Budget Analysis Reform and Progress The Way Forward

Description
The Union Budget of 2015-16 was the first full budget to be presented by the Modi led government and was preceded by sky high expectations of reform.

1 Budget Analysis: Reform & Progress- The way forward
The Union Budget of 2015-16 was the ?rst
full budget to be presented by the Modi led
government and was preceded by sky high
expectations of reform. The budget clearly did
not disappoint as it gave due importance to all
sections of the economy and tried to enhance the
ease-of-doing business while keeping its focus
on infrastructure development. It is important
to note that the macro backdrop for the Indian
economy has probably never been as favourable
and presents a rare opportunity to bring about the
necessary changes needed to propel India towards
double digit growth.
Optimism and improved macro parameters in the
economy have increasingly aligned over the past
one year. One of the biggest challenges, in?ation,
has seen a decline at a time when growth is on
the rise, giving freedom to the government to
bring about structural change, while making space
for the monetary authority to aid growth. The
global commodity price crash, while negative for
some emerging economies, has been a boon for
the domestic economy and that is evident from
an ever-improving external account. Under these
circumstances, the Finance Minister presented a
very credible budget rather than one ?lled with big
bang announcements.
Importantly, the budget was not short on
substance as it provided a balanced policy
framework aimed at supporting the common man
to the corporate. Acknowledging the fact that the
Indian economy had entered a sweet spot, the
need for aggressive reduction of the ?scal de?cit
was no longer present, he presented a new ?scal
framework by establishing new targets for
?scal consolidation.
This was important given that the ?scal space
had been diminished with the acceptance of
the recommendations of the 14th Finance
commission. Importantly, this increased ?scal
space is being used for productive purposes as the
government has increased capital expenditure by
0.2% while reducing subsidies by 0.4% of GDP in
line with expectations of expenditure switching
towards higher quality spending.
The budget has also tried to restart the investment
cycle by incentivizing more money in the direction
of infrastructure – roads, ports and railways by
using tax free bonds, plans to revitalize PPP models
by reducing risk faced by the private sector and by
creating a National Investment and Infrastructure
fund. These proposals were complimented by
important incremental steps towards ensuring
the success of the ‘Make in India’ campaign
by bringing down some tax rates to make
manufacturing more competitive. These steps
were further supported by a promotion of the
‘Skill India’ initiative wherein the ?nance minister
provided money to aid the employability of the
youth. There were also schemes introduced to
bring about the culture of entrepreneurship
in India.
Foreword
February 2015
www.deloitte.com/in
India Budget Analysis
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
2 Budget Analysis: Reform & Progress- The way forward
Coming to the taxes, there were important developments on both the direct and
indirect taxes. There was a twofold thrust here, the ?rst was to enhance the ease of
doing business while at the same time make the industry more competitive.
On the direct taxes front, one of the important developments was the postponement
of GAAR and the prospective implementation from 2017. This move sends a very
clear message to investors that the government is willing to take their concerns
in account in creating a more robust taxation regime. The budget also included
a proposal wherein it would bring down corporate taxes in a phased manner to
25% from the current 30% over the next four years. Making Indian markets more
attractive it was also announced that MAT will not be applied to FIIs. The issue of
black money was also tackled in a credible manner by introduction of a new law
with stringent penalties.
On the indirect tax front, changes have been made keeping in mind the transition to
the goods and services tax with measures aimed at widening the tax base by pruning
negative list of services and achieving tax buoyancy. The focus of tax proposals also
seems to be facilitating easier compliance and removing unnecessary complications
that have been major hindrances for companies. The subsuming of cess in the tax
rates of Excise and Service Tax, recognizing digitally signed invoices and electronic
records and speeding up the process of obtaining registrations go a long way in
ease of doing business at ground level. Exempting most items from levy of Special
Additional Duties and correcting inverted duty rates on certain items not only
addresses problems of CENVAT credit accumulation but also reduces working
capital needs.
Overall, an impressive budget, balancing the needs of the economy while providing
direction to reforms.
28 February 2015
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
3 Budget Analysis: Reform & Progress- The way forward
India enters a sweet spot
The last year has been a fortuitously good one for the Indian economy with a sea
change in the macroeconomic parameters and a sustainable turnaround on the
cards. At a time when concerns have been raised about global growth prospects, the
Indian economy has marched on and has in fact entered a sweet spot. As a start,
Gross Domestic Product (GDP) growth, which had plummeted to sub 5% levels in
past two ?scal years ?nally seems to have picked up on the back of a cyclical rebound
and some genuine improvement. Growth in the current year, while not spectacular,
has moved up ?rmly into the 5%+ handle. This improvement has come on the
back of improved performance in the industrial sector, stable growth in the services
sector and a surprisingly resilient agriculture sector. Further, policy action on the
environmental clearances and mining licences has helped prop up sentiment while a
push to some stuck projects have aided growth prospects.
Encouragingly, the pick-up in growth seems to be taking place at a time when
in?ation is on the downtrend as effects of the past slowdown and the massive fall
in global commodity prices is ?ltering through the economy. In?ation levels have
continued to surprise on the downside and have printed comfortably under the
Central Bank’s comfort zone. Price levels have seen an across the board moderation
as food, fuel and service price in?ation has come down. This clearly shows that there
is still some slack in the economy as it grows below its potential rate of growth.
This moderation in in?ation has also had an impact on interest rates as the Reserve
Bank of India (RBI) has ?nally started its rate cutting cycle with its ?rst rate cut in
January earlier this year. The RBI had established targets for in?ation under its new
policy regime and as such those targets have been met comfortably and set the stage
for a further easing of policy in the coming months. That said, the RBI continues to
remain vigilant on the external front and the possible threat of capital out?ows in
response to the normalization of monetary policy in the US. Accordingly, while we do
expect the RBI to continue easing, the cycle is unlikely to be as deep as some in the
markets expect.
The situation is further being buttressed by a perceptible improvement in the
external account metrics with the current account de?cit coming under control
despite the government lifting most of the import restrictions from the last year.
Imports have fallen sharply in response to the halving of global crude oil prices and
while exports have suffered too, service exports have held up as growth in the US
has rebounded in the current year. Foreign fund ?ows through the portfolio route
have picked up massively after the elections responding to an improvement across
most macroeconomic parameters. The more important and stable ?ows through
the Foreign Direct Investment (FDI) route have also picked up as the government
increased the level of permissible investments into some sectors.
The capital markets have continued to scale record levels as euphoria has built up on
the possible trajectory of the Indian economy. The markets seem to have priced in a
favourable policy environment and a consequent increase in corporate performance
in the coming years.
Overall, there is a real sense that a new set of reforms and the enthusiasm in the
markets can lead India towards another prosperous era of high growth. That said,
the government’s job is not yet over. Given the high expectations of success it has
now become imperative for the government to deliver in order for the growth
momentum to be sustained.
State of the Economy
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
4 Budget Analysis: Reform & Progress- The way forward
GDP growth: ?nally a turn around
The Indian economy ?nally saw a bounce back from decadal lows seen for growth
over the last two years. Government data shows that GDP had grown by 5.5% in
the ?rst two quarters of the Financial Year 2015 (FY15) in accordance with the older
format of calculating growth numbers. Growth bene?tted from both a revival in
sentiment and a cyclical bounce back in the current year.
As a start, growth rebounded in the crucial industrial sector as all the three major
components namely the mining, manufacturing and electricity picked up pace from
last year. Within the mining sector multiple clearances on the policy front has helped
particularly in the case of coal production. Coal output rose despite the cancellation
of 204 mining licences, essentially showing that the government was intent on
bringing down coal imports. Steel production was the main laggard within the core
industries as it suffered lower production volumes on account of a massive decline
in global prices. Overall, core industries also performed better than the previous year
with the core infrastructure sector growing by 4.4% in the ?rst nine months of FY15
as compared to 4.1% in the previous year. Electricity production continued to impress
as it registered a growth of 10% in the period from April to December as compared
to 5.6% in the previous year. Manufacturing growth on the other hand remained
anaemic as it printed in 1.2% in the ?rst nine months as compared to a contraction
of 0.4% in the same period last year.
A detailed breakup of the manufacturing sector shows that the weakness has
primarily emanated from the consumer durables segment that has contracted by
15.2% as compared to a contraction of 12.9% in the previous year. Investments have
also remained weak as the volatile capital goods segment has shown a growth of
just 4.8%. As such, there are two key points that are evident in the economy. Firstly,
consumer demand remains low and is unlikely to see a rebound in a hurry. There
is likely to be some lag for consumer demand to pick up as the lower fuel prices
and optimism on the economic front ?lters through. Secondly, the capex cycle has
clearly not taken off and the corporate sector still awaits more policy action from
the government before taking forward its investment plans. Separately, the industrial
sector was buoyed by a better performance of the construction sector, which saw
growth of 4.8% and 4.6% in Q1 and Q2 of FY15. The industrial economy is likely
to witness another year of sub par growth and would most probably see improved
number from the ?rst quarter of FY16.
