Union Budget 2015 - A budget which balances populism and pragmatism - K. R. Girish - Article published in Business Advisor, dated March 10, 2015 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume X Part 5 March 10, 2015 19 Business Advisor
Union Budget 2015: A budget which
balances populism and pragmatism
K. R. Girish
The Union Budget for FY 2015-16 certainly is not one
which can be termed as a “big bang story” but is certainly
one which focuses on delivery. The overall underpinning
of this year‟s Budget is to make business environment
more conducive, have a non-adversarial tax regime and
above all a predictable policy in the years to come. It lays
down emphasis on growth and here the Finance Minister
has taken a bold move to indicate a slippage in fiscal
deficit target by one year, i.e., from FY 2017 to FY 2018,
to give him a little more leeway for infrastructure spend.
The boldest move is the announcement to move a Bill in the coming weeks
on black money, especially holding of foreign assets and its reporting and
bringing in stringent punishment including imprisonment up to 10 years. A
good move which was very much required and this should deter persons
who have been indulging in these activities to give away and come clean.
However, the down side of this is that this tool should not be used by
officers to harass common citizens!
Another Bill which he proposes to introduce is the Benami Transactions
(Prohibition) Bill, again a good move to reduce black money from the
system. Both these are very laudable moves, the beneficial effects of which
will be seen in the years to come.
Corporate taxation
No change in the rates but through a clever way has indirectly increased
corporate tax by increasing the surcharge by 2% which shall have an impact
on all corporate assessees!
The first major move he had done is to announce a predictable tax regime
by saying in Parliament that corporate tax would be reduced to 25% over
the next four years by doing away with exemptions. Indeed a very welcome
move and this should really give confidence to investors that one can look at
a stable tax regime.
Today, the effective tax rate of corporate tax is 23% and if we were to look at
exemptions there aren‟t too many of them. It is for SEZs and infra projects,

2. Volume X Part 5 March 10, 2015 20 Business Advisor
where tax holiday benefits have been given. So, I don‟t think there is a need
to panic that exemptions would be taken away; instead, there would be
calibrated withdrawal over the next four years.
The next major move has been the much-awaited deferral of GAAR. Not only
has he deferred GAAR till March 31, 2017 but also mentioned that rules
would be framed to see that transactions up to March 31, 2017 would not
be brought under GAAR. Again a welcome move and this should provide
relief to corporate assessees.
A much-needed clarification has been brought in, in respect for indirect
transfers which were brought in by the Finance Act 2012, in section 9(1) (i);
and the recommendations of the Expert Committee report of Dr Shome have
been accepted with certain modifications.
This again is a very welcome move and corporates and foreign investors
should now breathe easy. Also, tax neutrality has been brought in respect of
overseas mergers and de-mergers by virtue of amendments to section 47.
The taxation regime for real estate investment trust (REIT) introduced in the
last budget did not take off in the absence of clarity on the tax pass through
status and the treatment of capital gains. Both have been provided in the
current year and with this, REIT should become fully operational.
Similarly pass through status has been brought in respect of alternate
investment funds and this should encourage foreign portfolio investments to
invest in India.
The other clarification which should help foreign portfolio investments is
that the fund managers, once located in India, would constitute a business
connection and thereby make the overseas fund taxable in India. This has
been clarified to mean that the location of a fund manager of an eligible
fund would not give rise to a business connection. Again this should make
India an investment destination for foreign portfolio investors.
There is a tax dispute currently whether FIIs should be subject to MAT. The
MAT controversy on applicability to foreign companies assumes significance
in the light of the AAR ruling in the case of Castleton Investment Limited
(AAR 999 of 2010). FIIs don‟t have operation in India and also don‟t have
business income, as the income they generate is also capital gains.
Amendments have been brought in section 115JB to exclude such gains
from the computation of book profits. This should bring much-needed relief
to FIIs but what needs to be seen is how past assessments are going to be
governed as amendment is prospective w.e.f 01.04.2016.

3. Volume X Part 5 March 10, 2015 21 Business Advisor
The withholding tax rate on royalty and fees for technical services has been
brought down from 25% to 10% in line with most tax treaties where India
has signed. This again is a welcome relief.
Coming to transfer pricing there has been no new amendment except for
increase in threshold limit for domestic transaction from Rs 5 crore to Rs 20
crore.
This is a welcome relief so that smaller transactions and inter-group
transactions are kept out of the transfer pricing compliance.
However, it is relevant to point out that the following amendments made last
year in the transfer pricing provisions have not seen the light of the day:
 Roll-back rules;
 Multi-year data for comparability;
 Range concept for arm‟s length determination.
The other major amendment has been on the law relating to tax residence of
companies – section 6(3) of the Act; and this would have adverse
ramifications.
Now the tax residence status will be determined not only on the
incorporation status of the company but based on the principle of effective
management (POEM). This no doubt is an internationally recognised
concept but the way the amendment has been brought in to mean POEM
any time during the year can bring in unforeseen consequences.
Just to illustrate, even a Board meeting or a strategic meeting of a foreign
company in India can expose the entry to Indian taxation. This also can
impact Indian companies which have foreign subsidiaries as in substance
they are managed out from India. This needs to be evaluated in each case.
There have been other amendments, such as tax incentives for capital
investments in notified backward areas of Telangana and Andhra Pradesh
by way of investment allowance and additional depreciation.
Also, amendments have been brought in to strengthen the revisionary
powers of the Revenue against an order which is prejudicial to the Revenue.
There is now an amendment is Section 158AA, giving the discretionary
powers to the Revenue to file an application in the Income-tax Tribunal on a
matter of law which has got repetitive implication and is pending before the
Supreme Court. This should help avoid repetitive appeals.

4. Volume X Part 5 March 10, 2015 22 Business Advisor
Amendment to provide for penalties even in respect of erroneous
computation of book profit and treating the same as concealment of income.
Also amendment has been brought in to give 100% deduction for
contribution to Swachh Bharat Kosh and Clean Ganga Fund. However,
sums spent on CSR are not eligible for deduction in line with section 135 of
the Companies Act.
Amendment has been made to formulate separate rules for foreign tax
credit.
These are the quite a few hits. However, there are major issues in this
Budget. They are:
 Anticipated reduction in MAT rates;
 Exempting SEZs from MAT;
 Change in dividend distribution tax;
 Resolution to settle tax disputes.
Personal taxation
As regards personal taxation, basically no change in the slab rates except
for increase in tax deduction in respect of health insurance premium section
80D, medical treatment section 80DD.
The major move on personal taxation has been the abolition of wealth tax,
w.e.f AY 2016-17 and compensating the loss of revenue from this abolition
by increasing the surcharge levy on high taxpayers of taxable income over
Rs 1 crore from the existing 10% to 12%.
This is indeed a bold move and should make NRIs breathe easy as there was
a debate on whether India should introduce inheritance tax given the huge
disparity of income and wealth!
However, the catch here is that the details required for wealth-tax proposes
have still to be filed in the income-tax return and this can lead into
unnecessary hassles for the honest taxpayer!
To conclude, this Budget is to be seen as one which has given emphasis to
ease of business and encouraging „Make in India‟.
The Finance Minister has now laid a roadmap for „Achhe Din‟ but looks like
one needs to wait for a few more years for this to happen!
(K. R. Girish is Chartered Accountant, Bangalore)