Published on March 15, 2016
1. About BMR Advisors | BMR in News | BMR Insights | Events | Feedback | Contact Union Budget 2016: Announcements in Infrastructure, Manufacturing and Capital goods (including Start-ups) Overview Delivering a Budget speech in the backdrop of a challenging global economy and shrinking global trade, the Finance Minister (‘FM’) outlined the agenda to ‘Transform India’ in the direction of growth, with focus on providing additional resources for vulnerable sections, rural areas and social and physical infrastructure. The proposals encompass all facets of infrastructure sector including, funding, dispute resolution, tax reforms, policy initiatives, and focus on development of roads, railways, airports, ports coupled with promotion of entrepreneurship through Stand-up India scheme. Infrastructure being one of the cornerstones of manufacturing, the proposals are expected to catalyse the ‘Make in India’ initiative along with the Start-up India Action Plan (‘the Start-up Plan’), which aims at innovation, development and deployment of indigenous products or services. With this background, the key announcements around policy and tax proposals have been set out in the ensuing paragraphs. Key announcements Policy announcements Specific infrastructure sector reforms To mobilise additional finances through bonds to be issued by the National Highway Authority of India, National Bank for Agriculture and Rural Development, Indian Renewable Energy Development Agency, etc. To reinvigorate the infrastructure sector, the following new initiatives are proposed: Public Utility (Resolution of Disputes) Bill: To streamline institutional arrangements for resolution of dispute in infrastructure related construction contracts, Public Private Partnership (‘PPP’) and public utility contracts; Guidelines for renegotiation of PPP Concession Agreements; and New credit rating system for infrastructure projects which give emphasis to various in-built credit enhancement structures. Dedicated funds proposed to be set up by LIC, for providing credit enhancement to infrastructure projects. Share Connect Please click the links below to read our comprehensive analysis. General amendments GAAR International Tax Amendments Transfer pricing Customs and excise Service tax Central sales tax GST Rajeshree Sabnavis +91 22 6135 7050 firstname.lastname@example.org Kaustuv Sen +91 22 6135 7042 email@example.com Bhupender Singh +91 22 6135 7057
2. Foreign Direct Investment (‘FDI’) Policy To accord foreign investors a residency status (subject to conditions), to promote the ‘Make in India’ campaign. Permit 100 percent FDI under the approval route for marketing of food products produced and manufactured in India. To enhance investment limit from 24 percent to 49 percent for investment to be made by Foreign Portfolio Investors in Central Public Sector Enterprises listed on stock exchange, other than banks. Skill development and Entrepreneurship To set up 1,500 Multi Skill Training Institutes. To setup the National Board for Skill Development Certification in partnership with the industry and academia. To provide entrepreneurship education and training through a massive open online course. Start-ups To introduce amendments to the Companies Act, 2013, in order to mend the enabling environment for Start-ups; so much so as to enable registration of companies within one day; and With a view to support internal and external innovation, the Railway Budget proposed a sum of INR 500 mn to, inter-alia, provide innovation grants to Start-ups. Others To amend the Motor Vehicle Act, 1988, to enable the road transport sector in passenger segment. To modernize the ports and increase their efficiency, it is proposed to develop new greenfield ports both in the eastern and western coasts of the country. To draw up an action plan in partnership with the State Governments, to revive the unserved and underserved airports for regional connectivity. Direct tax proposals Reduction in corporate tax rate for new manufacturing companies To grant a domestic company, the option to avail reduced corporate tax rate of 25 percent, provided: firstname.lastname@example.org Shabala Shinde +912261357061 email@example.com