The services sector continued to show a stable rate of growth slightly bene?tting
from the benign revival on the industrial front and largely shrugging off the global
slowdown. Growth printed in around the 7% mark driven primarily by higher public
expenditure and the ?nancial sector. The trade, hotels and communication sub-sector
7.0%
9.5% 9.6% 9.3%
6.7%
8.6%
8.9%
6.7%
4.5%
4.7%
5.9%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Data Source: MOSPI
Figure 1: Percentage GDP growth rate
Figure 2: GDP sectoral growth rate
-1
0
1
2
3
4
5
6
7
8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2012-13 2013-14 2014-15
Growth in Agriculture (%) Growth in Industry (%) Growth in Services (%) GDP
Data Source: MOSPI
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
5 Budget Analysis: Reform & Progress- The way forward
remains weak growing by barely 2.8% and 3.8% in the ?rst two quarters respectively,
another indication that the activity levels on the ground are yet to see a meaningful
pickup. We would expect the services sector to continue to show stable rates of growth
and gradually improve as the industrial sector witnesses a more sustained pickup.
Moving on to the agriculture side, the performance has been rather impressive
given the high base of last year and the erratic monsoons witnessed this year. The
agricultural sector has raked up an impressive 3.8% and 3.2% in the ?rst two quarters.
While the performance up until now has been impressive, the second half is likely
to suffer from lower production levels as sowing of important kharif crops has been
lower in the current year. However it is crucial to note that agricultureal output still
remains dependent on yearly monsoon rains. At present, approximately 60% of the
land remains rain fed and any departure of rains from its historical patterns affects
the overall output. There is also a need for large scale use of technology to improve
acreage of crops and make them more resillient of pests and insects. Usage of
genetically modi?ed crops, though controversial, can be a possible solution to the
problem once farmers are convinced of its bene?ts. Lastly, the Indian agricultural
sector is woefully short of adequate storage facilities. Inadequate power supply and
consequently the lack of cold storage facilities result in almost 40% of total fruits and
vegetables being wasted before reaching the markets. A quick resolution to these
issues can give an immediate boost of incomes and consumption in the rural economy.
A closer look at the expenditure side estimates of GDP shows that demand still remains
feeble. Private consumption growth stood at 5.7% for the ?rst half. While data on
private consumption indicates some revival of demand, it is at odds with other lead
indicators such as consumer durables that have contracted almost through the year.
Recovery in investments still remains a concern as growth in ?xed capital formation
grew by a meagre 0.2% in the Q2 of FY15 after expanding 7% in Q1. Government
expenditure, which contributes around 11% of the GDP, grew at an impressive 9.6% in
Q2 FY15 as compared to 9.1% in the previous quarter due to a pick up in expenditure
after the budget and a favourable base effect. Overall, the demand side estimates
corroborate the picture of an economy that was slowly improving.
New GDP numbers
The last few weeks has also seen some important changes in the way GDP is calculated
as the Ministry of Statistics has changed the methodology and consequently also the
way in which data is presented. Before getting into the implications and details of the
data, we must observe that conceptual changes have taken place with this revision.
This revision is a part of a regular exercise in line with international standards where the
base year i.e. the year from which the prices, commodities and services are taken, is
revised every 5 ?ve years. India has now moved from the base of 2004-05 to 2011-12
as the new base year for GDP computation.
India’s headline GDP will now also refer to GDP at market prices, which is in line
with international practices, as opposed to GDP at factor cost. The Central Statistics
Organisation has subsequently also made accounting changes in line with the
System of National Accounts (SNA), and included new and pmore comprehensive
data sources. As per the new series, GDP (at market prices) grew at a robust 6.9%
in 2013-14, versus the 5% estimated earlier and 5.1% in 2012-13 versus 4.7%
estimated earlier. The upward revisions have primarily come from higher consumption
expenditure and weaker imports under the new series.
Figure 3: Percenatge GDP growth rate as per new series
4.5
4.7
5.9
5.1
6.9
7.4
8.1-8.5
0
1
2
3
4
5
6
7
8
9
2012-13 2013-14 2014-15 (F) 2015-16 (F)
Data Source: MOSPI
% GDP growth rate (Old series) % GDP growth rate (New series)
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
6 Budget Analysis: Reform & Progress- The way forward
Further, there are improvements in the way data is collected as there is a more
comprehensive coverage of the corporate sector (for both manufacturing and
services) through the use of the annual accounts of companies ?led with the
Ministry of Corporate Affair (in the MCA 21 database). Data on manufacturing and
services now comes from almost the universe of approximately 5 lakh companies as
compared to only 2500 earlier.
Looking at the details of the revised data we see that the share of manufacturing
has been increased signi?cantly, to 17.3% from 12.9% earlier. Mining’s share has
also been increased with industry now accounting for 30.7% of GDP from 24.7%
estimated earlier. The service sector’s share has reduced to 51.3% from 57% earlier
led by a smaller share of the trade, hotels & restaurants component.
Using the new methodology, the government has put out an advance estimate for
India’s growth at 7.4% Year-on-Year (YoY) from 6.9% in the previous year. Further,
the government expects GDP in FY16 to grow in the range of 8.1% to 8.5%.
Quarterly estimates have also been released under the new methodology where the
government has used tax data for collecting information on services while private
corporate performance has been included for compiling industrial estimates. GDP
in Q3 FY15 grew by 7.5% following 8.2% in Q2 and 6.5% in Q1 under the new
methodology. The Financial Year To Date (FYTD) GDP growth now stands at 7.4%
and given the full year expectation of a 7.4% growth, the last quarter growth
of FY15 would also have to be 7.4%. A careful look at the disaggregated data
would suggest that the higher growth would be driven by domestic demand while
government ?nal expenditure and investments are also expected to grow.
Table1: Summary of key aggregates of national accounts
FY’13 FY’14 FY’15 (E )
Total ?nal consumption expenditure 4.9 6.5 7.6
Private ?nal consumption expenditure 5.5 6.2 7.1
Government ?nal consumption
expenditure
1.7 8.2 10.0
Gross capital formation 2.6 -4.0 NA
Gross ?xed capital formation -0.3 3.0 4.1
Changes in stock -6.2 -21.4 3.9
Valuables 3.3 -48.7 28.2
Exports 6.7 7.3 0.9
Imports 6.0 -8.4 -0.5
Growth in GDP at constant market prices 5.1 6.9 7.4
Overall, these latest set of numbers raise a lot of questions on the possible slack
in the economy and the potential rate of growth, the extent of upmove under the
new methodology. Also, while the transition to the new method of computation
is an improvement, the trends defy the reality as indicated by other conventional
indicators. Some clarity is expected towards the end of the month when the
government releases the detailed methodology.
Related Budget Proposals
• Setting up National Investment and Infrastructure Fund (NIIF), with an
annual ?ow of `20,000 crores to it to encourege private investment.
• Proposal of an increase in investment in infrastructure by `70,000
crore in the year 2015-16 over the year 2014-15 from the Centre’s
funds and resources of CPSEs.
• Proposal of tax free infrastructure bonds in rail, roads and irrigation
has as well as setting up of the national investment infrastructure fund.
• To ensure faster project implementation in roads, railways and
infrastructure, the budget proposed a ‘plug and play’ model.
• 5 new Ultra mega Power Projects each of 4000MW to be set up
through the ‘plug and play’ model
• `8.5 lakh crore of agricultural credit during the year 2015-16
as well as setting up a National Agriculture Market for the beneft
of farmers.
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
7 Budget Analysis: Reform & Progress- The way forward
In?ation comes under control
One of India’s biggest challenges over the past few years has been the persistently
high levels of in?ation. As such, it has had a major negative impact on the economy
as it has eroded purchasing power and forced the RBI to keep interest rates high.
Higher interest rates have further been inimical to investments. However, the last
year has seen in?ation decline to multi year lows as the weakness in the domestic
economy ?nally ?ltered through the in?ation metrics. Further, aiding the declining
trend has been the massive drop in global commodity prices especially crude oil that
has fallen by more than 50% in a span of 7 months.
However, the more encouraging aspect of retail in?ation has been the dropping price
pressures in the food index. Despite the erratic monsoons price pressures did not
escalate as they had been in the past few years as governments both at the center
and states were more vigilant. Food in?ation that has been in double digit territory
since April 2012 ?nally declined to single digits in the last year and since then has
remained range bound. The lower increases in minimum support prices and slower
rural wage growth added to the overall lowering of in?ationary pressures within
the economy.
