Post-Budget Reactions by Khaitan & Co. Across Sectors Direct Tax, Indirect Tax, FPI, AIF, Offshore Funds, MAT

DIRECT TAX:

Daksha Baxi, Executive Director, Khaitan & Co.

I would give a thumbs-up to this budget, which has, in substance covered and taken care of almost all the issues to a greater extent. The FM needs to be commended for his ingenuity in the manner in which he has addressed the major issues.  Some of the provisions which I have found very encouraging are as follows:

 

The Finance Minister and through him, the PM has passed the test today, through the historic budget speech that the FM made in the Indian Parliament.

 

• There is hardly any recommendation made by all the stakeholders, which has not been addressed

 

 

• On the Direct tax side, the FM has rightly recognised the need to give 4 year road map to enable businesses to do their long term planning. He has proposed to bring down the corporate tax rate to 25% over the next 4 years, starting next fiscal year. Correspondingly, he proposes to remove all exemptions and deductions, which distort the actual collection of corporate tax and lead to avoidable litigation.

 

• No reduction in tax rates for individual tax payer but increased a host of exemptions and announced that those concessions and exemptions will continue to be available.  These help put more money in the hands of the individuals, to increase spending power and savings. By this he has achieved dual purpose: spur demand and increase availability of retail saving for investments.

 

• Further, he has increased avenues of investment for retail saving by promising to deepen bond market through Public Debt Management Agency  and announcement of other funds where retailers can invest

 

• GAAR has been deferred by 2 years and its applicability will be prospective, i.e. from 1 April 2017. All domestic and more importantly, foreign investors now have time to prepare themselves for GAAR. Though we hoped for it to be postponed by 5 years, this is acceptable, especially if the Govt also adopts the recommendations of the TARC reports and cleans up tax administration in the mean while.

 

• Reduction of withholding tax rate on royalties and fees for technical services from 25% to 10% should bring a lot of cheer to industries across sector where intellectual property of all kinds, technology and technical expertise is required for establishment of high quality businesses in India.

 

• The FM has put to rest all speculations with regard to the Direct Tax Code Bill by saying that all major proposals therein have been incorporated in the Income Tax Act, 1961 and there is significant jurisprudence under the Income Tax Act, and there is no merit in going ahead with the DTC.

 

• For levy of capital gains tax on indirect transfer of Indian asset (Vodafone type transactions) he has said that this is getting cleaned up in the detailed provisions which are expected to be in the Finance Bill and it is hoped that the concerns are properly addressed.

 

• While he has clarified non-applicability of MAT to the capital gains realised by FPIs, the question of applicability of MAT to other foreign companies with Indian source income remains to be addressed, it is hoped that the Finance Bill has details to address this. Otherwise it may be interpreted that MAT has always been intended to apply to foreign companies. This would be negative to say the least.

 

• The FM has recognised the inability of the Government to bring the black money stashed abroad, back to India in absence of specific legislation. Introduction of law which will give the government ability to cease or confiscate Indian assets for the moneys lying in foreign accounts illegitimately, should certainly address this issue.

 

• For the first time, government has provided strongly against black money by providing for criminal prosecution, imprisonment to offenders and 300% penalty on tax avoided.

 

• Non-disclosure of foreign assets, beneficial interest and accounts would also lead to imprisonment. Such  harsh measures should act as significant deterrent to keeping the illegal monies outside India

 

Encouraging and facilitating transactions through credit and debit cards and dis incentivising cash transactions should help in curbing generation of domestic black money, though the details of these provisions need to be examined.

 

Sanjay Sanghvi, Partner, Khaitan & Co. 

