By Ganesh Raj, Partner & National Leader, Policy Advisory Group, EY
The Budget hinges on three tenets of introducing tax incentives to provide a fillip to domestic manufacturing and the start-up industry—simplification and rationalisation of tax regime and an endeavour to promote the non-adversarial tax regime. The transformative agenda of the government, coupled with a taxpayer-friendly approach, is likely to boost the confidence of the taxpayer and improvise investment climate.
The Budget proposes to provide 100% deduction of profits for three out of five years for eligible start-ups set up between April 2016 and March 2019. However, such start-ups would be liable to pay MAT.
It is also proposed to tax income from worldwide exploitation of patents, developed and registered in India by a resident, at the rate of 10% on gross basis, instead of the existing rate of 30%.
The government has proposed that new manufacturing companies incorporated on or after March 1, 2016, will be given an option to be taxed at 25% plus surcharge and cess, provided they do not claim profit-linked deductions and do not avail of investment allowance and additional/accelerated depreciation. There is also a proposal to lower the corporate tax rate for the next financial year for relatively small enterprises—companies with turnover not exceeding Rs 5 crore—to 29% plus surcharge and cess. The lower rate is bound to increase investment activity in the country.
The reduction in tax rate is paired with limiting deductions in a phased manner. It is proposed that accelerated depreciation will be limited to a maximum 40% from April 1, 2017. The extant benefit of deductions for research would be limited to 150% with effect from April 1, 2017, and 100% from April 1, 2020. Profit-linked incentive of Section 10AA to new SEZ units shall be available to those units which commence activity before March 31, 2020. Weighted deduction in case of skill development shall be restricted to 100% from April 1, 2020.
There is also a proposal to introduce a new dispute resolution scheme. The scheme provides for varying rates of penalty, depending on the quantum of disputed tax. Any pending appeal against a penalty order can be settled by paying 25% of the minimum of the imposable penalty (in cases where tax involved is more than Rs 10 lakh) along with tax and interest on quantum addition. Penalty rates have been revised to 50% of tax in case of under-reporting of income and 200% where there is misreporting of facts. A one-time dispute resolution scheme has been introduced for ongoing cases under retrospective amendment, and a short window for bringing in domestic tax evasion cases into the tax net.
On measures to curb black money, there is a limited period compliance window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset, and clear up their past tax contraventions. This will include paying tax at 30%, surcharge at 7.5% and penalty at 7.5%—a total of 45% of undisclosed income.
Foreign companies earning Indian taxable income and not having a PAN shall get a breather. As per the current law, any person who is entitled to receive any income on which tax is deductible at source shall furnish his PAN to the deductor, failing which tax shall be deducted at a higher rate of 20%. It is proposed that the higher rate of 20% shall not be applicable where taxpayer furnishes the prescribed alternative documents. Determination of residency of a company on the basis of PoEM has been deferred by a year. To reduce compliance costs and streamline audit proceedings, it is proposed to expand ‘e-sahyog’ and ‘e-assessments’ initiatives in the coming year.