Importantly, the RBI’s metric of demand side pressures, core Consumer Price Index
(CPI) in?ation has also been on a declining trend. This decline was gain on account
of an overall slowing of demand pressures as service categories that have historically
seen constrained supplies. Overall, core in?ation declined by almost 300 basis points
from January to December of 2014.
Monetary Policy turns accommodative, reform on the anvil
The RBI on its part stuck to its guns for most of the last year and kept its key policy
rate, the repo, at an elevated level of 8%. Earlier in the calendar year, the central
bank had adopted recommendations of the Urjit Patel committee and put in place
a rule based system for monetary policy making. The RBI set its sight on rolling
targets for CPI in?ation, with the ?rst being 8% by January 2015 and 6% by January
2016. Further, it made it very clear that elevated levels of in?ation had been a major
cause of slowing growth in the economy and further was inimical to the country’s
long-term growth prospects. So while in?ationary pressures were on the decline,
the RBI maintained its stance of a high policy rate explaining to market participants
that it was essential to bring down in?ation in a sustained way. Towards the end of
the year, the RBI started to ease its stance by indicating that a rate cut was a distinct
possibility if de?ationary pressures continued to take shape. Finally, the RBI initiated
Figure 4: Consumer Price In?ation
2
4
6
8
10
12
14
16
Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14
Core CPI (%) Food (%) Fuel (%)
Data Source : RBI
Figure 5: Consumer Price In?ation
4%
6%
8%
10%
12%
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CPI Repo rate Data Source: RBI
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
8 Budget Analysis: Reform & Progress- The way forward
its rate cutting cycle with a token 25 basis points cut on 15th January 2015. It also
added that further cuts could be on the horizon but that decision would be taken
on the basis of the evolving price dynamics and the kind of budget unveiled by the
government. We expect another 50-75 basis points cut in the benchmark repo over
the course of the current calendar year.
The budget has initiated an important reform by agreeing to create a Monetary Policy
Committee for which the RBI Act will be amended. This would mean a structural
change in RBI policy making in line with the agenda set out by RBI Governor
Raghuram Rajan. Prima facie it seems that the objective would be to keep in?ation
below 6%.
Related Budget Proposals
• Monetary Policy Framework Agreement with RBI, in an effort
to keep infation below 6%.
• To address the supply side bottlenecks, the government has
alloted `5,300 crore, to support micro-irrigation, watershed
development and the ‘Pradhan Mantri Krishi Sinchai Yojana’.
• `25,000 crore for Rural Infrastructure Development Fund (RIDF)
set up in NABARD in 2015-16.
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
9 Budget Analysis: Reform & Progress- The way forward
Capital markets continue bullish trend
As is the case whenever there is a turn in the economy, capital markets take the
lead as they price in future improvement in the macroeconomic fundamentals of
the economy. The clear mandate given to the central government and the business
friendly reforms expected as a result of this has raised the expectation of both
domestic and foreign investors. Further, factors such as rising growth prospects,
contraction in Current Account De?cit (CAD) as well as the recent stabilization
of the rupee have all contributed to this positive sentiment. Investors have been
betting heavily on the economy which has led to high growth of the capital markets.
The Sensex has witnessed a consistent rise in 2014 with a growth of around
40%, reaching record highs and crossing the 29,000 mark in January 2015. The
government has done its fair share to support this optimism by further opening
sectors such as defense, telecommunications, construction services as well as
insurance. These developments have further injected a sense of optimism in investors.
Mutual funds have pumped in around INR 6 trillion as compared to `4.8 trillion in the
previous year showing a growth of 28%. It is encouraging to note that the domestic
MFs have not been completely overshadowed by Foreign Institutional Investments
(FII).
The FII in?ows have replicated the overall mood of the global investors towards the
Indian market. After experiencing volatile in?ows in the previous year, FII in?ows
have been much more consistent in FY 2014-15, providing reasonable stability in
the market as compared to last year. FIIs have poured in roughly US$ 42.4 billion in
calendar year 2014 and continued with this streak even in the ?rst two months of
2015 as they poured in another US$ 7.2 billion in 2015.
The bond markets have clearly bene?tted in the last year from the higher interest
rates as compared to the rest of the world. Yield on the 10 year benchmark bond has
come down from a high of around 9% to 7.7% at present in line with a decline in
in?ation, an improvement in government ?nances and an initiation of the rate cutting
cycle by the RBI in the same period. Within the FIIs, debt in?ows have outsized equity
in?ow with debt in?ow at US$ 23.8 billion and equity in?ow at US$ 14.5 billion in FY
2014-15.
Figure 6: 10 yr benchmark bond yield and BSE Sensex
17000
19000
21000
23000
25000
27000
29000
7
7.5
8
8.5
9
9.5
Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15
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Data Source: RBI & Bloomberg
10 yr benchmark bond yield SENSEX
Figure 7: FII in?ows in 2014 - 15
-6
-4
-2
0
2
4
6
Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14
Equity (US$ billion) Debt (US$ billion)
Data Source: SEBI
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
10 Budget Analysis: Reform & Progress- The way forward
The Indian market has been outperforming most of the global markets in 2015. The
Indian capital markets did well to go through the initial bout of volatility in H1 of
FY14 and recover smartly in H2 to ?nish on a high. This positive sentiment continued
through 2014-15 and the Indian capital markets have experienced consistent and
stable growth in 2014-15. Factors such as the recent monthly bond-buying stimulus
announced the European Central Bank (ECB) to the tune of Euro 1 trillion as well
as Japan’s recent announcement of further quantitative easing (QE) is expected to
increase liquidity in the global markets. The ?ow of this liquidity can be directed
towards the Emerging Market and Developing Economies (EMDE) as they offer higher
returns. With higher growth prospects than a majority of EMDEs, the Indian market is
poised to grow further in the coming months.
Figure 8: Performance of global stock markets in 2013 & 2014
-60%
-40%
-20%
0%
20%
40%
60%
Growth in 2014 Growth in 2015 (Till Feb'13)
India China Russia Brazil South Africa Indonasia Turkey USA Japan UK Euro Area
Data Source: Bloomberg
Related Budget Proposals
• Proposal for Forward Markets commission to be merged
with SEBI.
• Amendment of Section-6 of FEMA to provide control on capital
fows as equity will be exercised by government in consultation
with RBI.
• Creation of a Task Force to establish fnancial redressal agency
that will address grievance against all fnancial service providers.
• Furthering deepening of bond markets by setting up a Public
Debt Management Agency which will bring both India's external
borrowings and domestic debt under one roof
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Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
11 Budget Analysis: Reform & Progress- The way forward
External Sector continues to improve
The onset of a global slowdown has had some positive impact on the Indian
economy as one of the major pain points, the external sector, has improved markedly
over the course of the last year. The improvement has come on the back of a massive
contraction of India’s imported energy costs. A closer look at the details shows that
total imports have started growing from Q2 of FY15 after contracting in Q1, bringing
overall import growth to 3.4% in the ?rst nine months of FY15. However, there is a
silver lining to the increasing imports as the majority of the growth has come from
the non-oil ex-gold segment. Contrary to some of the other lead indicators, this
shows that domestic growth is perhaps turning around as demand for imports have
gone up excluding the effects of oil and gold. The ?gures show that while oil imports
have contracted by 4.5% in the ?rst three quarters, gold imports have risen by 3.2%
and non-oil ex-gold portion has risen by 8.2%.
A look at the gold import ?gures in the year shows that gold imports shot up in
September, October and November mainly due to the onset of the festive season.
There was fear about the possibility of a further surge in gold import after the
government revoked the 80:20 rule in November 2014, wherein, out of the total
gold imported, 20% had to be re-exported. Gold imports did not respond to this
change and have in fact seen a decline in recent months and are expected to remain
subdued in Q4 of 2014-15.
Looking at the other side, exports have registered a growth of 2.3% in the period
from April to December. After an impressive performance in Q1 where exports grew
by 7.3%, exports witnessed a steady decline with moderation in growth to 1.0% in
Q2 and contraction in exports to -1.0% in Q3. The decline is exports can be largely
attributed to the moderation in growth and economic activity of the global economy.
Major events such as the Ukraine crisis, the increased possibility of recession in the
Eurozone and a slowing Chinese economy have caused the global economy to
slow and have further led to a crash in some important commodity prices. Exports
have also contracted on account of the major fall in oil prices as oil forms a major
component of India’s overall export basket.
Overall trade de?cit has risen by 5.8% Y-o-Y in FY15. In line with trends in exports
and imports after a contraction in Q1 of 2014-15, trade de?cit has bloated in Q2
and Q3. However, it is expected to remain under control over the remainder of the
current ?scal year.
