Budget 2013: Some retrograde steps worry

The Budget has taken some retrograde steps which strengthen the belief of foreign investors about the instability and non-predictability of the Indian tax policy/ regime.

These include the levy of 20% tax on buyback of shares by unlisted companies, which will dent foreign investment, and the increase in tax rate on royalty and fees for technical services paid to non-resident from 10% to 25%.

This is likely to hamper flow of technology or will increase costs for Indian companies. However, lower rate as per tax treaty will continue to apply.

The finance minister has also clarified that obtaining Tax Residency Certificate (TRC) is necessary but not sufficient condition to claim treaty benefits. This has once again raised concerns about availability of treaty benefits to non residents.

Meanwhile, a tax planning device to remunerate key employees by availing of keyman insurance has been taken away by denying exemption when such policies are assigned.
Similarly, director’s liability to pay tax in case of default by a private company has been extended to cover penalty, interest etc.

The changes as were promised are incorporated in the GAAR provisions and its implementation from April 2016 is a welcome move as this will build at least some confidence among taxpayers and allow them time to gear up.

The finance minister, nevertheless, has given joy to manufacturing companies investing in plant and machinery (above Rs 100 crore during the next two years (April 1, 2013 to March 31, 2015), which will enjoy an additional deduction of 15% of the cost of investment, subject to certain conditions.

The new deduction is over and above the existing depreciation available for new investment @20% under the Act. This will certainly give a boost to manufacturing companies and encourage further capex investment in India.

The tax measures on nonresident are likely to shake trust of foreign investors and this could impact FDI and thereby cripple growth.  We hope that Direct Taxes Code brings in more stable and clear tax regime.

Samir Kanabar
Tax Partner,
Ernst & Young