Budget 2016 and its impact Series…

budget-2016

We were all excited with the expectation of the big announcement that budget will make on

Startups and give a clear roadmap on these grounds:

1. Ease of doing business

2. Finance & Funding

3. Tax & Compliance

This year, the budget expectation was made extra special. Thanks to the Startup India & Stand-up

India Plan on 16th January, 2016 addressed by PM Narendra Modi & his announcements. Keeping

the political scenario aside, the budget seems to be committed for fiscal consolidation, which is a

good news for the nation. The Finance Ministers’ Fiscal Deficit target of 3.5-3.9% is commendable.

Overall, the budget is good for the country and the much needed clarity on certain issues has been

finally made.

Few updates from Startup point of view:

1. Nearly 100 new amendments in companies act, 2013 & rules there under are proposed to provide

more ease of doing business in India. These include, registration of company in a single day with

reduced cost and shifting to an era of self certification. Fascinating right? It’s applicability is not yet

notified though.

2. Can any benefits be complete without tax benefits. This year our FM has provided income tax

benefit u/s 80-IAC for profits for 3 consecutive years out of 5 years. So, essentially, if you make

profits in 4th year, you get benefit for 4th & 5th Year. (That’s only 2 years!) Good news is, if you have

losses, you can still carry it forward to set off against future year’s income. (Limited to next 8 years)

3. Service Tax has become expensive. The new Krishi Kalyan Cess (KKC) @ 0.5% makes the effective

rate of service tax at 15%. Moreover, input of this new KKC can be adjusted only against

output/liability of such KKC.

4. Limits on TDS have been extended to bring some relief. Payments made u/s 194C to contractors

have a minimum payment annual limit increased from Rs 75,000 to Rs 1,00,000. The limit for

individual transaction stays at Rs 30,000/-. Moreover, u/s 194H; payments in respect of commission,

the limit has been revised to Rs 15,000. Yay!

5. Good news for all new startups in manufacturing sector incorporating on or after 1st March, 2016.

Now you can avail benefit of reduced tax rate of 25% provided your turnover is less than Rs 25

crores. However, no other benefit will be made available in respect of exempt income.

6. Now trading industry became very convenient. Maximum Limit of revenue for applicability under

Presumptive Taxation Scheme u/s 44AD doubled from Rs 1 crore to Rs 2 crores. Now show your

income at 8% or more of the total turnover and pay tax on that income. If you want to show less

profits, get your Tax Audit done u/s 44AB.

7. A new section 44ADA, similar to 44AD has been introduced for professionals. The turnover limit is

Rs 50 lacs and income will have to be minimum of 50% of the turnover or more. If you want to show

less income, get a tax audit u/s 44AB.

8. Startups will be recognised on the basis of 2 criterias:

a. Eligible Business: which will be certified by govt.

b. Eligible Startup: which will be certified by govt.

We might be back to the era of License Raj. On a good note, we can still get funds from investors

registered with SEBI.

Detailed Analysis:

1. Ease of Doing Business: The 100 new amendments, including registration of new company in

one day, brings along innumerable benefits for Startups and small business. The License Raj

is back. For being eligible for tax benefits, you need certification which will be granted on a

case to case basis. Now, on the surface, this looks good & very promising but the ambiguity

leaves scope for corruption for the bureaucracy! Increase in Service Tax by 0.5% in name of

Krishi Kalyan Cess may put more pressure on business struggling with low prices. No ease on

the rate of RBI means tough cash flow in the market which means cash will be a very big

factor for managing business for Startups.

2. Funding & Finance: Funds received from investors continue to be tax free provided the

investors are registered with SEBI. It means any funds raised from family is exempt. But

funds received from friends & other unregistered investors will attract Income Tax vide

Amendment in Finance Act, 2012. A possible solution here could be to issue convertible

preference shares or issue shares with differential rights but do not issue shares with huge

premium. The commitment to fiscal consolidation and steps taken to tackle retrospective

amendments may have restored faith on govt. to bring more funds in the country which

means more investments for Startups. However, tax sops declared on 16th January, 2016 are

yet to be passed in the parliament and till they are passed, they remain a fantasy. The good

news is there is a specific provision & Allocation of funds for SC/ST & Women Entrepreneurs

to pursue their entrepreneurial dreams.

3. Tax & Compliance: For Startups, getting registrations to be eligible for Tax benefits u/s 80-

IAC could be tricky. Self-certification & compliances are made easy and will ease the burden

of small tax payers. The extension of TDS Limits u/s 194C & 194H bring the much needed

relief for making payments. The biggest benefactors are small business operating under

Individual & HUF having turnover up to Rs 2 crores. Now they have an opportunity to file IT

u/s 44AD by claiming business income at least 8% of the total turnover and pay tax thereon.