Figure 9: Quarterly trade ?gures (US$ Bn)
0
10
20
30
40
50
60
0
20
40
60
80
100
120
140
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2011-12 2012-13 2013-14 2014-15
Export Import Trade Balance
Data Source: RBI
Figure 10: Percenatge growth rate in non-oil non-gold imports
-20
-15
-10
-5
0
5
10
15
20
25
30
Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14
Data Source: Ministry of Commerce
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Foreword 1
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Glossary 49
State of the Economy 3
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12 Budget Analysis: Reform & Progress- The way forward
The Current Account has also shown improvement for a second year running and the
CAD/GDP ratio is expected to hit a low of 1.3% in FY 2014-15. In terms of CAD, India
is comfortably placed with investment in?ows more than suf?cient in ?nancing the
de?cit. Another major contributory factor has been the trade in services. The Services
sector has seen consistent trade surplus in the last few years and FY 2014-15 is no
exception. A combination of moderation in trade de?cit of merchandise, increased
investment in?ow, rise in surplus of trade in services and the recent stability of the
rupee have all led to improved condition of the CAD.
Contraction in CAD has contributed to a rise in FOREX reserves with reserves at US$
330 billion in 2014-15 (Apr-Feb) as compared to US$ 293 billion in 2013-14 (Apr-
Feb), registering a growth of 13%. Hence, with all the parameters heading in the
right direction, the external sector is expected to further strengthen the economic
prospects in the coming year and we can expect a CAD of below 1% as estimated by
the government.
Figure 11: CAD and Forex reserves
0
50
100
150
200
250
300
350
-5
-4.5
-4
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
F
o
r
e
x

R
e
s
e
r
v
e
s

C
A
D
/
G
D
P

(
%
)
Data Source: RBI
CAD/ GDP Ratio (%) Total Reserves (US $ Billion)
Related Budget Proposals
• Scheme for gold monetisation to allow the depositors of gold to
earn interest in their metal accounts.
• As an alternative to purchasing metal gold, a proposed scheme to
developed Sovereign Gold Bond.
• A gold coin with Ashok Chakra on its face to encourage domestic
trade and curtail gold imports.
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Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
13 Budget Analysis: Reform & Progress- The way forward
Fiscal Defcit – Charting a new path
The government continued to adhere to the ?scal target for the current year by
bringing its de?cit down to 4.1% of GDP. The last year saw the government’s
?scal fortunes swing from positive to negative. On the positive side, the global
crash in crude oil prices has meant that the government’s subsidy outgo will lessen
considerably. Further, bringing diesel prices at parity with the market in the ?rst half
of the year and subsequently increasing taxes to limit the fall in domestic prices is
also helping shore up government ?nances. On the negative side, tax revenues have
disappointed as the lack of growth in the manufacturing sector has meant lower
revenues. In the ?rst nine months of the ?scal year, the government had already
run up 100% of its budgeted ?scal de?cit as expenditures were on track while tax
revenues lagged behind. A closer look into the detail shows that up until December,
tax collections had only reached 58.2% of the budgeted amount while expenditure
had touched 68.9% of the budgeted amount. However, as is the case every year,
the de?cit level will go down in the coming months as disinvestment picks up and
ministries cut back on their expenditures.
A new direction and focus on quality
The latest budget has seen the government embark on a new path keeping in mind
the larger goal of ?scal consolidation. New targets for de?cit reduction have been
introduced keeping in mind ?ne balance between the need for ?scal rectitude to
provide suf?cient space for monetary policy easing on one hand and the need to
adequately provide for social programmes and increase public spending in core areas
to give boost to growth, on the other hand. Importantly, it must be noted that the
government has accepted the recommendations of the 14th Finance Commission
and will now be distributing a much larger share of its revenues to the states.
Going forward the focus is clearly on improving the quality of the de?cit as the
government is trying to reduce the amount of subsidy by better targeting while
also raising tax rates on services. The larger goal of ?scal policy is to move towards
the golden rule of eliminating the revenue de?cit and ensuring that, over the cycle,
borrowing is only for capital formation. In line with these objectives, the government
has set out new de?cit targets of 3.9% for FY16, 3.5% for FY17 and 3% for FY18.
Figure 12: Components of de?cit as percentage of GDP
0
1
2
3
4
5
6
2011-12 2012-13 2013-14 2014-15 2015-16
(P)
2016-17
(P)
2017-18
(P)
Data Source: Economic Survey 2014 - 15
Fiscal de?cit (% of GDP) Revenue de?cit (% of GDP)
Related Budget Proposals
• Commitment towards rationalising of subsidies and achieve
effciency in disbursement of subsidies by avoiding
subsidy leakage.
• Direct Transfer of Benefts to be extended to cover 10.3 crore
people, a signifcant rise from the current coverage of 1 crore.
• Commitment to achieve targets of 3.9%, 3.5% and 3.0% in FY
2015-16, 2016-17 and 2017-18, respectively.
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State of the Economy 3
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REFORMS & PROGRESS THE WAY FORWARD
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14 Budget Analysis: Reform & Progress- The way forward
Bringing structural change
Make in India
Since coming to power last year the new government’s main concern has been the
revival of growth in the Indian economy and crucially enough, it has chosen to give
the Industrial sector a structural push to achieve its goal. The government announced
the ‘Make in India’ initiative, which intends to make manufacturing the engine of
growth and also generate employment. Under the initiative there would be increased
focus on new processes, new infrastructure, new sectors and creating a new mindset
in order to increase the share of manufacturing in GDP to 25% from the current
16%. Further, the government has set its sight on improving India’s ease of doing
business ranking and identi?ed 25 key sectors such as automobiles, aviation, IT,
construction and textiles among other to achieve its stated goals.
The Progress
In line with the stated objectives of the new initiative, the government has initiated
many reforms and tried to bring in ef?cacy through administrative changes designed
to help the manufacturing sector. Some important reforms have been undertaken in
an attempt to improve the ease-of-doing business as given in the table below and as
stated by the government more detailed plans are under the works.
Table 2: Important measures undertaken under ‘Make in India’
Industrial license validity extended to three years
E-?lling of industrial license
Online environmental clearances
Self-certi?cation for all non-risk, non-hazardous businesses
Approval accorded to 17 national investment zones
FDI in defence raised from 26% to 49%
100% FDI allowed in defence sector for modern technology
Portfolio investment in defence sector permitted upto 24% under automatic route
FDI in construction further liberalized
Source: Government announcements and media reports
While these are positive developments, one of the major challenges in achieving
desired success in ‘Make in India’ has been the availability of skilled labour.
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15 Budget Analysis: Reform & Progress- The way forward
Supplemented by Skill India
Realising this fact, the budget has given due importance to the ‘Skill India’ program,
which is integral to the success of the ‘Make in India’ campaign. Skill India, which
was launched earlier in the year, is a multi-skill program with its emphasis on training
the youth in different skills required for employability or enhancing entrepreneurial
skills. It aims to develop the skillset of youth in various traditional professions such
as carpenters, welders, cobblers, etc. as well as more advanced professions such
as manufacturing, IT, etc. a huge impetus to education and educational institutions
along with investment in supporting infrastructure is required for the successful
implementation of Skill India.
A convergence of these two programs, i.e ‘Make in India’ and ‘Skill India’, is a perfect
recipe for success as both programs can bene?t from one another. With ‘Skill India’
providing the required skill labour and ‘Make in India’ providing the infrastructure
and the opportunity for this skilled labour to realise its potential.
Related Budget Proposals
• Tax pass through to be allowed to both category I and category II
alternate investment funds.
• To facilitate technology infow, tax on royalty and fees from
technical services reduced from 25% to 10%.
• Proposal to reduce corporate tax from 30% to 25% over the next
four years.
• With regards to own assets, rental income of REITs to have pass
through facility.
• For the MSME sector, a separate 7.5% sub limit created under
priority sector lending.
• Deen Dayal Upadhyay Gramin Kaushal Yojana to improve
employability of rural youth.
• With an aim to monitor scholarships proposal to set up Financial
Aid Authority. It will also monitor Educational Loan Schemes,
through the Pradhan Mantri Vidya Lakshmi Karyakram.
• Setting up of institutions such as IIM in Karnataka as well as All
India Institute of Medical Science (AIIMS) in J&K, Punjab, Tamil
Nadu, Himachal Pradesh and Assam to further improve access to
quality education.
• Setting up of 3 new National Institute of Pharmaceuticals
Education and Research in Maharashtra, Rajasthan
and Chattisgarh.
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16 Budget Analysis: Reform & Progress- The way forward
Improving ease-of-doing business
The government seems to be focusing on creating a non-adversarial environment for
corporates by improving the ease-of-doing business. India currently ranks 142 among
the 189 countries according to the latest World Bank report, falling two places from
last year's ranking and needs immediate reforms to speed up execution. In line with
these objectives, there have been a number of steps taken that have been taken till
date with some more announced in the budget.
1. Launched an e-biz portal which integrates 14 regulatory permissions at
one source.