Overall, a positive budget with clear vision and demonstration of commitment to have non-adversial tax regime in India to facilitate economic growth, foreign investment and ease of doing business in India.  Two – three big ticket items – deferral of GAAR by two years; fair reasoning that Direct Taxes Code (DTC) is not really needed as current tax regime already has most of the provisions of DTC and suitable clarifications on Indirect Transfer of Indian Assets.  One would need to see in the fine print of the Finance Bill whether the highly controversial issue of applicability of MAT to foreign companies has been addressed as widely expected.  The re-assurance of the Finance Minister on the floor of Parliament is that India is committed to not retrospectively amend tax laws and to have a stable and practicable tax regime will clearly set a tone of next phase of India’s economic growth under the leadership of the Prime Minister Mr Narendra Modi.

 

FINANCIAL SERVICES SECTOR

Bijal Ajinkya, Partner, Khaitan & Co. 

This Budget seems to be the voice of foreign investors, and shall be a welcome move to boost foreign investments in India. It is clear that the overarching theme of the Budget is to make India an attractive and tax friendly investment destination. 

 

FPI:

The Minimum Alternate Tax (‘MAT’) controversy which FPIs and erstwhile FIIs were recently embroiled with, is set to rest with the budget proposal to exempt FPIs and FIIs from MAT. This is a welcome move as the seemingly tax favorable regime which exempts long term capital gains tax on market trades, was a blush off with the imposition of MAT. This proposal would surely provide a further boost to the capital markets.

 

AIF:

In a welcome move to attract foreign investments in AIFs, the Budget announces no regulatory interface and an automatic route for investments.

 

The tax pass-through accorded to Category I and II AIFs is a big sigh of relief for investors and funds, who were embroiled in prolonged controversies on who pays the tax on income of such AIFs.

 

Interestingly the fine print suggests that the pass through is available only if the income of the AIF is not in the nature of ‘profits and gains from income or profession’. Hence, in spite of this announcement, AIFs will still be embroiled in litigation as to whether its income is business income or otherwise, as if the former, there would be no pass through available.

 

Unfortunately, even though a tax pass through has been offered a withholding tax of 10 percent on distributions has been levied. The withholding is irrespective of whether the income is taxable. 

 

This would also be a sigh of relief to the MAT paying investors who were paying double tax on the income from an AIF, in cases where the AIF offered the income to tax. 

 

Interestingly, silence on the taxability of Category III AIFs, leads to a contra juxtaposition on whether it is expected that tax be paid at the AIF level. The uncertainty as to whether the income is business income or capital gains continues Category III AIFs.

 

Offshore Funds:

In order to facilitate reverse brain drain of the highly qualified fund managers who left the country in order to manage offshore funds in a tax efficient manner, the Budget proposes to clarify that the presence of the fund manager of an offshore fund in India, does not create the presence of a business connection in India. Neither would their presence be construed as making the offshore fund an Indian tax resident. Hence their presence in India would not lead to any negative tax implication for the offshore fund. This proposal would be a big boost to the fund industry, and we would expect a large quantum of such managers to relocate to India. 

 

In an ‘unfortunate miss’, though FPIs/FIIs have been carved out of the MAT implications, no such relief has been considered for offshore funds which do not fall within the FPI/FII category.

 

INDIRECT TAX:

Nihal Kothari, Executive Director, Khaitan & Co.

The Union Budget 2015 -16 will put India on the cusp of high growth trajectory while continuing fiscal consolidation. Public investment in infrastructure will be accelerated to create this growth momentum.

 

It is heartening that the Government has reiterated its strong commitment to introduce Goods and Service Tax by 1^st April 2016 which will create Indian common market and will eliminate cascading effect of taxes on indigenous manufacture of goods and services. In this process, Service Tax rate has been increased from 12.36% to 14% and negative list of services pruned. Education cess has been integrated in the Excise and Service Tax rates. In the process services will become more expensive.

 

To promote indigenous manufacture, inverted duty structure has been corrected by reducing customs duty of 22 input items. Measures like relaxing the time limit for availing CENVAT credit from 6 months to 1 year and expediting service tax and excise registration will facilitate ease of doing business.