Time limit for belated IT Return u/s 139(4) has been reduced by 1 year from earlier 2 years.

Major Amendments:

1. Patents: 10% tax on royalty income from worldwide exploitation on the patent developed &

registered in India. (Proposed new section 115BBF in Income Tax Act, 1961) (w.e.f. 1.4.2017)

2. Increase in basic customs duty (BCD) on primary aluminium from 5 % to 7.5 % and on

aluminium products from 7.5% per cent to 10% will help Indian aluminium industry by

checking influx of cheap imports.

3. Withdrawal from NPS on maturity made tax-free up to 40%

4. The budget has focussed specifically on the rural sector, roads and railways.

5. Chandra Shekhar Ghosh, Bandhan Bank: Biggest take away is commitment to fiscal

consolidation.

6. India will now levy a cess at the rate of 20% on domestically produced crude oil, calculated

ad valorem, as against the present rate of Rs 4,500 per tonne providing a big relief to

explorers like ONGC and Cairn India

7. New section 44ADA is proposed to be inserted in the Act to provide for estimating the

income of an assessee who is engaged in any profession referred to in sub-section (1) of

section 44AA such as legal, medical, engineering or architectural profession or the

profession of accountancy or technical consultancy or interior decoration or any other

profession as is notified by the Board in the Official Gazette and whose total gross receipts

does not exceed Rs 50 lakh in a previous year, at a sum equal to fifty per cent of the total

gross receipts, or, as the case may be , a sum higher than the aforesaid sum earned by the

assessee. The scheme will apply to such resident assessee who is an individual, Hindu

undivided family or partnership firm. It is also proposed that the assessee will not be

required to maintain books of account under sub-section (1) of section 44AA and get the

accounts audited under section 44AB in respect of such income unless the assessee claims

that the profits and gains from the aforesaid profession are lower than the profits and gains

deemed to be his income under sub-section (1) of section 44ADA and his income exceeds

the maximum amount which is not chargeable to income-tax.

8. The Clean Energy Cess (renamed as Clean Environment Cess) has been increased from Rs.

200 per tonne to Rs. 400 per tonne. (VISA Steel MD Vishal Agarwal – Steel sector)

9. The general budget 2016-17 earmarked an amount of Rs 3,205 cr for the development of

100 smart cities across the country by 2020, while nearly Rs 4,091 crore for AMRUT. Under

the programme, each selected city will be given Rs 500 crore over a period of five years by

the Centre with the respective states expected to make a matching contribution.

10. Nuclear power generation capacity is built over a period of time and Finance Minister Arun

Jaitley’s announcement of a Rs.3,000 crore yearly allocation for the next two decades is

certainly a welcome move.

11. The Union Budget has proposed an additional tax of 1% on luxury cars worth more than Rs

10 lakh. Moreover, an infrastructure cess of 4% will be imposed on higher engine capacity

vehicles and SUVs. FM Jaitley has also decided to levy an infrastructure cess of 1% on small

petrol, LPG and CNG cars and 2.5% on diesel cars respectively.

12. GoI will pay contribution of 8.33 per cent for of all new employees enrolling in EPFO for the

first three years of their employment. Budget provision of Rs 1000 crore for this scheme.

13. Deduction under Section 80JJAA of the Income Tax Act will be available to all assesses who

are subject to statutory audit under the Act

14. Total outlay for infrastructure – Rs 2,21,246 crore.

15. 100 per cent FDI to be allowed through FIPB route in marketing of food products produced

and manufactured in India.

16. Amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100

per cent stake in the ARC and permit non institutional investors to invest in Securitization

Receipts.

17. Target of amount sanctioned under Pradhan Mantri Mudra Yojana increased to Rs 1,80,000

crore.

18. A Task Force has been constituted for rationalisation of human resources in various

Ministries. Comprehensive review and rationalisation of Autonomous Bodies.

19. “The Bill would also improve the enabling environment for start-ups. The registration of

companies will also be done in one day,” he added. Earlier this month, a government-

appointed panel had suggested nearly 100 amendments to the new Companies Act to make

it easier to do business in India, including for simpler laws for incorporating a company and

for raising funds, as also for insider trading and dealings with top executives.

20. Raise the ceiling of tax rebate under section 87A from Rs 2000 to Rs 5000 to lessen tax

burden on individuals with income upto Rs5 lakhs.

