The SUPER Budget: Analysis

KEY HIGHLIGHTS:

1) Fiscal Deficit targeted at 4.1% for 2014-15 and to bring it to 3% by 2016-17.

2) GST to be introduced by the year end.

3) No retrospective amendments by this Government.

4) A new committee under CBDT to study cases pending because of retrospective amendments.

5) FDI on Defense and Insurance raised to 49%.

6) To allow FDI upto 49% in select sectors.

7) E Visa to be allowed on 9 major Airports.

8) PSU Banks to need a Capital Infusion of Rs 2.48 Lakhs Crore by 2018.

9) Change in Dividend Distribution Tax Calculation applicable from 1st Oct 2014.

10) Various Plans And Budget Allocations

DIRECT TAX PROVISIONS

1) New Slab Rates

FOR INDIVIDUALS & HUF & BODY OF INDIVIDUALS

Upto Rs.2,50,000- Nil.

Rs. 2,50,001 to Rs. 5,00,000- 10 per cent.

Rs. 5,00,001 to Rs. 10,00,000- 20 per cent.

Above Rs. 10,00,000- 30 per cent.

FOR SENIOR CITIZEN

Upto Rs.3,00,000- Nil.

Rs. 3,00,001 to Rs. 5,00,000- 10 per cent.

Rs. 5,00,001 to Rs.10,00,000- 20 per cent.

Above Rs. 10,00,000- 30 per cent.

FOR SENIOR CITIZEN AGED ABOVE 80 Years

Upto Rs. 5,00,000- Nil.

Rs. 5,00,001 to Rs. 10,00,000- 20 per cent.

Above Rs. 10,00,000- 30 per cent.

If Total Income crosses One Crore then the above rates would be enhanced by 10% Surcharge.

2) 80C Limit Enhanced to Rs 150000 from Rs 100000.

3) Deduction from House property Enhanced from Rs 150000 to Rs 200000.

4) Amendment in Section 32AC of Income Tax Act, Limit reduced from 100 Crore to Rs 25 Crore. Section 32AC states that 15% Investment Allowance would be allowed in case company Invest Rs 25 Crore or more in Plant and Machinery. 15% is over and above the Depreciation.

5) 10 year tax holiday extended to the undertakings which begin generation, distribution and transmission of power by 31.03.2017.

6) 2 New Business Added for Deduction Under Section 35AD

a. Slurry Pipeline for transportation of Iron Ore.

b. Setting Up and Operating a Semi conductor wafer fabrication Manufacturing Unit.

7) Use period of 8 years now specified under section 35AD.

8) Period of holding for short term capital gain has been increased to 36 Months for shares.

9) Foreign Dividend received by Indian companies now will get low tax benefit of 15% without limiting it to particular Assessment Year.

10) Section 92CC of the Act relates to Advance Pricing Agreement (APA). However, these agreement were valid for future transactions and transaction entered earlier usually enter into Litigations. In order to streamline this, APA may be sought for 4 previous years.

11)  Security held by FII which has invested such In such security in accordance with regulations made under SEBI Act,1962 would be treated at Capital Asset and any income arising from that would be capital Gain.

12)  Entities other than companies claiming deduction under Section 35AD, now under the preview of Alternate Minimum Tax taxable @ 18.5%. However benefit of depreciation would be allowed.

Example:

Total income: Rs. 60

Deduction claimed under Chapter VI-A: Rs. 40

Deduction claimed under section 35AD on a capital asset: Rs.100

Computation of adjusted total income for the purposes of AMT

Total income: Rs. 60

Addition:

(i) deduction under Chapter VI-A (on non-specified business): Rs. 40

(ii) deduction under section 35AD (on specified business): Rs.100

Less: depreciation under section 32: Rs. 15  Rs. 85

Adjusted total income under section 115JC: Rs. 185

13) Any advance forfeited against any capital asset would now be taxable under income from other Sources. Also, advance forfeited earlier was reduced from cost of asset and now it won’t be reduced to remove double taxation.

