THE INDIAN BUDGET – A PERSPECTIVE
Budget 2014 – What is it for me?
Yesterday in the Learning & Development group, I shared some key budget provisions pertaining to the Corporate Taxation.
Let us see some more provisions of the budget.
Dividend Distribution Tax (DDT) to be paid after grossing up net profits distributed by the company. Currently, Domestic companies and mutual funds pay dividend distribution tax (DDT) on the ‘net’ amount, i.e., amount paid after reduction of distribution tax. DDT to be levied on gross amount of dividends. Effective rate therefore increased from the current 16.995% to 20.48%.
o It may be noted that prior to introduction of dividend distribution tax (DDT), the dividends were taxable in the hands of the shareholder. The gross amount of dividend representing the distributable surplus was taxable, and the tax on this amount was paid by the shareholder at the applicable rate which varied from 0 to 30%. However, after the introduction of the DDT, a lower rate of 15% is currently applicable but this rate is being applied on the amount paid as dividend after reduction of distribution tax by the company.
o Therefore, the tax is computed with reference to the net amount. Similar case is there when income is distributed by mutual funds.
o Due to difference in the base of the income distributed or the dividend on which the
distribution tax is calculated, the effective tax rate is lower than the rate provided in the respective sections.
o In order to ensure that tax is levied on proper base, the amount of distributable income and the dividends which are actually received by the unit holder of mutual fund or shareholders of the domestic company need to be grossed up for the purpose of computing the additional tax.
o Therefore, it is proposed to amend section 115-0 in order to provide that for the purposes of determining the tax on distributed profits payable in accordance with the section 115-0, any amount by way of dividends referred to in sub-section (1) of the said section, as reduced by the amount referred to in sub-section (1A) [referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits.
o Thus, where the amount of dividend paid or distributed by a company is Rs. 85, then DDT under the amended provision would be calculated as follows:
■ Dividend amount distributed = Rs. 85
■ Increase by Rs. 15 [i.e. (85*0.15)/(1-0.15)]
■ Increased amount = Rs. 100
■ DDT@ 15% of Rs. 100= Rs. 15
■ Tax payable u/s 115-0 is Rs. 15
■ Dividend distributed to shareholders = Rs. 85
o Similarly, it is proposed to amend section 115R to provide that for the purposes of determining the additional income-tax payable in accordance with sub-section (2) of the said section, the amount of distributed income shall be increased to such amount as would, after reduction of the additional income-tax on such increased amount at the rate specified in sub-section (2), be equal to the amount of income distributed by the Mutual Fund, o These amendments will take effect from 1st October, 2014.
Concessional tax rate of 15% on dividend received by Indian companies from specified foreign companies shareholding of 26 per cent or more) continues without any sunset clause.
Annual Information return will henceforth be called Statement of financial transaction or reportable account.
Tax deducted at source
- Concessional rate of withholding tax of 5% on interest payments in respect of borrowing in foreign currency (ECB) extended to all long term borrowings instead of only infrastructure bonds. Further, the benefit to be extended for the bonds issued upto 30 June 2017 as against 30 June 2015.
- Disallowance on account of non / late deduction and deposition of Tax at source under Sec 40(a) (i) is now extended to cover all categories of payments to a resident on which tax is deductible, including salaries. Amount of disallowance to be restricted to 30% of amount of expenditure. Section 40(a)(i) will now allow the deductor to claim deduction on payment made to nonresidents, if tax is deducted and is paid on or before due date of filing of return.
- Section 200 & 201 amended to allow the deductor to file correction statements
- Unlisted securities and mutual funds to be treated as LT Capital assets if they are held for a period of more than 36 months.
- Capital gain exemption on investment in a residential house property is available only if such investment is made in a residential house in India.
- New provisions introduced to treat the money received as an advance or otherwise in the course of negotiations for transfer of a capital asset as income chargeable to tax under Income from other sources if such sum is forfeited and the negotiations do not result in transfer of capital asset.
