Budget Connect+ 2015: EY Tax Alert

Technology Sector
The lead up to the second Budget of this
government was event-filled with the Prime
Minister putting together a series of events that
put India firmly back on the global investors’
radar. The sentiments were high on the “Make in
India” campaign and the promise of “Minimum
Government, Maximum Governance”.
The Finance Minister articulated how India is
about to take off on a faster growth trajectory. As
important as these promises are, the Finance
Minister presented a Budget that was filled with
vision, stability in policy and a roadmap for
While setting out some changes in this year’s
Budget, the Finance Minister emphasized that
this is only the beginning. On the direct taxes, his
vision is to put in place a regime that is
internationally competitive on rates, is without
exemptions and incentivises savings. Towards
this, he has set out a proposal to reduce the
corporate tax rate from 30% to 25% over the next
four years, which will bring cheer to the IT
On the indirect taxes front, as part of the
movement towards GST, the Finance Minister has
also proposed various changes in the indirect tax
system. For instance, Education Cess and the
Secondary and Higher Education Cess in Central
Excise duty are proposed to be subsumed. To
facilitate smooth transition to GST, the service
tax rate is also proposed to be increased from the
present rate of 12.36% (including cesses) to a
consolidated rate of 14%. The time limit of
availing credit on inputs and input services has
also been increased from six months to one year
in order to rationalize the credit mechanism, as
seamless flow of credits is another expected
benefit of GST.
Programme to support all aspects of start-up
businesses, and other self-employment activities,
particularly in technology-driven areas.
Various proposals have been brought in to
improve the ease of doing business in India,
which is the clear direction in which the
Government is travelling. Some of them which
have been proposed in the Budget are as follows:
Proposal to set up an e-Biz portal which
would integrate 14 approvals at one
Exploring the possibility of replacing the
need for multiple prior permissions with
a pre-existing regulatory mechanism.
This Budget has also paved way for a stable and
non-adversarial tax regime. Assigning a threshold
and defining ‘substantial value’ for indirect
transfers and the deferment of GAAR should
come as a huge relief to the investor fraternity.
However from a technology sector standpoint,
some of the key expectations such as
withdrawing MAT for units in the SEZ, providing
a specific clarification for weighted deduction for
R&D expenses in the IT sector, have not been
In this Tax Alert, we have discussed the key tax
proposals/ amendments that were announced by
the Finance Minister in Budget 2015 which are
relevant to the Technology Sector.
Overall the Budget proposals indicate the
Government’s commitment to transition towards
GST by next year.
The emphasis in last year’s budget was on
encouraging entrepreneurship in the technology
sector. The Finance Minister has continued with
this message by proposing to establish a
mechanism for encouraging technology start-ups
under a program known as SETU (SelfEmployment and Talent Utilisation). SETU will be
a Techno-Financial, Incubation and Facilitation
Budget Connect+ 2015
Key direct tax proposals
A. Tax rates
Base rate of corporate tax remain
unchanged for both domestic and foreign
companies. However, the Finance Minister
has proposed to reduce the rate of corporate
tax from 30% to 25% over the next 4 years
starting from next year.
B. Levy of surcharge
Presently, a surcharge of 5% or 10% is levied
on domestic companies, if their income
exceeds INR 10 million or INR 100 million,
respectively. It is proposed to increase the
rate of surcharge by 2% to 7% or 12% for the
aforesaid classes, respectively. A surcharge
of 12% applies to Dividend Distribution Tax
and Buy-back tax. The effective tax rate
pursuant to the above are as follows:
Where income of the company is
less than Rs.10 Mn
Where income of the company is
greater than Rs.10 Mn but less
than Rs.100 Mn.
Where income of the company is
greater than Rs.100 Mn.
Dividend Distribution Tax
Buy-back tax
Pursuant to the retrospective amendment
under the Finance Act, 2012, it was
provided that a share/interest in a company
or entity, registered or incorporated outside
India, would be deemed to be situated in
India if the share/interest derives, directly
or indirectly, its value “substantially” from
assets located in India. Consequently, any
gains arising from transfer of such an asset
is taxable in India.
While such far reaching provisions were
introduced, the law remained ambiguous as
to what would constitute deriving
“substantial” value from assets in India, etc.
It is proposed to amend the extant law as
follows –
Budget Connect+ 2015
(b) Assets would include both tangible and
intangible assets.
(c) Value of an asset shall mean the fair market
value of such asset without reduction of
liabilities, if any, in respect of the asset.