3. It has been setup and registered on or after March 1, 2016; Engaged solely in the business of manufacturing or production of article or things and not in any other business; Has not claimed any profit linked or investment linked deduction and has not availed of any investment allowance or accelerated depreciation; and Option to avail the beneficial rate of 25 percent is furnished before the due date of furnishing the return of income. Phasing out of deductions and exemptions In line with the proposal mooted in last year’s Budget, phasing out of the following incentives / deductions has been proposed: No deduction in respect of profit linked deductions for units established in Special Economic Zones (‘SEZ’) on or after April 1, 2020. No profit linked deductions available to enterprises engaged in developing, operating and maintaining of infrastructure facility and for developers and co- developers of SEZ on or after April 1, 2017. Accelerated depreciation to be restricted to 40 percent with effect from April 1, 2017. Weighted deduction in respect of expenditure incurred on approved in-house research and development facility to be restricted to 150 percent, effective from April 1, 2017 to March 31, 2020, and to 100 percent thereafter. Investment linked weighted deduction in respect of specified business, ie cold chain facility, warehousing facility of agricultural produce, affordable housing projects and production of fertilizer, to be restricted to 100 percent, effective from April 1, 2017. Amortisation of spectrum fee paid for purchase of spectrum To provide certainty and clarity on taxation of spectrum fee for auction of airwaves, it is proposed to allow a deduction for the capital expenditure incurred and actually paid for acquisition of any right to use spectrum for telecommunication services in equal annual instalments spread over the period of which the right to use the spectrum remains in force. This deduction is similar to the deduction available for expenditure incurred for acquiring any license to operate telecommunication services. Rationalization of tax regime for Infrastructure Investment Trust (‘InVIT’) and unitholders To exempt the dividend distributed by Special Purpose Vehicle (‘SPV’) to InVIT from the levy of Dividend Distribution Tax (‘DDT’) subject to certain conditions:
4. InVIT either holds 100 percent of the share capital of the SPV or holds all of the share capital other than that which is required to be held by any other entity as per the regulations; and Exemption is available only for dividends distributed out of current income earned after the InVIT acquires the requisite shareholding. To exempt dividend received by InVIT from SPV: Income in the nature of dividend received from SPV and distributed by InVIT, is proposed to be exempt from tax for the unitholders. The proposal to tax dividend received by individuals, HUFs and Firms from domestic companies, in excess of INR 1 mn, is not proposed to be applied to distributed income received by unitholders from InVIT. Special regime for ‘patent’ taxation Tax rate of 10 percent is proposed for persons resident in India, earning royalty income in respect of a patent developed and registered in India to boost indigenous manufacturing and promote the ‘Make in India’ campaign. Others To allow investment allowance in the year of installation, in case where the year of acquisition and the year of installation is different and plant and machinery is installed on or before March 31, 2017. Deduction of 30 percent of additional wages to additional employee for 3 years proposed to be granted to all companies including companies engaged in the infrastructure sector, subject to certain conditions. It is proposed to extend the investment linked deduction to taxpayers engaged in developing, operating and maintaining or developing, operating and maintaining new infrastructure facility with effect from April 1, 2017. Non-chargeability of capital gains arising from transfer of long-term capital asset, invested in long-term specified asset To exempt capital gains arising from transfer of a long-term capital asset (‘Original Asset’), subject to the following conditions: Taxpayer invests whole or part of such capital gains, within six months from transfer of the Original Asset, in unit(s) of funds issued before April 1, 2019, to be notified by the Central Government (‘long-term specified asset’). If the long-term capital gains arising from sale of Original Asset is more than the cost of long-term specified asset, the exemption is proposed to be restricted to the proportion that the cost of long-term specified asset bears to the capital gains arising from the transfer of Original Asset.
