Impact of Budget-2013: A review


By

Dr. Arun Singhal
Professor
Mangalmay Institutions
Greater Noida
 


The Hon'ble Finance Minister Shri. P. Chidambaram on 28.02.2013 presented the Union Budget 2013 and mentioned that slowdown in Indian economy has to be seen in the context of slowing global economic growth. He admitted that the country's present situation and growth is indeed challenging but India has potential growth rate of 8 percent and getting back to this is possible as has been proven in the past.

The central theme now is "higher growth leading to inclusive and sustainable development" with emphasis on women, children, minorities, backward classes and disabled persons. Impetus has also been given to create opportunities for youth for skill development. Health, Education, Rural, Manufacturing, Infrastructure and affordable housing have been kept on the priority list. Capital Markets initiatives like strengthening SEBI for Investor protection and fine tuning FDI/ FII norms has also been touched upon.

The Fiscal deficit for the current year has been contained at 5.2 per cent of GDP and for the year 2013-14 is estimated at 4.8 percent. By 2016-17 fiscal deficit is targeted to be brought down to 3 per cent. On the other hand, it is food inflation that is worrying, and he said that all possible steps will be taken to augment the supply side to meet the growing demand for food items. The Finance Minister has showed greater worry towards current account deficit (CAD) and has admitted that FDI, FII or External Commercial Borrowing (ECB) are the only ways to finance it.Given this backdrop, the Finance Minister identified following focus areas in Budget 2013-14:

* Additional Resource Mobilization
* Measures to Promote Socio-economic Growth
* Relief and Welfare Measures
* Widening of Tax Base and Anti Tax Avoidance Measures
* Rationalization Measures

I am providing herein the snapshot of the major budget 2013 proposals with our comments The key Investment environment and Tax aspects proposed in Budget 2013 are summarized below.

Proposal Impact:

Individuals

1 No change in basic threshold limit for income-tax and tax slab rate (10% /20%/ 30%) remain the same.

2 Marginal Relief for Tax Payers to the extent of Rs 20,000 in the tax bracket of Rs 2 lakhs to Rs 5 lakhs. This will result in an extra tax savings for Rs 2,000 for assesses having taxable income upto Rs. 5 Lakhs. With this around 1.8 crore tax payers are expected to benefit to the value of Rs 3,600 crore.

3 Surcharge of 10 percent on persons whose taxable income exceeds Rs 1 crore per year. This will apply to individuals, HUFs, firms and entities with similar tax status. This will result in a additional tax expenditure of Rs. 2,91,490/- to all individual with the taxable income above Rs 1 crore

4 TDS at the rate of one percent on the value of the transfer of immovable property (except agricultural land) where the consideration exceeds Rs. 50 lakhs. With a view to improve the reporting of transactions and the taxation of capital gains at first level only.

5 Gross Total Income limit under Rajiv Gandhi Equity Savings Scheme has been increased from Rs. 10 Lakhs to Rs. 12 Lakhs which shall be allowed for three consecutive assessment years. More individuals would be able to take the advantage of the scheme.

Corporates

1 Proposes to increase the surcharge from 5 percent to 10 percent on domestic companies whose taxable income exceeds Rs 10 crore per year.* Domestic companies whose taxable income exceeds Rs 10 Crore per year, Effective Tax rate and MAT rate will be 33.99 percent and 21 percent respectively.

2 In case of foreign companies who pay a higher rate of corporate tax, surcharge to increase from 2 to 5 percent, if the taxable income exceeds Rs 10 crore.* An increase in effective tax rate by 2.3 percent in case taxable income of foreign companies exceeds Rs 10 Crore.

3 In all other cases like dividend distribution tax or tax on distributed income, current surcharge increased from 5 to 10 percent*. This will increase the tax burden of assesse.
* Additional surcharges to be in force for only one year.

4 Concessional rate of tax of 15 percent on dividend received by an Indian company from its foreign subsidiary proposed to continue for one more year. This will help to encourage repatriation of funds from overseas companies.

5 A final withholding tax at the rate of 20 percent on profits distributed by unlisted companies to shareholders through buyback of shares.
The buyback in lieu of dividend distribution would not be resorted now.

6 The rate of tax on payments by way of royalty and fees for technical services to non-residents has been increased from 10 percent to 25 percent. This is done to harmonize the tax rate as most DTAA provide for higher rate of tax.

7 No Dividend Distribution Tax on domestic company on receiving dividend from its foreign subsidiaries. This will remove cascading effect of DDT.

Capital Market

1 Reduction in securities transaction tax on certain segments. This will provide a boost to the capital market as the proposed move will help in bringing down the overall cost for investors. Equity futures: from 0.017 to 0.01 percent MF/ETF redemptions at fund counters: from 0.25 to 0.001.percent

MF/ETF purchase/sale on exchanges: from 0.1 to 0.001 percent, only on seller

2 FIIs can participate in currency derivatives and also be permitted to use their investment in corporate bonds and government securities as collateral to meet their margin requirements.
This step will encourage foreign investments in India.

3 Commodities Transaction Tax (CTT) on non-agricultural commodities futures contracts at the same rate as on equity futures, that is at 0.01 percent of the price of the trade.It will negatively impact the market, especially MCX where maximum of non-agricultural commodities are traded, but has provided some respite to traders by treating CTT not as speculative trade but as business profit/loss.

