Union Budget Highlights 2016 on Tax proposals

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Highlights of the UNION Budget 2016

The thrust of tax proposals this year falls in nine categories:-

Relief to small tax payers.

Measures to boost growth and employment generation.

Incentivizing domestic value addition to help Make in India.

Measures for moving towards a pensioned society.

Measures for promoting affordable housing.

Additional resource mobilization for agriculture, rural economy and clean environment.

Reducing litigation and providing certainty in taxation.

Simplification and rationalization of taxation.

Use of Technology for creating accountability.

Relief to small tax payers.

Section87A

  • In order to lessen tax burden on individuals with income not exceeding `5 lakhs, it has been proposed to raise the ceiling of tax rebate under section87A from `2,000 to `5,000. There are 2 crore tax payers in this category who will get a relief of `3,000 in their tax liability.

Section 80GG

  • The people who do not have any house of their own and also do not get any house rent allowance from any employer today get a deduction of `24,000 per annum from their income to compensate them for the rent they pay. It has been proposed to increase the limit of deduction in respect of rent paid under section 80GG from `24,000 per annum to `60,000 per annum, which should provide relief to those who live in rented houses.

Section 44AD

  • Presumptive taxation scheme under section 44AD of the Income Tax Act is available for small and medium enterprises i.e non corporate businesses with turnover or gross receipts not exceeding one crore rupees. At present about 33 lakh small business people avail of this benefit, which frees them from the burden of maintaining detailed books of account and getting audit done.  It has been proposed to increase the turnover limit under this scheme to Rupees two crores which will bring big relief to a large number of assesses in the MSME category.

Section 44AD

  • It has also been propsed to extend the presumptive taxation scheme to professionals with gross receipts up to `50 lakh with the presumption of profit being 50% of the gross receipts.

Measures to boost growth and employment generation

The highlights on phasing out exemptions are as follows:-

The accelerated depreciation provided under IT Act will be limited to maximum 40% from 1.4.2017.

The benefit of deductions for Research would be limited to 150% from 1.4.2017 and 100% from 1.4.2020.

The benefit of section 10AA to new SEZ units will be available to those units which commence activity before 31.3.2020.

The weighted deduction under section 35CCD for skill development will continue up to 1.4.2020.

 

2.  The reduction in corporate tax rate has to be calibrated with
additional revenue expected from the incentives being phased out. The

 

benefits from phasing out of exemptions are available to Government only gradually. In the first phase, therefore, It has been proposed the following two changes in corporate income-tax rates:-

 

  • The new manufacturing companies which are incorporated on or after 1.3.2016 are proposed to be given an option to be taxed at 25% + surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.

 

  • It has also been propses to lower the corporate income tax rate for the next financial year of relatively small enterprises i.e companies with turnover not exceeding 5 crore (in the financial year ending March 2015), to 29% plus surcharge and cess.

Startups generate employment, bring innovation and are expected to be key partners in Make in India programme. It has been proposed to assist their propagation through 100% deduction of profits for 3 out of 5 years for startups set up during April 2016 to March 2019. MAT will apply in such cases. Capital gains will not be taxed if invested in regulated/notified Fund of Funds and by individuals in notified startups, in which they hold majority shares.

  1. Research is the driver of innovation and innovation provides a thrust to economic growth. It has been proposed a special patent regime with 10% rate of tax on income from worldwide exploitation of patents developed and registered in India.
  1. In order to get more investment in Asset Reconstruction Companies (ARCs) which play a very important role in resolution of bad debts, It has been proposed to provide complete pass through of income-tax to securitization trusts including trusts of ARCs. The income will be taxed in the hands of the investors instead of the trust. However, the trust will be liable to deduct tax at source.
  1. The period for getting benefit of long term capital gain regime in case of unlisted companies is proposed to be reduced from three to two years.
  1. Non-banking financial companies shall be eligible for deduction to the extent of 5% of its income in respect of provision for bad and doubtful debts.
  1. The determination of residency of foreign company on the basis of Place of Effective Management (POEM) is proposed to be deferred by one year.
  1. It has been to reiterated with commitment to implement General Anti Avoidance Rules (GAAR) from 1.4.2017.
  1. n order to meet with our commitment to BEPS initiative of OECD and G-20, the Finance Bill, 2016 includes provision for requirement of country by country reporting for companies with a consolidated revenue of more than Euro 750 million.
  1. It has been proposed to exempt service tax on services provided under Deen Dayal Upadhyay Grameen Kaushalya Yojana and services provided by Assessing Bodies empanelled by Ministry of Skill Development & Entrepreneurship.