2. Appoint an expert committee to examine the possibility and prepare a draft
legislation where the need for multiple prior permissions can be replaced with a
pre-existing regulatory mechanism.
3. Subsuming of cess in the tax rates of Excise and Service Tax, recognizing digitally
signed invoices and electronic records.
The efforts of the Finance minister to bring in these changes are commendable and
in accordance with the stated goals of the administration wherein it wants to bring
India’s ranking down to 50 in a matter of two years. There is likely to be a continued
thrust in this area, which bodes well for the overall growth of the economy, getting it
ever closer to the aspirational double digit growth ?gure.
Related Budget Proposals
• Domestic transfer pricing threshold limit increased from `5 crores
to `50 crores.
• Within the regulatory framework, in terms of a case to be heard
in the ITAT by a single member bench, the monetary limit is
increased from `5 lakhs to `15 lakhs.
• Wealth tax has been replaced by an additional surcharge of 2%
on citizens with a taxable income of over 1 crore annually.
• To improve effciency in regulatory framework, online central
excise and service tax registration to be done in 2 working days.
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State of the Economy 3
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17 Budget Analysis: Reform & Progress- The way forward
Rates of Income Tax
Individuals/HUF
There is no change in the basic exemption limit and tax rates for individuals/HUF. It is
proposed to increase the surcharge from 10% to 12% on taxable income above
`1 crore for individuals/HUF.
Table: 1 Tax Rates for Individuals/HUFs
Income Slabs (`) Rate of Tax (%)
Upto 250,000 Nil
250,001 - 500,000 10
500,001 – 1,000,000 20
1,000,001 and above 30
Notes:
• For resident senior citizens (60 years but less than 80 years) and very senior
citizens (80 years or more), the basic exemption limit remains unchanged at
`300,000 and `500,000, respectively.
• Additional surcharge of 2% proposed in lieu of the proposed abolition of
Wealth Tax.
• Education cess will continue to be levied at the rate of 3% of Income Tax
(including surcharge).
• The maximum marginal rate will be 34.608%, where taxable income is above
`1 crore.
Budget Proposals
Direct Taxes
Additional surcharge of 2% on super rich’s
income in lieu of wealth tax abolishment
Companies
It was announced in the Finance Minister’s speech that it is proposed to reduce the
tax rates from 30% to 25% over the next four years. The reduction of tax rate is to
be accompanied by rationalization and removal of various kinds of tax exemptions
and incentives for corporate taxpayers. These changes will be effective from ?nancial
year 2016-17.
For domestic companies surcharge is proposed to be increased from 5% to 7%
on taxable income above `1 crore but upto `10 crores and from 10% to 12% on
taxable income above `10 crores. No change is proposed in surcharge for
foreign companies.
The effective rate of tax for domestic and foreign companies is depicted in Table 2.
Income Slabs (` ) Domestic Company (%) Foreign Company (%)
Normal
Provision
MAT Normal
Provision
MAT
Upto 1 crore 30.90 19.05 41.2 19.05
Exceeding 1 crore and
upto 10 crores
33.06 20.39 42.02 19.44
Exceeding 10 crores 34.61 21.34 43.26 20.01
*(1) Unless otherwise stated, the proposed
provisions will be applicable from the ?nancial
year 2015-16
(2) Unless otherwise stated, applicable surcharge
and cess would be leviable on the rate
mentioned
Proposed levy of additional surcharge of 2% and abolishment of
wealth tax will increase revenue and reduce additional compliance/
administrative burden on the taxpayer and income tax department
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18 Budget Analysis: Reform & Progress- The way forward
Firms
There is no change in the base tax rates applicable to ?rms. It is proposed to increase
the rate of surcharge from 10% to 12% on taxable income above `1 crore.
Hence, the effective tax rate under normal provisions and AMT will be 34.61% and
21.34%, respectively, where the income exceeds `1 crore.
Co-operative Societies
There is no change in the base tax rates applicable to co-operative societies. It is
proposed to increase the rate of surcharge from 10% to 12% on taxable income
above `1 crore.
Personal Taxation
Abolishment of Wealth Tax Act, 1957
Currently, wealth tax is payable on speci?ed assets at the rate of 1% on the amount
of net wealth exceeding `3,000,000. It is proposed to abolish the Wealth Tax Act to
reduce additional compliance burden on the assessee and administrative burden on the
income tax department.
Determination of residential status of an Indian citizen working on
a foreign ship
It is proposed that for determining the residential status of an individual, being a citizen
of India and crew member of a foreign bound ship leaving India, manner and basis
of computing the period of stay in India in respect of voyage shall be prescribed. The
proposed amendments will be retrospectively effective from ?nancial year 2014-15.
Exemption for transport allowance
Exemption for transport allowance is to be increased from `800 per month to `1,600
per month as per the Finance Minister’s speech.
Deductions to encourage savings
The overall limit of deductions available for speci?ed savings referred to in section 80C,
80CCC and 80CCD (1) of the Act is `150,000. Amendments have been made in some
of these sections that allow ?exibility of saving in these schemes:
• Deposit under Sukanya Samriddhi Account scheme
Currently, investment in Sukanya Samriddhi Scheme is eligible for deduction
subject to limits applicable under section 80C of the Act (`150,000) in respect of
subscription to such scheme made in the name of the individual taxpayer.

It is proposed that such subscription can be made even in the name of a girl child
of the individual taxpayer or in the name of a girl child of whom taxpayer is the
legal guardian.It is also proposed that any payment received from the account
opened in accordance with the scheme will be exempt from tax. The proposed
amendments will be retrospectively effective from ?nancial year 2014-15.
• Deduction for contribution to certain pension fund
Currently, deduction upto `100,000 is allowed in respect of contributions made to
speci?ed pension funds. It is proposed to increase the limit of such deduction to
`150,000.
Corporate tax rate proposed to be reduced
from 30% to 25% over next four years
Reduction in tax rate to be accompanied by rationalization and
removal of various kinds of tax exemptions and incentives for
corporate taxpayers
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19 Budget Analysis: Reform & Progress- The way forward
• Deduction for contribution to pension scheme
Currently, deduction is allowed for contribution to noti?ed pension scheme of
Central Government upto 10% of salary or 10% of the gross total income. This
was limited to `100,000, which is now proposed to be removed. It is now
proposed that an additional `50,000 savings be subject to deduction in addition
to the overall limit of savings under section 80C, 80CCC and 80CCD (1). Thus, the
overall savings under section 80CCD has now increased from
`150,000 to `200,000.
Deduction for health insurance premium
Currently, deduction upto `15,000 is allowed for health insurance premium paid for self
and family and an additional `15,000 is allowed for health insurance premium
for parents.
It is proposed to increase the limit of such deduction to `25,000 as per Finance
Minister’s speech. It is further proposed to increase the limit of such deduction for
senior citizens from `20,000 to `30,000.
Additionally, it is proposed to provide a deduction of `30,000 to an Individual for any
payment made for medical expenditure in respect of very senior citizen for whom no
health insurance premium is paid.
The aggregate deduction available to any individual for health insurance premium and
medical expenditure will be limited to `30,000 for self/ family and `30,000 for parents.
Deduction for dependent person with disability
Currently, deduction is allowed to a resident individual of `50,000 for a dependent
person with disability and `100,000 with severe disability. It is proposed to increase the
limits to `75,000 and `125,000, respectively.
Deduction in respect of medical treatment
Currently, deduction of `40,000 is allowed to a resident individual for self or dependent
and `60,000 for senior citizen for speci?ed medical treatment only when a certi?cate is
obtained from a specialist in a Government hospital and is furnished with the return
of income.
The above limits will remain the same and it is proposed to increase the limit to
`80,000 in case of medical treatment of a very senior citizen.It is further proposed
to do way with the requirement of furnishing the certi?cate and a prescription in
prescribed form for such treatment from a specialist is to be obtained.
Deduction in case of a person with disability
Currently, deduction of `50,000 is allowed to a resident individual with disability and
`75,000 with severe disability. It is proposed to increase the limits to `75,000 and
`125,000, respectively.
Collation of proof by the employer for providing deduction from
salary income
Currently, there is no uniformity regarding the documents to be obtained from the
employee for allowing deductions, exemptions and set-off of losses while computing
the tax to be deducted.
Additional `100,000 deduction for contribu-
tion to National Pension Scheme, which is
currently the only noti?ed pension scheme.
The additional deduction will encourage investment in pension
schemes which will enable India to become a pensioned society
instead of a pensionless society.
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20 Budget Analysis: Reform & Progress- The way forward
It is proposed that the employer, prior to allowing deductions or exemptions, will
obtain the proofs from the employee in a form and manner as may be prescribed. The
proposed amendment will be effective from 1 June 2015.
TDS on pre mature withdrawal of employees Provident Fund
Currently, the tax to be deducted on Provident Fund withdrawal is to be calculated by
re-computing the tax liability of the years for which the contribution was made. It is
dif?cult for the central trustees of EPFS to obtain past information.
