Don’t look now,

you might jinx it.

But steal a few glances and
you’ll surely see it.
It’s happening.
The subtle signs and the silent traction. In the parched economy of ours,
it’s finally raining some action.

Confidence is returning. Enthusiasm has resurrected. ‘Policy’ seems to be

recovering from the ‘paralysis’. Old collaborations, new synergies, domestic
handshakes and foreign interests are all working hard to convince each
other that they mean business.

There is so much spring in everybody’s step that one may mistake this as a
preparation for a celebratory dance.

Maybe they’re celebrating the fact that all things we love, now have hope to
survive and flourish. Growing our business, reveling in our prosperity and
talking about the future without fear. All this doesn’t scare us anymore.
It’s happening.
Investors are loosening their purses, announcements are not being held
close to the chest in perpetuity, and a global future for any business is
incomplete without some part of ‘Make in India’ empowering the vision.

The single most important weapon in the arsenal of a business, the

‘appetite for risk’ has returned from a long sabbatical and is raring to fly.

All this, and more. It’s happening. And unless you’re too superstitious, blind
or living under a rock, you would have seen it too.

The world is coming together to make the future.

A majority of them want the ‘Make in India’ version of it.

Budget 2015. Change has begun. Peaking begins now.

Preface 07

Economic Survey 08

Policy Announcements 16

Direct Taxes 23

Indirect Taxes 37
Preface
It is often said that change is the only constant in life. If one were to
look for validation of that statement, then all one has to do is to look
at India's economic performance. A roller coaster ride, if there ever
was one, India's economy has oscillated from one end of the
spectrum to another. Alas, while such swings are good for
entertainment, they can never be the story of an economic growth.
From touting India as the next big growth story, to heads shaking in
disappointment and despair, every one from the world's most
liberal economist to the common man has had to eat the humble
pie. It is in this period of despondency that India elected a
Government with an absolute majority, for that seemed to be the
only panacea for the ills affecting us. The previous budget was an
interim budget; a continuum of the previous ones, if one may dare
say so. And with good reason too. But whatever may be the reason
then, it is now time to buckle up and validate the country's
expectations.
Unlike in other developed economies, India's Budget is still
shrouded in a lot of mystery and intrigue. The Budget is effectively a
statement of income and expenditure, over the years, it has come
to reflect the reigning government's policies and plans. The Budget
pronouncement begins with the Railway Budget, moves on to the
Economic Survey before concluding with the Union Budget, which
lays out the Government's, fiscal and growth policies.
Moving away from platitudes for the moment, our attempt is to
familiarise you with the sage wisdom of the Economic Survey and
the machinations of the Budget. As has often been the case, the
Finance Minister's Budget Speech has always played to a full
audience, but the real impact has always been in the details. We will
be dwelling less on the speech and more on the details in an
exercise to demystify the mumbo jumbo.
07
Economic Survey
The Economic Survey is released by the Department of Economic Affairs
and, in a candid confession, acknowledges that it bears the imprint of the
Chief Economic Advisor to the Government. This document dwells on the
immediate past performance of the Economy and uses it as a basis to
advocate future policies. In advocating future policies, the document does
not profess to offer fix-it all solution, but rather throws up opportunities to
provoke and stimulate debate thereby enriching the policy making
process.
months that ended in March 2005. Henceforth, the base year will be the 12
months that ended in March 2012. The revised calculation also
incorporates more-comprehensive data on corporate activity and newer
surveys of spending by households and informal businesses.
GDP Growth, 2011-12 prices (%)
10
8.5-10
8

6.9 7.4
Gross Domestic Product (GDP) 6

4 5.1
On January 30, the Central Statistics Office released a new methodology
2
for measuring GDP growth in line with international standards.

Since January 2010, the base year for India's statisticians had been the 12 2012-13 2013-14 2014-15 Estimated growth in coming years

08
 Difference between New and Old Estimates of Economic Growth, 2012-13 and 2013-14 (Per cent)
6

-1

-2

2012-13 2013-14 2012-13 2013-14

Growth new series - Growth old series Deflator new series - Deflator old series

Agriculture & Allied Industry Manufacturing Services Total

09
In addition to this change, the benchmark measure of economic growth
will be based on market prices, not on factor costs. The latter method
tabulates economic activity based on the costs of production, whereas the
former method is based on the amounts paid by the consumers. Most
countries and international bodies calculate GDP based on market prices.
Be that as it may, the new measure continues to befuddle many an
intelligent person.
In the year 2015-16, GDP growth is estimated at 8.0%-8.5%, which is about
0.6-1.1 percentage points higher vis-à-vis 2014-15. This increase, it is
presumed, will be driven by four factors:
g Policy reforms such as de-regulation of diesel price, taxation of
petroleum products, replacing cooking gas subsidy by direct transfer
on national scale, etc
g Declining oil prices and increasing monetary easing due to moderate
inflation
g Increase in household spending power leading to boost in
consumption and growth
g Normal monsoons
Macroeconomic review and outlook
2014-15 witnessed the emergence of India as one of the larger economies
with promise.
Viewed purely from a macroeconomic perspective, the worst is clearly
behind us. The latest indicators, point to the fact that the revival of growth
had started in 2013-14 and attained further vigour in 2014-15 due to:
g steep decline in oil prices
g plentiful flow of funds from the rest of the world
g potential impact of the reform initiatives of the new government at
the centre
Greater macro-economic stability and a reformist intent coupled with
improved business sentiments in the country has led the IMF and the
World Bank to present an optimistic growth outlook for India for 2015
and beyond.
10

Improvement in macro-vulnerability index (MVI)
MVI combines a country's fiscal deficit, current account deficit and
inflation. Thus, this index affords comparisons across countries and times.
In 2012, India was the most vulnerable country as measured by its index
value of 22.4, comprising an inflation rate of 10.2%, a budget deficit of
7.5% and a current account deficit of 4.7% of GDP, well above that in the
other countries.
10
Today, inflation has declined by over 6 percentage points since 2011-13,
and the current account deficit has shrivelled from a peak of 6.7% of GDP
(in Q3, 2012-13) to an estimated 1.0% in the coming fiscal year. Also in a
nearly 12-quarter phase of deceleration, economic growth averaged 6.7%
but since 2013-14 has been growing at 7.2% on average. The combined
effort has resulted in India's macroeconomic position being comparable
with other countries.
Macro-Vulnerability Index
25

8 20

6 15

4 10

2 5

2011-12 2012-13 2013-14 2013-14 (Upto Dec’14) 2010 2011 2012 2013 2014 2015

Inflation (WPI)(average) Gross fiscal deficit Current account deficit Brazil Indonesia South Africa Turkey India Russia Mean MVI (BBB)

11
Rational Investor Ratings Index (RIRI) Rational Investor Rating Index
6
If macro-economic stability is one key element in assessing a country's
situation/potential, its growth - is another. A simple way therefore to 5
compare the relative economic situation is to supplement the macro- 4
economic vulnerability index with a “Rational Investor Ratings Index
(RIRI)”. In assessing the risks and rewards of competing destinations, 3
rational investors take into account not just macroeconomic stability 2
(which proxies for risks) but also growth which crucially determines
1
rewards and returns.
0
India represents a dramatic improvement in the RIRI index too when
-1
compared with comparable countries including the BRICS, other major
emerging markets (Turkey) as well as countries in India's investor rating -2
category (BBB) and category (A) which is above India's. -3

India ranks amongst the most attractive investment destinations, well -4

above other countries. Amongst BRICS (and other comparable countries) 2010 2011 2012 2013 2014 2015
only China scores above India. The reality and prospect of high and rising
Brazil Russia Indonesia Mean (BBB Rating) China Mean (A Rating)
growth, combined with macroeconomic stability, is the promise of India India (New GDP) India (New GDP)
going forward.

12
 exemptions will maximize the economy's pro-growth, pro-compliance,
Reforms in taxation and pro-single market creating potential.

