In a webinar BMR & Associates LLP tax experts Gokul Chaudhri and Rajeev Dimri analyse the fine print of Budget 2017. Chaudhri shed some light on the area of taxation, focusing primarily on foreign investors, who he says will have to do with only a single demand being met from the list they had sent, while Dimri discusses general landscape of the Budget, highlighting changes in e-payments and implications for Make-in-India.
What is the significant change in the fine print that impacts individual taxation?
Chaudhri: Well, there is a change to how the interest cost on rented out properties can be deducted. Historically, the framework was that the entire loss from rented out properties (arising due to the interest paid) could be fully deducted against any other income of that year, like salary or business income. Now, it is proposed that this loss set-off relating to let out house property will be limited to R2 lakh. The unadjusted loss amount (in excess of R2 lakh) can be carried forward for eight years, to deduct from subsequent income from house property. This will impact those individuals who have taken substantially large housing loans and are availing a set-off of interest cost in totality from their salary and other incomes.
What should foreign and Indian multi-national groups be looking at now?
Chaudhri: Corporate tax rate cuts, including reduction in the Minimum Alternate Tax (MAT) rate. Most large domestic companies and foreign subsidiaries are beyond the Rs 50 crore turnover level, and hence not entitled to the 25% corporate tax rate. Tax directors would keenly hope for guidelines to clarify and constraint the introduction of secondary adjustments under transfer pricing regime, and liberalise the newly introduced thin-capitalisation rules.
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What about the impact on smaller corporates?
Chaudhri: A straight 4-5% reduction in the corporate tax rate is helpful. This can have attendant benefits such as an immediate job creation, modernisation, increasing their scale etc. Liberalisation made in provisions relating to start-ups and the affordable housing sector will also help.
What is the key takeaway for foreign investors?
Chaudhri: While foreign investors had sought numerous changes and liberalisations in the indirect transfer of shares provisions, at least one important relaxation has been given-foreign investors will not be liable to tax under these provisions on redemption of their share/interest in certain kinds of India focused investment vehicles. This should give them some comfort. Several other issues on these provisions need to still be clarified, which will possibly happen through a revised administrative circular (the original circular issued was put in abeyance in view of several objections from the investor community). Another welcome move is the capital gains tax exemption given on sale of the rupee-denominated bonds from a non-resident.
How do the Union Budget announcements reflect on Government’s commitment and preparedness towards GST?
Dimri: The Union Budget 2017 did not have many changes with respect to indirect taxes since GST is expected to be implemented soon in the country. The definitive statement by the finance minister, in his Budget speech regarding resolution of almost all contentious issues during the nine GST council meetings was reassuring. He further reiterated that GST is the top priority for the government and they are in the process of giving finishing touch to the proposed GST law.
The FM also made unqualified statements that preparation of IT system for GST is on schedule and the government will undertake extensive efforts for creating GST awareness across trade and industry from April 1, 2017. While the FM did not make any explicit comment on go-live date for GST, the tone of the Budget speech brings about the clear intent of the government to ensure implementation of GST from July 1, 2017. On the next steps, all eyes are now fixed on the next GST council meeting which is scheduled on February 18, 2017.
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What are the key initiatives towards Make-in-India?
Dimri: The government has imposed a levy of special additional duty of 2% on import of populated circuit boards used in the manufacture of mobile phones. While this may marginally increase the price of phones in the short run, this would incentivise domestic manufacturing of PCBs. Further, the basic customs duty on import of solar tempered glass has been reduced from existing 5% to nil and replaced with a levy of 6% CVD. While BCD is a cost, CVD is creditable and hence not a cost. Parts required for manufacture of solar tempered glass would be subject to lower rate of excise duty of 6%. The above moves would encourage domestic manufacturing of solar cells/panels/modules, etc, in India.
What are the key initiatives towards digital economy for encouragement of e-payments/ cashless transactions?
Dimri: With the movement towards digital economy, exemption is proposed of excise duty on Micro-ATM’s, fingerprint reader/scanner, iris scanner, miniaturised-PoS card reader for mPoS, along with parts and components and PoS devices coupled with BCD and CVD exemptions on import of the same. The CVD and excise duty exemptions are valid till June 30, 2017.
What would be the impact of abolishment of research and development cess (R&D cess)?
Dimri: As far as indirect tax proposals are concerned, the withdrawal of the R&D cess, with effect from April 1, 2017, was the one of the key highlights of Union Budget 2017. Consequent to the same, the service tax abatement/exemption of R&D cess enjoyed by taxpayers so far is also proposed to be done away with. This is surely a good news for India Inc as R&D cess was a sunk cost to taxpayers, being non-creditable in nature. Withdrawal of R&D cess would encourage technology imports and thereby incentivise domestic value addition. The decision is also aligned with the GST design.
Authority for Advance Ruling (AAR) is an authority designated for providing certainty to potential investors with respect to taxability of activities proposed to be undertaken by them. The budget proposes to amend AAR provisions also. What would be the impact of the proposed amendments on investors’ outlook?
Dimri: The finance minister in his speech did acknowledge that increase in number of tribunals in the country has led to overlapping functions and there is a need to rationalise and merge tribunals. With respect to taxes, the budget proposes to merge AAR under direct and indirect taxes, expand the eligible pool for appointment as chairman and member of AAR, and provide that in absence of the chairman, the vice-chairman of AAR would discharge his functions. All these measures are focused on expediting the pendency of cases both under direct and indirect taxes. This in turn is expected to send a positive signal to potential investors looking for certainty in taxation of activities proposed to be undertaken by them and facilitate ease of doing business in India.
Chaudhri is leader, direct tax, while Dimri is leader, indirect Tax, BMR & Associates LLP