IN THE midst of a slowing global economy, India continues to be a "bright spot" experiencing "extraordinarily high" growth.
On Feb 29, India's finance minister Arun Jaitley unveiled the country's Budget for this year by projecting full year GDP growth of 7.6 per cent, reducing inflation rate to 5.4 per cent and retaining fiscal deficit to 3.5 per cent of GDP. The Budget aims to uplift the rural and social sectors, improve infrastructure, promote innovation and entrepreneurial growth and reinvigorate foreign investor confidence in India.
"Transform India" is the new focus of the Modi government for 2016, whose stamp is visible in the following measures announced in the Budget:
- Support for agriculture and farmers by creating long term irrigation funding and a sustainable water resource management programme;
- Assistance for addressing the needs of the rural community by launching a new digital literacy mission scheme for rural India;
- Initiation of a national dialysis services programme in all district hospitals;
- Provision of entrepreneurship education and training in schools and colleges;
- Development of roads, ports and the revival of unserved and underserved airports;
- Revival of the Public Private Partnership mode of infrastructure investment;
- Revamping of public sector banks;
- Focus on minimum government and maximum governance; and
- Tax reforms to incentivise entrepreneurs, SMEs and the real estate sector, reduce litigation, provide certainty and rationalisation of tax regime.
The budgeted amount set aside for infrastructural development must be spent promptly and judiciously to achieve the nine-point economic ambitions laid out by Mr Jaitley. This will enable India to harness its demographic advantage, build on the strength of its entrepreneurial private sector and continue supporting its rural and agricultural sector.
On the tax front, the Budget has proposed significant changes and categorised the tax proposals in the following nine categories:
- Relief to small taxpayers;
- Boost growth and employment generation;
- Incentivising domestic value addition to support the "Make in India" campaign;
- Moving towards a pensioned society;
- Promoting affordable housing;
- Resource mobilisation for agriculture, rural economy and clean environment;
- Reduce litigation and provide tax certainty;
- Simplification and rationalisation of taxation; and
- Use of technology for creating accountability.
India is keen to support global BEPS (Base erosion and profit shifting) initiatives and, in sync with this, has announced the introduction of country by country reporting (CbCR) under its transfer pricing rules for Indian based multinational companies. CbCR will also be applicable to foreign headquartered companies with Indian subsidiaries in certain prescribed situations.
With CbCR in place, Indian companies venturing abroad and foreign headquartered companies should meticulously structure their international business and operating models to avoid any adverse tax consequences.
In order to counter past court rulings which held that payments made to non-residents for online advertisements are not in nature of royalty or technical services hence not taxable, the Budget has proposed to tax B2B digital transactions.
The proposal moots the imposition of an equalisation levy of 6 per cent on payments made to non-residents in relation to specified digital transactions (i.e. online advertisements). Currently there are interpretation issues which would need further evaluation, i.e. availability of credit for non-resident payee in home country.
Taking the cue from some European countries, Mr Jaitley unveiled a patent box incentive regime to encourage patent development and registration in India. The proposal is to introduce a concessional tax rate of 10 per cent in respect of royalty income, along with a shelter from minimum alternate tax.
Dispute resolution schemes seems to be the new "mantra" for the Modi government. A taxpayer who has an appeal pending before the first appellate authority can now settle and end the litigation proceedings - by paying the disputed tax and interest amount up to the date of assessment, thereby relieving the taxpayer of any penalty (in some cases reduced penalty) exposure.
Further, any pending appeal against a penalty order can also be settled by paying 25 per cent of the minimum imposable penalty. The Budget has also sought to revamp the entire scheme of penalty provisions by providing different categories of misdemeanour with graded penalties, thereby removing the discretionary powers of Indian revenue authorities to levy penalties at will.
Capital markets and capital raising have been given a boost by a proposal to rationalise Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (Invits) taxation by exempting dividend distributed by Special Purpose Vehicles (SPV) to REITs/Invits, both in the hands of the trusts as well as the investors in such trusts.
Surprisingly, the Budget has been silent on the progress and/or implementation of the Goods and Service Tax framework which has been heralded as a landmark legislation in the history of indirect taxation in India.
Also, contrary to expectation, the Indian government has not proposed any changes in retrospective amendments which were introduced in the 2012 Budget. However, the government has tried to assure investor confidence by way of a two-fold approach.
The first approach is by the reconstitution of the High Level Committee responsible for overseeing any fresh cases of retrospective amendment, which would now be chaired by the revenue secretary and consist of chairman of Central Board of Direct Taxes and an outside expert.
The second approach is a one time amnesty programme for cases under existing audits under retrospective amendments. As per this new programme, a taxpayer can settle his tax cases which are pending before any Court or tribunal by only paying the tax arrears. Taxpayers opting for this scheme will not be required to pay interest and/or penalties.
One needs to acknowledge that while outlining the Budget proposals, the Indian finance minister has played his cards very well.
Firstly, by providing direct and indirect tax benefits for affordable housing and exempting dividends under the REIT tax framework, the finance minister has bolstered the "Smart City" initiative.
Secondly, by providing a lower tax rate of 25 per cent on new manufacturing facilities coupled with a reduction in customs and excise duty rates on certain inputs, raw materials and other goods, he has put in place an attractive framework for the "Make in India" initiative.
Finally, by providing a host of incentives for start-ups, entrepreneurs and SMEs coupled with the introduction of patent box regime, an impetus is provided to support "Innovation led Economic" growth.
The 2016 Budget has unveiled many interesting measures and one can hope that Indian policymakers will stay on course to guide India to leap forward to achieve sustainable economic growth.
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