(d) The relevant date for the purpose of the
above would be –
Tax rate
C. Indirect transfer of capital asset
(a) “substantial” value shall be deemed to be
derived from assets located from India if on
the specified date, the value of such assets
Exceeds INR 100 Mn; and
It represents at least 50% of the value
of all assets owned by the company.
The last day of the accounting year
preceding the date of the transfer; or
The date of the transfer, if the book
value of the assets on the date of
transfer exceeds 15% of the book value
of the assets as on the last day of the
accounting year preceding the date of
the transfer.
(e) Such income from ‘indirect transfer’ shall
not be taxable in India, in a case where the
transferor of share or interest in a foreign
entity, along with his associated enterprises,
neither holds the right of control or
management nor holds voting power or
share capital or interest exceeding 5% of the
total voting power or total share capital in
the foreign company or entity, directly or
indirectly, holding the Indian assets.
Gains arising from indirect transfer of Indian
assets shall be taxable in that proportion
which part may be reasonably attributable
to assets located in India and determined in
such manner as may be prescribed.
(g) Capital gains shall be exempt in respect of
transfer of share of a foreign company
deriving its value, directly or indirectly,
substantially from the shares of an Indian
company, under a scheme of amalgamation
or demerger, subject to satisfaction of
stipulated conditions.
(h) The Indian entity shall be obligated to
furnish information relating to the offshore
transactions having the effect of directly or
indirectly modifying the ownership structure
or control of the Indian company or entity.
In case of non-compliance, a penalty of 2%
of the value of the transaction is proposed
to be levied, if the transaction had the effect
of transferring the right of management or
control in relation to the Indian concern; or
Rs.500,000 in other cases.
D. Applicability of GAAR
It is proposed to defer the applicability of
GAAR by two years; GAAR would be
applicable from 1 April 2017. It is further
proposed that GAAR would apply
prospectively to investments made on or
after 1 April 2017.
outside India, against the income-tax
payable under the Act.
H. Limits for applicability of domestic transfer
pricing provisions overhauled
It is proposed to increase the threshold limit
for applicability of transfer pricing
regulations to specified domestic
transactions from INR 50 Mn to INR 200 Mn.
Curbing disputes/ Easing compliance
With a view to reduce multiplicity of
litigation, provision introduced to preclude
tax authorities to appeal on matters in
favour of taxpayers when an identical
question of law is pending before the
Supreme Court for earlier years.
E. Reduction of rate of tax for ‘Royalty’ and
‘Fee for Technical services’
Vide the Finance Act 2013, tax on royalty
and / or fees for technical services earned
by non-resident taxpayers was increased
from 10% to 25%. It is proposed to reduce
such rate of tax back to 10% for income in
the nature of royalty and / or fees for
technical services earned by non-resident
taxpayers. The above tax rates are the tax
rates under the Indian tax laws; the tax rate
under the applicable Tax Treaty would
continue to be available as before, wherever
J. Taxation of Depository Receipts (DRs)
Under the Depository Receipts Scheme,
2014, DRs (sponsored and unsponsored)
can be issued against the securities of listed,
unlisted or private or public companies.
It is proposed to amend the definition of
Global Depository Receipts so as to restrict
the applicability of the concessional tax
rates under sections 115AC and 115ACA
only in respect of Global Depository Receipts
issued to investors against the issue of
ordinary shares of the issuing company,
being a company listed on a recognized
stock exchange in India.
F. Rules of tax residency for companies
Presently under the Indian tax laws, a
company is said to be resident in India, interalia, if during the year, the control and
management of its affairs is entirely situated
in India. It is proposed that a company shall
be a resident in India if its Place Of Effective
Management (‘POEM’) is in India, at any time
in that year. POEM is defined to mean a
place where key management and
commercial decisions that are necessary for
the conduct of the business of an entity as a
whole are in substance made.
K. Tax withholding obligations on salary
Employer shall be required to obtain
evidence for certain prescribed claims
(including claim for set-off of loss) from the
Nature of claims, form and manner of
collection of evidence to be prescribed.
G. Rules for claiming foreign-tax credit
The Act does not provide the manner for
granting credit of taxes paid in any country
outside India. It is proposed to amend the
tax laws to insert rules to provide for the
procedure for granting relief or deduction,
as the case may be, of any income-tax paid
in any country or in a specified territory
Budget Connect+ 2015
L. Others
Penalty levied on concealment of income to
take into account any understatement or
concealment of income as computed under
the MAT provisions.
It is proposed to abolish the Wealth-tax Act,
1957; in lieu of this it is proposed to
increase the surcharge by 2% for all
taxpayers earning income in excess of INR
10 Mn.
Excise duty structure of 2% without Cenvat
credit or 12.5% with Cenvat credit prescribed
for tablet computers.
