Direct Tax Highlights, Budget 2015

The Finance Bill, 2015
Direct Tax Highlights
TABLE OF CONTENTS
1. Corporate Tax Rates
2. Personal Tax Rates
3. Corporate Tax Proposals
4. Benefits Proposed for Individual
Taxpayers
5. Other Proposed Amendments
6. Measures to Curb Black Money
CORPORATE TAX RATES

Corporate tax rates will remain same as applicable to Financial
Year 2014-15

For domestic companies
 increase in surcharge from 5% to 7% on taxable income
above rupees one crore up to rupees ten crores, and
 increase in surcharge from 10% to 12% on taxable
income above ten crores
 Proposed to reduce the tax rates from 30% to 25% over
the next four years
Taxable Income
above Rs. 1 crore
but less than Rs.
10 crores
Taxable Income
above Rs. 10
crores
Tax Rate
30%
30%
Surcharge
7%
12%
32.10%
33.60%
3%
3%
33.06%
34.61%
Particulars
Tax Rate + Surcharge
Education Cess
thereon
Effective Tax Rate

For Foreign Companies:
 No change in surcharge rates
Taxable Income
above Rs. 1 crore
but less than Rs.
10 crores
Taxable Income
above Rs. 10
crores
Corporate Tax Rate
40%
40%
Surcharge
2%
5%
41.80%
42%
3%
3%
42.02%
43.26%
Particulars
Tax Rate + Surcharge
Education Cess
thereon
Effective Tax Rate
PERSONAL TAX RATES
Basic income-tax rates/slab will remain same as applicable to Financial
Year 2014-15:
Not exceeding Rs. 250,000
Rate
Nil
Over Rs. 250,000 but not exceeding Rs.
500,000
10%
Over Rs. 500,000 but not exceeding Rs.
1,000,000
20%
Over Rs. 1,000,000
30%
Residents above the age of sixty years but less than eighty years:
Total Income
Not exceeding Rs. 300,000
Total Income
Not exceeding Rs. 500,000
Individuals (residents as well as non-residents):
Total Income
Residents above the age of eighty years:
Rate
Nil
Over Rs. 300,000 but not exceeding Rs.
500,000
10%
Over Rs. 500,000 but not exceeding Rs.
1,000,000
20%
Over Rs. 1,000,000
30%
Rate
Nil
Over Rs. 500,000 but not exceeding Rs.
1,000,000
20%
Over Rs. 1,000,000
30%
1. There will be an increase in surcharge from 10% to 12% on
taxable income above rupees one crore for individuals/HUFs
resulting in effective tax rate being increased from 33.99% to
34.6%.
2. Wealth-tax proposed to be abolished
Wooing Foreign Investment
CORPORATE TAX PROPOSALS
WOOING FOREIGN INVESTMENT
Pass through status given to Category-I and Category-II Alternative
Investment Funds (AIF)
Presently, pass through status has been given to Venture Capital Company
(VCC) and Venture Capital Fund (VCF), whereby income received by VCC
and VCF from Venture Capital Undertaking (VCU) is exempt from taxation
in the hands of the VCC and VCF and is instead taxable in the hands of the
Beneficiaries of VCC and VCF, as if the income was received directly by the
Beneficiaries from the VCU. This ensured applicability of exemption
provided by favourable tax treaties resulting in such income not being
taxed in India.
Fund Manager located in India
Establishment of offshore funds
not
to
constitute
a
Permanent
At present activities of a fund manager present in India with respect to the
off shore fund could be treated as a business connection or a permanent
establishment (PE) of the offshore fund in India resulting in profits of the
offshore fund being taxed in India. Also, the offshore fund could be
treated to be resident in India by virtue of its control and management
being situated in India.
It is proposed to amend the current provisions to provide that a fund
manager of offshore fund would not be treated as the business connection
or PE of the offshore fund. The proposed amendment is to apply to
offshore funds and fund managers that meet the conditions stipulated.
Reduced withholding tax rate on interest extended for FIIs and QFIs
However, VCC and VCF are only a type of Category-I AIF. It is proposed to
extend the benefit of pass through status to all types of pooled investment
vehicles (other than hedge funds) set up under Category-I and CategoryII AIF, with respect to income other than business income. This benefit
would be available irrespective of whether such funds are set up as a
Trust, Company or a LLP etc. It was also clarified that the provisions of
Dividend Distribution Tax (DDT) and tax on distributed income (buy-back
tax) would not apply to payment made to unit holders of such funds.