To provide legal certainty and confidence to investors, the ordinances on Similarly a competitive, predictable, clean, and exemptions-light direct tax
coal, insurance, and land need to be translated into legislation approved policy regime that will lower the cost of capital, incentivize savings, and
by Parliament. Reforms in indirect taxes with a single GST rate (across facilitate taxpayer compliance is also needed.
States and products) set at internationally competitive levels with limited

Growth of Direct and Indirect Taxes and GDP Growth at

Current Market Prices
Jan Dhan-Aadhaar-Mobile (JAM) Number
45
40
Trinity Solution for subsidies
35
30 Product subsidies, both Central and State, have long been used with the
25
intention of making them affordable for the poor. Rice, wheat, pulses,
20
15 sugar, kerosene, LPG, fertiliser etc. form a select sub-set. The estimated
10 direct fiscal costs of these (select) subsidies are about ` 378,000 crore or
5 about 4.2% of GDP.
0

2010-11 2011-12 2012-13 2013-14 PA 2014-15 BE But, in their present form, only a fraction really accrues to the poor. To wit,
a large fraction of subsidies allocated to water utilities are spent on
Direct taxes Indirect taxes GDP Growth at Current Market Prices subsidising private taps when 60% of poor households get their water

13
from public taps. Similarly, with Kerosene, only 59% of subsidised
kerosene allocated via the PDS is actually consumed by households, with
the remainder lost to leakage. Direct cash transfers appear to be the only
remedy. The JAM Number Trinity– Jan Dhan Yojana, Aadhaar and Mobile
numbers— might well be a game changer because it expands the set of
welfare and anti-poverty policies that the state can implement in future.
Recent experimental evidence documents that unconditional cash
transfers – if targeted well – can boost household consumption and asset
ownership and reduce food security problems for the ultra-poor.
Direct Cash transfers can also augment the effectiveness of existing anti-
poverty programs, like the MGNREGA. A recent study reported evidence
from Andhra Pradesh where MGNREGA and social security payments
were paid through Aadhaar-linked bank accounts. Households received
payments faster with the new Aadhaar linked DBT system, and leakages
decreased so much that the value of the fiscal savings – due to reduced
leakages – were 8 times greater than the cost of implementing the program.
Make in India initiative
The Survey discusses the “Make in India” the flagship initiative and a key
policy objective of the new government. The Survey contemplates “What
should India make? Manufacturing or Services? ”
The Survey concludes that Indian growth should balance the nation's
comparative advantage in availability of low skilled labour with skill
development required by future generations to take advantage of lost
opportunities. The registered manufacturing must be expanded to take
leverage of India's abundant unskilled labour.
While “Make in India” occupies prominence as an important goal, the
future trajectory of Indian Development depends on both “Make in India”
and “Skilling India”, the Economic Survey says.
Climate change – moving from Carbon
subsidy to Carbon tax regime
Survey acknowledges the green actions taken by India, including imposing
significantly higher taxation of petroleum products and reenergizing the
renewable energy sector.
India has cut subsidies and increased taxes on fossil fuels (petrol and
diesel) turning a carbon subsidy regime into one of carbon taxation, by
14
putting an effective price on emissions. autonomy on the States.

This has significantly increased petrol and diesel price while serving as The FFC has radically enhanced the share of the states in the central
price signal to reduce fuel burnt and hence CO2 emissions. In addition, divisible pool of taxes from the current 32% to 42% which is the biggest
India has increased the coal cess from ` 50 per ton to ` 100 per ton, which ever increase in vertical tax devolution.
has been further increased to ` 200 per ton.

Cooperative federalism and

recommendations of Fourteenth
Finance Commission (FFC)
Far-reaching changes for sharing of revenues between the Center and the
States, on the one hand, and between the States, on the other, have been
recommended by the FFC. If these recommendations are implemented,
not only it would advance the cause of cooperative federalism that the
new government has embraced but it would also confer more fiscal

15
Policy Announcements
This Budget was touted to be the Budget to beat all Budgets – a Big Bang
Budget. But, just as we made a mistake about the war, we seem to have
repeated it in the context of the Budget as well. But, all the hype
notwithstanding, Mr. Jaitley appears to have done a fairly impressive job
given his constraints.
The Budget does not have any ground shifting pronouncements. Nor does
it pontificate. But, what it does have is a road map. The Budget does not talk
only about the year ahead…it looks well past it into the future and in a few key
areas, sets out ambitious, albeit measurable goals. Very little in the Budget
appears to be abstract. For every action proposed, there appears to be a
well thought of raison d'être. And this is what makes this Budget different.
Of course, the usual doubts linger, but they appear to be more because of
a hangover of past non-performances rather than doubts associated with
the present incumbent. But, it is this very belief, which makes the task of
ensuring adherence to the Budget statements more onerous. For, if the
statements made herein are not achieved, then the Finance Minister will
be hard pressed to make the economy repose confidence in him.
As is our custom, our attempt is not to critically analyse the Budget. That
job is in the safe hands of the Opposition parties. We only bring you a
précis. But, what we definitely do is to give you an impact analysis of the
direct and indirect tax proposals. Pay particular attention to them, but
before you take any decisions based on them, please seek out
professional advice.
Amrut Mahotsav - India's 75th year of Independence
The year 2022, India's 75th year of Independence, has been chosen as an
anchor year for many of the Government's promises. By 2022, the vision of
Team India, led by the States and guided by the Centre should include:
16
g A roof over every head. This would mean 20 million urban houses and prices for agricultural production
40 million rural houses
g Communication connectivity to all villages
g Every house will have 24 hour electricity, clean drinking water, a toilet
g To make India the manufacturing hub of the world
and be connected to a road
g Encourage and grow the spirit of entrepreneurship in India and
g At least one member from each family should have access to a means
support new start-ups and
for livelihood and employment or economic opportunity, to improve
his or her lot g Ensure the eastern and northern regions of India are on par with the
rest of the country
g Substantial reduction of poverty

g Electrification, by 2020, of the remaining 20,000 villages in the country

g Connecting each of the 1,78,000 unconnected habitations by all The Five Challenges
weather roads. This will require completing 1,00,000 km of roads
The Budget is candid enough to acknowledge five serious challenges and
currently under construction plus sanctioning and building another
realistic enough to try and address them. These challenges are:
1,00,000 km of road
g Stressed agricultural income
g Providing medical services in each village and city
g Increasing investment in infrastructure
g Educating and skilling youth to enable them to get employment
g Decrease in manufacture from 18% of GDP to 17% and stagnating
g Increase in agricultural productivity and realization of reasonable
exports at 10% of GDP

