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Finance Minister Arun Jaitley gave income tax relief to small tax payers and manufacturers but retained the 10% super rich tax on individuals and companies in addition to extending tax breaks to foreign portfolio investors, power producers and external commercial borrowers in his maiden Union Budget.
Budget 2014-15, however, did not make any changes to the controversial 2012 retrospective changes to the Income Tax Act meant to tax past deals such as Vodafone’s 2007 offshore acquisition of Hutch Essar that led to widespread criticism of India’s tax administration.
Jaitley promised that the government will not ordinarily bring any change retrospectively that would create fresh liability and that fresh cases arising from the 2012 amendments will be scrutinised by a high-level panel of the apex direct tax policy making body CBDT before any action is taken.
While the FM’s direct tax proposals are beneficial for small tax payers, including senior citizens, certain measures such as those on dividend distribution tax and long-term capital gains on non-equity mutual funds will lead to higher tax outgo for investors.
An individual (other than senior citizen) will now have a tax saving of about Rs 35,000 a year from the increase in the basic personal income tax exemption limit to Rs 1.5 lakh, higher deduction of Rs 1.5 lakh on investments under 80C of the IT Act and the increased deduction of Rs 2 lakh on home loan interest payment, explained Sameer Gogia, director, Deloitte Haskins & Sells. In the case of senior citizens, the basic income tax exemption has been raised from Rs 2.5 lakh to Rs 3 lakh.
Dividend distribution tax (DDT) will now be applicable on the gross amount of dividend being distributed instead of on the dividend amount net of taxes. “This would increase the effective DDT outgo to 20.48% from the present 17% inclusive of cess,” explained Rahul Garg, leader (direct tax practice), PwC. The same principle will be made applicable on dividend distributed by mutual funds as well.
Foreign portfolio investors in Indian securities will now be taxed only for the capital gains they make. The move says they will not be taxed at the corporate tax rate characterising their gains as business income. Companies borrowing abroad until June 2017 will get a concessional 5% tax on interest payment irrespective of whether funds are raised for infra creation or not. Dividend received by Indian firms from overseas subsidiaries will continue to attract the concessional 15% dividend distribution tax without any terminal date for this benefit.
Gains on non-equity MFs held for more than 36 months will in the future attract a long term capital gains tax of 20% against the existing concessional 10% applied on such investments held for more than a year — the current definition of long term.
Manufacturing units that would invest Rs 25 crore or more in plant and machinery up to March 31, 2017, will need to pay corporate tax only on the remaining income after deducting a 15% investment allowance. New power production and distribution units that start operations up to March 31, 2017, will be able to claim a 10-year income tax holiday, while investment linked deductions will be available to pipelines carrying iron ore as well as to semi-conductor wafer fabrication units.
To encourage investments in the real estate sector, Jaitley also allowed pass through status to real estate investment trusts so that such investments do not face double taxation.
To reduce tax disputes, Jaitley proposed applying advance pricing agreements signed by MNCs for previous four years and introduction of range concept and use of multi-year data for determining arms length price of cross-border deals. “Use of multi-year data is allowed in many countries to take into account business cycles. This would help a lot of firms in avoiding litigation,” said Amit Maheshwari, partner, Askok Maheshwary & Associates.