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Indian 2013 Budget Delivers Tax Changes

by Mary Swire,, Hong Kong

04 March 2013

Indian Finance Minister P. Chidambaram has unveiled his 2013 Budget, offering an update on several of the more contested tax, proposals made by the Government and implementing a series of tax reforms.

Chidambaram delivered his Budget speech to parliament on February 28. Announcing his tax measures, Chidambaram referred back to a statement made when he took over as Finance Minister last August. He said at the time that "clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution, and an independent judiciary will provide great assurance." According to his Budget speech, this statement provides the "underlying theme" for Chidambaram's tax proposals. He believes that: "An emerging economy must have a tax system that reflects global best practices." To this end, the Government is seeking to press ahead with three major tax initiatives: the introduction of a Direct Tax Code (DTC), General Anti-Avoidance Rules (GAAR), and a goods and services tax (GST).

Work on the DTC is in progress, Chidambaram explained. The Standing Committee on Finance has submitted its report on the DTC, and the Finance Ministry is examining the recommendations. The DTC was intended to enter into force from April, 2013, but this appears to be no longer the case. The DTC will not serve as an amended version of the 1961 Income Tax Act, but is intended to act as "a new code based on the best international practices that will be compatible with the needs of a fast developing economy." Chidambaram expects that he will be able to bring the DTC Bill back before parliament before the end of the present Budget session.

Chidambaram also confirmed that the delayed GAAR will enter into effect from April 1, 2016. The 2012 Finance Act introduced the GAAR, but, following a series of consultations and the publication of an expert committee report on the proposals, the Government decided on a number of amendments to the original GAAR. These changes will be incorporated into the Income Tax Act. Detailing the "basic thrust and purpose" of the GAAR, Chidambaram said: "Impermissible tax avoidance arrangements will be subjected to tax after a determination is made through a well laid-out procedure involving an assessing officer and an Approving Panel headed by a judge."

Efforts to introduce a goods and services tax (GST) have so far failed to come to fruition, although according to Chidambaram, "all States swear by the benefit of GST." Recent meetings with the Empowered Committee of State Finance Ministers has led Chidambaram "to believe that the State Governments - or, at least, the overwhelming majority - are agreed that there is need for a Constitutional amendment." The State administrations are also of the opinion that a GST law will need to be drafted, and that the central Government should compensate States for any losses caused by a reduction in the Central Sales Tax (CST). Chidambaram hopes to be able to "take this consensus forward in the next few months" and to bring a draft bill on the necessary constitutional amendments, together with a separate GST bill, before parliament in the near future. INR90bn will accordingly be set aside as the first instalment of CST compensation.

Turning to individual income tax, Chidambaram said that there is no case to revise either the tax bands or the rates. He feels that: "Even a moderate increase in the level of threshold exemption will mean that hundreds of thousands of taxpayers will go out of the tax net and the tax base will be severely eroded." He did nonetheless announce that all individuals with an annual total income of between INR200,000 (USD3,689) and INR500,000 will receive a tax credit of INR2,000. Chidambaram anticipates that 18m people will benefit from this measure. In addition, a new surcharge of 10% will be levied on persons (other than companies) with a taxable income in excess of INR10m. The surcharge on domestic companies with taxable income in excess of INR100m will rise from 5% to 10%, and, in the case of foreign companies, it will increase from 2% to 5%. These additional surcharges will be in force for one year.

A number of changes to the taxation of financial transactions were also announced in the Budget. The securities transactions tax (STT) will be reduced on certain transactions. The rate will fall from 0.017% to 0.01% on equity features, from 0.25% to 0.001% on MF/ETF redemptions at fund counters, and from 0.01% to 0.001% on sellers in cases of an MF/ETF purchase/sale on exchanges. At present, there is no distinction between derivative trading in the securities market and derivative trading in the commodities market. A commodities transaction tax (CTT) will therefore be introduced in a limited fashion. It will be levied on non-agricultural commodity future contracts at 0.01% of the price of trade. Trading in commodity derivatives will not be considered a "speculative transaction" and the CTT will be permitted as a deduction where the income from such transactions forms part of business income.

Finally, initiatives have been introduced to clamp down on tax avoidance. A final withholding tax will be levied on profits distributed by unlisted companies to shareholders through the buyback of shares. The rate of tax on payments made by way of royalties and fees for techinical services to non-residents will rise from 10% to 25%, in order to rectify an anomaly between the rates charged in the Income Tax Act and a number of Double Tax Avoidance Agreements.

Concluding his Budget speech, Chidambaram said: "Any economist will tell us what India can become. We are the tenth largest economy in the world. We can become the eighth, or perhaps the seventh, largest by 2017. By 2025, we could become a USD5 trillion economy, and among the top five in the world. What we will become depends on us and on the choices that we make."

TAGS: individuals | compliance | Finance | tax | economics | business | tax compliance | India | tax avoidance | royalties | fiscal policy | law | budget | goods and services tax (GST) | fees | tax rates | withholding tax | tax breaks | revenue statistics | tax reform | trade | individual income tax | services

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