17
g Rising demands for public investment and
g Maintaining fiscal discipline
Agriculture
Over the years, we have seen the services sector boom, manufacturing too
has contributed its mite and with the Prime Minister's “Make in India” call,
this is only bound to go up. But despite all this, the Indian economy is still,
at its heart, an agrarian economy. And this fact cannot be denied. No
Budget is complete without appropriate allocations for this sector. This
year's allocations have been:
g ` 53 billion to support soil fertility and water usage efficiency
g ` 250 billion for a corpus of Rural Infrastructure Development Fund in
NABARD to support small and marginal farmers
g ` 150 billion for Long Term Rural Credit Fund
g ` 450 billion for Short Term Cooperative Rural Credit Refinance Fund
and
g ` 150 billion for Short Term RRB Refinance Fund
And finally to increase the incomes of farmers the Budget proposes to
create a National agricultural market, which will have the incidental
benefit of moderating price rises.
Funding the Unfunded
The Budget proposes creation of a Micro Units Development Refinance
Agency (MUDRA) Bank with a corpus of ` 200 billion to improve credit
facilities to small manufacturing, trading and service businesses.
An electronic Trade Receivables Discounting System (TReDS) will be
established to improve liquidity in the MSME sector
With the Sick Industrial Companies Act (SICA) and the Board for Industrial
and Financial Reconstruction (BIFR) having failed to address bankruptcy
adequately, a new Bankruptcy Code will be introduced to replace these laws.
Jan Suraksha
A key takeaway from the Budget is a universal social security system for all
Indians in general and the poor and the underprivileged in particular.
18
Multi-faceted, this social security system will include:
g Pradhan Mantri Suraksha Bima Yojana, an accident cover of ` 200,000
for a premium of ` 12 per year
g Atal Pension Yojana to provide a defined pension depending on the
contribution. To encourage participation, the Government will match
contributions up to a maximum of ` 1,000 for five years
g Pradhan Mantri Jeevan Jyoti Bima Yojana covering natural and
accidental death risk of ` 200,000 for a premium of ` 330 per year and
covering people in the 18-50 year age group
Unclaimed deposits of ` 30 billion in the Public Provident Fund and ` 60
billion in the Employees Provident Fund will be appropriated towards a
corpus for a new created Senior Citizen Welfare Fund and used to
subsidise premiums for old age pensioners, BPL citizens and so on.
Contributions to on-going welfare schemes for the Scheduled Castes,
Scheduled Tribes and Women will receive allocations of ` 309 billion, ` 200
billion and ` 793 billion respectively.
Infrastructure
The bane of the Indian economy, this is one sector, which seems to defy
every Finance Minister's attempts to control. Problems have ranged from
inadequate finance to project throttling bottlenecks. Yet, given the
vastness of our country and the depth of improvement required in this
sector, this offers tremendous potential.
This year's budget increases allotment to Railways by ` 101 billion and to
Roads by 140 billion. Coupled with the capital expenditure of the public
sector, investment in this sector is expected to go up by ` 700 billion.
A National Investment and Infrastructure Fund (NIIF) with an annual flow
of ` 200 billion will be established. On this base, this Trust will raise debt
and invest in the equity of infrastructure companies who will then leverage
it manifold.
Tax-free infrastructure bonds will be permitted in rail, road and
irrigation sectors.
Public Private Partnership, which has been plagued by an imbalance in
19
assumption of risk, will be revitalised with the Government absorbing
significant risks without absorbing it entirely.
The Government will set up a Self-Employment and Talent Utilisation
(SETU) Programme to support all aspects of start-ups and other self-
employment activities, particularly in technology-driven areas. This
programme will have an initial allocation of ` 10 billion.
The Budget proposes to set-up five Ultra Mega Power Projects (UMPP) in
plug and play mode. These projects will be pre-cleared and have all
linkages in place before being transparently auctioned. Similar projects
will also be considered in roads, ports, rail, airports etc.
Financial Markets
At present, while RBI manages the market-borrowing program for central
and state governments, the central government manages external debt.
A separate debt management office has been a bone of contention
between the government and the RBI with the Government of the the view
that it is best placed to manage government's debt given India's large fiscal
deficit and consequent large borrowing program. In developed
economies like the US, the Central Bank is more of a regulator and does
not perform debt management functions. In this backdrop, the minister
has announced setting up of an independent public debt management
agency (PDMA) in line with the recommendation of the Financial Sector
Legislative Reforms Commission (FSLRC).
India will have a unified regulator for commodities and capital markets by
merging the Forward Markets Commission (FMC) with SEBI. The proposed
merger will help streamline monitoring of commodity futures trading and
curb wild speculations. FMC was brought under Finance Ministry in 2013,
which was earlier under the Consumer Affairs ministry.
The Financial Sector Legislative Reforms Commission (FSLRC) had
recommended that SEBI, IRDA, PFRDA and FMC should be merged into a
single entity into a unified financial agency (UFA). Indian Financial Code
(IFC) has been proposed by FSLRC.
While this would enable full implementation of the provisions of Forward
Contract (Regulation) Act (FCRA), it is pertinent to note that SEBI needs to
build its commodity capacity and expertise.
In his speech, the Minister said that a properly functioning capital market also
20
requires proper consumer protection. Towards this, the Minister has proposed
to create a Task Force to establish a sector-neutral Financial Redressal
Agency that will address grievances against all financial service providers.
Capital Account controls are residency-based measures such as
transaction taxation, other limits, or outright prohibitions that a nation's
government can use to regulate flows from capital market into and out of the
country's capital account. These measures may be economy-wide, sector-
specific (usually the financial sector), or industry specific (for example,
“strategic” industries). They may apply to all flows, or may differentiate by
type or duration of the flow (debt, equity, direct investment; short-term vs.
medium- and long-term). The Government therefore, proposes to amend
Section-6 of Foreign Exchange Management Act (FEMA) to clearly provide
that control on capital flows, as equity will be with the Government, in
consultation with the Reserve Bank of India (RBI).
Gold Monetisation
India's love story with gold goes back a very long time. Alas, this love story
makes little economic sense. India imports between 800 and 1000 tons of
gold each year and stock of gold in India is estimated to be 20,000 tons, a
majority of this is neither traded nor monetised. In an attempt to
monetise,
g A Gold Monetisation Scheme will replace the existing Gold Deposit and
Gold Metal Loan scheme. Depositors will earn interest and jewellers
can obtain loans
g As an alternative to purchasing gold, a Sovereign Gold Bond will be
introduced. Not only will it bear interest but will also permit
redemption in terms of face value of the gold
g An Indian Gold Coin with the Ashoka Pillar on its face will be developed
to reduce demand for coins minted outside India and to recycle
domestic gold.
Investment
Foreign investments will be permitted in Alternate Investment Funds
which have been set up to provide another vehicle for facilitating domestic
investments.
To encourage foreign investment, distinction between different types of
foreign investments will be eliminated and replaced with composite caps.
21
 Employees will be given a choice of opting for the ESI scheme or
Tourism contributing to a health insurance approved by the Insurance Regulatory
Development Authority (IRDA).
Nine heritage sites have been identified for betterment of on-site facilities
such as landscape, signage etc. Visa on arrival, available to 43 countries
will gradually be increased to 150 countries.

Miscellanea
A National Skills Mission through the Skills Development and
Entrepreneurship Ministry will be set up to consolidate skill initiatives
across ministries

Defence of the realm will have an allocation of Rs. 2.47 trillion

Employees will be given a choice of opting either for the Employees

Provident Fund or the National Pension Scheme.

Employees below a certain threshold of monthly income will have a choice

of contributing to EPF while maintaining the employer's contribution.

22
Direct Taxes
Direct tax collection chart
9,000

8,000
` in '000 millions

7,000

6,000
4,706
5,000 4,261
3,947
4,000 3,563
3,000 3,228
2,987
2,447
2,000 1,929 2,134
2,726 3,208
1,000 1,965 2,378
1,225 1,391 1,645
1,026 1,060
0
2007- 08 2008 - 09 2009 - 10 2010 - 11 2011 - 12 2012 - 13 2013 - 14 2014 - 15 2015 - 16

financial year Corporate Tax Personal Income Tax

23
Direct Taxes
who is a crew member of a foreign bound ship will be prescribed and
Investment Boosters will apply retrospectively from 1 April 2014.
g In order to develop a competitive environment in conformity with
other major Asian economies, it is proposed to reduce the corporate g From 1 April, a company will be considered resident if the place of its
tax rate from 30% to 25% over the next four years effective management is in India. Place of effective management will
mean a place where key management and commercial decisions
g The implementation of General Anti-Avoidance Rule (GAAR) is deferred
necessary for the conduct of the business in substance are made.
by two years. The GAAR provisions will apply prospectively from
financial year 2017-18.
Income accruing or arising in India
g Considering that the major provisions of Direct Tax Code are already
imbibed in the existing Income Tax Act, the Direct Tax Code is struck
g Indirect Transfer
down.
Income from transfer of shares or interest in a foreign entity is taxable
g In a move to simplify the tax regime in India, Wealth Tax is abolished
in India if such shares or interest derives its value substantially from
from financial year 2015-16.
assets located in India (directly or indirectly).

(I) An entity is said to derive its value substantially from assets located
Residential Status
in India when the fair market value of Indian assets without reduction
g A procedure to determine the residential status of an Indian citizen of liabilities:

24
 n exceeds the amount of ` 100 million and
n consists of at least 50% of the value of all the assets owned by the
company or entity.
(ii) The valuation shall be as on the date on which the accounting period
ends preceding the date of transfer. However, if the book value of
assets as on the date of transfer exceeds by at least 15%, then the
same needs to be considered.
(iii) The taxation will be in proportion to the assets located in India.
(iv) Exception to the rule of Indirect Transfer:
n When a transferor of such shares or interest along with its
associated enterprises does not hold, directly or indirectly, right to
control/management and voting power/share capital/interest
exceeding 5% anytime during the period of 12 months preceding the
date of transfer.
n Transfer in case of amalgamation / demerger subject to certain
conditions.
(v) The Indian entity would be duty bound to furnish specified
information or documents relating to offshore transactions modifying
its ownership, directly or indirectly. Failure to furnish such information
may attract penalty of 2% of the value of the transaction or ` 500,000
as the case may be.
g Source rule in respect of interest received by a non-resident bank:
From 1 April 2015 interest paid by a Permanent Establishment (PE) to
its head office engaged in banking business will be taxable and hence
will attract tax withholding. This takes note of the observation made by
the Special Bench of the ITAT in the case of Sumitomo Mitsui Banking
Corporation.
g Fund Managers in India not to constitute PE of offshore funds:
In order to facilitate location of fund managers of off-shore funds in
India, a specific regime in the Act is proposed in line with best
international practice from 1 April 2015. As per the said regime, in the
case of an eligible investment fund, the fund management activity
carried out through an eligible fund manager acting on behalf of such
fund shall not constitute PE of the said fund in India.
Further, such off shore funds shall not be considered as residents in
25
 India merely on account of the fund manager performing fund
management activities in India. To qualify as an eligible investment
fund and an eligible fund manager, it list out various conditions to be
fulfilled. Every offshore fund will be required to file a statement with
the income tax authorities within 90 days from the end of the financial
year, failing which a penalty of ` 500,000 would be levied.
Royalty or Fee for technical service
g Come 1 April 2015, tax on income earned by non-resident taxpayers
from royalties and fee for technical services will be decreased from
25% to 10%.
g The withholding tax rate will also correspondingly decrease. However,
in case of non-furnishing of Permanent Account Number (PAN),
withholding tax rate shall be 20%.
Transfer Pricing
g With effect from financial year 2015-16, the threshold for applicability
of transfer pricing provisions with respect to specified domestic
transactions will be increased from ` 50 million to ` 200 million.
Minimum Alternate Tax (MAT)
g With effect from financial year 2015-16, following incomes earned by a
company have been exempted from minimum alternate tax:
n Share of income from an association of person or body of
individuals, total income of which is charged to tax at the maximum
marginal rate or such other higher rate.
n Capital gains arising on transactions in securities (other than short-
term capital gains arising on transactions on which securities
transaction tax is not chargeable) earned by Foreign Institutional
Investor (FII) in accordance with the regulations made under the
Securities and Exchange Board of India Act, 1992.
g Accordingly, income/expense pertaining to above two items will not be
considered in computation of book profits on which MAT would be paid.
Additional depreciation
g To incentivize investment in new plant or machinery, an additional
depreciation of 20% will be allowed on such assets acquired and
installed by a manufacturing unit.
26
g From financial year 2015-16, new plant and machinery acquired and
installed by a manufacturing unit in the backward area of the State of
Andhra Pradesh and the state of Telangana will be eligible for an
additional depreciation of 35% instead of 20%.
g If the assets are put to use for less than 180 days in the financial year of
purchase, then the additional depreciation will be spread over two
financial years equally.
Additional Investment Allowance
g A manufacturing unit setup between 1 April 2015 and 31 March 2020
in the notified backward area of the state of Andhra Pradesh or the state
of Telangana will be eligible for 15% additional investment allowance.
g New asset cannot be transferred within five years from the year of
installation. For assets transferred within 5 years, allowance claimed in the
year of installation will be treated as business income in the year of transfer.
g However, transfer of asset within 5 years under a scheme of
amalgamation or demerger will be allowed. In such cases, the
amalgamated company or the resulting company cannot transfer
such asset for the unexpired period in the 5 year
g New assets exclude ships & aircrafts, vehicles, second hand plant and
m a c h i n e r y, a s s e t s u s e d i n o ffi c e p re m i s e s / re s i d e n t i a l
accommodation / guest house and assets for which 100% cost is
claimed as deduction under any other provisions.
Business Trust
g Beneficial regime of capital gains taxation (i.e. tax of 15% in the case of
short term capital gains and exemption in the case of long term capital
gains) will be extended to capital assets being units held in a Business
Trust, which are acquired in exchange of shares in a Special Purpose
Vehicle. This will be applicable from financial year 2015-16.
g Any income earned by a Business Trust, being a Real Estate Investment
Trust (REIT), by way of leasing of real estate asset owned by such
Business Trust shall be exempt in the hands of Business Trust and will
be taxable in the hands of unit holder. Accordingly, distribution of such
rental income is subject to withholding tax at the rate of 10% in case of
resident unit holders and at 5% in the case of non-resident unit holders.
Investment Fund
g From 1 April 2015, a separate regime of taxation will be introduced for
Investment Funds. An Investment Fund is a fund established in India,
27
 which has obtained a certificate of registration as Category I or
Category II Alternative Investment Fund as regulated by SEBI
Regulations.
g Income earned by such Investment Fund will be accorded a “tax pass-
through” status on similar lines with venture capital fund/venture
capital companies.
g Tax proposals for these Investment Funds and the unit holder in such
Investment Fund will be as follows:
n Incomes earned by such Investment Fund (other than income in
the nature of profits and gains from business or profession) will be
taxable in the hands of unit holders on an accrual basis irrespective of
whether such income is distributed or not. Further, such income will
be taxable in proportion to units held by the unit holders in the same
manner as if such income were directly accrued to them. A
withholding tax rate of 10% will be applicable on such incomes.
n Income in the nature of profits and gains from business or
profession will be taxable in the hands of the Investment Fund either
at the rates applicable to a company/firm or at the maximum marginal
rate in any other case. Further, when such income is distributed to unit
holders, it will not be taxed in their hands.
n Provisions of dividend distribution tax and tax on distribution of
income will not apply to income distributed by the Investment Fund.
n The Investment Fund will have to furnish a statement of details of
income so credited/paid in a prescribed form to unit holders and
income tax authority.
n Every Investment Fund will have to file its income tax return every
year within the prescribed due dates.
Exempt incomes
g Swachh Bharat Kosh' is a fund set up to mobilize resources for
improving sanitation facilities in rural and urban areas and school
premises and the 'Clean Ganga Fund' is set up to attract voluntary
contributions to rejuvenate river Ganga. From financial year 2015-16,
income of these funds will be exempt from taxation.
g Clearing Corporations are mandated to establish a fund called as 'Core
Settlement Guarantee Fund'. Income arising from the contributions
received, investments made and penalties imposed and credited to
28
 this fund by Clearing Corporation are exempt from tax. However,
where any amount standing to the credit of the fund which are not
charged to tax are shared with the Clearing Corporation or the Stock
Exchanges, it will be treated as income of the fund for the year in which
such income is shared.
Charitable Trusts
g From 1 April 2015, 'Yoga' will also be considered as a charitable
purpose activity.
g From 1 April 2015, in case of a charitable institution constituted for
advancement of object of general public utility, the restriction of
maximum receipts from carrying out of trade or business will be
restricted to 20% of the total receipts of such trust as against the
erstwhile monetary limit of ` 2,500,000.
g Application of Income in case of Charitable Trust
n Tax authorities while granting the tax exemption to Charitable
Trust, impose a condition that, every year, such Trust is required to
apply at least 85% of its income for charitable purpose in India.
n From financial year 2015-16, intimation in a prescribed form is
mandatory for carry forward of unapplied portion of income of such
85% caused due to non-receipt of money.
n The period for which such income can be carried forwarded is
reduced from 10 years to 5 years and this period for carried forwarded
excludes any period for which income could not be applied due to an
order or injunction of any court.
n When the option is not exercised on or before the due date of filing
of tax return or when the tax return itself is not filed within due date
prescribed, then the unapplied income will be chargeable to tax.
Capital Gains
g From financial year 2015-16, transfer of shares of an Indian company
between two foreign companies under a scheme of amalgamation or
demerger, where the transferor company 's share value is
substantially derived from the share or shares of an Indian company,
will not be subject to capital gain tax if:
n In case of amalgamation, minimum 25% of the shareholders of
amalgamating company become the shareholders of amalgamated
company;
29
 n In case of demerger, minimum 75% of the shareholders in value of
the demerged company become the shareholders of the resultant
company; and
n Such amalgamation / demerger is exempt from tax in such foreign
country.
g The cost of acquisition of such shares for the amalgamated/resultant
company will be the cost incurred by the amalgamating or demerged
company to acquire such shares.
Consolidation of Mutual fund Schemes
g Transfer of mutual fund units by a unit holder to the mutual fund
pursuant to consolidation of 2 or more funds under consolidation
scheme approved by SEBI will not be treated as transfer subject to
capital gain tax. This benefit will be available from financial year 2015-16.
g The cost of acquisition of units in consolidated scheme of mutual fund
will be the cost incurred for obtaining the units exchanged.
g Holding period for units received under consolidation scheme will be
reckoned from the date of acquisition of units exchanged under the
consolidation scheme.
Deductions
g The ceiling limit for claiming deduction for contribution to pension
funds is increased from ` 100,000 to ` 150,000.
g Presently, contribution to pension schemes of Central Government is
eligible for deduction up to 10% of the salary income for employees
and 10% of the gross total income for other type of taxpayers. From
financial year 2015-16, an additional amount up to ` 50,000 can be
claimed towards such contribution.
g The proposed deduction for health insurance premia is summarized
below:
30
 Deduction for expenses towards Additional deduction for expenses
taxpayer himself, spouse and children towards taxpayer's Parents
Particulars
Persons less than Persons more than Persons more than Persons less than Persons more than Persons more than
60 years of age 60 years of age 80 years of age 60 years of age 60 years of age 80 years of age

Medical insurance premium 25,000 30,000 30,000 25,000 30,000 30,000

Payment for preventive 5,000 5,000 5,000 5,000 5,000 5,000

health check-up

Other medical expenditures 0 0 30,000 0 0 30,000

Total (subject to ceiling limit) 25,000 30,000 30,000 25,000 30,000 30,000

g Deduction limit for maintenance of dependents with disability is
enhanced from ` 50,000 to ` 75,000 and for dependents with severe
disability, the limit enhanced from ` 100,000 to ` 125,000
g Deduction for medical expenses incurred for medical treatment
respect of very senior citizens is enhanced from ` 60,000 to ` 80,000.
The prevailing condition of obtaining a certificate from prescribed
medical experts of a Government hospital will be discontinued from
financial year 2015-16. However, a prescription from prescribed
medical specialist is required.

