The Budget for the Fiscal 2016-17 was announced in the Parliament by the Honorable Finance Minister on February 29th , 2016. Mapped-out below the key themes in the Direct Tax proposals of the Budget.

I. Push to Government Initiatives

Make-in-India and take the promised 25% rate

Newly Manufacturing companies (ie those incorporated on or after March 1, 2016) can avail the 25% tax rate that was promised in the earlier budget, straight-away, provided they promise not to avail any other deduction under the Tax laws.

Tax Honeymoon for Start-ups

Companies which provide technologically driven products and services can avail a three year tax holiday within a period of five years from the date of incorporation.

II.  Steps towards BEPS

The Union Budget introduces two significant proposals towards implementation of Base Erosion and Profit Shifting (BEPS) project.

Country by Country reporting requirement to be introduced

A detailed Country by Country reporting is proposed for large Multinational Enterprises (MNEs) which are based out of India. For MNEs with overseas parent, a designated Indian entity would have to facilitate access to the Parent entity’s CbC reporting in cases where Indian does not have a Treaty for Exchange of such information with the jurisdiction of the Parent entity or where such information is not forthcoming from the foreign jurisdiction.

Equalization levy

A proposal that is bound to irk Googles and facebooks of the world is the introduction of an equalization levy of six percent on payments to non-resident digital advertisers. Residents in India as well as Permanent Establishments of non-residents would have to pay this levy either by deduction or directly out of their pocket, when paying to non-residents for digital advertising. The scope of the levy can be expanded further to other services in the future.

III. Dispute Resolution

A Dispute resolution scheme has been introduced whereby a Taxpayer can settle his case pending before the Commissioner of Income-tax by paying Taxes with interest till date of assessment and 25% of the minimum penalty. Where the Tax dispute has arisen on account of retrospective amendment to law, cases pending at any forum can be settled and only the Tax component needs to be paid. This is being widely perceived as an invitation for settlement to Vodafone and all such similar cases where a validating amendment was introduced under the Tax laws to bring indirect ownership transfers of Indian companies into the Tax net.

Standing Penalty exemption

As a measure to nip future tax litigation in the bud, a standing penalty exemption provision has also been introduced in the Act for cases where the additions made in the assessment are accepted by the Taxpayer and not appealed against.

No Department Appeal against order of DRP – a Faux pass

Perhaps with a view to mitigate litigation, it is also proposed that the Department would not file any appeal against the order of the Dispute Resolution Panel. This proposal, while appearing to be well-intentioned, would actually prove to be counter-productive based on past experience as the DRP would now shirk to take a balanced view of objections referred to it and would feel compelled to side with Revenue, specially where the stakes involved are high.

IV. Piketty Re-distribution model for individual Taxpayers

Concessions for smaller Tax payers whilst increasing the Tax burden  on those in the bulge bracket has been the highlight of proposals for individual Tax payers.

Tax the rich

Individuals, Trusts and Hindu undivided families with Dividend income of greater than 10 lacs would have to pay an additional tax of 10%. Effectively, this would be the third point of taxation of such income, after suffering Tax twice at the corporate level in the form of corporate tax and distribution tax.

Individuals having total income in excess of INR one crore (10 million ) would also have to shell out more in the form of increase in Tax surcharge from 12% to 15%.

Spare the low-earner

Tax relief for those in the low bracket (less than 5 lacs income) has been enhanced to INR 5,000 from INR 2,000. Further,  rental deduction under section 80GG has also been increased to INR 5,000 per month from INR 2,000 per month for those who do not avail Housing Rent Allowance.

V.Streamlining Assessment & Penalty Processes

More Interest, in lesser time

It has been expressly provided that self-assessment taxes would be entitled to payment of interest. This has been a matter of some controversy with different Courts of the land adopting varying views.

Further, summary assessments have been mandatory. This would be beneficial for taxpayers who would have cash flows tied-up in Taxes deducted at source in a sum higher than their tax liability. The scope of adjustments that can be made in the course of summary assessment have been widened, although a provision has been introduced to put the Taxpayer on notice before making the addition.

The time-limit for concluding regular assessments is also proposed to be shortened by a period of three months.

Welcome to digital assessments

Enabling amendments have been proposed for facilitating paper-less assessment process, which is a positive step in reducing time and efforts of the Taxpayers

Penalty provisions lose sting, somewhat

The ubiquitous penalty provision – Section 271 – is dead. But Penalty provisions are alive – in a new avatar. Quantum of penalty to be levied has now become non-discretionary with two standard rates – 50% for under-reporting of income and 200% for misreporting of income.

There is also a standing penalty waiver provision introduced for Taxpayers who do not appeal against the assessment order and pay-up the taxes.

VI. Appeal Process-  A Mixed Bag of changes

Time-bound implementation of Appeal reliefs

A time-limit of three months has been prescribed for giving effect to the appellate orders. This can be extended by further six months by the Commissioner. Taxpayers would be entitled to additional interest of three percentage if the giving effect orders are not passed within the time-limit.

No Department Appeal against DRP order

It is proposed that Revenue cannot appeal against the order of the Dispute Resolution Panel. This proposal is actually a curse disguised as blessing. Taxpayers would vividly recall how dysfunctional DRP proceedings had become when the Revenue had no right of appeal against the Panel’s decision.  Acutely conscious of the fact that Revenue would not have any right to further appeal against its order, the panel would adopt a very conservative approach to resolution of disputes and not follow jurisdictional precedents, even where reliefs were granted by higher forums in Taxpayer’s own case. Re-introduction of the appeal restriction is likely to lead to same situation with DRP forum effectively being reduced to an authority for stamping approvals to the orders of the Revenue officers.

VII. Small Businesses, Some Troubles

8% Scheme comes with strings attached to tie you down

The threshold limit for adopting the presumptive rate of 8% of turnover as income has been extended to business with a turnover of upto two crores. And that’s where the good news ends for the small businessmen. The 8% dispensation now comes with a tie-down condition of five years and should the businessman not return the mandatory minimum 8% in a bad year, he would be barred from availing this simplified scheme for a period of five years. Deductions towards payment for Salary to Partners of partnership business availing the 8% scheme is also proposed to be withdrawn.  Further The taxes would have to be paid in advance, in a single installment towards end of the  year.

Non-corporates to pay Advance Tax on same schedule as corporate assessees

All non-corporate taxpayers would have to follow the same four-installment Advance Tax payment schedule which is applicable to a corporate.

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