Excise duty on mobile handsets including
cellular phone changed from 1% without
Cenvat credit or 6% with Cenvat credit to 1%
without Cenvat credit or 12.5% with Cenvat
Excise duty is being reduced from 12% to 6%
on wafers for use in manufacture of IC
modules for smart cards subject to actual
user condition.
Key Indirect tax proposals
M. Tax Rates
Excise and Customs
Peak rate of effective customs duty increased
from 28.85% to 29.44% due to change in
peak excise duty rate.
Ad valorem rate of excise duty increased
from 12% to 12.5%.
In order to rationalize inverted duty
structure, exemption from Basic Customs
Duty (BCD), Countervailing duty (CVD) and
Special Additional Duty (SAD) has been
prescribed for parts, components and
accessories for use in manufacture of tablet
computers and their sub-parts for use in the
manufacture of parts, components and
accessories, subject to actual user condition.
Additionally, all goods, except populated
printed circuit boards (PCBs), used in the
manufacture of goods falling under
Information Technology Agreement (ITA)
bound items, fully exempted from SAD,
subject to actual user condition.
BCD on Black Light Unit Module for use in the
manufacture of LCD/LED TV panels reduced
from 10% to Nil, subject to actual user
BCD on Organic LED (OLED) TV panels is
being reduced from 10% to Nil.
BCD on Digital Still Image Video Camera
capable of recording video with given
specification and parts/ components for use
in the manufacture of such cameras reduced
to Nil.
SAD on inputs for use in the manufacture of
LED drivers or MCPCB for LED lights and
fixtures or LED lamps exempted, subject to
actual user condition.
Budget Connect+ 2015
[All the changes in rates of duty of customs
and excise are effective immediately]
Service Tax
Service tax rate to be increased from 12.36%
to 14%. Swachh bharat cess @2% to be
imposed on value on specified taxable
services. Accordingly, the effective rate of
service tax would be 16%/ 14%. [The
effective date to be notified after enactment
of Finance bill]
N. Reverse Charge Mechanism
Service tax payable by a body corporate on
reverse charge basis on procurement of
‘Manpower supply’ and ‘security services’
when provided by an individual, HUF, or
partnership firm changed from 75% to 100%.
[Effective from 1 April 2015]
O. Valuation of Taxable Services
The definition of consideration under
explanation in section 67 has been
substituted to provide that consideration for
a taxable service shall include all
reimbursable expenditure or cost incurred
and charged by the service provider except in
such circumstances and subject to such
conditions that may be prescribed on a later
date. [The effective date to be notified after
enactment of Finance bill]
P. Cenvat Credit
Time limit for availment of Cenvat credit has
been increased from 6 months to 1 year from
the date of issue of invoice of input/ input
service. [Effective from 1 March 2015]
Cenvat credit of service tax paid under partial
reverse charge by service recipient is allowed
without linking it to the payment to the
service provider. [Effective from 1 April
Cenvat credit wrongly taken but not utilised
shall be recovered as per the provisions of
recovery of service tax provided in Section
73 of Finance Act 1994.
The manner of determining utilisation of
credit has been provided. [Effective from 1
March 2015]
Q. Penal Provisions
Rationalisation of penal provisions in
customs, excise and service tax to provide
reduced penalties in bonafide cases. More
stringent provisions have been prescribed for
tax evasion. Reduced penalties have been
prescribed in specific circumstances. [The
effective date to be notified after enactment
of Finance bill]
R. Others
Reliance on electronically maintained
documents allowed which is a welcome step
towards GST. Guidelines will be issued in this
regard. [Effective from 1 March 2015]
Budget Connect+ 2015
While the Budget does focus on the
much fan-fared “Make in India”
theme, the Finance Minister does
acknowledge the role the IT sector
and the renewed entrepreneurship
in the sector has played as regards
job creation.
There is definitely something to look
forward to for the IT sector. As some
of the measures that the Finance
Minister proposed in the Budget of
last year (i.e., roll back provisions
for APA, amendments in the
transfer pricing rules to tackle
issues of multiple year data for
comparison, etc.) take shape
through necessary Rules, the sector
will see much more respite.
From an indirect tax standpoint, the
increase in the rate of service tax to
14% and the Swachh Bharat cess of
2% on specified taxable services is
going to increase the cost of input
services. However, the increase in
this rate is seen as a measure to
progressively align the rate with the
eventual rate that will be introduced
in the GST regime.
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Budget Connect+ 2015
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