31
g Donations to the 'Swachh Bharat Kosh' (Clean India Drive) and the
'Clean Ganga Fund' will be eligible for 100% deduction, only if such
donations are made other than CSR compliant purpose. Donations to
the National Fund for Control of Drug Abuse will also be eligible for
100% deduction.
g Benefit given to persons with disability will be enhanced from ` 50,000
to ` 75,000 and for Persons with severe disability, the limit will be
enhanced from ` 100,000 to ` 125,000
g A manufacturing entity would be eligible for deduction of 30% of the
additional wage paid/incurred in employing more than 50 (existing
100) new regular workmen provided the increase in total labour force
will be at least 10% of the existing employee base. Deduction will be
available for a period of 3 years.
Withholding Tax (from 1 June 2015)
g In order to promote long term savings and to discourage employees
from premature withdrawal from their EPF accounts i.e. before the
period of 5 years, it is proposed to make the withholding provisions
applicable on such withdrawals at the rate of 10% in case PAN is
available. In the absence of PAN, rate of withholding will be 34.608%.
Withdrawals in excess of ` 30,000 will be subject to Withholding tax.
Self-declaration in the prescribed form can be provided by the payee
for non-withholding on the said payment.
g Taxes need to be withheld only at the time of payment of interest on
the compensation awarded by the Motor Accident Claim Tribunal
provided the aggregate of such payments during a financial year
exceeds ` 50,000.
g It is proposed to include recurring deposits as 'time deposits' for the
purposes of tax withholding on Interest.
g Any person in the business of plying, hiring or leasing goods carriages
owning ten or less goods carriages at any time during the previous
year will be exempted from withholding, provided a declaration to this
effect along with PAN is submitted.
g Tax on any interest earned by FIIs and Qualified Financial Investors is
currently withheld at 5% and the same rate had been proposed till 1
June 2015. But seeing the current prospects of investment flowing into
India, it is proposed to continue with the lower rate of withholding up
to 30 June 2017.
g Payments to non-residents will have to be furnished in a prescribed
32
 format irrespective of their chargeability to tax. Further, non- from prosecution or penalty) at any stage of assessment proceedings.
submission or inaccurate submission of information will attract a
g From 1 June 2015, following provisions have been introduced in case of
penalty of ` 100,000.
proceedings before settlement commission:
g Provisions relating to processing of statements of withholding tax will
n Settlement commission can be approached even for the years for
be amended to enable computation of fee payable for default in
which notice for re-assessment is not issued provided the return of
furnishing withholding tax statements.
income is filed for the respective years
g The requirement of obtaining Tax deduction Account Number (TAN)
n Settlement commission can rectify its order by itself for mistakes
for certain deductors as specified by the Central Government will be
apparent on record within 6 months from the end of the month in
relaxed.
which the order is passed or within 6 months from the end of the
g Currently, there is no provision to file correction statement in respect month in which application for rectification is made by the
of Tax Collection at Source (TCS) statement. The relevant provisions stakeholders (parties to settlement). However, application for
will be to allow furnishing of TCS correction statement. rectification has to be moved within 6 months from the end of the
month in which order is passed.
g TCS intimation, will be deemed notice of demand, can be rectified by
making an application and can be appealed against with n Settlement commission has to record reasons in writing while
commissioner of income tax (appeals). granting immunity from prosecution or penalty.

Settlement Commission Income Tax Appellate Tribunal

g A forum to which a taxpayer voluntarily admitting the concealment of g From 1 June 2015, universities or hospitals existing for philanthropic
income, makes an application to settle the case (seeking immunity purpose can appeal the order of Chief Commissioner or Director

33
 General refusing to grant approval for claiming tax exemption, with
Income Tax Appellate Tribunal.
g From 1 June 2015, a single member Income Tax Appellate Tribunal
bench can entertain appeal where the assessed total income does not
exceed ` 1,500,000 as against existing limit of ` 500,000.
Revision of orders prejudicial to revenue
g From 1 June 2015, the Principal Commissioner or Commissioner may
consider following orders as erroneous for the purposes of setting
aside, modifying or directing fresh assessment:
n An order passed without making inquiries or verification or
n An order allowing any relief without inquiring into the claim or
An order which is not in accordance with directions/instruction of
n
CBDT or any decision of jurisdictional High Court or Supreme Court
Penalty
g From 1 June 2015, any receipt in excess of ` 20,000 as advance in
relation to the immovable property or repayment of such advance
should be only by way of account payee bank cheque or account payee
bank draft or electronic clearing system, failing which penalty
equivalent to the transaction amount will be levied on the person who
is accepting/repaying such advance.
g Where an assessing officer makes any adjustment to the total income
under normal provisions of the Act at the time of assessment to assess
concealed income or deliberately furnishing of inaccurate
information, yet, such adjustment does not result in any additional tax
payable under the normal provisions of the Act as the taxpayer is liable
to pay tax under the MAT provisions, various courts have held that
penalty in such cases cannot be levied. Hence, from 1 April 2016,
suitable amendments will be brought in to correct this anomaly.
Tax benefits for a girl child under Sukanya
Samriddhi Account Scheme
g Investment made under this scheme will be eligible as a deduction in
computation of total income. The parents/legal guardian of a girl child
will be eligible for such deduction.
g Interest accruing on deposit in such account will be exempt from tax.
34
g Withdrawal made in accordance with the rule of this scheme will be
exempt from tax.
Reporting of Foreign Assets
g Key features of the proposed legislation with respect to reporting of
Miscellaneous
g With effect from 1 June 2015, seized or requisitioned assets may be
utilized for adjusting tax liability arising from application made before
Settlement Commission as well.
g The beneficial tax rate of 10% on income arising to a resident from
Global Depository Receipts (GDRs) purchased in foreign currency, is
limited to those GDRs which are issued against the issue of either
ordinary shares of a company which are listed on recognized stock
exchange in India or foreign currency convertible bonds issued by
such company.
g To avoid multiple litigation by tax authorities in respect of issues
pending before the Supreme Court, from 1 June 2015 the assessing
officer can, with the consent of the tax payer, make an application to
the Appellate Tribunal stating that an appeal on the same question of
law may be filed when it is decided by the Supreme Court.
foreign assets in this regard is enumerated below:
n Concealment of income and assets and evasion of tax in relation to
foreign assets will be prosecutable with punishment of rigorous
imprisonment up to 10 years. Further, such offence will be non-
compoundable, attract a penalty of 300% of tax and the offenders will
not be permitted to approach settlement commission.
n Non filing of return or filing of return with inadequate disclosure of
foreign assets will lead to rigorous imprisonment of up to 7 years
n Income in relation to such undisclosed foreign assets or
undisclosed income from such foreign assets will be taxed at the
maximum marginal rate. Further, no exemptions/deductions will be
provided against such income.
n Beneficial owner or beneficiary of foreign assets will be
compulsorily required to file returns, even if there is no taxable
income.
35
n Abettors of the above offences, whether individuals, entities, prosecution with punishment of imprisonment up to five years.
banks or financial institutions will be liable for prosecution and
n Quoting of PAN will be mandatory for any purchase or sale
penalty.
exceeding the value of ` 100,000.
n The offence of concealment of income or evasion of tax in relation
to a foreign asset will be made a predicate offence under the
Prevention of Money-laundering Act, 2002. This would enable
attaching and confiscation of such unaccounted assets held abroad
and launching of prosecution against the offender. Further, the
equivalent asset in India may be attached/confiscated where the asset
located abroad cannot be forfeited.

n Foreign Exchange Management Act, 1999 will also be amended to

effect that if any foreign exchange, foreign security or any immovable
property situated outside India is held in contravention of these
provisions, then action may be taken for seizure and eventual
confiscation of assets of equivalent value situated in India. These
contraventions are also being made liable for levy of penalty and

36
Indirect Taxes
Common amendments under Central Excise, Customs and Service Tax Penalty
Wilful Default Others
Penal provisions Up to 10% of
Penalty for failure to pay duty/tax 100% of duty
Penal provisions under all three statutes have been substituted. The new duty or Rs. 5,000
rationalised provisions show a willingness to reduce the penal burdens as 15%
On payment within 30 days from
a trade off against long-drawn and expensive litigation. While Central 0%
the date of communication of SCN of the Penalty
Excise and Service tax follow largely common penal provisions, Customs
adopts a slightly different tack. On payment within 30 days from
the date of communication 25%
25% of Penalty
These being legislative amendments will be applicable only after the of Order for payment of duty of the Penalty
Presidential assent. However, by virtue of an explanation, such cases even and interest
if they occur prior to the Finance Bill receiving the President's assent, but Transactions recorded from
are uncovered thereafter, the substituted provisions will apply. 8 April 2011 till the date of
50% of duty
Penalty under Customs will now be 10% of the duty or ` 5,000/- whichever enactment of the Finance
is higher and if the penalty is paid within 30 days of the communication of Bill, 2015

37
the order, the penalty will reduce to 25% of the amount so determined. invoice as against the existing period of 6 months

The Settlement Commission's powers to reopen closed proceedings for g Credit under partial reverse charge can now be availed immediately upon
completion of pending cases have now been withdrawn. receipt of invoice as against the existing condition of payment of invoice

With the introduction of the new Companies Act, new classes of persons
It has been clarified that interest will be applicable only in case of CENVAT
have also been introduced. Consequently, firms, limited liability
credit wrongly availed and utilised.
partnerships, individuals and one-person companies can now make an
application for advance ruling
Penalty for erroneously availing and utilizing CENVAT credit has been
linked to penalty provision under Section 11AC of the Central Excise Act,
CENVAT Credit Rules 1944 in order to unify the provisions in relation to penalty.

