High-tension budget for corporate India

Riad Joseph | Updated on March 03, 2013

The Finance Minister played the budget with a straight bat, balancing the need to protect the tax base with nudging the economy towards recovery.    

As Finance Minister P. Chidambaram rose to present Budget 2013, India Inc, still recovering from the effects of Budget 2012, watched with bated breath. The Minister had to protect the tax base while, at the same time, give a positive stroke to the Budget, given the impending general elections.

Leaving the basic rates unchanged, he instead proposed an increase to the surcharge rates. Corporates, both domestic and foreign, would have to pay higher surcharge at 10 per cent and 5 per cent, respectively (5 per cent and 2 per cent), where taxable income exceeds Rs 10 crore during FY 2013-14.

To counter the evasion of dividend distribution tax, he has proposed an additional tax from June 1, 2013 — private and unlisted public companies undertaking share buyback will have to pay a 20 per cent tax on the consideration paid above the issue price. Shareholders, however, would be exempt from tax on the gains.

Undervaluation of property sales would be curbed by requiring buyers to withhold tax at 1 per cent from consideration exceeding Rs 50 lakh paid to resident sellers. This could affect the real-estate sector, which is also impacted by the proposal to tax profits on the higher consideration recorded in the books and assessable for stamp duty.

Tax rates with respect to royalty and fee for technical services payable to non-residents have increased from 10 per cent to 25 per cent, subject to treaty benefits. Last year, the need to obtain a tax residency certificate was imposed on non-residents claiming treaty benefits. The Minister has tightened the leash by stating that TRC is necessary, but not sufficient for treaty benefits.

The deduction for recruitment of additional workmen available to an industrial undertaking is now restricted to a factory as defined in the Factories Act. Commodities Transaction Tax would be levied on sale of commodity derivatives, other than agricultural commodities, traded in recognised associations.

Turning to the positive proposals, the concessional tax rate of 15 per cent on foreign dividend received by Indian corporates has been extended to FY 2013-14. Dividend distributed by an Indian company out of incoming foreign dividends would not attract dividend distribution tax. Tax holiday for the power sector has been extended to FY 2013-14. Securities transaction tax has been marginally lowered. To bring income tax provisions in line with SEBI regulations, tax pass-through status is now provided to Category I alternative investment funds under the venture capital fund sub-category.

To provide fillip to the manufacturing sector, an investment allowance of 15 per cent has been provided on cost of new plant and machinery acquired during April 1, 2013 to March 31, 2015, for investment exceeding Rs 100 crore.

As announced earlier, GAAR has been postponed to FY 2015-16 and a new regime, taking into account some of the recommendations of the Shome Committee, will replace what was introduced last year. The key change relates to invoking the provisions only where the main purpose (and not one of the main purposes) of an arrangement is to obtain a tax benefit.

On balance, this budget seems to have taken the middle path, with no drastic changes to the tax laws as happened last year; at the same time, it attempts to maintain the tax base and revenues. However, the absence of proposals clarifying/ amending indirect transfer related rules (introduced last year to ostensibly tax Vodafone-like transactions) is a matter of concern. One can only hope that after taking due note of the Shome Committee recommendations, suitable amendments will be proposed in the final Bill.

Last, but not the least, the Minister’s promise to bring the Direct Taxes Code Bill back to the House before the end of the Budget session is encouraging.

Riad Joseph is Tax Partner, Ernst & Young

Published on March 03, 2013

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