14) Any sum received from Life Insurance companies which is not exempt under section 10(10D) of the Act, including sum received as bonus would now be subject to TDS @2% . However if amount received is less than 1 Lac no TDS is to be deducted.

15) Transfer pricing officer now powered to levy penalty Under Section 271G of the Act. Earlier only AO has the power to levy penalty.

16) Expenditure incurred under CSR would not be allowed as deduction under section 37 of Income tax Act.

17) In case of Non deduction of TDS or nonpayment of tax, the disallowance would be restricted to 30% of the amount of expenditure.

18) Applicability of section 40(a)(ia) {i.e. disallowance of expenditure in case TDS is not deducted or not paid} on payments made under chapter XVII-B {I.e Salary, director remuneration etc.}

19) Presumptive tax in case of plying, hiring or Leasing of goods carriages in case assessee does not hold 10 good carriages at any time during the year. Presumptive tax increased to Rs 7500 per vehicle per month.

20) Any transfer of government security carrying a periodic payment of interest from one non resident to another non resident would not be considered as transfer under section 47 of Income Tax Act.

21) Amendment under section 54: Deduction is only available if new resident house is located in India

22) Amendment under section 54F: Deduction is available for only 1 residential house located in India.

23) The eligible date of borrowing in foreign currency extended from 30.06.2015 to 30.06.2017 for a concessional tax rate of 5 percent on interest payments. Tax incentive extended to all types of bonds instead of only infrastructure bonds.

24) Mutual fund company, venture capital company and venture capital fund and securitization fund are now required to furnish a return of income under section 139(4C) of income tax act.

25) Deduction under Section 80CCD now allowed to Private sector employees too. Section 80CCD relates to contribution to pension funds subject to a maximum of 10% of salary.

CHARITABLE INSTITUTION – MAMMOTH CHANGES

The existing provisions of section 11 of the Act provide for exemption to trusts or institutions in respect of income derived from property held under trust and voluntary contributions subject to various conditions contained in the said section. The primary condition for grant of exemption is that the income derived from property held under trust should be applied for the charitable purposes, and where such income cannot be applied during the previous year, it has to be accumulated in the modes prescribed and applied for such purposes in accordance with various conditions provided in the section. If the accumulated income is not applied in accordance with the conditions provided in the said section, then such income is deemed to be taxable income of the trust or institution.

Section 13 of the Act provides for the circumstances under which exemption under section 11 or 12 in respect of whole or part of income would not be available to a trust or institution.

The sections 11, 12, 12A, 12AA and 13 constitute a complete code governing the grant or withdrawal of registration and its cancellation, providing exemption to income, and also the conditions under which a charitable trust or institution needs to function in order to be eligible for exemption. They also provide for withdrawal of exemption either in part or in full if the relevant conditions are not fulfilled.

Several issues have arisen in respect of the application of exemption regime in cases of trusts or institutions in respect of which clarity in law is required.

The first issue is regarding the interplay of the general provision of exemptions which are contained in section 10 of the Act vis.-a-vis. the specific and special exemption regime covered in sections 11 to 13. As indicated above, the primary objective of providing exemption in case of charitable institution is that income derived from the property held under trust should be applied and utilized for the object or purpose for which the institution or trust has been established. In many cases it has been noted that trusts or institutions which are registered and have been claiming benefits of the exemption regime do not apply their income, which is derived from property held under trust, for charitable purposes. In such circumstances, when the income becomes taxable, then a claim of exemption under general provisions of section 10 in respect of such income is preferred and tax on such income is avoided. This defeats the very objective and purpose of placing the conditions of application of income etc. in respect of income derived from property under trust in the first place.

Sections 11, 12 and 13 are special provisions governing institutions which are being given benefit of tax exemption, it is therefore imperative that once a person voluntarily opts for the special dispensation it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions or specific provisions at will. Allowing such flexibility has undesirable effects on the objects of the regulations and leads to litigations.