It is proposed that trustees of EPFS will deduct tax at the rate of 10% on the taxable
withdrawal amount above `30,000. It is further proposed that if the person
withdrawing the Provident Fund fails to furnish PAN to the trustees, tax will be
deducted at the maximum marginal rate.
The proposed amendment will be effective from 1 June 2015.
Corporate Taxation
Deferment of General Anti Avoidance Rule (“GAAR”) provisions
In order to ensure that GAAR provisions are implemented as part of a comprehensive
regime to deal with Base Erosion and Pro?t Shifting and aggressive tax avoidance, it is
proposed that implementation of GAAR be deferred by two years.
GAAR provisions to be made applicable from the assessment year 2018-19 and
subsequent years.
The Finance Minister in his speech has indicated that the investments made up to 31
March 2017 will not be subject to GAAR.
Collation of proof by the employer for
providing deduction from salary income.
GAAR provisions deferred for
2 years
Employer will have to obtain documentation, based on rules to be
specifed, in support of deductions/exemptions such as house rent
allowance, interest on self-occupied house property loan, etc.
This is a welcome development which will be cheered by the
international community. Enactment of GAAR could have had
adverse implications for foreign companies specially those claiming
exemption under treaties such as Mauritius, Cyprus, Netherlands
etc. The grandfathering provision would mean that even capital
gains arising after 1 April 2017 in relation to investments made
before 1 April 2017 will be protected from applicability of GAAR.
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21 Budget Analysis: Reform & Progress- The way forward
Additional Investment Allowance
It is proposed to insert a new section 32AD in the Act to provide for an additional
investment allowance of an amount equal to 15% of the cost of new asset acquired
and installed by an assessee, if:
• an undertaking or enterprise for manufacture or production of any article or thing
is set up in any noti?ed backward areas in Andhra Pradesh and Telangana during
the period beginning from 1 April 2015 and ending on 31 March 2020.
This deduction shall be available, under similar conditions prescribed, and over and
above the existing 15% deduction available, under section 32AC of the Act (subject to
ful?lment of speci?ed conditions under both the sections).
Additional conditions prescribed to be fulflled by the approved in-house
R&D facility
Section 35(2AB) provides for 200% weighted deduction in relation to expenditure
incurred on approved in-house R&D facility, subject to conditions.
It is proposed that to avail the bene?t, the company shall have to ful?l such conditions
with regard to maintenance of accounts and audit thereof and furnishing of reports in
such manner as may be prescribed.
Additional Depreciation at the rate of 35% for investment in backward areas
of Andhra Pradesh and Telangana
Currently, an additional depreciation of 20% is allowed in respect of the cost of new
plant or machinery (other than a ship and aircraft) acquired and installed by assesses
engaged in manufacturing or power business.
It is now proposed to allow higher additional depreciation, subject to similar conditions,
at the rate of 35% (instead of 20%) where an assessee acquires and installs new
plant or machinery (other than a ship and aircraft) in a manufacturing undertaking or
enterprise set up in the noti?ed backward area of the State of Andhra Pradesh or the
State of Telangana on or after 1 April 2015 and ending before 1 April 2020.
Allowance of balance 50% additional depreciation
Currently, the additional depreciation of 20% of cost of new plant or machinery is
restricted to 50% of the eligible amount when the new plant or machinery acquired
and installed by the assessee, is put to use for less than 180 days in the previous year.
The balance 50% depreciation is deferred for claiming under normal depreciation route.
It is now proposed to provide that the balance 50% of the additional depreciation on
new plant or machinery acquired and used for less than 180 days which has not been
allowed in the year of acquisition and installation of such plant or machinery, shall be
allowed in the immediately succeeding previous year.
Additional investment deduction
of 15%
Additional Depreciation at the
rate of 35% for investment in Andhra
Pradesh and Telangana
Balance additional depreciation restricted to 50% for assets put
to use for less than 180 days, to be allowed in the immediately
succeeding previous year.
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Glossary 49
State of the Economy 3
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22 Budget Analysis: Reform & Progress- The way forward
It is proposed that the ‘amount of tax sought to be evaded’ be determined in
accordance with the following formulae:
(A – B) + (C – D)
Where:
A= amount of tax on total assessed income under normal provisions
B= amount of tax on (total assessed income less concealed income)
C= amount of tax on total assessed income under Section 115JB or 115JC of the Act
D= amount of tax on (total assessed income under Section 115JB or 115JC of the Act
less concealed income)
It is proposed that the amount of tax sought to be evaded shall be the summation of
tax sought to be evaded under the general provisions and the tax sought to be evaded
under the provisions of section 115JB or 115JC of the Act.
However, amount considered to be concealed under both, the general provisions as
well as under provisions of section 115JB or 115JC, shall be ignored for the purpose of
D above.
If section 115JB or 115JC is not applicable, the computation of item (C-D) in the above
formula will be ignored.
It is further proposed that:
Where due to additions made in assessment, loss is reduced or converted in pro?t, the
formulae (A – B) shall be the tax on the amount of such additions.
Abolition of Wealth Tax
It is proposed to abolish the levy of Wealth Tax with effect from Assessment
Year 2016-17. The Finance Minister in his speech has indicated that the information
relating to assets which is currently required to be furnished in the wealth-tax return
will be captured by modifying the income-tax return form.
Rationalizing of MAT provisions
It is proposed that the share of income of a member of an AOP on which no income
tax is payable, if credited to the pro?t and loss account, will be reduced from the book
pro?t for MAT purposes. The corresponding expenditure, if any, debited to the pro?t
and loss account is to be added back.
Formula for computing ‘amount of tax sought to be evaded’ introduced for
levy of penalty
Currently, “amount of tax sought to be evaded” has been de?ned, inter-alia, as the
difference between the tax due on the income assessed and the tax which would have
been chargeable had such assessed income been reduced by the amount of
concealed income.
Share of pro?t of a member in AOP is to
be excluded from MAT, corresponding
expenditure, if any, to be disallowed
Levy of wealth tax abolished
Penalty shall be summation of tax sought to be evaded under
normal provisions and provisions of section 115JB or 115JC of
the Act
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Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
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23 Budget Analysis: Reform & Progress- The way forward
Non-resident taxation
PoEM introduced as test of residence for foreign companies
It is proposed to amend the test of residence for foreign companies to provide that a
company would be treated as resident in India if its place of effective management is in
India at any time in that year.
“Place of effective management” has been de?ned to mean a place where key
management and commercial decisions that are necessary for the conduct of the
business of an entity as a whole are, in substance made. A set of guiding principles to
determine POEM is also proposed to be issued.
Clarifcations on indirect transfer provisions
Currently, share or interest in a company or an entity outside India is deemed to be
situated in India if such share or interest derives its value substantially, either directly or
indirectly, from assets located in India. Capital gains arising from transfer of such share
or interest (‘indirect transfer’) is liable to tax in India. It is now proposed to provide
clari?cations on certain terms referred in said provisions.
It is proposed that the share or interest of a foreign company or entity shall be deemed
to derive its value substantially from the assets (tangible or intangible) located in India,
if on the speci?ed date, the value of Indian assets:
(a) Exceeds `10 crores; and
(b) Represents at least 50% of the value of all the assets owned by the foreign entity.
It is further proposed to de?ne some of the key terms as under:
Terms De?nition
Value of asset Methodology of determining value of assets to be
prescribed. Liabilities in respect of such assets not to be
reduced.
Speci?ed date of
valuation
• Date on which the accounting period of the foreign
entity ends preceding the date of transfer; or
• If book value of assets of foreign entity on date of
transfer exceeds by at least 15% as compared to the
book value as on the date on which the accounting
period preceding the date of transfer ends, then the
valuation date will be the date of transfer.
It is proposed that only such part of the income arising from indirect transfers as is
reasonably attributable to assets located in India will be deemed to accrue or arise in
India and will be determined in such manner as may be prescribed.
It is also proposed to grant exemption from taxation of capital gains arising from
indirect transfers in the following scenarios:
• Foreign entity that is transferred directly owns Indian assets - Where the
transferor of shares or interest in the foreign entity (along with associated
enterprises) does not have the right of control and management over the foreign
entity and does not hold more than 5% voting power / share capital / interest in
such foreign entity.
• Foreign entity that is transferred indirectly owns Indian assets through another
company - Where the transferor of shares or interest in the foreign entity (along
with associated enterprises) does not have the right of control and management
over the foreign entity and other company and does not hold more than 5%
voting power / share capital / interest / in the foreign entity / other company.
• Transfer of shares or interest in a foreign company under a scheme of
amalgamation or demerger, subject to conditions.