Withholding tax at the reduced rate of 5% was provided for interest
earned between 1st June, 2013 and 1st June, 2015 by FIIs and QFIs, on
investments in Government Securities and rupee denominated corporate
bonds. The reduced withholding tax period has been proposed to be
extended to interest earned up to 30th June, 2017.
Further, it is proposed that the income received by the investment fund
would not be subject to TDS.
Finance Act, 2013 under the regime of Congress lead government had
increased the rate of tax on Royalty income and Fees for technical
services, earned by non-residents, from 10% to 25%. The present
government has reverted to the pre-2013 rates; reducing the tax rate to
10% on royalty and fees for technical services earned by non-residents.
It would also be mandatory for the fund to file its return of income
regardless of whether it has any taxable income or not.
Reduction on tax-rate for Royalty and Fees for technical services for nonresidents
REITs and INVITs
Real Estate Investment Trusts (REIT) and Infrastructure Investment Trust
(Invit) were introduced by Finance Act (No.2), 2014 to incentivise
investment in real estate and infrastructure and were collectively referred
to as ‘business trusts’.
Swapping of shares by sponsors
The existing provisions defer the capital gain in the hands of the sponsor
when the sponsor exchanges the shares of the SPV, which holds the
assets, with the units of the Business Trust. The tax is deferred and
payable at the time of transfer of the units of the Business Trust.
However, the benefit of exemption long term capital gain and reduced
rate of 15% where the gain is short term is not available to the sponsors
on sale of such swapped units.
In order to do away with the disadvantageous position faced by sponsors
on exchange of shares of the SPV, it is proposed to exempt the gain made
on swapped units transferred under an IPO or subsequent sale on stock
exchange.
However, there is no corresponding proposed amendment with respect
Minimum Alternate Tax (MAT) payable.
Pass through status for rental income received by REITs
REITs predominantly earned income by way of rentals through property
either held directly by the REIT or through an SPV. In order to provide
pass through status to the rental income received by the REIT, it is
proposed to exempt such income in the hands of the REIT and tax it as
rental income in the hands of the unit holder. However, it is also proposed
that such rental income distributed by REITs to its unit holder shall be
subject to TDS at the rate of 10% where the unit holder is a resident and
the applicable rate of tax in case of non-resident unit holder.
Furthermore, in order to ensure that the income is not taxed in the hands
of the REIT, it is proposed that no tax shall be deducted at source on
payment of rental income to the REIT.
Manufacturing & Generation of Employment
MAKE IN INDIA- MANUFACTURING AND GENERATION OF EMPLOYMENT
to factories hived off or transferred from an existing entity or acquired as
a result of amalgamation.
Promotion of industrialisation and economic growth for Andhra Pradesh
and Telangana
Encouraging manufacturing and power sector to acquire new plant and
machinery early in the year
In order to boost the manufacturing sector in the said states, it is
proposed to provide an additional investment allowance of 15% of the
cost of new plant and machinery acquired and installed in an undertaking
or enterprise set up in notified areas, for manufacture or production of any
article or thing. The allowance will be available for machinery acquired
between 1st April, 2015 and 31st March, 2020. This allowance is proposed
to be in addition to other allowances prevalent.
At present manufacturing and power sector are permitted an additional
depreciation of 20% on plant and machinery acquired. However, where
the plant and machinery is acquired in the second half of the financial year
only 50% of such additional depreciation is permitted.
The allowance will be subject to certain conditions including that the asset
must not be transferred for a period of 5 years after acquisition unless in
course of amalgamation or demerger. Also, assets such as office
appliances including computers and vehicles would not qualify as eligible
assets.
Furthermore, it is proposed to increase the rate of depreciation from 20%
to 35% on new plant and machinery (other than a ship and aircraft)
acquired between 1st April, 2015 and 31st March, 2020, to be used in
undertaking or enterprise set up for manufacture or production in the
notified area in the said states.
