Skyline of Mumbai city (Photographer: Dhiraj Singh/Bloomberg)

Budget 2017 Makes Tax Compliance Simpler And Eases Domestic Transfer Pricing Pain  

Budget 2017 has included various initiatives for reducing human interference in tax compliance, promoting digitisation for completion of assessment proceedings, and for realisation of revenue without undue compliance burden on the taxpayer.

To address certain taxpayer grievances on delay in issuance of refunds and prolonged income tax proceedings, the finance minister has proposed a reduction in time limits for conclusion of tax assessment proceedings. Further, the finance minister has also proposed restriction on the tax department’s powers to hold back the refunds till the assessment is concluded where assessment proceedings have already been initiated.

The existing statutory time limit for completion of assessment proceedings is 21 months from the end of the assessment year in which the income was first assessable. That is proposed to be reduced to -

  • 18 months after April 1, 2018, and
  • 12 months after April 1, 2019

The time frame for filing the revised income-tax return has also been reduced and a fee has been proposed on a delay in filing returns.

With a view to provide a tax friendly regime to businesses in India, the budget has proposed to merge the Authority for Advance Rulings for income tax, Central excise, customs duty and service tax.

Taxpayers will welcome all of these, and one can hope that with these steps, the government’s objective to promote ease of doing business and to rationalise and simplify the tax administration will bear some fruit and promote a much-needed culture of compliance.

Rakesh Dharawat, Partner, Dhruva Advisors

Less Painful Domestic Transfer Pricing Provisions

Currently, the domestic transfer pricing provisions are applicable to transactions between two domestic related parties even in situations where transactions between them are tax neutral from base erosion of Indian tax base point of view. To reduce the compliance burden of taxpayers, the finance minister has now proposed to restrict the scope of domestic transfer pricing provisions only to transactions between domestic related parties, where one of the parties is eligible for claiming profit-linked deduction.

Sudhir Nayak, Partner, Dhruva Advisors

Also Read: Abusive Tax Structures, Make Way For Budget 2017’s Transfer Pricing Combat Weapons

Changes In Indirect Tax

Beneficial owner will be covered under the ambit of importer/exporter under the customs law. Earlier, the customs authorities could only issue notices to the importer/exporter on record. Now the customs authorities have the power to go beyond and issue notices to Beneficial owner as well. The term “Beneficial owner” has also been defined.

An approval is required for transfer of CENVAT credit in furtherance to a merger, demerger, amalgamation etc. as opposed to mere submission of an intimation for transfer of credit, required earlier. This implies that companies with more than one registration will be required to seek approvals from each jurisdictional authority for transfer of CENVAT credit.

Specific change has been introduced for banks, financial institutions (including NBFCs) to reverse proportionate CENVAT credit under Rule 6 of CENVAT Credit Rules, 2004 after considering value of interest or discount. This provision is effective from 2 February 2017. However, there is no clarity on the treatment for the period April 2016 to 2 February 2017.

The value of land is to be excluded while computing the value of works contract services effective 1 July 2010. While there was a specific abatement (i.e. considering the value of land) mechanism prescribed, to inter alia allow deduction for value of land, courts have ruled otherwise. The amendment seems to be made specifically to overcome the decision of the Delhi High Court in the case of Suresh Kumar Bansal (2016) which held that the rules do not prescribe any specific computation mechanism for deduction of the land value.

R&D cess has been repealed effective April 1, 2017. This will have a positive impact on the cost of importation of technology into India pursuant to collaboration or joint venture agreement.

Ritesh Kanodia, Partner, Dhruva Advisors

Foreign Portfolio Investors Can Breathe Easy

In a major relief to foreign portfolio investors (FPIs) investing in India, Finance Minister Arun Jaitley seems to have provided a blanket exemption to Category-I and Category-II FPIs from the indirect transfer provisions. The proposed amendment is expected to have a retrospective effect and will soothe the nerves of FPIs and allay fears of multiple taxation under the indirect transfer tax provisions. With this, the circular issued by CBDT in December 2016 – which spooked the FPI community and was kept in abeyance since mid-January – will stand null and void.

The FPI community will further rejoice with extension of the concession withholding tax rate of 5 percent to interest payable before July 1, 2020. The inflow of foreign capital will be boosted by the extension of a similar concessional withholding tax rate of 5 percent on interest payable on two other instruments of funding:

  • External Commercial Borrowings availed before July 1, 2020
  • Rupee Denominated Bonds issued outside India before July 1, 2020

The investor community would largely be happy with the capital gains tax regime being left untouched, coupled with relief on indirect transfer provisions and extension of concessional tax regime on interest.

– Punit Shah, Partner, Dhruva Advisors

Also Read: Budget 2017: A New Long-Term Capital Gains Tax Controversy That May Hurt ESOPs And IPO Shares

Housing: Six Enabling Announcements

With a view to provide fillip to the real estate sector and to promote affordable housing, government has granted infrastructure status to “affordable housing”. This is expected to have a positive impact on the sector by reducing the cost of borrowing.

In addition, the following decisions will also bring cheer to the sector.

  • Redefining the size of the residential unit with reference to carpet area rather than built-up area.
  • Extension of the period for completion of the project from 3 to 5 years – to stay in existing profit-linked affordable housing deduction scheme.
  • Clarity on the liability to pay capital gain tax in a Joint Development Agreement (entered into by an individual/ HUF) only in the year the project is completed.
  • Reduction in holding period of immovable property to be regarded as long-term capital asset from three years to two years.
  • In a move which could help rationalise real estate prices and reduce hoarding of unsold units, the law has been amended to specifically provide for the levy of tax on ‘notional rental’ in respect of unsold property held as stock in trade – subject to certain exemptions.

– Punit Shah, Partner, Dhruva Advisors

NPA Burden: Tax Relief And More Access To Capital

With a view to boost the banking sector, the finance minister has proposed to increase the allowable provision for non-performing assets from 7.5 percent to 8.5 percent. However, this benefit has not been extended to NBFCs. Further, listing and trading of Security Receipts issued by a securitisation company or a reconstruction company under the SARFAESI Act will be allowed to list on SEBI registered stock exchanges. This is expected to enhance capital flows into the securitisation industry.

– Punit Shah, Partner, Dhruva Advisors

The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.

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