Foreign companies to become Indian
residents if PoEM in India
This could have an adverse impact for foreign companies which
undertake key management decisions in India
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Foreword 1
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Glossary 49
State of the Economy 3
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24 Budget Analysis: Reform & Progress- The way forward
The law proposes reporting obligation on the Indian entity as may be prescribed. It is
proposed to levy penalty on the Indian concern through or in which the Indian assets
are held by the foreign company, who fails to furnish information or document as
required for the purpose of determination of income arising under section 9(1)(i). The
penalty will be equal to 2% of the value of transaction, if such transaction had the
effect of direct or indirect transfer of management or control in relation to the Indian
concern, and in any other case, the penalty will be `500,000.
In the Budget speech, the Finance Minister has also clari?ed that applicability of indirect
transfer provisions to dividends paid by foreign companies will be addressed through a
clari?catory Circular.
Source rules for interest received by a non-resident
There is no speci?c provision in the Income Tax Act dealing with interest payments from
an Indian branch to foreign head of?ce or foreign branches, especially in case of banks.
It is proposed to provide that in case of a non-resident engaged in business of banking,
any interest payable by the PE in India to its head of?ce, other branches or any other
part of the non-resident outside India shall be deemed to accrue and arise in India.
Consequently, such interest income will be taxable in India in the hands of the head
of?ce in addition to any other income attributable to the PE in India.
It is further proposed that the PE in India and the non-resident will deemed to be
separate persons. Therefore, provisions relating to computation of total income,
determination of tax and withholding tax will apply accordingly.
Rate of tax on royalty and FTS
Currently, income in the nature of royalty and FTS earned by non-residents from
Government or Indian concern, which is not effectively connected with PE, is taxable
at the rate of 25%. It is proposed to reduce the tax rate on such royalty and FTS from
25% to 10%.
MAT provisions relating to FIIs
It is proposed to amend the provisions of MAT to provide that income from transactions
in securities (other than short-term capital gains arising on transactions on which
securities transaction tax is not chargeable) arising to a FII, shall be excluded from the
chargeability of MAT and the pro?t corresponding to such income shall be reduced
Indirect transfer tax provisions simpli?ed
Interest payment by bank branches now
taxable
Reduced rate of tax on royalty and FTS
The relaxations in the indirect transfer provisions specially the
introduction of 50% threshold will reduce the uncertainty on
applicability of the provisions in different situations.
The amendment seeks to overrule favourable judicial precedents
on non-taxability of interest received by head offce of a bank from
branches in India
FIIs may be subject to MAT provisions on short-term capital gains
on which no STT is paid.
MAT provisions applicable to FIIs restrictively
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Foreword 1
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Glossary 49
State of the Economy 3
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25 Budget Analysis: Reform & Progress- The way forward
from the book pro?t.
Interest on rupee denominated bonds and Government securities
Bene?cial tax rate of 5% on interest payable to FIIs and QFIs in respect of investments
in rupee denominated bonds of an Indian company or Government securities
proposed to be extended till 30 June 2017.
The proposed amendment is applicable from 1 June 2015.
Fund managers in India not to constitute business connection of
offshore funds
In order to facilitate location of fund managers of off-shore funds in India, a special
regime has been proposed to ensure that the fund management activity of an ‘eligible
investment fund’ carried out by an ‘eligible fund manager’ will not constitute business
connection in India of the said fund.
Moreover, an eligible investment fund will not be said to be resident in India merely
because the eligible fund manager is situated in India.
An offshore fund will qualify as ‘eligible investment fund’ for this purpose if it ful?ls
certain criteria, viz.:
• The fund qualifes as non-resident in India, is resident of a country with which
India has entered into a tax treaty, and is subject to applicable investor protection
regulations in such country
• The direct or indirect participation or investment by India tax-residents in the fund
should not in aggregate exceed 5% of its corpus
• The fund must have at least 25 members not connected to each other, with no
individual member having participation interest exceeding 10%; and the aggregate
participation interest (direct or indirect) in the fund of any ten or less members
(along with their connected persons) shall be less than 50%
• The fund must not invest more than 20% of its corpus in any entity, should not
make any investment in its associate entity, and should not carry on or control and
manage (directly or indirectly) any business in India or from India in a way that will
constitute business connection in India (other than the activities undertaken by the
eligible fund manager on its behalf)
• The monthly average of the corpus of the fund shall not be less than one hundred
crore rupees and if the fund has been established or incorporated in the previous
year, the corpus of fund shall not be less than one hundred crore rupees at the end
of such previous year; and
• The eligible fund manager is remunerated at arm’s length price
A person will qualify as ‘eligible fund manager’ if:
• the person is not an employee of the eligible investment fund or a connected
person of the fund;
• the person is registered as a fund manager or investment advisor in accordance
with the speci?ed regulations;
• the person is acting in the ordinary course of his business as a fund manager;
• the person along with his connected persons shall not be entitled, directly or
indirectly, to more than 20% of the pro?ts accruing or arising to the eligible
investment fund from the transactions carried out by the fund through such a
fund manager.
These provisions will not have any impact on taxability of any income of the eligible
investment fund which would have been chargeable to tax irrespective of whether the
activity of the eligible fund manager constituted the business connection in India of
such fund or not.
These provisions will not have any effect on the scope of total income or determination
of total income in case of the eligible fund manager.
The proposed eligibility conditions might disqualify several funds
from beneftting from the relaxation.
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Foreword 1
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State of the Economy 3
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26 Budget Analysis: Reform & Progress- The way forward
Income from ADRs / GDRs
Currently, a concessional tax treatment has been prescribed in relation to income from
ADRs / GDRs.
As per the new Depository Receipts Scheme, 2014, ADRs / GDRs can be issued against
the securities of listed or unlisted companies. Further, both sponsored and unsponsored
issues are permitted. ADRs / GDRs can be freely held and transferred by both residents
and non-residents.
It is proposed to provide that the concessional tax treatment will be available only in
respect of ADRs / GDRs of companies listed on a recognized stock exchange in India.
Furnishing of information relating to foreign remittance
Currently, a person responsible for paying to a non-resident any sum chargeable to
tax is required to furnish information as prescribed. It is now proposed to extend
the requirement to provide the information in respect of payments to non-residents,
whether the sum payable is chargeable to tax or not.
Further, it is also proposed to levy a penalty of `100,000 for failure to furnish
information or furnishing of inaccurate information, if there is no reasonable cause for
the failure.
The proposed amended is effective from 1 June 2015.
Rules for determining eligible foreign tax credit
Currently, the Act does not provide the manner for granting credit of taxes paid in any
country outside India. It is proposed to amend provisions of the Act to enable CBDT to
make rules in this regard
The proposed amendment is effective from 1 June 2015.
Amendments in tax regime of AIFs & REITs
Pass-through status for Alternative Investment Funds
• Currently the Act provides for the manner of taxation of income received from a
Venture Capital Fund (VCF) (as a sub category of Category 1 Alternative Investment
Fund (AIF) under SEBI (AIF) Regulations 2012 (AIF Regulations) and Venture
Capital Fund (VCF) registered under erstwhile SEBI (VCF) Regulations 1996 (VCF
Regulations). It is proposed to clarify that the existing manner of taxation shall
apply only to existing VCF registered under erstwhile VCF Regulations and shall not
include Category I AIF and Category II AIF registered under AIF Regulations, which
are separately dealt with by insertion of a new regime discussed below.
• A new section is proposed to exempt any income of an “Investment Fund”, other
than the income chargeable under the head “Pro?t and gains of business or
profession”. Correspondingly, the income accrued or received by a unit holder is
proposed to be exempt from tax.
• “Investment fund” means any fund established or incorporated in India in the form
of a trust or a company or a limited liability partnership or a body corporate which
has been granted a certi?cate of registration as a Category I or a Category II AIF
and is regulated under AIF Regulations.
• By virtue of the proposed amendment, the pass-through status is extended to:
- all the Category I AIFs (i.e. AIFs which invest in angle fund, start-up or early
stage ventures or social ventures or SMEs or infrastructure); and
- Category II AIFs (i.e. private equity funds or debt funds) which neither
undertake leverage or borrowing (except for operational purposes) nor
employs diverse or complex trading strategies.
• Salient features of the revised tax regime for the Investment Fund are as under:
- Income from investments paid/ credited by fund will be deemed to be of same
nature and proportion in the hands of Unit Holder as such income is received
by/or accrued to Investment Fund
- Income from pro?ts and gains of business will be taxable in the hands of
such Investment Fund. All other income shall be exempt in the hands of the
Investment Fund.
