Key Proposals in Corporate Taxation

Webinar11th July 2014

India Union Budget 2014

Agenda

• Corporate Taxation

• Incentives

• Transfer Pricing

• Non- Resident Taxation

• Other Significant Proposals

Corporate Taxation

CSR Expenditure and S.37

• As per S.135 of the Companies Act 2013, certain companies are required to spend at least 2% of the average net profit of the company in every financial year as CSR.

• Via this Budget, it has been now clarified that CSR expenditure shall not be considered as an expenditure incurred for the purposes of business and accordingly same would not be allowed while computing taxable income.

• As per Schedule VII of the Companies Act 2013, contribution to the “Prime Minister's National Relief Fund” is considered as valid CSR expenditure. Benefit under S.80G is still available on the same.

Avg. Profits CSR Expenditure Tax Liability @33.99% Effective CSR spend

100 2 0.6798 2.6798

Amount Not Deductible S.40

• Extension of time limit for depositing TDS– As per the current provisions of S.40(a)(i), payments to a non-resident are not

allowed as a deductible expenditure in case applicable tax is not deducted or after deduction at source, not deposited within the prescribed timelines.

– It is proposed to extend the time limit to “due date of return” i.e. at par with TDS in case of residents

• Disallowance of expense on non deposition of TDS– As per the current provisions of S.40(a)(ia), 100% of the expense in the nature

of interest, commission, brokerage, rent, royalty, FTS, amount payable to contractor or sub-contractor is disallowed on which TDS is deducted but not deposited on or before due date of return.

– As per proposal in the budget, now disallowance would be limited to 30% on all type of expenses.

Dividend Distribution Tax – S.115 O & S.115 R

• As per current provision

• As per proposed provision

Particular Amount in Rs.

Dividend declared and paid 100.00

DDT @ 16.995% (15% plus surcharge plus cess)

16.995

Cash Out Flow 116.995

Particular Amount in Rs.

Dividend declared and paid 100.00

DDT @ 16.995% X [100/ (1 -0.16995)]

20.4747

Cash Out Flow 120.4747

Additional outlay of

3.48%

Incentives

Investment Allowance to Mfr. Company

• As per current provisions under S.32AC, wherein taxpayer acquires and installs new asset after the 31.03.2013 but before 1.04.2015 and the aggregate amount of actual cost of such new assets exceeds Rs.100 Cr., an amount equal to 15% of cost of new assets was allowed as the deduction for FY 2013-14 and 2014-15.

• Now it is proposed to extend the same benefit even wherein value of new assets acquired is Rs.25 cr. or more. This amendment is effective from FY 2014-15 and would be available on all investment made till 31.03.2017.

• This deduction would be in addition to the depreciation allowable in accordance with the existing provisions of the Act.

Investment Linked Deduction

• S.35AD – Deduction in respect of capital expenditure on specified business– Deduction in respect of the eligible capital expenditure extended to

• laying and operating a slurry pipeline for the transportation of iron ore, and

• setting up and operating a semiconductor wafer fabrication manufacturing unit,

subject to notification by the Board. – Restriction to use such assets for 8 years for eligible business

• S.80IA – Extension of the sunset date for power sector– Presently, the sunset clause was due to expire on March 31, 2014.– The sunset clause for commencing eligible activity for claiming profit-linked

incentive by power companies is proposed to be extended by three years i.e. up-to 31 March 2017.

Dividend received from Foreign Company

• S.115BBD – Tax on certain dividends received from foreign companies– Currently, dividend received by an Indian company from a foreign company in

which it holds it holds more than 26% or more equity share capital, is taxable at the rate of 15%. However, such benefit was available only up to 31 March 2014.

– Now, such benefit would be available for all future assessment years without any sunset clause.

