One of the commitments of the present Government when it came to power was to end tax terrorism and has since shown the intent to provide stability and consistency in tax policies. The thrust of this Budget's corporate tax proposals are well manifested in the Government's messages to tax payers over the past several months. Reduction in corporate tax rate, phase out of tax exemptions, focus on Make in India, measures to aid ease of doing business, reduction of litigation, road map towards implementation of BEPS Action Plans, were high in terms of expectations.
The Finance Minister's Budget speech today has focused on all of the above and more. A strong focus on the tax proposals was very visible from the structure of Part B of the budget speech which categorized the tax proposals into nine different pillars, something we haven't seen in the prior budgets.
For corporate India, the tax proposals pack a big punch. We take a look.
Reduction in tax rates and Incentives for start-ups
As regards reduction of the headline corporate tax rates, Finance Bill makes a beginning with small companies. Headline tax rate of 29 per cent is being proposed for small companies i.e., companies having gross receipt of less than Rs 5 crore during FY 2014-15. Further, to pave the way for new start-ups, tax rate of 25 per cent is being proposed for new companies engaged in manufacturing business.
Further, in line with announcements already made, certain tax incentives to start-ups are also being granted in form of exemption of 100 per cent of their profits for the initial three years (out of first five years) starting from the year of incorporation.
Phasing out of exemptions
Again in line with expectations, a roadmap for, phase out of exemptions/weighted deductions has been charted out and various exemptions currently available under the Income tax Act will be phased out eventually by 2020.
Incentive for innovation
In what could be game changer, a regime similar to a patent box regime, prevalent in the western world, is proposed to be introduced. It proposes to promote innovation in India by incentivising those who develop and register the patents in India, in the form of concessional tax rate of 10 per cent on royalties for use of patents registered in India. This may spur many to consider India as a destination for their IP holding company, thereby bringing in the royalties as well as promote a culture of innovation.
Removal of anomalies
The draconian dividend distribution tax on asset reconstruction companies is proposed to be removed; similarly the Government has responded to a long standing demand of the NBFC sector to allow deduction for provision of bad and doubtful debts. In order to incentivize domestic management of foreign funds, a significant condition relating to tax residency of the offshore fund has been rationalized. DDT on distributions to REITS has been removed, clarity has been provided on applicability of 10 per cent rate on capital gains tax on shares of private limited companies, clarifications already provided on inapplicability of MAT on foreign companies without any presence, have been codified.
A potential surprise in the Budget relates to the introduction of 'Equalisation levy', similar to 'Google tax' in the UK is being proposed wherein resident payer making payment to the foreign companies towards services availed in form of online advertisements shall be subjected to make payment of tax at the rate of 6 per cent of the amount paid by such residents to non-residents. Non-residents would be exempted vis-à-vis such income in their hands. Availing tax credit under the tax treaty in this scenario is going to be an interesting issue to look forward to.
Other major changes
With a view to settle the past litigation arising out of the retrospective amendments made by the Finance Act, 2012, the Budget proposes a one-time Dispute resolution by payment of tax arrears and offering waiver of penalty and interest.
The design of the penalty provisions, which have been largely untouched for several decades, have seen a fresh approach, which is largely a welcome provision.
The proposals made vide Budget 2016 have far reaching impact on corporate tax payers. Amendments have been made through the length and the breadth of the tax law under almost every substantive part of the law whether dealing with chargeability, procedural aspects, penal provisions etc. Corporates will need to closely evaluate the impact of the Finance Bill, based on an analysis of the fine print.
The author is Tax Partner, EY India. Jigar Shah, Senior Tax Professional, EY, also contributed to the article. Views expressed are personal.