Budget 2015 - Welcoming 'Big Bang' changes in a phased manner

The clear mandate given to the new government last year created hope that the critical challenges staring the Indian economy would be addressed.

The capital markets have continued to scale new heights as euphoria has built up on the possible growth revival and moving back to a high growth trajectory in the medium term.

With moderate inflation, lower crude oil prices and current account deficit under control, the first full year budget of the new government created high expectations among all and sundry.

Given the above backdrop, before the laying down of Union Budget 2015, it was firmly believed that opportunity has met preparedness and, therefore, miracles could happen. And indeed, a review of some of the macro announcements made in the Budget appears to convey that it has been growth oriented and lays structural changes to the tax reforms in a phased manner.

Reduction of corporate tax rate in phased manner

In view of the corporate tax rates in India higher than the rates prevalent in the other major Asian economies, and therefore making the Indian industry uncompetitive, the FM has proposed to reduce the basic corporate tax rate from the current 30 per cent to 25 per cent over the next four years. It is expected that this reduction will lead to higher level of investments, higher growth, and more jobs.

Deferral of General Anti-Avoidance Rules (GAAR)

On the premise of investment sentiment in the country turning positive and the need to accelerate the growth momentum, the applicability of GAAR has been deferred by two years i.e., 2017-18. It has been further proposed that all investments made up to March 31, 2017 would be grandfathered.

Clarity on provisions relating to indirect transfers

The retroactive amendments made by Finance Act 2012 relating to indirect transfer of shares created a lot of negativity and uncertainty among the investor community. For an investment-friendly, stable and certain tax environment, various recommendations contained in the Shome Committee report on indirect transfers are proposed to be accepted by making suitable amendments in section 9 of the Income-Tax Act.

Reduction in rate of tax on Royalty and Fees for technical services (FTS) in case of non-residents

The Finance Act 2013 increased the rate of tax on income by way of royalty and FTS of a non-resident tax payer from 10 per cent to 25 per cent. This significantly increased the cost of importing latest technology and technical services by Indian businesses.
As a welcome move, in order to reduce the hardship faced by small entities due to high rate of tax of 25 per cent, the FM has proposed to restore the tax rate of 10 per cent, thereby taking it back to the pre-2013 level. Applicability of MAT to Foreign Portfolio Investors (FPIs)

It appears from the press reports that the revenue authorities have issued notices to FPIs claiming MAT on their income. Taking cognisance of the various representations made, the Finance Minister has proposed that MAT provisions would not be applicable to the FPIs on the income from transactions in securities (other than short term capital gains arising on transactions on which securities transaction tax is not chargeable).

Wealth tax to go

It has been a desire since many years to abolish the levy of wealth tax. Recognising the significant compliance burden on the assessees and administrative burden on the department which resulted in collection of only a nominal amount of revenue, Finance Minister proposed to abolish wealth tax w.e.f 1 April 2016. Alternatively, it has been proposed to levy additional 2 per cent surcharge on super rich (those earning above Rs 1 crore in a year).

Direct Tax Code (DTC) is history

As widely anticipated, the plan to roll out the DTC has been shelved. The Finance Minister has rightly taken note of the fact that most of the provisions of the proposed DTC (viz, safe harbor, GAAR, advance pricing agreements etc.,) have already been included in the Income-tax Act.

Therefore, an altogether new Code would have created more uncertainty. Some more aspects of DTC such as the Place of Effective Management and the foreign tax credit rules, which were hitherto left out, are proposed to be incorporated in the Act.

Concluding thoughts

Though the above big bang measures by the Finance Minister should be lauded, the budget is not devoid of certain rough patches. The reduction/ abolition of MAT on Special Economic Zone and differential MAT rates for certain sectors could have certainly bolstered the ‘Make in India’ theme of the government. Overall, there is a sense of positivity and enthusiasm in some of the aforesaid structural changes which could lead India towards another prosperous era of growth.

(The writers are Himanshu Patel, Partner, Deloitte Haskins & Sells LLP and Bikash KR. Jain, Manager, Deloitte Haskins & Sells LLP)