India: India Budget 2014-2015 – in a Nutshell

The Indian Finance Minister (FM) presented the Union budget 2014 in the Indian Parliament on July 10, 2014. All the amendments will take effect from April 1, 2014 unless otherwise stated.

Some of the significant highlights of the budget are discussed below -

DIRECT TAX – BUSINESSES

Corporate Tax Rates

The corporate tax rates would remain unchanged including the applicability of surcharge on corporate tax at 5 per cent for incomes from INR 10 million (~USD 167,000) to INR 100 million (~USD 1,670,000) and at 10% for incomes above INR 100 million. Surcharge would also continue to apply to foreign companies.

The corporate tax rates applicable on Domestic Companies and Foreign Companies is given in the below table:-

* The effective tax rate includes applicable surcharge and education cess of 3%.

** The effective tax rate includes education cess of 3%.

^#- Financial year starting from April 1 and ending on March 31

The benefit from marginal relief would continue to be available for income exceeding Rs. 10 million and Rs. 100 million – to offset the increase in tax liability at these slabs.

Other Tax Rates

• Dividend distribution tax (DDT) rate would remain at 15% (excluding surcharge and education cess). However, the dividends that are actually received by the shareholders of the domestic company would now be needed to be grossed up for the purpose of computing the additional tax. This would result in increased cash outflow for companies while paying dividends. This amendment would be effect from October 1, 2014.

Illustration

Where the amount of dividend paid or distributed by a company is Rs. 85, then DDT under the amended provision would be calculated as follows:

Dividend amount distributed = Rs. 85

Increase by Rs. 15 [i.e. (85*0.15)/(1-0.15)]

Increased amount = Rs.  100

DDT @ 15% of Rs. 100 = Rs. 15 (before surcharge and education cess)

Previously the tax on Rs. 85 of dividend would have been – Rs. 12.75 (before surcharge and education cess)

• The Minimum alternate tax rate would remain the same as follows -

* – the effective tax rate includes applicable surcharge and education cess (3%).

** - the effective tax rate includes education cess (3%)

^#- Financial year starting from April 1 and ending on March 31

Relief for Disallowance of Non Deduction of Tax at Source (TDS)

In case of non-deduction or non-payment of TDS on payments made to residents, the entire expenditure would not be disallowed as was the case earlier. Now, the disallowance of expenditure would be restricted to 30% of the amount of expenditure.

Incentive – Acquisition of plant/machinery in the manufacturing sector

For certain eligible companies operating in the manufacturing sector, a 15% additional deduction of the cumulative cost of acquisition and installation of new assets was introduced last year provided the cost of such assets exceeded INR 1 billion (~USD 16.7 million). This deduction would now be available up to March 31, 2017 i.e. financial year 2016-17.

Further, the deduction would now be available even if the company invests more than INR 250 million (~USD 4.1 million) on or after April 1, 2014 in plant and machinery.

Corporate Social Responsibility (CSR)

Under the Companies Act, 2013 certain companies (which have net worth of INR 5 billion or more (~USD 83 million), or turnover of INR 10 billion or more (~USD 167 million), or a net profit of INR 50 million or more (~USD 830,000) during any financial year) are required to spend certain percentage of their profits on activities relating to Corporate Social Responsibility (CSR).

The budget has clarified that such expense on CSR will not be entitled for a tax deduction unless it fulfils certain conditions.

Direct Tax Code (DTC) and Goods and Services Tax (GST)

There was nothing concrete on the much awaited DTC and GST from the finance minister. 

DIRECT TAX - INDIVIDUALS

Surcharge for Super Rich – Continued to be levied in FY 2014-15

Individuals having income above Rs.10 million will continue to pay an additional surcharge of 10%. Thus, the effective highest tax rate that will apply to them will be 33.99%.

Tax Rates and Slabs – Exemption limit raised to INR 250,000 (~USD 4,200)

The following slabs in case of individuals are prescribed for year 2014-2015. The effective tax rates will continue to be the same:

* Financial year starting from April 1 and ending on March 31

Notes -

1. The first income slab for senior citizens (60 years of age or more) and very senior citizens (80 years of age or more) are INR 300,000 (~USD 5,000) and INR 500,000 (~USD 8,400) respectively i.e. no tax up to INR 300,000 for senior citizens and up to INR 500,000 for very senior citizens.
2. The rates include education cess and secondary education cess totaling to 3 percent on the base tax rates
3. The above does not take into consideration the surcharge on super rich mentioned above.

Other Deductions

• The limit of deduction on account of interest in respect of house property would be increased from INR 150,000 (~USD 2,500) to INR 200,000 (~USD 3,300)
• The limit of deduction allowed under section 80C in respect of certain specified savings instruments such as life insurance premium, contributions to provident fund, schemes for deferred annuities etc. would be increased from the existing INR 100,000 (~USD 1,700) to INR 150,000 (~USD 2,500) 
• Annual PPF ceiling has been hiked to Rs 1.5 lakh

The result of all this will be marginal tax reduction for most individuals

DIRECT TAX – OTHER CHANGES

Tax on Capital Gains Arising From Sale of Unlisted Securities

The budget has introduced an amendment to treat unlisted securities (including shares) as short-term capital asset if held for 36 month or less (as against current period of 12 months). This will increase tax incidence for both resident as well as non-resident transferors on transfer of such unlisted securities before 36 months from investment date. For foreign corporate transferors the tax rate can increase from 10% to 40% (excluding surcharge and educations cess).

Advance Pricing Agreement (APA) Scheme – Introduction of Roll back provisions

It is proposed to provide roll back mechanism in the APA scheme.

The “roll back” provisions refers to the applicability of the methodology of determination of Arm’s Length Principle (ALP), or the ALP, to be applied to the international transactions which had already been entered into in a period prior to the period covered under an APA.

This amendment will take effect from October 1, 2014.

Income Computation and Disclosure standards

The Central Government may now notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of or in respect of any class of income.

• This may result in increased complexities for tax computation.
• The above amendments would be effective from April 1, 2014.

INDIRECT TAXATION

Service Tax

• The effective rate of service tax remains unchanged at 12.36% (including education cess)
• Exemption extended to certain services like clinical research on human participants would be withdrawn
• Service provided by a Director to a body corporate would be brought under the reverse charge mechanism making body corporate liable to pay service tax.
• Penal interests -Interest rates for delay in payment of Service Tax beyond 6 months increased from 18% p.a. to 24% p.a. For further delay of 6 months, the interest rate to be 30% p.a.
• Point of Taxation in respect of reverse charge mechanism to be the payment date or the first date that occurs immediately after a period of 3 months from the date of invoice, whichever is earlier.

Excise / Customs

• The normal excise rate and peak customs duty remains unchanged at 12% and 10% respectively (before surcharge and education cess)

For further information, please contact Radius