Encouragement for generation of employment
An amendment is proposed to extend the benefit of deduction equal to
30%, of ‘additional wages’ paid to regular workmen, to all persons having
manufacturing units and not just companies. Furthermore, to provide the
deduction to smaller units, meaning of ‘additional wages’ proposed to be
amended to mean wages paid to workmen in excess of 50 workmen
instead of 100 workmen. However, such deduction would not be available
It order to encourage manufacturing and power sector to acquire new
plant and machinery in the first half of the financial year, it is proposed to
disallow the existing 50% of the additional depreciation (20%) where the
asset is acquired in the latter half of the financial year and defer the
benefit of 50% of additional depreciation to the succeeding financial year.
INTEREST RECEIVED BY FOREIGN BANKS FROM ITS INDIAN BRANCHTAXABLE
India having board meetings through video conferencing could result in
the foreign company being treated as resident of India.
The special bench of Income Tax Appellate Tribunal (ITAT) in the case of
Sumitomo Mitsui Corporation [136 ITD- 166 TBOM] held that the interest
payable by a Permanent Establishment (PE) in India of a foreign bank will
not be taxable in India as the branch is not a separate entity and interest
received from self cannot not be taxable.
MERGER OF SIMILAR SCHEMES OF MUTUAL FUNDS- Capital gains
exemption
In order to overcome the effect of the said judgment, it is proposed that
interest received by foreign banks from its branch in India will be taxable
in India and such interest payment is also proposed to be subject to TDS.
FOREIGN COMPANIES: To be cautious to avoid being treated as resident
of India
At present a foreign company is treated as a resident of India if control
and management of such company is wholly situated in India. Control and
management is said to be situated where the key decisions of the
company are made and is generally where the board of the company
meets. Therefore, where even a single board meeting of a foreign
company took place outside India, such foreign company was not treated
as a resident of India. A Company which is treated as resident of India has
to pay income-tax in India on its world-wide profits.
It is proposed to amend the legislation to provide that where a foreign
company’s place of effective management is said to be in India, at any
time in the year, such company is to be treated as resident of India. The
proposed amendment to use the term “place of effective management”
(POEM) is to bring the domestic legislation at par with terminology used in
the tax treaties. Accordingly, even if one board meeting of the foreign
company is said to take place in India, such foreign company could be
treated as resident of India. Directors of foreign companies present in
In order to encourage consolidation of different schemes having similar
features and to reduce the number of schemes, it is proposed to exempt
capital gains in the hands of the unit holders. The cost of acquisition of
the new unit would be the same of the original unit and the holding period
for the purpose of the capital gain on onwards sale would also be taken to
be from the date of acquisition of original unit.
MAT- RATIONALISATION
Presently, where a Company is a member of an Association of Persons
(AOP) and the income is not taxable in the hands of the Company under
normal provisions the same was yet taxable under Minimum Alternate Tax
(MAT), as the same increases the book profits. It is proposed to amend
the MAT provisions to provide for exemption from MAT by adjusting the
book profits to exclude such income received from an AOP.
Furthermore, Finance Act (No.2), 2014 clarified that the securities held by
FIIs would be treated as capital asset and any income on transfer of such
securities would amount to capital gain and not business income.
However, the existing provisions of MAT are applicable to such gain
resulting in tax at the rate of 18.5% of the book profits.
It has been proposed to provide exemption from MAT on transfer of
securities held by FIIs, other than short term capital gain on transfers on
which STT is not payable.
Individual Taxpayers
BENEFITS PROPOSED FOR INDIVIDUAL TAXPAYERS
Sukhanaya Samridhi Account Scheme: For Girl Child
A special saving instrument was introduced for the girl child pursuant to
the budget announcement in July 2014. The investments made under this
scheme will be eligible for deductions under section 80C of the Act.
Furthermore, it is proposed that the interest accruing on such deposits or
any withdrawal from the said scheme will be exempt from tax. Hence,
allowing a double benefit to encourage investments for the welfare of the
girl child. Also, the said provisions are to be applicable retrospectively
w.e.f 1st April, 2015.
HEALTH INSURANCE PREMIA: DEDUCTION INCREASED
It is proposed to increase the deduction in case of expenditure on health
insurance by individual on himself or his family from Rs. 15,000/- to
25,000/-. Further, the individual can also get an increased deduction of
Rs. 30,000/- instead of Rs. 20,000/- on expenditure towards health
insurance of his parents.
