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Indian Budget Aims For Tax Certainty, Simplicity

by Mary Swire,, Hong Kong

04 March 2016

On February 29, 2016, India's Finance Minister, Arun Jaitley, delivered his 2016 Budget, which contains several tax initiatives designed to simplify and rationalize the country's tax regime.

The Budget proposes to amend section 112(1)(c) of the Income Tax (IT) Act to clarify that long-term capital gains arising from the transfer of shares of a company (not being a company in which the public are substantially interested) shall be chargeable to tax at the rate of ten percent. Further, transactions within two years, down from three year, will benefit from the long-term capital gain regime.

Taking into account the recommendations of the Shah Committee, the Budget proposes to amend section 115JB of the IT Act to provide that a minimum alternate tax (MAT) shall not be applicable to foreign companies, with retrospective effect from April 2001, if such companies do not have as a permanent establishment or a place of business in India. Jaitley had previously announced that foreign companies would no longer have to pay MAT from April 1, 2015, but the tax authorities interpreted the decision to mean that foreign companies may owe MAT for prior years, leading to a spate of demands for back taxes from foreign firms earlier this year.

Next, in a bid to address tax challenges posed by the digital economy, the Budget proposes an "equalization levy" of 6 percent of the amount of consideration for specified services received or receivable by a non-resident not having a permanent establishment (PE) in India, from an Indian resident carrying out a business or profession, or from a non-resident having a PE in India. The levy would only apply to business-to-business transactions worth INR100,000 (USD1,484) or more.

The Ministry explained: "The digital business fundamentally challenges physical presence-based PE rules. If PE principles are to remain effective in the new economy, the fundamental PE components developed for the old economy, that is, place of business, location, and permanency must be reconciled with the new digital reality. Considering the potential of new digital economy and the rapidly evolving nature of business operations it is found essential to address the challenges in terms of taxation of such digital transactions."

The Budget contains other key tax proposals including a rise in energy cess from INR200 per tonne to INR400 per tonne; a compliance window for domestic taxpayers to declare undisclosed income; and a slew of tax incentives for start-ups.

TAGS: court | compliance | Finance | tax | business | tax compliance | India | tax incentives | interest | energy | law | audit | ministry of finance | small and medium-sized enterprises (SME) | legislation | transfer pricing | tax reform | legislation amendments | trade | services | Tax

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