a hefty interest deduction just because the construction crosses the three year window is manifestly unfair. The FM must relax the time limit or, better still, do away with it altogether. A sure shot way to win the hearts of many distraught home owners.

Should I forget all shame and ask for raising the lowest tax slab a little bit? Maybe just a tiny nudge of Rs.50,000 or so? Is that asking for too much? I hear a whisper in my ears, “That's Rs.5,000 of tax for each of those 35 million tax payers, stupid!”. “So what”, I retort, “The tax payers at the bottom of the pyramid also deserve a reason to smile. Raise the slab by Rs.50,000 and add another hefty surcharge on the uber rich. Give another hefty hike to excise duty on cigarettes. Bring another amnesty scheme for all I care.” Everyone loves a Robin Hood.

The National Pension Scheme, which was hugely touted as a better alternative to PF and PPF, has been struggling to win popularity. Actually a simple substitution of one alphabet will do the trick - change its taxability from EET to EEE. Now, is that asking for too much?

I could go on with a few more expectations but I do not want to put our FM under too much pressure. Personally speaking, I would be quite happy if he just delivered on the paltry items listed above. After all, we have always been taught not to be greedy!

People movement from India is on the rise as never before. With the expanding service sector and increased opportunity to leverage on Indian talent, medium to long term corporate deputations are the order of the day. Tax regulations in India have not recognised the challenges faced by the globally mobile population, specifically in the area of alleviating double taxation.

Double taxation - a major challenge

In many cases, employees continue to receive their salary in India which is subject to India tax withholding.  Since services are rendered abroad, overseas tax obligations are triggered as the income is sourced in such country, resulting in significant cash flow issues.  To illustrate, an individual is subject to tax withholding in India at 34% and subject to tax in the US at 25%.  With a total tax of 59% the take home pay of the employee is significantly impacted, the employee is required to claim a refund in his India tax return and wait for the tax refund. Many a time this translates into a higher cost for the employer in topping up the allowances to meet the cash flow challenges. 

In respect of deputation to countries with which India has entered into Double Taxation Avoidance Agreements (DTAA) the availability of relief from double taxation is dependent on the specific provisions of the DTAA.  Unlike countries such as the US which provides for detailed guidelines for foreign income exclusions and foreign tax credits under the domestic tax regulations, the Indian tax regulations do not provide for the same. Hence availing of exemptions and foreign tax credit in the tax return is no easy task.  The conditions specified under the relevant DTAA needs to be satisfied to avail the relief, for instance, residential status is to be determined both under domestic law and under treaty to avail relief from double taxation.

Further, for deputations to countries where India does not have a DTAA, e.g. Hong Kong, the only relief available is a foreign tax credit, that too for resident individuals.  A non-resident who is on India payroll ( and subject to a tax withholding) and rendering services in Hong Kong could potentially end up paying both India as well as Hong Kong taxes.

Broadly, relief from double taxation for salaries could be either in the form of a credit in the Indian tax return for taxes paid overseas (generally applicable to residents) or an exemption under the DTAA (generally applicable to non-residents). 

In the absence of procedural guidelines, employees could face challenges in computing the quantum of relief as well as substantiating the same with the tax authorities. Let us examine the specific challenges faced in detail.

Availing Foreign Tax Credits (FTC)

The DTAAs enable resident individuals to claim a foreign tax credit in India to the extent the income is doubly taxed. The individual needs to be aware of the specific provisions under the relevant DTAA to claim the FTC, understand the methodology of arriving at the doubly taxed income and the related taxed. Lack of guidelines in this regard results in certainty on the quantum of relief that is available. 

Tax returns claiming FTCs are in many cases not processed automatically by the Centralised Processing Centre (the CPC), but are transferred to the jurisdictional tax officers.  It is then left to the individual to follow up with the officers to obtain the refund and the quantum of refund would depend on whether the tax officer agrees with the computation adopted by the tax payer

Mismatch in the tax years in various jurisdictions complicates the FTC computations. While India follows the April to March financial year, many countries follow a calendar year approach. 

There is no clarity on the documentation that is required to claim the FTC.  Tax authorities generally request for copies of overseas tax returns. Many countries do not have the requirement to file annual tax returns where the salary is subject to a tax withholding.  How does the employee substantiate the quantum of taxes paid in such cases? In certain situations, the employee may be subject to tax withholding at a particular rate and the actual taxes paid, based on the tax return may be different.  Employees have the challenge of revising the India returns to reflect any change in the overseas tax return. Arriving at the “salary that is doubly taxed” is yet another challenge. Given that the tax regulations of India and overseas jurisdiction are different, arriving at the doubly taxed income is complex and subject to interpretations.

Another debatable issue is on whether the foreign tax credit can be considered by the employer at the point of withholding taxes.  Guidelines in this regard are absolutely necessary.

Exemptions and reliefs under the DTAA 

Most DTAAs provide for exemption from salary taxation in India where the individual is a resident of the overseas country and the services are rendered abroad.  However the tax regulations do not specifically provide that the relief can be computed by the employer in estimating the taxable income for withholding tax purposes. Employees are therefore subject to tax withholding and end up claiming a refund in the tax return. Tax authorities insist on submission of a Tax Residency Certificate (TRC) from the overseas jurisdiction to provide this exemption and issue the refund.  Obtaining a tax document from an overseas jurisdiction after the individual has come back to India is challenging both from a cost and effort perspective. Non availability of the TRC could result in denial of the relief by the authorities.

Expectations from the budget to ease these challenges. 

With increased focus on “ease of doing business” in India, the pressing need is to introduce various measures that would significantly ease the difficulties in the area of individual taxation.  Some expectations from the forthcoming budget in this regard are:

• Domestic regulations need to clearly provide for exemptions and foreign tax credit for avoidance of double taxation. This would entitle employees to avail the reliefs without accessing the DTAA.  The benefit would be available irrespective of the country to which they are deputed and simplify the process of claiming tax reliefs.
• Clarifications to be issued enabling the employer to consider relief from double taxation at the point of withholding. This would ease the cash flow challenges that employees may be facing.
• Guidelines (including examples for computation) for claiming foreign tax credit to be provided. Flexibility of claiming FTC based on tax returns or tax withholdings should be given along with provisions for carry forward of FTC.
• Documentation for claiming FTC and relief under DTAA to be prescribed on a realistic basis.
• Requirement to submit TRCs for individuals to be abolished.

The above measure would be beneficial not only for the individuals, but would help in significantly reducing the administrative burden on the tax authorities as well.