21. Increase the limit of deduction of rent paid under section 80GG from Rs 24000 per annum to

Rs 60000, to provide relief to those who live in rented houses.

22. Increase the turnover limit under Presumptive taxation scheme under section 44AD of the

Income Tax Act to Rs 2 crores to bring big relief to a large number of assessees in the MSME

category.

23. Extend the presumptive taxation scheme with profit deemed to be 50 per cent, to

professionals with gross receipts up to Rs 50 lakh.

24. Accelerated depreciation wherever provided in IT Act will be limited to maximum 40 per

cent from 1.4.2017

25. Benefit of deductions for Research would be limited to 150 per cent from 1.4.2017 and 100

per cent from 1.4.2020

26. Benefit of section 10AA to new SEZ units will be available to those units which commence

activity before 31.3.2020.

27. The weighted deduction under section 35CCD for skill development will continue up to

1.4.2020

28. New manufacturing companies incorporated on or after 1.3.2016 to be given an option to be

taxed at 25 per cent + surcharge and cess provided they do not claim profit linked or

investment linked deductions and do not avail of investment allowance and accelerated

depreciation.

29. Lower the corporate tax rate for the next financial year for relatively small enterprises i.e

companies with turnover not exceeding Rs 5 crore (in the financial year ending March 2015),

to 29 per cent plus surcharge and cess.

30. 100 per cent deduction of profits for 3 out of 5 years for startups setup during April, 2016 to

March, 2019. MAT will apply in such cases.

31. 10 per cent rate of tax on income from worldwide exploitation of patents developed and

registered in India by a resident.

32. Complete pass through of income-tax to securitization trusts including trusts of ARCs.

Securitisation trusts required to deduct tax at source.

33. Period for getting benefit of long term capital gain regime in case of unlisted companies is

proposed to be reduced from three to two years.

34. Non-banking financial companies shall be eligible for deduction to the extent of 5 per cent of

its income in respect of provision for bad and doubtful debts.

35. Determination of residency of foreign company on the basis of Place of Effective

Management (POEM) is proposed to be deferred by one year.

36. Commitment to implement General Anti Avoidance Rules (GAAR) from 1.4.2017.

37. Exemption of service tax on services provided under Deen Dayal Upadhyay Grameen

Kaushalya Yojana and services provided by Assessing Bodies empanelled by Ministry of Skill

Development & Entrepreneurship.

38. Exemption of Service tax on general insurance services provided under ‘Niramaya’ Health

Insurance Scheme launched by National Trust for the Welfare of Persons with Autism,

Cerebral Palsy, Mental Retardation and Multiple Disability.

39. Basic custom and excise duty on refrigerated containers reduced to 5 per cent and 6 per

cent.

40. Withdrawal up to 40 per cent of the corpus at the time of retirement to be tax exempt in the

case of National Pension Scheme (NPS). Annuity fund which goes to legal heir will not be

taxable.

41. In case of superannuation funds and recognized provident funds, including EPF, the same

norm of 40 per cent of corpus to be tax free will apply in respect of corpus created out of

contributions made on or from 1.4.2016.

42. Limit for contribution of employer in recognized Provident and Superannuation Fund of Rs

1.5 lakh per annum for taking tax benefit. Exemption from service tax for Annuity services

provided by NPS and Services provided by EPFO to employees.

43. Reduce service tax on Single premium Annuity (Insurance) Policies from 3.5 per cent to 1.4

per cent of the premium paid in certain cases.

44. 100 per cent deduction for profits to an undertaking in housing project for flats upto 30 sq.

metres in four metro cities and 60 sq. metres in other cities, approved during June 2016 to

March 2019 and completed in three years. MAT to apply.

45. Deduction for additional interest of Rs 50,000 per annum for loans up to Rs35 lakh

sanctioned in 2016-17 for first time home buyers, where house cost does not exceed Rs 50

lakh.

46. Distribution made out of income of SPV to the REITs and INVITs having specified

shareholding will not be subjected to Dividend Distribution Tax, in respect of dividend

distributed after the specified date.

47. Exemption from service tax on construction of affordable houses up to 60 square metres

under any scheme of the Central or State Government including PPP Schemes.

48. Additional tax at the rate of 10 per cent of gross amount of dividend will be payable by the

recipients receiving dividend in excess of Rs 10 lakh per annum.

49. Surcharge to be raised from 12 per cent to 15 per cent on persons, other than companies,

firms and cooperative societies having income above Rs 1 crore.

50. Tax to be deducted at source at the rate of 1 per cent on purchase of luxury cars exceeding

value of Rs ten lakh and purchase of goods and services in cash exceeding Rs two lakh.