5. Investment made in long-term specified asset on or after April 1, 2016 does not exceed INR 5 mn. Total investment made in long-term specified asset during the year of transfer of Original Asset(s) and in the subsequent year does not exceed INR 5 mn. Long-term specified asset is not transferred within 3 years from date of acquisition – in case such a transfer takes place, the amount of capital gains originally exempt, to be subject to capital gains tax in the year of transfer of the long term specified asset. o Loan / advance taken against long-term specified asset shall be deemed to result in ‘transfer of long-term specified asset’ as on the date of taking loan / advance. Proposed amendment is in line with the exemption proposed under the Start-up Plan and seeks to promote investment in the ‘Fund of funds’ proposed to be set-up as part of the Start-up Plan. Non-chargeability of capital gains arising from transfer of residential property by individual / HUF and invested in eligible Start-ups It is proposed to extend the capital gains tax exemption, currently available to individuals and HUFs for investment of capital gains arising from transfer of a residential property in shares of an MSME, to investment in shares of eligible Start- up, subject to the individuals / HUFs holding more than 50 percent share capital and / or voting rights, post such investment: The exemption shall be available for transfer of residential property made on or before March 31, 2019, and shall be subject to the eligible Start-up investing in new asset (including computers or computer software in case of certified technology driven eligible Start-ups) within one year from the date of subscription of shares. The proposal is expected to provide impetus to small individuals / HUFs who are willing to set-up and operate innovative businesses by selling their residential properties. Three year tax exemption to eligible Start-ups Similar to the deduction currently available to developers of infrastructure projects, it is proposed to introduce new section for providing 100 percent deduction from profits and gains derived from eligible business by an eligible Start-up, for any 3 consecutive assessment years, at the option of the eligible Start-up, out of the first 5 years of its existence, subject to certain conditions (refer our newsletter for IT and ITeS sector). The definition of ‘eligible business’, is similar to the definition provided in Start-up Plan - business which involves innovation, development, deployment or
6. commercialisation of new products, processes or services driven by technology or intellectual property. Further, eligible Start-up is defined to mean a company engaged in eligible business, which fulfils the following conditions: The company is incorporated after April 1, 2016 but before April 1, 2019; Total turnover of eligible business does not exceed rupees twenty-five crore in any previous year, beginning on or after April 1, 2016 and ending on March 31, 2021; and The company has been certified as an ‘eligible business’ by the Inter-Ministerial Board of Certification, set-up in this regard. While the tax incentive was identified as one of the significant proposals of the Start- up Plan, the fact that it is available only to Start-ups incorporated as companies on or after April 1, 2016, is a dampener to non-corporate eligible Start-ups as well as eligible Start-up companies already in existence. Indirect tax proposals Service tax In a departure from the broad based expectation that the service tax rate would be materially increased, the effective rate has been increased in a staggered manner from 14.5 to 15 percent through the introduction of Krishi Kalyan Cess. This approach to introduce a cess instead of a direct rate increase appears to be intended to garner exclusive revenues for a particular end use rather than generating consolidated revenues that is shared with the states. Monorail and metro The service tax exemption for construction of monorails and metros has been removed for contracts entered into from March 1, 2016. As a result, such contracts will attract an effective service tax rate of 5.8 percent, which will inch up to 6 percent from June 1, 2016. This is in continuation of the direction to bring infrastructure development in the tax net; example, last year’s Budget had removed the service tax exemption for construction of ports and airports. Stage carriage The licensing regulations governing stage carriage under the Motor Vehicles Act, 1988 (example buses operating on fixed routes) would be liberalized to allow private investments. With this objective, the Government removed the service tax exemption to air-conditioned stage carriages; as a result, such fares would now attract service tax at 5.8 percent (and 6 percent from June 1, 2016). International freight (Inward)
7. Ocean freight on inward shipments has been made taxable with an abatement of 70 percent. The effective rate of service tax is 4.35 percent (4.5 percent from June 1, 2016). It is pertinent to note that though inward air shipments continue to be service tax free, this tax free status is on account of a new exemption, while the statutory protection in the negative list has been removed. Given this, there is a potential of service tax being imposed in due course. MRO for aircraft & ships To provide a boost to the setting up of a domestic MRO facility for aircraft, imports of parts, testing equipment, tools etc for such activities has been exempted from customs duty upon fulfilment of certain qualifying criteria. Similar exemption to import of capital goods, spares, parts, etc for repair of ocean going vessels by a ship repair unit has been allowed. Rail transport of goods Limited relaxation on