Rule 4 of the CENVAT Credit Rules has been amended permitting credit to
be availed even when inputs or capital goods are received directly by a job- Central Excise
worker. This amendment will now facilitate the “bill to - ship to” transactions
With the withdrawal of Education Cess and Secondary and Higher
by manufacturer/importer resulting in reduced cost of production.
Education Cess, the rate of Excise Duty has been rationalised at 12.5%.
The time limit to receive back the capital goods from the job-workers
The minimum penalty for contravention of any rule with an intention to
premises has been increased to 2 years from 180 days.
evade duty has been enhanced to Rs. 5,000/-
Relaxation of time limit for availing CENVAT credit
Valuation based on Maximum Retail Price is being extended to a few more
g CENVAT credit can now be availed up to one year from the date of products, particularly, condensed milk, extract, essences and

38
concentrates of tea or mate, electric filament or discharge lamps other
than automobile lamps etc.
Further, the Third Schedule has also been amended to include these
goods thereby making the activity of packing or repacking and labelling or
re-labelling manufacture.
Akin to manufacturers, dealers and exporters, registered importers too
will be liable for withdrawal of facilities and imposition of restrictions.
Removal of goods at concession rates of duties was permissible only upon
execution of a bond with surety or security. Henceforth, manufacturers
with a clean record will be permitted to do so on the basis of a Letter of
Undertaking.
Manufacturers, registered dealers and exporters benefit from monthly
payment of excise duty, utilisation of CENVAT credit to pay their duties etc.
These benefits can be withdrawn for violation of the CENVAT credit rules.
This measure is now being extended to registered importers as well.
Similarly, confiscation and other penal provisions too have been extended
to registered importers.
With permission being granted to ship goods directly to a job worker or
any other person on the directions of the manufacturer or registered
dealer / importer, consequential amendments have been made in
invoices as well so as to reflect the name of the job-worker or such other
person thereby facilitating availing CENVAT credit.
Invoices can now be digitally authenticated; though the transporter needs
to be handed a physical copy which is self-attested by the manufacturer
Delay in filing returns and other prescribed statements will invite a daily
penalty of ` 100 going up to a maximum of ` 20,000/-.
Central Excise and Service Tax registration will now be completed within 2
days. Procedural requirements such as site visits and documentary
requirements will be completed thereafter.
Customs
The peak rate of Customs duty has been retained at 10%.
Though Excise Duty has been reset at 12.5% with the removal of Education
Cess and Secondary and Higher Educations Cess, these cesses will
39
continue on customs duty.
Curiously, a significant amount of change has been made to tariff rates,
without disturbing the effective rate. Ostensibly, this will make it easier for
the Government to increase duties at a later date without having to resort
to legislative changes. Articles of iron and steel, motor vehicles are some of
the goods, which have been subjected to this treatment.
Tariff Clarification
Cash dispenser/automatic bank note dispenser machines fall under
Customs Tariff 8472 90. And their Parts and components fall under
customs tariff 8473 40. In the BCD exemption notification, while both the
machine and its part and components were mentioned, but the
classification of parts and components (8473 40) was not mentioned in the
exemption notification leading to doubts about exemption to parts and
components.
Now it is clarified in the TRU Circular that exemption was also available to
parts and components. Further to remove this anomaly, exemption
notification is prospectively amended to include the classification (8473
40) of parts and components of cash dispensers and automatic bank note
dispensers. It would be interesting to see if field formations would allow
this benefit to the assessee prospectively or retrospectively.
Service Tax
In preparation for GST, service tax has been increased from 12.36% to 14%
and will be effective from the date to be notified in future.
Taxation of Aggregators appears to be a cornerstone of the service tax
provisions in this Budget.
Aggregators are persons who own and operate a web based software and
by means of an application and communication device enable potential
customers to connect with service providers who provide service under
the Aggregator's brand name
Henceforth, Aggregators will be liable to pay service tax on services
provided by a service provider.
Based on the abatement provisions, the rate of service tax will be
40
computed as follows: New Exemptions, change in abatement rates are effective from 1 April 2015.
Sl.No. Particulars Rate (%) Service tax amendments with reference to “aggregator” are effective from
1 Gross rate of service tax 1
12.36 1 March 2015

Mandatory pre-deposit of Central Excise Duty, Customs Duty and

Abatement as per Sl. No. 9 of Notification
2 7.416 Service Tax
26/2012-ST
Appellate authorities were saved the burden of hearing stay applications
3 Rate of Service Tax 4.944 by a mandatory pre-deposit provision introduced in 2014. This provision is
1, Present rate of service tax is 12.36%. New rate of service tax of 14% will be effective from the not free from the following potential issues:
date to be notified in future.
g Rule against retro-activity;
Points to Ponder g Right to appeal is a vested right;
Effective date of change in rate of duty / tax g Commencment of “lis”.
Legislative amendments take effect only after enactment of the Finance Bill.
But, amendments imposing new duties or increasing existing duties take effect Rule against retro-activity
immediately (1 March 2015) if the clause in the Finance Bill is specified as a
declared provision under Provisional Collection of Taxes Act, 1931.
A controversy has arisen with respect to the applicability of the amended
Amendment to Rules take effect from the “stated” effective date or date of provisions of mandatory pre-deposit to cases where the demands for is
its publication (1 April 2015). period(s) prior to 6 August 2014 that have been confirmed on and after

41
that date. This controversy has arisen pursuant to the Circulars dated 28
August 2014 and 14 October 2014 issued by the CESTAT and Circular dated
16 September 2014 issued by the CBEC. In these circulars, the CESTAT as
well the CBEC has clarified that the mandatory provisions for pre-deposit
would also apply to those cases even where show cause notice was issued
prior to 6 August 2014 notwithstanding the fact that the demand is
confirmed after this date.
The above clarifications seem to have completely eclipsed the Rule against
retrospective operation of Statutes which states that no statute shall be
construed to have retrospective operation unless such a construction
appears very clearly in terms of the Act, or arises by necessary and distinct
implication. While the legislature has been careful in not giving any
retrospective effect to the amended provisions as is evident from the
second proviso substituted under section 35F of the Finance Act which
categorically states that the amended provisions shall not apply to the stay
petitions and appeals pending prior to the commencement of the Finance
(No. 2) Act, 2014, the Circulars issued by CESTAT and CBEC has unsettled
the strongly founded precedent of law in this regard as laid down by the
Apex Court.
Right of appeal is vested right
By replacing a “discretionary provision” with “mandatory pre-deposit”,
provisions relating to vested rights with respect to right to file appeals
along with “stay applications” available for so long with all assessees has
been affected. This interpretation is based on the decision of the full
bench of the Hon'ble Supreme Court in the case of Garikapatti Veeraya v.
N. Subbiah Choudhry which states that, in a legal pursuit of a remedy, an
appeal is but a step in a series of proceedings connected by an intrinsic
unity. The right of appeal is a vested right. A right vested on the date of
commencement of the lis (i.e. a lawsuit or an action) and the lis
commenced when the show cause notice was first issued to the appellant.
The Supreme Court has gone a step ahead and categorically held that this
vested right of appeal can be taken only by a subsequent enactment, if it
so provides expressly or by necessary intendment and not otherwise.
“Lis” commences when the proceedings are first initiated
The moot point as to when the “lis” (as also the right to appeal) commences
has also been answered by the Supreme Court in the case of Hoosein
Kasam Dada (India) Ltd which held that the critical and the relevant date
42
for the purpose of the accrual of the right of appeal is the date of initiation
of the original proceedings and not the decision itself. This rendering of
the Hon'ble Supreme Court seem to have been a complete go bye when
one looks at the contrary Circulars issued by CESTAT and CBEC as also the
amended Section 35 of the Excise Act.
Be that as it may, the Hon'ble High Court of Andhra Pradesh (2015-TIOL-
511-HC-AP-CX) has already granted interim relief and waiving pre-deposit
on the ground that the “lis” has commenced on the date of initiation of
original proceedings. Yet, the Kerala High Court (2015-TIOL-499-HC-Ker-
Cus) without going into the question of “lis” commencement has opined
that the right of appeal granted by the statute is a conditional one and the
conditions are not so onerous as to deprive the petitioner of an effective
right of appeal. This is more so, because what is required to be deposited
by the petitioner, as a condition for maintaining the appeal, is only a small
percentage of the duty/penalty amount confirmed against him, and the
said amount has to be refunded to the petitioner in the event of his
succeeding in the appeal before the Appellate Tribunal.
Notwithstanding the above decision we are of the considered opinion that
the substitution of “discretionary provision” with “mandatory pre-deposit”
will need to pass legal muster in the High Courts and/or Supreme Court.
Section 80 relief for proceedings prior to
commencement of Finance Bill, 2015
In an extremely retrograde step, the Budget 2015 has given a sudden death
to the provisions of section 80 of the Finance Act, 1994 which had for long
sheltered assessees from imposition of penalties in cases where there was a
reasonable cause for failure to pay service tax. While this may be an
unwelcome amendment, one may appreciate at the same time that the
judicial precedent of “lis” commencement as delivered in the case of Hoosein
Kasam Dada (India) Ltd holds good for prior periods on account of the fact
that the “lis” commences on and from the date of the original proceedings.
Applicants may well take advantage of this long settled judicial principle as
per which they could look at knocking the doors of Courts for section 80
relief even for appeals filed after this date as long as the lis commenced
prior to the commencement of Finance Bill, 2015. The principle rendered
by the Hon'ble Supreme Court would also hold good as far as the
applicability of amended provisions of Section 76 and Section 78 of the
Finance Act are concerned. Applying the same ratio, the new amended
provisions of section 76 and section 78 would not apply to the transactions
which are covered prior to the commencement of the Finance Bill, 2015.
43