It has been proposed to exempt service tax on general insurance services provided under ‘Niramaya’ Health Insurance Scheme launched by National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disability.

  1. To promote use of refrigerated containers, It has been proposed to reduce the basic custom and excise duty on them to 5% and 6% respectively.
  1. A number of assistive devices, rehabilitation aids and other goods for differently abled (Divyang) persons attract Nil basic customs duty. It has been proposed to extend this exemption to Braille paper.

Incentivising domestic value addition to help Make in India.

Customs and excise duty structure plays an important role in incentivizing domestic value addition towards Make in India campaign of our Government. In line with that, It has been proposed to make suitable changes in customs and excise duty rates on certain inputs, raw materials, intermediaries and components

and certain other goods and simplify procedures, so as to reduce costs and improve competitiveness of domestic industry in sectors like Information technology hardware, capital goods, defence production, textiles, mineral fuels & mineral oils, chemicals & petrochemicals, paper, paperboard & newsprint, Maintenance repair and overhauling [MRO] of aircrafts and ship repair etc.

Measures for moving towards a pensioned society

Pension schemes offer financial protection to senior citizens.  It has been proposed to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme.

  1. In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016.
  1. Further, the annuity fund which goes to the legal heir after the death of pensioner will not be taxable in all three cases.  Also, It has been proposed a monetary limit for contribution of employer in recognized Provident and Superannuation Fund of 1.5 lakh per annum for taking tax benefit.

It has been proposed to exempt from service tax the Annuity services provided by the National Pension System (NPS) and Services provided by EPFO to employees.

It has also been proposed to reduce service tax on Single premium Annuity (Insurance) Policies from 3.5% to 1.4% of the premium paid in certain cases.

Measures for promoting affordable housing

Pradhan Mantri Awas Yojna embodies the assurance of the Government to address the housing needs of all and more specifically the poor, in a time bound manner. Construction of houses creates considerable employment opportunities as well. In order to fuel activity in the housing sector, It has been proposed to give 100% deduction for profits to an undertaking from a housing project for flats upto 30 sq. metres in four metro cities and 60 sq. metres in other cities, approved during June 2016 to March 2019, and is completed within three years of the approval. Minimum Alternate Tax will, however, apply to these undertakings.

  1. For the ‘first – home buyers’, It has been proposed to give deduction for additional interest of 50,000 per annum for loans up to 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed 50 lakh.
  1. Another proposal to stimulate housing activity is to facilitate investments in Real Estate Investment Trusts. Ii has been proposed that any distribution made out of income of SPV to the REITs and INVITs having specified shareholding will not be subjected to Dividend Distribution Tax.
  1. It is proposed to exempt service tax on construction of affordable houses up to 60 square metres under any scheme of the Central or State Government  including PPP Schemes.
  1. It has also been proposed to extend excise duty exemption, presently available to Concrete Mix manufactured at site for use in construction work at such site to Ready Mix Concrete.

Additional resource mobilization for agriculture, rural economy and clean environment

Dividend Distribution Tax (DDT) uniformly applies to all investors irrespective of their income slabs. This is perceived to distort the fairness and progressive nature of taxes. Persons with relatively higher income can bear a higher tax cost. It,is therefore, proposed that in addition to DDT paid by the companies, tax at the rate of 10% of gross amount of dividend will be payable by the recipients, that is, individuals, HUFs and firms receiving dividend in excess of 10 lakh per annum.

It has also been proposed to raise the surcharge from 12% to 15% on persons, other than companies, firms and cooperative societies having income above 1 crore.

  1. It has also been proposed to collect tax at source at the rate of 1% on purchase of luxury cars exceeding value of Rs.ten lakh and purchase of goods and services in cash exceeding Rs.two lakh. For compliant tax payers with resources, this levy not only advances collection of tax when the expenditure is incurred, but it provides data to the tax authorities to identify the persons who incur such expenditure, but may be missing from the tax base. Farmers and notified class of persons will have an option of giving a form by which TCS will not be charged.
  1. Rate of Securities Transaction tax in case of ‘Options’ is proposed to be increased from .017% to .05%.
  1. In order to tap tax on income accruing to foreign e-commerce companies from India, it is proposed that a person making payment to a non-resident, who does not have a permanent establishment, exceeding in aggregate 1 lakh in a year, as consideration for online advertisement, will withhold tax at 6% of gross amount paid, as Equalization levy. The levy will only apply to B2B transactions.
  1. It has also been proposed to impose a Cess, called the Krishi Kalyan Cess, @ 0.5% on all taxable services, proceeds of which would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers. The Cess will come into force with effect from 1st June 2016. Input Tax credit of this cess will be available for payment of this cess.
  1. The pollution and traffic situation in Indian cities is a matter of concern. I propose to levy an infrastructure cess, of 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles and SUVs.
  1. It has also been proposed to impose an excise duty of ‘1% without input tax credit or 12.5% with input tax credit’ on articles of jewellery [excluding silver jewellery, other than studded with diamonds and some other preciousstones], with a higher exemption and eligibility limits of 6 crores and 12 crores respectively. Necessary steps will also be taken to enable the new taxpayers to comply with this levy without any difficulty.