Transfer Pricing

Transfer Pricing

• S.92B(2) – Deemed international transaction– Current provision

• Assumes transaction between an enterprise (say “A”) and non-associated enterprise (say “B”)

• as deemed transaction between two associated enterprises

• If there exists a prior agreement between associated enterprise of A and non associated enterprise or the terms of the transaction are determined in substance between B and associated enterprise of A

– Two basic condition for characterising transaction as international transaction

• Transaction between two or more associated enterprises

• Either or both of whom are non-resident

Transfer Pricing

• S.92B(2) – Deemed international transaction– Changes proposed provision [Effective A.Y. 2015-16]

• Assumes transaction between an enterprise (say “A”) and non-associated enterprise (say “B”)

• as deemed international transaction

• If there exists a prior agreement between associated enterprise of A and non associated enterprise or the terms of the transaction are determined in substance between B and associated enterprise of A

• Wherein A or associated enterprise of A or both are non-resident

• Irrespective of whether B is a non resident or resident

– Impact

• Even a transaction between two resident entities could fall under the ambit of transfer pricing provisions

Transfer Pricing

• S.92B(2) – Deemed international transaction

A B

AE of A

India

Canada

International transaction Y

Judgments Overruled• Swarnandhra IJMII Integrated Township Development Co. P. Ltd. Vs. DCIT [TS-762-ITAT-2012(HYD)-TP]• IJM (India) vs. ACIT [TS – 257 – ITAT – 2013 (HYD) – TP]

Transfer Pricing

• S.92CC – APA Roll back provisions [Effective 1st October 2014]– Current provisions only allows APA for future international transactions

– It is proposed to provide for “roll back” mechanism for dealing with ALP issue entered during the period prior to APA

– Roll back provisions for any period not exceeding four previous years preceding the first of the previous years for which APA obtained

• Introduction of “range concept” – Reference in speech however no changes proposed in provisions

– Provision still refers to “arithmetic mean”

– Range concept – generally refers to “Inter-quartile range”

– Need to wait for appropriate amendment in the Act and Rules to support range concept

Transfer PricingExample

Comparable Transaction Margin in percentage

1 10.00

2 11.00

3 12.00

4 10.00

5 09.00

6 09.50

7 12.50

8 75.00

9 45.00

10 11.50

Mean Margin 20.55

Quartile 1 10.00

Quartile 3 12.37

Transfer Pricing

• Use of “Multiple year data” • As per Rule 10B(4) – “current year data” should be used for computation of

ALP

• In his speech, FM has indicated that soon taxpayers could use “multiple year data” for computation of ALP. Need to wait for detailed rules

• S.271 G - Penalty for failure to furnish transfer pricing documentation• Currently penalty can only be levied by assessing Officer or the commissioner

(appeals)

• Now, it is proposed that transfer pricing officer can also levy penalty under this section

• It is to be noted that no changes have been made under S.271AA and S.271 BA

Non Resident Taxation

Non Resident Taxation

• Transfer of Govt. securities• It is proposed to introduced new sub-section under S.47

• As per the proposed provision, transfer from non-resident to non-resident of Govt. Securities (carrying a periodic payment of interest) outside India through an intermediary would not be regarded as transfer and thus no capital gain tax would be livable on such securities

• S.194 LC - Withholding Tax on overseas borrowing • Current provisions provide for lower withholding of tax @5% on interest paid

by Indian company to non resident on monies borrowed by it in foreign currency under a loan agreement or through issue of long-term infrastructure bonds at any time on or after the 1.07.2012 but before 1.07.2015

• The same has been extended to cover any long term bond. Further, borrowing period also extended to 1.07.2017

Non Resident Taxation

• Characterisation of income in case of FIIs• Current provisions are ambiguous and does not provide clarity whether the

income arising to FIIs on transfer of securities shall be categorised as “business income” or “capital gain”

• It is now proposed, that income arising on transfer of securities shall be categorised as “Capital gain”

Other Significant Proposals

Other Significant Proposals

– Presumptive income from the business of plying/hiring or leasing goods carriages has been rationalized to Rs.7,500 for every month or part of the month during which the goods carriage is owned by the taxpayer.

– Unlisted security and a unit of mutual fund (other than equity oriented fund) shall be short-term capital asset if is held for not more than 36 months.

– Facility to take advance ruling from “Authority of Advance Ruling” would also be available to resident taxpayer.

Thank You

CA Gaurav Garg(M) +91 9899994934

(E) gaurav@jgarg.com