Service tax on contract manufacturing / job
work for production of potable liquor
Entry 8 of the State List in the Constitution of India vests the State
Government with powers to tax Liquor. An amendment to the negative list
has brought contract manufacturing / job work for production of potable
liquor within the service tax net. What with the Constitution providing
specific directives on taxation of liquor, this amendment could lead to
potential legal disputes on interpretation of Federal and State powers.
CESTAT's power to grant extensions to the
stay orders already obtained
The power to stay payment of central excise duty, customs duty and
service tax was removed pursuant to a provision relating to mandatory
pre-deposit that was inserted vide Finance Budget 2014. However, the
plethora of stay applications that are pending for hearing and the cases
where stay is presently in operation have been given immunity from
mandatory pre-deposit. Given the strict timelines for disposal of appeals
(365 days) and the validity of stay orders (180 days) the continuity of such
relief has become moot.
Under such a scenario, a Larger Bench decision of the Hon'ble Delhi
CESTAT in the case of R K and Sons came to rescue. The Larger Bench in
this case has held that extension of stay may be granted by the Tribunal
even in cases where the period of 365 days has passed from the date of the
initial stay order subject to the condition that the appeal could not be
disposed of for reasons not attributable to the assessee. Reliance in this
regard was placed on the decision of the Gujarat High Court in the case of
Small Industries Development Bank of India which held that in no case the
burden of automatic vacation of stay be placed on an assessee where the
assessee is not at all responsible for the non-disposal of appeal.
In this connection, the decision of the Hon'ble Supreme Court in the case
of Kumar Cotton Mills also is to be taken note of where Hon'ble Supreme
Court also made an observation that power to grant stay is an inherent
power of the Tribunal.
Given the above settled positon of law, and validity period of a stay order
44
which is 180 days, it is highly recommended that appropriate applications
are filed with the Tribunal requesting an extension of stay orders till the
appeal is finally disposed by the Tribunal.
Furthermore, the Bangalore CESTAT has also passed an Order that
assessees should file an application for extension of stay within the
specified period of 180 days from the date or stay order failing which the
Department would be free to initiate recovery proceedings.
Exemption to Supplies made against
International Competitive Bidding
Budget 2015 has made amendments in Central Excise exempting
domestic manufacturers supplying goods to projects awarded through
the process of International Competitive Bidding. While this may be
considered as a welcome measure, one may also consider the lengthy
procedure and the documentation that is required to ensure that this
opportunity to avail exemption is not foregone. Past efforts by assesees
to avail the exemption/refund have been not been fruitful. As a result, the
assessees had to pay excise duty and claim refund at a later date and to
ensure that the execution of the project is not hampered on account of
delay that is caused in the documentation to claim refund. The assessees
have knocked the doors of the High Courts and are still waiting for
disbursement of excise duties paid during the course of such high funded
projects. Reference may be made to the following judicial precedents
delivered on the subject wherein the assessees have been successful
finally at the High Court forum.
g Kandoi Metal Powders Manufacturing Company Private Limited (Delhi
High Court)
g Raja Crowns and Cans Private Limited (Madras High Court)
Grammatical connotation of “Service”
and its impact on taxablity
A search for the “service” in a transaction liable to service tax would lead to
disappointment and a big bill for service tax. That is because, the title of
this tax may urge one to look for the existance of a “service” for the levy of
“service tax”. Section 66B does not offer this commitment. “Any activity for
a consideration from one person to another” is a service. Grammatical
45
connotations of “activity” do not dictate their taxability. Service tax is a tax
on any transaction that is not specifically excluded/exempted from the
levy. Assessee”s like Home Retail Solutions have led themselves to believe
that no tax would apply if there is no “verb” form of service performed by
the service-provider to the service-recipient. With the law having made
way for the negative regime, it is advisable to steer clear of the notions of
the past and identify the basis of a claim for exclusion / exemption else,
apply this tax in all contracts.
Effect on CENVAT of withdrawal of exemption
When an exempt product becomes dutiable, CENVAT credit relatable to
inputs lying in stock (as raw material or works-in-progress) on the budget
day, can be claimed as opening balance of credit under Rule 3(2) of the
CENVAT Credit Rules, 2004. Similar provisions for service provider exist
under Rule 3(3) of the CENVAT Credit Rules, 2004. This position would
equally apply to those transitioning into a CENVAT based rate of tax or duty.
Effect on CENVAT of introduction of exemption
Whenever a manufactured product is exempted from excise duty, the
CENVAT Credit balance stands disallowed by Rule 11(3) of CENVAT Rules,
2004. This results in an instantaneous erosion of current asset balance
and a cost for the manufacturer. If there were an accelerated utilization of
credit, then in addition to reversal, cash payment of the deficit will be
required. And in cases of credit-surplus, due to rate imbalance, such
surplus will lapse after reversal of related credit.
Omission-Repeal
Omission of a provision in a statute has the effect “as if” that provision were
never contained in the statute. And upon such omission, proceedings
initiated previously come to a halt, if no “saving” clause are attached during
its omission. But, if a provision were to be “repealed” then such repeal will
not affect any previous operation of the provision or any right, privilege,
obligation or liability acquired under the (now) repealed provision.
Multi-point tax
A common error is that service tax is a tax on the contract with the end-
customer and if the main service provider has paid the tax, then
intermediaries and sub-contractors are understood to be compliant. This
is not the case at all. Every contract is exposed to tax if it is not specifically
excluded/exempted. Equitable considerations have no place here more so
46
when inter-sectorial credits are permissible. All service providers are liable
to pay tax if their contract contains all taxing ingredients. Service tax is a
multi-point tax on all limbs even in a continuous chain of transactions.
Taxable Event and Payer of Tax
Service tax is a tax on service and the “taxing events” giving rise to this
incidence are contained in section 66B. Thereafter, the law maker may, at
his pleasure, place the responsibility to discharge the tax so levied on any
person – service provider or service recipient. That being so, the law maker
can even alter the extent to which either of these persons is to discharge
the liability. Terminologies like reverse charge and partial reverse charge
are thrown around as if to distinguish them from charge is any specific
manner only seem to confuse the nature of the impost. When service
recipient is called upon to pay, whole or part, of tax levied under section
66B is not to be understood as the liability of the service provider being
discharged by the service recipient. Levy is on the service and liability is on
the person named in the law as “his” own liability.
Exercise of Power to Arrest
As emphasized in Budget 2013 and consequent amendments made
therein, non-payment of Service tax leads to imprisonment. Further, the
monetary threshold limit for imprisonment has been set as low as ` 50
Lakhs remaining unpaid for just 6 months after collection, the threat of
prosecution is real. Other offences being evasion of tax, misuse of credit
and falsification of records are also open to prosecution. Fearsomeness of
any weapon is inversely proportional to the skill of the one wielding it. With
the current velocity of business transactions, breaching this low threshold
can take place in a very short duration of time and could slip one”s
attention. Proper delegation as well as appointment of oversight
functionaries may be imperative.
Garnishee proceedings
Proceedings to recover tax dues from third parties who owe money to the
defaulter is a statutory authority arising out of extraneous circumstances
wherein direct recovery is not viable. This power cannot be exercised as a
matter of routine. Existence of a valid demand is a sine qua non for such a
proceeding to be initiated. Of equal importance is the visible non-
responsiveness of the defaulter. But, these are matters of fact to be gone
into at a later stage when the use of garnishee proceedings comes under
challenge. The party who is served a notice is to regard the notice of the
tax authority as being legitimate and not conduct his own inquiry into the
47
matter or play arbitrator. The response ought to be swift and timely.
Deliberate disregard to the notice can render the notice to be in default /
contempt of order. The notice cannot be put to great distress in the course
of seeking information about money owed to the alleged defaulter.
Garnishee proceedings were introduced in Central Excise and Customs in
Budget 2013. Budget 2015 has gone a step ahead and clarified the
procedure to be adopted by the Govt. in such proceedings. Matters such as
the amendment to the Garnishee Notice and to facilitate recovery of taxes
in instalments have now been clarified.
Power to Levy Penalty
New penal provisions will soon replace section 76 and 78 of the Finance Act
and will deal with wilful non-payment of tax. The opportunity to explain
“reasonable cause' for such non-payment provided in section 80 will be
omitted.
Penalty is a punishment for denying the State revenue due to it by a
deliberate devise. Penalty cannot be of a compensatory character for the
delay in payment of tax, for that is the object of levying interest. Imposition
of penalty is the responsibility of the authority discharging a quasi-judicial
function. Our experience with section 11 AC of the Central Excise Act, 1944
tells us that the need to impose penalty must manifest itself in the course of
the proceedings before the adjudicating/appellate authority. And the
quantum specified in the law is the upper limit and not its lower limit.
Language notwithstanding, penal provisions proposed cannot be accepted
as having mechanical applicability. If any adjudicating/appellate authority
feels compelled to impose penalty at the percentages prescribed, he would
invite the ire of the superior Courts who will not lend credence to a provision
that permits legislature to trespasses into the territory of the judiciary.
Penalty is proposed to be imposed “in addition to' the tax and interest and
“not exceeding ten per cent”. Such language is adequate to encourage
quasi-judicial authorities to exercise diligence in imposing the penalty
without experiencing any legislative compulsion to do so in every case.
Further, the proviso appended seeking to exempt payment of the penalty
that has been so imposed by a quasi-judicial authority is also on dangerous
ground as far as legislative overruling of judicial decisions. It is not for the
executive to waive that which is found by the judicial authority to be justified
in imposing considering the facts of a case. Such kind of 'discounts' are
unbecoming of a penal provision. And if it is not a discount, then surely it
cannot be the blatant admission of inability to recover that which has been
imposed by the judicial authority. All in all, these new provisions may come
under review soon.
48
Chart for rates of taxes for the financial year 2015-16
Type of Assessee Range of Income
Personal Tax
Resident Individual who is of the age of 80 years or more up to ` 500,000
` 500,001 - ` 1,000,000
` 1,000,001 - ` 10,000,000
` 10,000,001 and above
Resident Individual who is of the age of above 60 years up to ` 300,000
and less than 80 years ` 300,001- ` 500,000
` 500,001- ` 1,000,000
` 1,000,001- ` 10,000,000
` 10,000,001 and above
Other Individual, Hindu undivided family, Association of up to ` 250,000
person & Body of Individuals ` 250,001- ` 500,000
` 500,001- ` 1,000,000
` 1,000,001- ` 10,000,000
` 10,000,001 and above
Firms/LLP Tax ` 15 – ` 10,000,000
Above ` 10,000,000
Type of Assessee Range of Income
Corporate Tax
Domestic company ` 15 – ` 10,000,000
` 10,000,000 - ` 100,000,000
Above ` 100,000,000
Foreign company ` 15 – ` 10,000,000
` 10,000,000 - ` 100,000,000
Above ` 100,000,000
Tax Liability
Nil
(Taxable income - ` 500,000)* 20.60%
(Taxable income - ` 1,000,000)* 30.90% + ` 103,000
(Taxable income - ` 1,000,000)* 34.608% + ` 115,360
Nil
(Taxable income - ` 300,000)* 10.30%
(Taxable income - ` 500,000)* 20.60% + ` 20,600
(Taxable income - ` 1,000,000)* 30.90% + ` 123,600
(Taxable income - ` 1,000,000)* 34.608% + ` 138,432
Nil
(Taxable income - ` 250,000)* 10.30%
(Taxable income - ` 500,000)* 20.60% + ` 25,750
(Taxable income - ` 1,000,000)* 30.90% + ` 128,750
(Taxable income - ` 1,000,000)* 34.608% + ` 144,200
30.90% on Taxable income
34.608% on Taxable income
Tax Liability
30.90% on Taxable income
33.063% on Taxable income
34.608% on Taxable income
41.20% on Taxable income
42.024% on Taxable income
43.26% on Taxable income
Contd...
49
Chart for rates of taxes for the financial year 2015-16
Type of Assessee Range of Income
Minimum Alternate Tax
Domestic company ` 15 – ` 10,000,000
` 10,000,000 - ` 100,000,000
Above ` 100,000,000
Foreign company ` 15 – ` 10,000,000
` 10,000,000 - ` 100,000,000
Above ` 100,000,000
Tax Liability
19.055% of Book profit
20.38885% of Book profit
21.3416% of Book profit
19.055% of Book profit
19.4361% of Book profit
20.00775% of Book profit