 

  1. It has been proposed to change the excise duty on branded readymade garments and made up articles of textiles with a retail sale price of 1,000 and above from ‘Nil without input tax credit or 6%/12.5% with input tax credit’ to ‘2% without input tax credit or 12.5% with input tax credit’.

It has been proposed to rename the ‘Clean Energy Cess’ levied on coal, lignite and peat as ‘Clean Environment Cess’ and simultaneously increase its rate from 200 per tonne to 400 per tonne.

  1. To discourage consumption of tobacco and tobacco products, It has been proposed to increase the excise duties on various tobacco products other than beedi by about 10 to 15%.
  1. It has been proposed to amend the Finance Act, 1994 so as to declare assignment by the Government of the right to use the radio-frequency spectrum and its subsequent transfers a service, to make it clear that assignment of right to use the spectrum is a service leviable to service tax and not sale of intangible goods.

Reducing litigation and providing certainty in taxation

Moving towards a lower tax regime with non-litigious approach. Thus, while compliant taxpayers can expect a supportive interface with the department, tax evasion will be countered strongly. Capability of the tax department to detect tax evasion has improved because of enhanced access to information and availability of technology driven analytical tools to process such information. I want to give an opportunity to the earlier non-compliant to move to the category of compliant.

It has been proposed 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 transgressions by paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income. There will be no scrutiny or enquiry regarding income declared in these declarations under the Income Tax Act or the Wealth Tax Act and the declarants will have immunity from prosecution. Immunity from Benami Transaction (Prohibition) Act, 1988 is also proposed subject to certain conditions. The surcharge levied at 7.5% of undisclosed income will be called Krishi Kalyan surcharge to be used for agriculture and rural economy. We plan to open the window under this Income Disclosure Scheme from 1st June to 30th September, 2016 with an option to pay amount due within two months of declaration.

Litigation is a scourge for a tax friendly regime and creates an environment of distrust in addition to increasing the compliance cost of the

tax payers and administrative cost for the Government. There are about 3 lakh tax cases pending with the 1st Appellate Authority with disputed amount being 5.5 lakh crores. In order to reduce this number, It has been proposed a new Dispute Resolution Scheme (DRS).

 

  1. A taxpayer who has an appeal pending as of today before the

Commissioner (Appeals) can settle his case by paying the disputed tax and interest up to the date of assessment. No penalty in respect of Income-tax cases with disputed tax up to 10 lakh will be levied. Cases with disputed tax exceeding 10 lakh will be subjected to only 25% of the minimum of the imposable penalty for both direct and indirect taxes. Any pending appeal against a penalty order can also be settled by paying 25% of the minimum of the imposable penalty. Certain categories of persons including those who are charged with criminal offences under specific Acts are proposed to be barred from availing this scheme.

In order to give an opportunity to the past cases which are ongoing under the retrospective amendment, It has been proposed a one-time scheme of Dispute Resolution for them, in which, subject to their agreeing to withdraw any pending case lying in any Court or Tribunal or any proceeding for arbitration, mediation etc. under BIPA, they can settle the case by paying only the tax arrears in which case liability of the interest and penalty shall be waived.

Levy of heavy penalty for concealment of income has over the years resulted in large number of disputes despite a number of decisions of the Apex court on interpretation of statutory provisions and principles guiding imposition of penalty. At present the Income-tax Officer has discretion to levy penalty at the rate of 100% to 300% of tax sought to be evaded. It has been proposed to modify the entire scheme of penalty by providing different categories of misdemeanor with graded penalty and thereby substantially reducing the discretionary power of the tax officers. The penalty rates will now be 50% of tax in case of underreporting of income and 200% of tax where there is misreporting of facts. Remission of penalty is also proposed in certain circumstances where taxes are paid and appeal is not filed.

