Budget 2014 – Corporate Tax Regime

Being the first budget of new government, Budget 2014 has focused on attracting more investments (both domestic and overseas), promoting the "made in India" label by setting up a manufacturing hub and providing a big push to the infrastructure sector. It was expected that Direct Tax Code would be overhauled, but instead, it is likely to be reviewed; and there was not much guidance on GST either. Having said that, it seems that capital markets were confused as stocks went on a roller coaster ride on a single day. We now look at key corporate tax proposals of Budget 2014:

The thin or thick air on retroactive amendments was cleared at the very beginning, with a bold announcement that going forward, investors can expect more stable and sustainable tax regime; however, past retroactive amendments will not be disturbed as they are at various stages in the judiciary system. It was also assured that such issues would be deliberated by a high level committee before any action is taken; this certainly provides a level of matured thinking at the administrative level as compared to decisions being taken at lower levels. Having said that, it is surprising that past cases on retroactive changes will not be referred to the high level committee and to that extent, the concerns of foreign investors on high pitched cases remains to be decided by the judiciary; this will certainly upset the mood.

One of the good measures, which does not find a place in the Finance Bill 2014, is allowing Indian companies to seek an advance ruling from Authority for Advance Ruling (AAR); this will certainly reduce the litigation and provide greater certainty to taxpayers. While this remains as a policy measure, the fine print needs to be seen.

Substantial attempts have been made to reduce transfer pricing disputes by providing avenues to companies to resolve past tax disputes in India through the APA 4 year roll-back. However, one would have to wait for the detailed mechanism and procedure to analyse the effectiveness of this reform as the same is currently not spelt out in the Finance (No 2) Bill 2014. Further, other changes like range concept, use of multiple year data, etc will also go a long way to bring an end to ongoing disputes.

Further, real estate investment trusts (REITs) and Infrastructure Investment Trust (IIT); both being cash pooling vehicles, have been encouraged by the government by providing pass through status to resolve the financial disability in infrastructure sector.

The FM has provided certain tax sops to incentivise investment, by allowing a deduction of 15% of cost of new investment in plant and machinery to manufacturers, if the cost exceeds Rs25 crore (which was currently Rs100 crore). The FM has also added two new sectors under the investment-linked deduction scheme to encourage investment in the semi-conductor wafer fabrication manufacturing and laying and operating of slurry pipelines for transportation of iron ore.

Extension of tax holiday for power sector up to March 2017 would not only provide stability to the power sector companies, but will also scale up investments in the sector. Linking of coal to the power plants would help in reviving the dead investment in power plants of various companies. Also, launch of Ultra Mega Solar Power Projects in the northern, western and southern states of the country would help in saving scarce resources and result in increased usage of solar energy. However, non-removal of power sector, infrastructure sector and units located in SEZ units from MAT would affect the above mentioned benefits provided by the FM.

The FM has altered the mechanism of computing the dividend distribution tax ('DDT') by providing for grossing up of dividend declared to compute the effective DDT of 15% which would indirectly reduce the retained earnings of the corporates by approximately 2.7%.

Concessional rate of 5% withholding tax has been extended to borrowings made before July 1, 2017 so as to incentivise low cost long-term foreign borrowings by Indian companies, and such a scheme has also been extend to long term bonds, apart from loans and long-term infrastructure bonds.

To ensure further FDI inflows, reforms have been proposed in terms of raising the sectoral cap in defence and insurance sector from the existing 26% to 49%, with full Indian management and control under the approval route. Further, the FM has announced that manufacturing companies having FDI will be allowed to sell its products through retail trading e-commerce platforms without any additional approval.

To sum it up, it is a visionary budget as it lays down a roadmap for future by bringing in governance and clear / stable tax regime. Hopefully, it should accelerate the engines of growth and bring India onto a high growth path by continuing such reforms in future.

(Views expressed are personal)