51. Krishi Kalyan Cess, @0.5 per cent on all taxable services, w.e.f. 1 June 2016. Proceeds would

be exclusively used for financing initiatives for improvement of agriculture and welfare of

farmers. Input tax credit of this cess will be available for payment of this cess.

52. Infrastructure cess, of 1 per cent on small petrol, LPG, CNG cars, 2.5 per cent on diesel cars

of certain capacity and 4 per cent on other higher engine capacity vehicles and SUVs. No

credit of this cess will be available nor credit of any other tax or duty be utilized for paying

this cess.

53. Excise duty of 1 per cent without input tax credit or 12.5 per cent with input tax credit’ on

articles of jewellery [excluding silver jewellery, other than studded with diamonds and some

other precious stones], with a higher exemption and eligibility limits of Rs 6 crores and Rs 12

crores respectively.

54. Excise on readymade garments with retail price of Rs 1000 or more raised to 2 per cent

without input tax credit or 12.5 per cent with input tax credit.

55. ‘Clean Energy Cess’ levied on coal, lignite and peat renamed to ‘Clean Environment Cess’ and

rate increased from Rs200 per tonne to Rs400 per tonne.

56. Excise duties on various tobacco products other than beedi raised by about 10 to 15 per

cent.

57. Assignment of right to use the spectrum and its transfers has been deducted as a service

leviable to service tax and not sale of intangible goods.

58. Domestic taxpayers can declare undisclosed income or such income represented in the form

of any asset by paying tax at 30 per cent, and surcharge at 7.5 per cent and penalty at 7.5

per cent, which is a total of 45 per cent of the undisclosed income. Declarants will have

immunity from prosecution. Surcharge levied at 7.5 per cent of undisclosed income will be

called Krishi Kalyan surcharge to be used for agriculture and rural economy.

59. New Dispute Resolution Scheme to be introduced. No penalty in respect of cases with

disputed tax up to Rs 10 lakh. Cases with disputed tax exceeding Rs 10 lakh to be subjected

to 25 per cent of the minimum of the imposable penalty. Any pending appeal against a

penalty order can also be settled by paying 25 per cent of the minimum of the imposable

penalty and tax interest on quantum addition.

60. High Level Committee chaired by Revenue Secretary to oversee fresh cases where assessing

officer applies the retrospective amendment. One-time scheme of Dispute Resolution for

ongoing cases under retrospective amendment.

61. Penalty rates to be 50 per cent of tax in case of underreporting of income and 200 per cent

of tax where there is misreporting of facts.

62. Disallowance will be limited to 1 per cent of the average monthly value of investments

yielding exempt income, but not exceeding the actual expenditure claimed under rule 8D of

Section 14A of Income Tax Act.

63. Time limit of one year for disposing petitions of the tax payers seeking waiver of interest and

penalty.

64. Mandatory for the assessing officer to grant stay of demand once the assesse pays 15 per

cent of the disputed demand, while the appeal is pending before Commissioner of Income-

tax (Appeals).

65. Monetary limit for deciding an appeal by a single member Bench of ITAT enhanced from Rs

15 lakhs to Rs 50 lakhs.

66. 13 cesses, levied by various Ministries in which revenue collection is less than Rs 50 crore in

a year to be abolished.

67. For non-residents providing alternative documents to PAN card, higher TDS not to apply.

68. Additional options to banking companies and financial institutions, including NBFCs, for

reversal of input tax credits with respect to non- taxable services.

69. Customs Act to provide for deferred payment of customs duties for importers and exporters

with proven track record.

70. Customs Act to provide for deferred payment of customs duties for importers and exporters

with proven track record.

71. Increase in free baggage allowance for international passengers. Filing of baggage only for

those carrying dutiable goods.

72. Expansion in the scope of e-assessments to all assessees in 7 mega cities in the coming

years.

73. Interest at the rate of 9 per cent p.a against normal rate of 6 per cent p.a for delay in giving

effect to Appellate order beyond ninety days. > ‘e-Sahyog’ to be expanded to reduce

compliance cost, especially for small taxpayers.

Notes & Inputs:

A. Startups

B. Individual

1. Ease of doing Business

2. Finance

3. Focus points on funding

4. Tax benefits

5. Cash flow

6. Startup policies

7. Indirect Tax incidence

8. Impact on SC/ST/Women

1. Tax benefits

2. House purchase

3. Salary structuring

4. Service Tax Impact

5. BPL/Farmers Benefit

6. Middle Class

7. Health, Insurance, senior citizens, etc.

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