Similar situation exists in the context of section 10(23C) which provides for exemption to funds, institution, hospitals, etc. which have been granted approval by the prescribed authority. The provision of section 10(23C) also have similar conditions of accumulation and application of income, investment of funds in prescribed modes etc.

Therefore, it is proposed to amend the Act to provide specifically that where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than that relating to exemption of agricultural income and income exempt under section 10(23C)]. Similarly, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 (except the exemption in respect of agricultural income).

The second issue which has arisen is that the existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. The provisions need to be rationalised to ensure that double benefit is not claimed and such notional amount does not get excluded from the condition of application of income for charitable purpose.

In view of the above, it is also proposed to amend the Act to provide that under section 11 and section 10(23C), income for the purposes of application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.

These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.

Clarification in respect of section 10(23C) of the Act

The existing provisions of sub-clause (iiiab) and (iiiac) of section 10(23C) of the Act provide exemption, subject to various conditions, in respect of income of certain educational institutions, universities and hospitals which exist solely for educational purposes or solely for philanthropic purposes, and not for purposes of profit and which are wholly or substantially financed by the Government.

Absence of a definition of the phrase “substantially financed by the Government” has led to litigation and varying decisions of judicial authorities who have, for this purpose, relied upon various other provisions of the Income-tax Act and other Acts. Thus, there is lack of certainty in this regard.

Therefore, it is proposed to amend section 10(23C) by inserting an Explanation that if the Government grant to a university or other educational institution, hospital or other institution during the relevant previous year exceeds a percentage (to be prescribed) of the total receipts (including any voluntary contributions), of such university or other educational institution, hospital or other institution, as the case may be, then such university or other educational institution, hospital or other institution shall be considered as being substantially financed by the Government for that previous year.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.

Cancellation of registration of the trust or institution in certain cases

The existing provisions of section 12AA of the Act provide that the registration once granted to a trust or institution shall remain in force till it is cancelled by the Commissioner. The Commissioner can cancel the registration under two circumstances:

(a) The activities of a trust or institution are not genuine, or;

(b) The activities are not being carried out in accordance with the objects of the trust or institution.

Only if either or both the above conditions are met, would the Commissioner be empowered to cancel the registration, and not otherwise. Therefore, the powers of Commissioner to cancel registration are severely restricted. There have been cases where trusts, particularly in the year in which they have substantial income claimed to be exempt under other provisions of the Act, deliberately violate provisions of section 13 by investing in prohibited mode etc. Similarly, there have been cases where the income is not properly applied for charitable purposes or has been diverted for benefit of certain interested persons. Due to restrictive interpretation of the powers of the Commissioner under section 12AA, registration of such trusts or institutions continues to be in force and these institutions continue to enjoy the beneficial regime of exemption.

Whereas under section 10(23C), which also allows similar benefits of exemption to a fund, Institution, University etc, the power of withdrawal of approval is vested with the prescribed authority if such authority is satisfied that such entity has not applied income or made investment in accordance with provisions of section 10(23C) or the activities of such entity are not genuine or are not being carried out in accordance with all or any of the conditions subject to which it was approved.

Therefore, in order to rationalize the provisions relating to cancellation of registration of a trust, it is proposed to amend section 12AA of the Act to provide that where a trust or an institution has been granted registration, and subsequently it is noticed that its activities are being carried out in such a manner that,—

(i) Its income does not ensure for the benefit of general public;

(ii) It is for benefit of any particular religious community or caste (in case it is established after commencement of the Act);

(iii) Any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or

(iv) Its funds are invested in prohibited modes,

Then the Principal Commissioner or the Commissioner may cancel the registration if such trust or institution does not prove that there was a reasonable cause for the activities to be carried out in the above manner. This amendment will take effect from 1st October, 2014.

Anonymous donations under section 115BBC

The existing provisions of section 115BBC of the Act provide for levy of tax at the rate of 30 % in case of certain assessees, being university, hospital, charitable organization, etc. on the amount of aggregate anonymous donations exceeding five per cent of the total donations received by the assessee or one lakh rupees, whichever is higher.

