Understanding the Tax proposals in the Budget. Expert view by Ernst & Young

11 Jul,2014

 

The devil, as they say, is in the details. We don’t have the fine print yet but here’s a Tax Alert for the M&E sector from leading consulting firm Ernst & Young (now referred to as EY)

 

Direct Taxes

:: No changes have been proposed to the existing tax rates (including surcharge  and education cess)

 

:: Retrospective amendments introduced by Finance Act 2012 have not been repealed. However, the Finance Minister has announced in his speech that all fresh cases involving applicability of retrospective amendment on indirect transfers will be scrutinized by the high level committee of CBDT before initiation of any action by the Assessing Officer

 

:: Presently, the tax legislation provides that a taxpayer can approach the Authority for Advance Ruling (‘AAR’) only to determine the tax liability of a non-resident. The Finance Minister in his speech has proposed to permit resident taxpayers to approach the AAR (subject to fulfillment of prescribed threshold limits) – necessary legislative amendments are expected to be made in this regard. Further, additional benches of AAR will be constituted to expedite the disposal of cases pending before the AAR.

 

:: The New Companies Act 2013 provides for companies meeting prescribed criteria to spend certain percentage of their profit on activities relating to Corporate Social Responsibility (‘CSR’). A clarificatory explanation has been proposed to Section 37(1) of the Act that amount spent on CSR activities for compliance with the provisions of Companies Act 2013 will not be allowed as a deduction. However, CSR expenditure of the nature described in Section 30 to 36 of the Act shall be allowed as deduction, subject to satisfaction of conditions of those sections.

 

:: Presently, provisions of Section 40(a)(ia) of the Act warrant a complete disallowance of expenditure in case of non-deduction or non-deposit of TDS on payments to residents. This Section has now been amended to provide a disallowance of 30% of the expenditure. The scope of Section 40(a)(ia) of the Act has now been proposedto include all payments to residents (currently, payments like salaries are not covered within the scope of Section 40(a)(ia) of the Act).

 

:: As per the current provisions of Section 40(a)(i) of the Act, payments made to non-residents are not allowed as a deduction if the applicable withholding tax thereon is not deducted and deposited into the Indian Government Treasury before the end of the relevant financial year. It is now proposed that payments made to non-residents would be allowed as a deduction in the relevant financial year provided that the withholding taxes deducted are deposited into the Indian Government Treasury by the due date of filing the tax return.

 

:: Presently, shares of a company (not listed on a recognized stock exchange in India) or a non-equity oriented mutual fund qualified as a long term capital asset where such assets were held for a period of not less than 12 months. It has now been proposed to provide that where such assets are held for a period of less than 36 months, they shall be considered as short term capital assets

 

:: Section 201 proceedings in case of withholding tax default in respect of payments made to resident payees can now be initiated within 7 years from the end of the financial year in which payment is made or credited. The time limit of 2 years from the end of the financial year in which withholding tax returns are filed has been deleted, since generally withholding tax defaults would generally be in respect of transactions not reported in the withholding tax returns.

 

:: With effect from 1 October 2014, DDT to be calculated on the gross amount of dividends declared by the Company.

 

:: The Finance Minister in his speech has announced that he proposes to review the Direct Tax Code (‘DTC’) in its current form and accordingly, take a view on the whole matter.

 

Transfer Pricing

:: Given the overwhelming response received in the first 2 years of the APA program, it has been proposed to further strengthen the administrative set-up of the APA program so as to expedite processing of the APA applications.

 

:: Presently, a taxpayer could apply for an APA only for future years (ie the APA application had to be filed before commencement of the first financial year to be covered under the APA). Keeping in line with international practice, rollbackprovisions have now been introduced wherein the APA could also cover the four previous years immediately preceding the first year covered under the APA, subject to conditions that may be prescribed. This amendment has been introduced with effect from 1 October 2014.

 

:: Presently, as per the wordings of the existing legislation, there was ambiguity as to whether the provisions relating to ‘deemed international transactions’ would apply where both the contracting entities are Indian residents. The legislation has been amended to clarify that the provisions relating to ‘deemed international transactions would also apply to transactions between two resident entities.

 

:: Presently, the Indian transfer pricing regulations provide for computation of arm’s length price based on the ‘arithmetic mean’ of comparable prices. In line with international practice, the Finance Minister in his speech today has proposed to introduce computation of the arm’s length price based on the ‘Range’ concept (except in cases where adequate numbers of comparables are not available). Necessary legislative amendments are expected to be made in this regard.

 

:: Presently, the Indian Revenue authorities have been taking a position that only single year comparable data should be considered for computing the arm’s length price. The Finance Minister in his speech has clarified that use of multiple year data can be used for computation of the arm’s length price. Necessary legislative amendments are expected to be made in this regard.

 

Indirect Taxes

Service tax

:: Service tax rate remains unchanged at 12.36%

 

:: Sale of space on all media such as internet, out-of-home media, on film  screen in theatres, bill boards, aerial advertising, etc. is now again proposed to be made leviable to service tax (Sale of space on Radio and TV was always taxable)

 

:: Sale of space on Print media continues to remain in the negative list and not be liable to service tax.

 

:: Limitation of six months introduced for claiming Cenvat credits on input and input services.

 

Excise Duty

:: Rate of excise duty on manufacture of ‘gloves specially designed for use in sports’ has been reduced from 12% to 2% (without availability of cenvat credit benefit) and 6% (with cenvat credit benefit).

 

Customs Duty

:: The Basic Customs Duty (‘BCD’) on LCD and LED TV panels of below 19 inches as well as on colour picture tubes for manufacture of cathode ray TVs has been reduced from 10% to NIL.

 

Interest and Penalty

:: Deposit of 7.5% to 10% of the total tax and penalty demanded proposed, made a mandatory pre-condition for being eligible to file an appeal under service tax and excise legislations.

 

:: Increased rate of interest on delayed payment of service tax

– Interest of 24% to be payable on delay of over 6 months to a year

– Interest of 30% for delay beyond one year

 

The EY report can be accessed at: http://www.ey.com/Publication/vwLUAssets/Budget_ Alert_Media_Ent_2014/$FILE/Budget_Alert_Media_Ent_2014.pdf

 

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