It is also proposed to allow deduction for expenditure on health insurance
premia of very senior citizens, being over the age of 80 years, upto a
maximum of Rs. 30,000/-. However, the total deduction allowed to an
individual towards premia and medical expenditure for himself and his
family would be capped at Rs. 30,000/-. Similarly, the deduction for such
expenditure on parents would also be capped at Rs. 30,000/-.
CHRONICALLY ILL VERY SENIOR CITIZENS: HIGHER DEDUCTION
ALLOWED FOR MEDICAL EXPENSE ON
It is proposed to increase the deduction from Rs. 60,000 to Rs. 80,000/for amount paid for medical treatment of very senior citizens afflicted with
certain chronic and protracted diseases such as cancer, full blown AIDS,
thalassemia, Haemophilia etc.
PEOPLE WITH DISABILITY: HIGHER DEDUCTION FOR MEDICAL EXPENSE
Deduction for medical expense with respect to a dependent person with
disability has been proposed to be increased from Rs. 50,000/- to Rs.
75,000/- and Rs. 1,00,000/- to Rs. 1,25,000/- for expense on dependents
who have severe disability.
PROMOTING INVESTMENT IN SOCIAL SECURITY
Deduction for amount paid towards annuity plan for receiving pension
from a fund set up under pension scheme has been enhanced from Rs.
1,00,000/- to Rs. 1,50,000.
NATIONAL PENSION SCHEME: ADDITIONAL DEDUCTION
In order to encourage contribution towards National Pension Scheme
(NPS), additional deduction of Rs. 50,000/- is proposed to be allowed for
contributions made by individuals under the NPS.
SWACHCHH BHARAT: TAX BENEFITS
100% deduction is proposed for donation made to “Swachh Bharat Kosh”,
a fund set up to mobilise resources for improving sanitation facilities and
“Clean Ganga Fund”. However, amount spent as part of CSR on such
funds would not be eligible for deduction to the donor.
Furthermore, exemption has been provided to such funds from tax on
their receipts subject to conditions stipulated in the Act.
OTHER PROPOSED AMENDMENTS
GAAR DEFERRED, FOR GOOD?
GAAR provisions were to be applicable from 1st April, 2015 with
retrospective effect. It is proposed to defer the applicability of the
provisions from 1st April, 2017 and also to have them prospectively
applicable. The Finance Ministry has made a mention of on-going Base
Erosion and Profit Shifting (BEPS) project under OECD and India’s active
participation therein. The FM has found it appropriate to defer GAAR
provisions to be implemented together with the BEPS regime to counter
aggressive tax avoidance.
SCRAPPING OF DTC!
The Hon’ble Finance Minister in his budget speech mentioned that most of
the provisions of the DTC have been incorporated in the Income-tax Act,
1961 and that the 1961 Act is supported by years of jurisprudence, which
could be washed away if a new enactment is brought in and would also
result in increased litigation. Accordingly, DTC is not deemed to be
relevant anymore.
TAXATION OF INDIRECT TRANSFER- CLARIFICATIONS!
Finance Act, 2012 had provided that transfer of shares of a foreign
company albeit between two non-residents will be taxable in India if the
shares being transferred derive their value, directly or indirectly, from
assets situated in India.
The term substantial was not defined for the said section and it lead to
litigation. However, recently the Delhi High Court in the case of DIT (IT) v.
Copal Research Limited, Mauritius and Others, dated 14/8/2014 held that
the meaning of word substantial in the said provision would mean at least
50%. The High Court also referred to the Shome committee’s report.
In order to provide clarification in the Act, it is proposed to provide that
indirect transfers would be taxable in India, where the foreign shares
being transferred derive at least 50% of value from assets situated in
India and the value of the Indian assets exceeds Rs. 10 crores.
Furthermore, under the proposed legislation the gain from shares is to be
taxed in proportion to the value derived from India: the detailed
mechanism is proposed to be provided by insertion of rules. Also,
exemption will be provided to transfer of foreign shares as part of
amalgamation or demerger. Some reporting requirements are also
proposed to be applicable to the Indian concern which holds the assets,
the value of which reflects in the shares of the foreign company.
DOMESTIC TRANFER PRICING- Increase in threshold
Currently the domestic transfer pricing provisions are applicable to
transaction above Rs. 5 crores in a year. In order to reduce the
compliance in case of small businesses, the threshold exemption has been
increased to Rs. 20 crores.