Due to the mechanism of aggregation of tax provided in section 115BBC, while tax at the rate of 30 percent is levied on the amount of anonymous donations exceeding the threshold, the remaining tax is chargeable on total income after reducing the full amount of anonymous donations. The proper way of computation is to reduce the income by the amount which has been taxed at the rate of 30 per cent.

Therefore, it is proposed to amend section 115BBC to provide that the income-tax payable shall be the aggregate of the amount of income-tax calculated at the rate of thirty per cent on the aggregate of anonymous donations received in excess of five per cent of the total donations received by the assessee or one lakh rupees, whichever is higher, and the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of the anonymous donations which is in excess of the five per cent of the total donations received by the assessee or one lakh rupees, as the case may be.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.

Applicability to earlier years of the registration granted to a trust or institution

The existing provisions of section 12 A of the Act provide that a trust or an institution can claim exemption under sections 11 and 12 only after registration under section 12AA has been granted. In case of trusts or institutions which apply for registration after 1st June, 2007, the registration shall be effective only prospectively.

Non-application of registration for the period prior to the year of registration causes genuine hardship to charitable organizations. Due to absence of registration, tax liability gets attached even though they may otherwise be eligible for exemption and fulfill other substantive conditions. The power of condonation of delay in seeking registration is not available under the section.

In order to provide relief to such trusts and remove hardship in genuine cases, it is proposed to amend section 12 A of the Act to provide that in case where a trust or institution has been granted registration under section 12AA of the Act, the benefit of sections 11 and 12 shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration, -if the objects and activities of such trust or institution in the relevant earlier assessment year are the same as those on the basis of which such registration has been granted.

Further, it is proposed that no action for reopening of an assessment under section 147 shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not obtained the registration under section 12AA for the said assessment year.

However, the above benefits would not be available in case of any trust or institution which at any time had applied for registration and the same was refused under section 12AA or a registration once granted was cancelled.

These amendments will take effect from 1st October, 2014.

INDIRECT TAX PROPOSALS

• To boost domestic manufacture and to address the issue of inverted duties, basic customs duty (BCD) reduced on certain items.

• To encourage new investment and capacity addition in the chemicals and petrochemicals sector, basic customs duty reduced on certain items.

• Steps taken to boost domestic production of electronic items and reduce our dependence on imports. These include imposition of basic customs duty on certain items falling outside the purview of IT Agreement, exemption from SAD on inputs/ components for PC manufacturing, imposition of education cess on imported electronic products for parity etc.

• Color picture tubes exempted from basic customs duty to make cathode ray TVs cheaper and more affordable to weaker sections.

• To encourage production of LCD and LED TVs below 19 inches in India, basic customs duty on LCD and LED TV panels of below 19 inches reduced from 10 percent to Nil.

• To give an impetus to the stainless steel industry, increase in basic customs duty on imported flat-rolled products of stainless steel from 5 percent to 7.5 percent.

• Concessional basic customs duty of 5 percent extended to machinery and equipment required for setting up of a project for solar energy production.

• Specified inputs for use in the manufacture of EVA sheets and back sheets and flat copper wire for the manufacture of PV ribbons exempted from basic customs duty.

• Reduction in basic customs duty from 10 percent to 5 percent on forged steel rings used in the manufacture of bearings of wind operated electricity generators. Exemption from SAD of 4 percent on parts and raw materials required for the manufacture of wind operated generators.

• Concessional basic customs duty of 5 percent on machinery and equipment required for setting up of compressed biogas plants (Bio-CNG).

• Anthracite coal, bituminous coal, coking coal, steam coal and other coal to attract 2.5 percent basic customs duty and 2 per cent CVD to eliminate all assessment disputes and transaction costs associated with testing of various parameters of coal.

• Basic customs duty on metallurgical coke increased from Nil to 2.5 percent in line with the duty on coking coal.

