The “Make In India” programme has garnered a lot of optimism. It was launched by the government of India in September 2014 with an agenda of transforming India into a global manufacturing hub. The underlying objective of the initiative is to encourage multinational as well as domestic companies to manufacture their products in India along with attracting technological and capital investment in the country. The focus of the initiative is on 25 sectors* of the economy.
There are four broad policies under “Make In India” programme viz new initiatives, foreign direct investment, intellectual property facts and national manufacturing. From tax perspective, the “Make In India” initiative envisages to simplify the complex tax regime, avoid prolonged litigation and provide directional road map to the investors.
Budget 2016 was expected to provide a push to the ambitious ‘Make In India’ initiative. Living up to the expectations, a host of announcements have been made with special focus on transformative growth in the manufacturing segment and tax administration reforms.
Key direct tax proposals of Budget 2016 making way for ‘Make In India’ are:
Relief in corporate tax rates to certain companies
- Newly setup domestic manufacturing companies have been given an option to be taxed at 25 percent plus surcharge and education cess provided:
- Company has been set up and registered on or after March 1, 2016
- The company is engaged in the manufacture or production of an article or thing and is not engaged in any other business
- Company does not claim any profit-linked deductions investment-linked deductions, accelerated depreciation, additional depreciation, investment allowance, expenditure on scientific research and such other deductions
- The intention to opt for such an option is furnished to tax authorities in a prescribed manner on or before due date of furnishing return of income
- Depreciation is computed as prescribed
- Corporate tax rate for domestic companies where turnover or gross receipts is less than Rs 5 crore in FY 2014-15 is reduced to 29 percent plus surcharge and education cess.
Ambit of tax incentive for employing new workmen/employees widened
- Currently, for new employment generation, additional deduction of 30 percent of additional wages paid to new regular workmen is available to manufacturing entity for three years, subject to certain limitations. Such benefit has now been proposed to be extended to all the sectors with rationalisation in above requirements:
- The condition of 10 percent increase in number of employees every year has been done away with.
- Requirement of minimum number of days of employment in a financial year stands reduced from 300 days to 240 days.
- Deduction shall be available in respect of cost incurred on any employee whose total emoluments are less than or equal to Rs 25,000 per month.
- No deduction in respect of cost incurred on those employees for whom the entire contribution under Employees’ Pension Scheme notified in accordance with Employees’ Provident Fund and Miscellaneous provisions Act, 1952 is paid by the government or who do not participate in recognised provident funds.
- The deduction shall be available for new business which is not formed by splitting up or reconstruction of an existing business.
Tax incentives for startups
- With a view to boost startups and provide impetus in growth during the initial phase of their business, it is proposed to provide a deduction of 100 percent of profits and gains derived by an eligible startup from business involving innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property. The deduction shall be available for three consecutive years within the period of five years from the date of incorporation.Further, eligible startups have been defined as under:
- Incorporated on or after April 1, 2016, but before March 31, 2019
- Total turnover of the business does not exceed Rs 25,000 crore rupees in any of the previous years beginning on or after April 1, 2016, and ending on March 31, 2019
- Valid certificate of eligible business is held as prescribed by the central government.
However, levy of Minimum Alternate Tax (MAT) would continue to apply to such startups.
It is proposed that long term capital gains accruing to an Individual or Hindu Undivided Family (‘HUF’) on sale of residential property shall be exempt provided proceeds are utilised to subscribe to shares of an eligible startup as per the prescribed conditions.
- In line with Action plan 5 of the OECD/G-20 led Base Erosion and Profit Shifting (BEPS) Project and in order to give impetus to research and development activities in India in various sectors such as pharma, information-technology, manufacturing, etc, concessional tax rate of 10 percent (plus applicable surcharge and cess) is proposed in respect of royalty income from patents developed and registered in India. However, no deduction is proposed to be allowed in computing such royalty income.Turnover limit for presumptive taxation increased
- With a view to reduce the compliance burden of small taxpayers engaged in eligible business, the existing threshold turnover limit of Rs1 crore to qualify for presumptive taxation is proposed to be increased to Rs 2 crore. Further, it is proposed that such taxpayers can pay advance tax by March 15 of the financial year. This is a welcome move for a large number of assessees falling under the ambit of micro and small medium enterprises.
Stability and certainty in taxation
- Currently, investment in new plant and machinery beyond Rs 25 crore is eligible for additional deduction at the rate of 15 percent to an entity engaged in manufacturing, subject to fulfilment of certain conditions. In this regard, the dual conditions of acquisition and installation of new plant and machinery in the same year is relaxed for claiming investment allowance. This tax incentive is available up to March 31, 2017. Such benefit is extended to new asset installed on or before March 31, 2017, even though acquired in earlier years. It has been clarified that the deduction shall be available in the year of installation. Such provision will enable completion of stalled projects in a timely manner.
(The provisions in this regards are proposed to be made applicable retrospectively from April 1, 2015)
- High-level committee proposed to be constituted to look into cases where assessing officers seek to apply retrospective amendments. Further, one time scheme of dispute resolution for ongoing cases under retrospective amendments is also proposed.
- To put to rest the continuing dispute over quantification of disallowance of expenditure relatable to exempt income, it is proposed to rationalise the methodology prescribed for such quantification and further it is proposed that such disallowance will be limited to 1 percent of the average monthly value of investments yielding exempt income but shall not be beyond the actual expenditure claimed.
- In respect of payments to non-residents not having Permanent Account Number (‘PAN’), tax is required to be withheld at the higher rate. This has resulted into higher cost for Indian entrepreneurs who were required to bear such withholding tax liability. In order to address this issue and to avoid hardships faced by Indian resident taxpayers, it is now proposed that production of prescribed alternative document to PAN shall suffice and accordingly higher tax deduction at source will not apply.
Road map for phasing out of deductions and incentives introduced
- Highest rate of tax depreciation is proposed to be restricted to 40 percent for both, old or new assets from FY 2017-18.
- Weighted deduction in relation to research and development (Sections 35(1)(ii), 35(2AA) and 35(2AB) will be restricted to 150 percent from April 1, 2017, to March 31, 2020, and 100 percent with effect from April 1, 2020.
- New unit in Special Economic Zone (‘SEZ’) needs to commence operation on or before March 31, 2020, to avail tax holiday benefits.
- Weighted deduction of 150 percent in respect of expenditure incurred on skill development shall be available for four years up to March 31, 2020. With effect from April 1, 2020, the same is restricted to 100 percent.
On the whole, the budget is well crafted and focussed on progressive tax reforms. A number of provisions have been introduced to provide impetus to the manufacturing segment. The efforts are also made to provide certainty in tax provisions. The implementation of such provision should benefit the economic growth of India. One of the aspects that could be looked at is to provide special tax regime for toll manufacturing in India. This may have provided more fuel for “Make in India programme” of the government.
To sum up, overall it is a good budget towards furthering the objective of “Make In India” programme of the government. The manufacturing industry can look forward to more clarity and certainty in the future.
- By Ashesh Safi, partner and Darshana Deshmukh, deputy manager, Deloitte Haskins and Sells LLP)
* Automobiles, Automobile components, Aviation, Biotechnology, Chemicals, Construction, Defence manufacturing, Electrical Machinery, Electronic systems, Food processing, Information technology and business process management, Leather, Media and entertainment, Mining, Oil and Gas, Pharmaceuticals, Ports and shipping, Railways, Renewable energy, roads and highways, space, textiles and garments, thermal power, Tourism and hospitality and wellness.
The thoughts and opinions shared here are of the author.
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