the applicable abatement and CENVAT credit norms available to goods transport by Indian railways and other parties has been made. As a result, credit can be now be availed on service tax paid to vendors. Road construction The exemption from CVD on various equipments required for construction of roads has been removed. The objective seems to be to encourage manufacture of such equipments in India. Import of capital goods With the intent of deepening the level of manufacturing capability development in India, the Government has increased the customs duty on 96 items of capital equipment from 7.5 percent to 10.0 percent, eg boilers, turbines for marine propulsion, hydraulic turbines etc. Another 110 items, though continuing to attract duty at 7.5 percent under a specific exemption, have been subjected to increase in the tariff rate. As a result, this set of 110 items may also attract increased customs duty in the near future. The objective appears to be to provide disincentives for import of such equipment in India. Manufacture of digital hardware in India With the success of the Government’s ‘Make in India’ initiative in Budget 2015 of encouraging manufacture of mobile handsets in India and removal of the long standing impediment of an inverted duty structure, this effort has now been widened to allow for duty free import of parts of accessories to mobile handsets such as headsets, batteries, chargers, speakers that are manufactured in India. This model is also sought to be replicated for hardware items required for the Government’s vision of a Digital India by offering customs duty exemptions to parts and accessories of set top boxes for internet access, routers, broadband modems,
8. CCTV / IP cameras, video recorders, lithium ion batteries, to encourage manufacture of the finished items in India. Under the excise duty regime as well, manufacture of aforementioned parts has been fully exempted, while manufacture of finished product allows for an optional scheme to avail a concessional rate of excise duty of 4 percent (with restricted CENVAT). This overall structure has also been initiated for import of LCD / LED / OLED panels for manufacture of TVs, parts for manufacture e-readers, which indicates the confidence of this Government on this front. Outsourced manufacturing In a significant positive development, CENVAT credit has been allowed to be transferred through the ISD mechanism to an ‘outsourced manufacturing unit’. This accedes to a long standing demand by the industry to correct a legal anomaly causing CENVAT credit loss in certain situations where the (final or entire) manufacturing process for undertaken by a job-worker. Conclusion The overall Budget proposals have been a mixed bag of goodies that provide impetus to this sector to put the economy on a growth trajectory, enabling India to stand tall despite global slowdown. The proposal to introduce dispute resolution scheme and guidelines for renegotiation of PPP concession agreements is expected to bring back buoyancy and create much needed physical infrastructure within the economy. The Budget has not addressed the eligibility to carry forward business loss, post change in controlling interest and also failed to provide clarity on taxation of association of persons. For Start-ups, while the Budget echoes the proposals contained in the Start-up Plan, it fails to meet the expectations as the 3 year tax exemption has been conjoined with several conditions. This seems to be slightly digressing from the intent of the Start-up Plan of reduced compliance burden. Also with no exemption from levy of MAT, the tax incentive further loses its impact. The FM also seems to have missed the proposal to exempt consideration received by Start-ups from Incubators, on issue of shares, in excess of Fair Market Value of such shares. The Government’s push to strengthen the backbone of the economy through creation of infrastructure such as roads, airports and metros is ambitious. The continued support to the Make in India program and Digital India vision is also clear by way of removal of inverted duty structures, and incentivising manufacture of digital products and MRO based operations. The incentivising of ‘in house’ manufacture of digital items should create much needed jobs and allowing CENVAT on outsourced manufacturing will also bring cheer to the FMCG segment. Overall, Budget 2016 has followed the framework for bringing infrastructure services in the tax net and directional impetus for adopting the digital revolution.
9. BMR Business Solutions Pvt. Ltd. 36B, Dr. RK Shirodkar Marg, Parel, Mumbai 400012, India Tel: +91 22 6135 7000 | Fax: +91 22 6135 7070 BMR and Community BMR has a strong commitment to good citizenship and community service. We are as dedicated to community work as we are to client work. Wherever appropriate we partner with our clients in fulfilling our social responsibility. Through the firm’s ‘Go Green Initiative’ we adopt environment friendly practices at our work place. The firm actively supports SOS Children’s Village, Indian Red Cross Society and MillionTrees Gurgaon campaign. For more details on our social and environmental responsibility programme, click here. Disclaimer: This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation and does not express views or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this newsletter will be accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts and circumstances. This newsletter does not substitute the need to refer to the original pronouncements. Copyright 2016. BMR Business Solutions Pvt. Ltd. All Rights Reserved | In case, you do not wish to receive this newsletter, click here to unsubscribe
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