Another issue which has led to considerable number of disputes is quantification of disallowance of expenditure relatable to exempt income in terms of Section 14A of the Income Tax Act. It has been proposed to rationalize the formula in Rule 8D governing such quantification. The said Rule is being amended to provide that disallowance will be limited to 1% of the average monthly value of investments yielding exempt income, but not exceeding the actual expenditure claimed.

As another tax payer friendly measure, It has been proposed to provide a time limit of one year for disposing petitions of the tax payers seeking waiver of interest and penalty.

The Income-tax Department is also issuing instruction making it mandatory for the assessing officer to grant stay of demand once the assesse pays 15% of the disputed demand, while the appeal is pending before Commissioner of Income-tax (Appeals). In case of deviation, assessing officer has to get orders of his superiors. The tax payer also has an option to go to superior officer in case he does not agree with conditions of stay order passed by the subordinate officer.

In order to remove backlog of cases it has been proposed to creat 11 new benches of Customs, Excise and Service Tax Appellate Tribunal (CESTAT).

The monetary limit for deciding an appeal by a single member Bench of ITAT is proposed to be enhanced from 15 lakhs to 50 lakhs.

It has also been proposed to amend the CENVAT Credit Rules, 2004, so as to improve credit flow, reduce the compliance burden and associated litigation, particularly those relating to apportionment of credit between exempted and non exempted final products/services. The amendments in these rules will also enable manufacturers with multiple manufacturing units to maintain a common warehouse for inputs and distribute inputs with credits to the individual manufacturing units.

Simplification and rationalization of taxation

The Government has already accepted many recommendations of Tax Administration Reform Committee and It has been proposed to accept a number of recommendations of Justice Easwar Committee in this Budget.

To reduce multiplicity of taxes, associated cascading and to reduce cost of collection, It is proposed to abolish 13 cesses, levied by various Ministries in which revenue collection is less than 50 crore in a year.

To improve the cash flow position of small tax payers who get their funds blocked due to current TDS provision, It has been proposed to rationalize TDS provisions for Income Tax as Given hereunder.

Measures for TDS / TCS Rationalisation

Present Heads Existing Proposed
Section Threshold Threshold
Limit (`) Limit (`)
192A Paymentof accumulated 30,000 50,000
balance due to an employee
in EPF
194BB Winnings from Horse 5,000 10,000
Race
194C Payments to Contractors Aggregate Aggregate
annual limit annual limit
of 75,000 of 1,00,000
194LA Payment of Compensation on 2,00,000 2,50,000
acquisition of certain
Immovable Property
194D Insurance commission 20,000 15,000
194G Commission on sale of lottery 1,000 15,000
tickets
194H Commission or brokerage 5,000 15,000
Present Heads Existing Proposed
Section Rate of Rate of
TDS (%) TDS (%)
194DA Payment in respect of Life 2% 1%
Insurance
Policy
194EE Payments in respect of NSS 20% 10%
Deposits
194D Insurance commission 10% 5%
194G Commission on sale of lottery 10% 5%
tickets
194H Commission or brokerage 10% 5%
194K Income in respect of Units To be
omitted w.e.f
01.06.2016
194L Payment of Compensation on To be
acquisition of Capital Asset omitted w.e.f
01.06.2016

 

 

  1. Non-residents without PAN are currently subjected to a higher rate of TDS. It is proposed to amend the relevant provision to provide that on furnishing of alternative documents, the higher rate will not apply.

 

  1. The facility for revision of return, hitherto available to a service tax assessee only, is being extended to Central Excise assessees also.

 

  1. It has been proposed to provide additional options to banking companies and financial institutions, including non-banking financial companies, for reversal of input tax credits with respect to non-taxable services provided by them by way of extending deposits, loans and advances.

 

  1. It has been proposed to amend the Customs Act to provide for deferred payment of customs duties for importers and exporters with proven track record.

The customs Baggage Rules for international passengers are being simplified so as to increase the free baggage allowance. The filing of baggage declaration will be required only for those passengers who carry dutiable goods.

Use of Technology for creating accountability

Technology is a boon for mankind.  We plan to use technology in taxation Department in a big way to make life simpler for a law abiding citizen, and also for data mining to track tax evaders.

A pilot was run in 2015-16 for e-assessment to obviate the requirement for tax payers to visit the Income-tax offices. It has been proposed to expand the scope of e-assessments to all assesses in 7 mega cities in the coming years.