- Increase in the rate of tax on long term capital gains from 10% to 20% on LTCG on transfer of units of Mutual funds not linked to equity.
- Mode of computing Cost inflation Index changed to provide that “Cost Inflation Index” in relation to a previous year means such index as may be notified by the Central Government having regard to seventy-five percent of average rise in the Consumer Price Index (Urban) for the immediately preceding previous year to such previous year.
- Sec 54EC restricted only to 50 lacs despite time available for two AYs
- Income arising to Foreign Institutional Investors from transactions in securities to be treated as capital gains.
- Amendment to Section 54 and 54F regarding capital Gains and Investment in House property:
o The existing provisions contained in sub-section (1) of section 54, inter alia, provide that where capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, and the assessee within a period of one year before or two years after the date of transfer, purchases, or within a period of three years after the date of transfer constructs, a residential house then the amount of capital gains to the extent invested in the new residential house is not chargeable to tax under section 45 of the Act. o The existing provisions contained in sub-section (1) of section 54F, inter alia, provide that where capital gains arises from transfer of a long-term capital asset, not being a residential house, and the assessee within a period of one year before or two years after the date of transfer, purchases, or within a period of three years after the date of transfer constructs, a residential house then the portion of capital gains in the ratio of cost of new asset to the net consideration received on transfer is not chargeable to tax.
O The benefit was intended for investment in one residential house within India,
o Accordingly, it is proposed to amend the aforesaid sub-section (1) of section 54 so as to provide that the rollover relief under the said section is available if the investment is made in one residential house situated in India,
o It is further proposed to amend the aforesaid sub-section (1) of section 54F so as to provide that the exemption is available if the investment is made in one residential house situated in India.
o These amendments will take effect from 1st April, 2015 and will accordingly apply in relation to assessment year 2015-16 and subsequent assessment years.
- Any trust or institution registered under sec 12 AA cannot claim exemption under section 10 except under Sec 10 (23C).
- Registration under sec 12AA is permissible for claiming tax exemption for earlier years also
- Sec 12AA widened to give more power to commissioner to cancel approval.
- International Transaction and Transfer Pricing
- Roll back provisions introduced for APAs. It is proposed that the APA may also cover four years preceding the years covered by the APA, subject to the rules that will be framed in this regard. Introduction of a ‘roll-back’ provision in the Advance Pricing Agreement (APA) scheme so that an APA entered into for future transactions is also applicable to international transactions undertaken in the previous 4 years in the specified circumstances –
o Section 92CC of the Act provides for Advance Pricing Agreement (APA). It empowers the Central Board of Direct Taxes, with the approval of the Central Government, to enter into an APA with any person for determining the Arm’s Length Price (ALP) or specifying the manner in which ALP is to be determined in relation to an international transaction which is to be entered into by the person. The agreement entered into is valid for a period, not exceeding 5 previous years, as may be mentioned in the agreement. Once the agreement is entered into, the ALP of the international transaction, which is subject matter of the APA, would be determined in accordance with such an APA. o In many countries the APA scheme provides for “roll back” mechanism for dealing with ALP issues relating to transactions entered into during the period prior to APA. The “roll back” provisions refers to the applicability of the methodology of determination of ALP, or the ALP, to be applied to the international transactions which had already been entered into in a period prior to the period covered under an APA. However, the “roll back” relief is provided on case to case basis subject to certain conditions. Providing of such a mechanism in Indian legislation would also lead to reduction in large scale litigation which is currently pending or may arise in future in respect of the transfer pricing matters.
o Therefore, it is proposed to amend the Act to provide roll back mechanism in the APA scheme. The APA may, subject to such prescribed conditions, procedure and manner, provide for determining the arm’s length price or for specifying the manner in which arm’s length price is to be determined in relation to an international transaction entered into by a person during any period not exceeding four previous years preceding the first of the previous years for which the advance pricing agreement applies in respect of the international transaction to be undertaken in future, o This amendment will take effect from 1st October, 2014.
Power to levy penalty u/s 271G granted to the TPOs.