YOGA- A CHARITABLE ACTIVITY
Publishing books on Yoga or holding programs of Yoga have been
proposed to be included within the meaning of charitable activity.
Accordingly, the income from such activities will be exempt provided the
entities are registered as charitable entity and adhere to the conditions set
out in the Act.
STRENGTHENING OF TDS PROVISIONS AND REPORTING
At present person responsible for deducting tax at source on payment of
salary takes into account various investments and deductions being
claimed by the employee. It is proposed to amend the provisions to
provide that person responsible for paying salary shall collect proof from
its employees of any deduction and allowances claimed.
It is proposed to extend the scope of reporting in Form 15CA and Form
15CB for all remittances regardless of whether the sums are chargeable
under the Act or not.
RESIDENCE OF INDIAN SEAFARERS ON SHIP LEAVING INDIA
It has been proposed to amend the residence provisions under the Act to
provide for a computation mechanism for computing number of days
spent in Indian crew on board a foreign bound ship leaving India. It has
been proposed that conditions may be prescribed in this regard.
ABOLISHMENT OF WEALTH TAX
In order to reduce compliance cost it has been proposed to abolish Wealth
Tax Act, 1957 and instead increase the rate of surcharge by 2% in case of
individual and domestic Companies earning income in excess of Rs. 1
crore.
Measures to Curb Black Money
CURBING BLACK MONEY IN RELATION TO TRANSFER OF IMMOVABLE
PROPERTY
The existing provisions prohibit payment and repayment of loan or deposit
exceeding Rs. 20,000/- in cash. It is proposed to extend the said
prohibition to payment of any sum in relation to transfer of an immovable
property including sums by way of advance and repayment of the same in
case of the transfer not taking place. The Rs. 20,000/- limit is proposed to
be an aggregate limit for loan, deposits and sums in relation to transfer of
immovable property and would also cover past payments received
remaining unpaid. Corresponding amendments also proposed in the
penalty provisions. The proposed amendment is to be effective from 1 st
June, 2015.
SPECIAL BILL TO CURB BLACK MONEY
A comprehensive new law to be introduced in the Parliament to deal with
black money parked outside the country.
Salient Features:
Taxpayer who conceals income/assets or inadequately discloses foreign
assets:




shall be liable for prosecution with punishment of rigorous
imprisonment up to ten years;
shall also be subject to a penalty of 300% of tax evaded;
The offence shall be non-compoundable and
The offender shall not be permitted to approach the settlement
commission.
Taxpayer who has income and assets abroad, but does not file returns or
files returns with inadequate disclosure of foreign assets:


shall be liable for prosecution with punishment of rigorous
imprisonment up to seven years;
shall also be subject to pay a penalty of 30% on any undisclosed
foreign asset or undisclosed income from any foreign asset .
BENAMI TRANSACTIONS (PROHIBITION) BILL; has been proposed to curb
black money domestically.
PREVENTION OF MONEY-LAUNDERING ACT, 2002 (PMLA)



The offence of concealment of income or evasion of tax of a
foreign asset shall be a predicate offence.
This provision would enable the enforcement agencies to attach
and confiscate unaccounted assets held abroad and launch
prosecution against persons indulging in laundering of black
money.
The definition of 'proceeds of crime' will be amended to enable
attachment and confiscation of equivalent asset in India where the
asset located abroad cannot be forfeited.
Contact Details: [email protected]
Mumbai Office
1203, One Indiabulls Centre,
Tower 2, Floor 12B,
841, Senapati Bapat Marg
Elphinstone Road
Mumbai 400 013
India
Tel: (91 - 22) 6658 8000
Fax: (91 - 22) 6658 8001
Mumbai Office (Litigation)
C-16, Dhanraj Mahal, 3rd Floor, Apollo Bunder, Colaba, Mumbai 400 001
India
Tel: (91 - 22) 6152 6000
Fax: (91 - 22) 6152 6001
Delhi Office
4 Aradhna Enclave,
R.K. Puram Sector 13
Opposite Hotel Hyatt,
New Delhi - 110 066
India
Phone : +91 11 66616666
Fax : +91 11 66616600
Pune Office
301, Power Point
Lane No. 6, Koregaon Park
Pune – 411 001
India
Tel: +91 20 6900 0930
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