Type of Assessee Range of Income Tax Liability

Alternate Minimum Tax
Person other than Company having adjusted total income ` 15 – ` 10,000,000 19.055% of Book profit
exceeding ` 2,000,000 from business or profession and Above ` 10,000,000 21.3416% of Book profit
claiming deduction in respect of certain income or capital
expenditure in case of specified business or claiming
SEZ tax holiday.

The above rates are inclusive of surcharge, education cess and secondary and higher education cess wherever applicable without considering the benefit of marginal relief (if any)

50
Proposed withholding tax rates for the payments to non-residents in the financial year 2015-2016 under income tax act, 1961
All figures are in percentage

Recipient is a non-resident (other than foreign company)

Section Nature of payment With PAN Without PAN With PAN Without PAN

≤ ` 1 crore (` 10 Million) > ` 1 crore (` 10 Million)

194LB Interest by infrastructure debt fund 5.15 20.60 5.768 23.072

194LC Interest by specified Indian infrastructure sector companies 5.15 20.60 5.768 23.072

195 Other Interest 20.60 20.60 23.072 23.072

Royalty 10.30 20.60 11.536 23.072

Fee for technical services 10.30 20.60 11.536 23.072

Any other income (other than capital gains) 30.90 30.90 34.608 34.608

Person to whom payment is made is a foreign company

Section Nature of payment With PAN Without PAN With PAN Without PAN With PAN Without PAN

≤ ` 1 crore (` 10 Million) ` 1 to 10 crore (` 10 to 100 Million) > ` 10 crore (` 100 Million)

194LB Interest by infrastructure debt fund 5.15 20.60 5.253 21.012 5.4075 21.63

194LC Interest by specified Indian infrastructure 5.15 20.60 5.253 21.012 5.4075 21.63
sector companies

195 Other Interest 20.60 20.60 21.012 21.012 21.63 21.63

Royalty 10.30 20.60 10.506 21.012 10.815 21.63

Fee for technical services 10.30 20.60 10.506 21.012 10.815 21.63

Any other income (other than capital gains) 41.20 41.20 42.024 42.024 43.26 43.26

The above rates are inclusive of surcharge, education cess and secondary and higher education cess, wherever applicable
The remitter may withhold the tax at the beneficial rate available, if any in the respective tax treaty, on production of tax residency certificate (TRC) & Form 10F

51
Proposed withholding tax rates for the payments to residents in the financial year 2015-2016 under income tax act, 1961
All figures are in percentage

Recipient is
Section Nature of payment Resident Individuals & HUF Resident Firm / LLP Resident Company

With PAN Without PAN With PAN Without PAN With PAN Without PAN

192 Salary1 Individual tax rate Not applicable Not applicable

193 Interest on securities 10.00 20.00 10.00 20.00 10.00 20.00

194A Interest other than 'interest on securities1 10.00 20.00 10.00 20.00 10.00 20.00

194C Payments to contractors:2

Contractors 1.00 20.00 2.00 20.00 2.00 20.00

Contractors in transport business(not

Nil 20.00 Nil 20.00 Nil 20.00
owning more than 10 goods carriage)

194D Insurance commission 10.00 20.00 10.00 20.00 10.00 20.00

194H Commission and brokerage2 10.00 20.00 10.00 20.00 10.00 20.00

194I Rent:2

Plant / machinery / equipment 2.00 20.00 2.00 20.00 2.00 20.00

Land / building / furniture / fittings 10.00 20.00 10.00 20.00 10.00 20.00

194J Fee for professional or technical services2 10.00 20.00 10.00 20.00 10.00 20.00

194IA Transfer of any immovable property other

than agricultural land or statutory 1.00 20.00 1.00 20.00 1.00 20.00
compulsory acquisition
1. Applicable to all types of Assessee
2. These above provisions are applicable to all types of assessee except individuals or Hindu Undivided Family, whose total sales, gross receipts or turnover from the business or profession does not exceed the limits specified
in section 44AB in the previous year.

52