• Duty on ship breaking scrap and melting scrap of iron or steel rationalized by reducing the basic customs duty on ships imported for breaking up from 5 percent to 2.5 percent.

• To prevent misuse and avoid assessment disputes, basic customs duty on semi processed half cut or broken diamonds, cut and polished diamonds and colored gemstones rationalized at 2.5 percent.

• To encourage exports, pre-forms of precious and semi-precious stones exempted from basic customs duty.

• Duty free entitlement for import of trimmings, embellishments and other specified items increased from 3 percent to 5 percent of the value of their export, for readymade garments.

• Export duty on bauxite increased from 10 percent to 20 percent.

 • For passenger facilitation, free baggage allowance increased from Rs.35,000 to Rs.45,000.

• To incentivize expansion of processing capacity, reduction in excise duty on specified food processing and packaging machinery from 10 percent to 6 percent.

• Reduction in the excise duty from 12 percent to 6 percent on footwear of retail price exceeding Rs 500 per pair but not exceeding Rs 1,000 per pair.

• Withdraw concessional excise duty (2 percent without Cenvat benefit and 6 percent with Cenvat benefit) on smart cards and a uniform excise duty at 12 percent.

• To develop renewable energy, various items exempted from excise duty.

• Exemption to PSF and PFY manufactured from plastic waste and scrap including PET bottles from excise duty with effect from 29th June, 2010 to 7th May, 2012.

• Prospective levy of a nominal duty of 2 percent without Cenvat benefit and 6 percent with Cenvat benefit on such PSF and PFY.

• Concessional excise duty of 2 percent without Cenvat benefit and 6 percent with Cenvat benefit on sports gloves.

• Specific rates of excise duty increased on cigarettes in the range of 11 per cent to 72 percent.

• Excise duty increased from 12 percent to 16 percent on pan masala, from 50 percent to 55 percent on unmanufactured tobacco and from 60 percent to 70 percent on gutkha and chewing tobacco.

• Levy of an additional duty of excise at 5 percent on aerated waters containing added sugar.

• To finance Clean Environment initiatives, Clean Energy Cess increased from Rs.50 per tonne to Rs.100 per tonne.

SERVICE TAX

• To broaden the tax base in Service Tax, sale of space or time for advertisements in broadcast media, extended to cover such sales on other segments like online and mobile advertising. Sale of space for advertisements in print media however would remain excluded from service tax. Service provided by radio-taxis brought under service tax.

•  Services by air-conditioned contract carriages and technical testing of newly developed drugs on human participants brought under service tax.

• Provision of services rules to be amended and tax incidence to be reduced on transport of goods through coastal vessels to promote Indian Shipping industry.

• Services provided by Indian tour operators to foreign tourists in relation to a tour wholly conducted outside India to be taken out of the tax net and Cenvat credit for services of rent-a-cab and tour operators to be allowed to promote tourism.

• Service tax exempted on loading, unloading, storage, warehousing and transportation of cotton, whether ginned or baled.

• Services provided by the Employees State Insurance Corporation for the period prior to 1st July 2012 exempted, from service tax.

• Exemption available for specified micro insurance schemes expanded to cover all life micro-insurance schemes where the sum assured does not exceed Rs.50, 000 per life insured.

• For safe disposal of medical and clinical wastes, services provided by common biomedical waste treatment facilities exempted.

• Tax proposals on the indirect taxes side are estimated to yield Rs.7525 crore.

• 24X7 customs clearance facility extended to 13 more airports in respect of all export goods and to 14 more sea ports in respect of specified import and export goods to facilitate cargo clearance.

• ‘Indian Customs Single Window Project’ to facilitate trade, to be implemented.

• The scheme of Advance Ruling in indirect taxes to be expanded to cover resident private limited companies. The scope of Settlement Commission to be enlarged to facilitate quick dispute resolution.

• Customs and Central Excise Acts to be amended to expedite the process of disposal of appeals.

CA Gaurav Mittal

mittalgaurav05@gmail.com