4 An investor has a stake of 10 per cent or less in a company, it will be treated as FII and, where an investor has a stake of more than 10 per cent, it will be treated as FDI Will remove the ambiguity that prevails on what is foreign direct investments and what is foreign institutional investment (FII)

MSME

1. Benefits or preferences (Non Taxed) enjoyed by MSME to continue upto three years after they grow out of this category.This step will facilitate the promotion and development of SME of the country.

2  Refinancing capacity of SIDBI double to Rs 10,000 crore.

3  A corpus of Rs 500 crore to SIDBI to set up a Credit Guarantee Fund for factoring.

4  Small and medium enterprises, to be permitted to list on the SME exchange without being required to make an initial public offer(IPO).

Housing Sector

Additional deduction of interest upto Rs 1 lakh for a person taking home loan upto Rs 25 lakh not exceeding Rs 40 Lakhs during period 1.4.2013 to 31.3.2014 and the assesse does not own any residential house property on the date of sanction of the loan. Lower the tax burden of the assesses fulfilling the prescribed criteria

Investment Link Incentive

Companies investing Rs. 100 crore or more in plant and machinery during the period 1.4.2013 to 31.3.2015 will be entitled to deduct an investment allowance of 15 per cent of the investment. This move will give a boost to new investments by companies

Infrastructure Sector

Allocation of Rs 5,000 crore to NABARD to finance construction for warehousing & cold storage facilities This step will going to improve the demand and supply gap of storage commodities

Other

1 Tax shall be levied only at the time of distribution of income by the Securitization Trust at the rate of 30% in case of companies and at the rate of 25% in the case of an individual or Hindu Undivided Family. No further tax will be levied on the income received by the investors from the Securitization Trust. This will facilitate the financial institutions to securitize their assets through a special purpose vehicle and would boost securitization transactions and help ailing microfinance institutions sell micro loans and generate liquidity.

2 Funds provided to technology incubators located within academic Institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure This step will help business incubators located in academic institutes have access to a wider pool of funds.

3 For transfer of asset (other than capital asset) being land and building being held as stock-in-trade it is proposed to insert new section 43CA for considering stamp duty value as deemed value of consideration, in case actual consideration is lower than the stamp duty value. Now Stock-in-Trade of Land & Building also covered under fair value assessment.

INDIRECT TAXES

* SERVICE TAX

* Exemption of Service Tax on copyright on cinematography limited to films exhibited in cinema halls.
* Proposals to levy Service Tax on all air conditioned restaurant.
* Out of nearly 17 lakh registered assesses under Service Tax only 7 lakhs file returns regularly. Need to motivate them to file returns and pay tax dues. A onetime scheme called 'Voluntary Compliance Encouragement Scheme' proposed to be introduced. Defaulter may avail of the scheme on condition that he files truthful declaration of Service Tax dues since 1st October 2007.

* EXCISE

* Relief to readymade garment industry. In case of cotton, zero excise duty at fibre stage also. In case of spun yarn made of manmade fibre, duty of 12 percent at the fibre stage.
* Handmade carpets and textile floor coverings of coir and jute totally exempted from excise duty.
* Specific excise duty on cigarettes increased by about 18 percent. Similar increase on cigars, cheroots and cigarillos.
* Excise duty on SUVs increased from 27 to 30 percent. Not applicable for SUVs registered as taxies.
* Excise duty on marble increased from Rs 30 per square meter to Rs 60 per square meter.
* MRP based assessment in respect of branded medicaments of Ayurveda, Unani, Siddha, Homeopathy and bio-chemic systems of medicine to reduce valuation disputes.

* CUSTOMS

* Export duty on de-oiled rice bran oil cake withdrawn.
* Duty on Set Top Boxes increased from 5 to10 percent.
* Duty on raw silk increased from 5 to 15 percent.
* Duty on specified machinery for manufacture of leather and leather goods including footwear reduced from 7.5 to 5 percent.

Overall the budget has consolidated and rationalized the things and has tried to plug in the tax loopholes. The Ratings agencies have already stated that there is not much impact of this budget on the sovereign ratings.

In my view, the delivery and governance of the budget with adherence to timelines will be a critical factor. Based on the Capital Market outlook, we expect some clarity and roadmap from the Government on some of the budget proposals - Tax Residency Certificate (TRC) necessary but not sufficient for claiming DTAA benefits
For the last so many years, India is following the landmark judgment of Azadi Bacho Andolan which held TRC to be a conclusive proof of residency. The IT Department had also issued its circular no. 789/2000 to uphold the acceptability of the TRC. Both of these were issued in the context of Investments from Mauritius though its ratio is followed across.

The Budget has amended the law to extent of incorporating that tax residency certificate is a necessary but not a sufficient condition for claiming benefits under the agreements referred to in sections 90 and 90A of the Income Tax Act, 1961. This provision grants wide powers to Revenue and is somehow linked with the treaty override concept that was linked with GAAR.

Moreover this amendment will take effect retrospectively from 1st April, 2013 (last financial year) as the same was earlier mentioned in the memorandum explaining the provisions in Finance Bill, 2012. A clarification on the same is expected from the Finance Minister.

No clarity on indirect transfer of capital assets in India

The entire litigation of Vodafone and the controversial retrospective amendments were on the issue of indirect transfer of assets in India. The FM did not deliberated on this issue in this Budget however, later it has been clarified that the recommendations of Shome committee would be looked into at appropriate time.

Setting up of Tax administration reforms commission is positive for Investors and is expected to have sustainability in tax regime.
 


Dr. Arun Singhal
Professor
Mangalmay Institutions
Greater Noida
 

Source: E-mail March 2, 2013

          

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