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Foreword 1
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State of the Economy 3
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- Income received by the Investment Fund from portfolio companies will
not be subject to withholding tax – to be effected by way of a subsequent
noti?cation
- Income (other than business income) accrued or paid by the Investment Fund
to a Unit Holder shall be subject to withholding tax of 10%
- In a year when Investment Fund incurs losses, no loss will be allowed to be
passed through to the Unit Holders and would be carried over to the next year
by such Investment Fund
- DDT and buyback tax not applicable on payment of income by the Investment
Fund to the Unit Holders
• Income of a Unit Holder of an Investment Fund will be chargeable to tax as if the
investments were made directly by him. Business income (taxed at the Investment
Fund level) will not be subject to tax in the hands of Unit Holders.
• Investment Fund is required to fle return of income or loss for every previous year.
Tax pass-through status to certain
Alternative Investment Funds
The government has addressed a long-standing demand and
concern of the Private Equity sector by according pass-through
status in line with international practices. This should provide a big
fllip to investments attracted by such funds.
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Foreword 1
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Glossary 49
State of the Economy 3
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28 Budget Analysis: Reform & Progress- The way forward
Real Estate Investment Trusts
Parameters Current Provisions Proposed Provisions
De?nition of
business trust
Makes reference to
trusts registered as REIT
or InvIT under SEBI
To make speci?c reference to
SEBI (Infrastructure Investment
Trusts) Regulations, 2014 and SEBI
(Real Estate Investment Trusts)
Regulations, 2014
Exemption of
rental income
No exemption from
taxation of rental
income arising from an
asset held directly by
a REIT
Rental income shall be exempt from
tax in hands of REIT in relation to
asset directly held
Exclusion of
income in
the hands of
unitholders
Any income distributed
to Unit Holder other
than interest is exempt
in the hands of Unit
Holder
Rental income will be taxable in the
hands of unitholders
Exemption
on transfer
of units in
business trust
No exemption from tax
on transfer of units in
business trust which
were acquired by
Sponsor in exchange of
shares of a SPV
Gains arising from transfer of
units held in business trust shall
be liable to Securities Transaction
Tax (STT) and the long-term capital
gains shall be exempt from tax.
Short-term capital gains tax will be
taxable @ 15% (plus surcharge and
education cess)
Withholding
tax on rental
income
payable
No exemption from
withholding tax on the
rental income payable
to a REIT
No taxes shall be withheld on
payment of rent to a REIT
Transfer Pricing
Raising the threshold for speci?ed domestic transaction
The existing provisions of section 92BA of the Act de?ne “speci?ed domestic
transaction” in case of an assessee to mean any of the speci?ed transactions, not
being an international transaction, where the aggregate of such transactions entered
into by the assessee in the previous year exceeds a sum of `5 crore.
In order to address the issue of compliance cost in case of small businesses on
account of low threshold of `5 crore, it is proposed to amend section 92BA to
provide that the aggregate of speci?ed transactions entered into by the assessee
in the previous year should exceed a sum of `20 crore for such transaction to be
treated as “speci?ed domestic transaction”.
This amendment will take effect from 1 April 2016 and will, accordingly, apply in
relation to the assessment year 2016-17 and subsequent assessment years.
Other Amendments
Measures to curb black money
In order to strengthen the measures to curb the generation and concealment of black
money from assets outside India as well as from transactions in India, it is proposed
to enact comprehensive new laws on black money.
Introduction of a new Bill
A new law is proposed to be introduced in order to curb the black money in relation
to foreign assets. The following are the key features of the proposed new law, as
announced by the Finance Minister:
• Offense of concealment of income and assets and evasion of tax in relation to
foreign assets:
- Liable for prosecution with punishment of rigorous imprisonment up to
10 years
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State of the Economy 3
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- Offense will be non-compoundable
- Offence will not be eligible for an application before the settlement
commission
- Levy of penalty at 300% of the tax liability
- Con?scation of unaccounted assets held abroad
- Attachment and con?scation of equivalent asset in India where the asset
located abroad cannot be forfeited
• Non-fling of return or fling of return with inadequate disclosure of foreign assets
- Liable for prosecution with punishment up to rigorous imprisonment 7 years
• Income from undisclosed foreign assets or undisclosed income from any foreign
assets
- Taxable at maximum marginal rate
- No deduction or exemption available therefrom
• Benefcial owner or benefciaries of foreign assets will be mandatorily required to
?le return even if there is no taxable income
• Abettors will also be liable for prosecution and penalty
Amendment to the provision of FEMA
Amendment to the provisions of FEMA for contraventions in relation to foreign
assets, resulting into:
• Seizure and eventual confscation of assets of equivalent value situated in India
• Levy of penalty and imprisonment up to 5 years
Comprehensive law for Benami Transactions
A more comprehensive Benami Transactions (Prohibition) Bill for black money from
domestic transactions will be introduced.
Other proposals
• Prohibition to accept or pay an advance of `20,000 or more in cash for purchase
of immovable property
• Quoting of PAN will be mandatory for any purchase or sale exceeding the value
of `100,000
• Third party reporting entities will be required to furnish information about foreign
currency sales and cross border transactions
Transfer of units in a consolidating scheme of mutual funds
It is proposed that the transfer of a units held by an assessee in a consolidating
scheme of mutual funds will be considered as an exempt transfer provided the
consolidation is of two or more schemes of an equity oriented fund or two or more
schemes of a fund other than an equity oriented fund.
It is also proposed that the period for which the units were held in the earlier scheme
will be included for the purpose of calculating the holding period of units in the
consolidating scheme. Further, it is proposed that the cost of acquisition of the units
transferred will be the cost of acquisition in a consolidating scheme.
Cost of acquisition of a capital asset in the hands of resulting company
The existing provisions of the Income Tax Act do not have express provisions to
determine the cost of acquisition of assets in the course of a demerger. It has been
proposed that the cost of the asset in the hands of the resulting company should be
cost of such asset in the hands of the demerged company as increased by the cost of
improvement, if any, incurred by the demerged company. This amendment will not
be applicable to depreciable assets.
Rigorous new law to curb black money
While one would have to wait for the fne print, the proposed new
law could act as a signi?cant deterrent for retaining unaccounted
assets and income abroad
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State of the Economy 3
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30 Budget Analysis: Reform & Progress- The way forward
Scope of charitable purpose broadened
The de?nition of the term charitable purpose is proposed to be broadened to include
“yoga” as a separate category on the lines of education and medical relief.
It is proposed to provide that carrying on of any activity in the nature of trade,
commerce or business, or any activity of rendering any service in relation to any
trade, commerce or business, for a cess or fee or any other consideration will not be
considered as a charitable purpose unless it is undertaken for such advancement of
any other object of general public utility and the aggregate receipts from such activity
during the previous year, do not exceed 20% of the total receipts.
Relaxation relating to accumulation of income by charitable trusts and
institutions
It is proposed that in order to avail the bene?t of accumulation under section 11, the
prescribed form will be required to be furnished on or before the due date for ?ling
the return of income. Further, it is proposed that bene?ts of section 11 will not be
applicable if the return of income is not ?led on or before the due date of ?ling the
return of income.
Exemption of specifed income of Core Settlement Guarantee Fund
It is proposed that speci?ed income of the Core Settlement Guarantee Fund by way
of contribution received from speci?ed persons, investment made by the Fund and
penalties imposed by the Clearing Corporation will be exempt from tax. However,
any amount standing to the credit of the Fund and not charged earlier to tax, will be
taxed in the year in which such amount is shared with the speci?ed person.
Deduction for employment of new workmen
Presently, a deduction equal to 30% of additional wages paid to new regular
workmen, in excess of 100 workmen, employed in a factory manufacturing goods is
available only to an Indian company. No deduction is allowed if the factory is hived
off or transferred from another existing entity or acquired by way of amalgamation.
It is now proposed to extend this bene?t to all assesses having a factory employing
new regular workmen in excess of 50 workmen.
It is further proposed that no deduction will be allowed if the factory is acquired by
way of transfer from any other person or as a result of any business re-organization.
100% deduction in speci?c cases
It is proposed that contributions made to Swachh Bharat Kosh and Clean Ganga Fund
(other than sums spent by companies in pursuance to CSR) and National Fund for
Control of Drug Abuse will be eligible for 100% deduction without the overall
10% cap.
Interest for shortfall in payment of advance tax
Currently, in case of reassessment under section 147 or assessment in case of search
or requisition under section 153A, the interest under section 234B for shortfall in
payment of advance tax is charged from the date of intimation under section 143(1)
or the date of the regular assessment till the date of reassessment under section 147
or section 153A. Here, the interest on additional tax is not charged for the period
from the ?rst day of assessment year to the date of intimation or regular assessment.
Also, in case an application is ?led before the Settlement Commission declaring an
additional amount of income-tax, there is no provision in section 234B for charging
interest on the additional amount of Income Tax declared in such application from
the ?rst day of assessment year to the date of such declaration.
It is proposed that interest will be charged on the additional tax determined in course
of reassessment from the ?rst day of the relevant assessment year till the date of
This amendment will provide signifcant relief to several charitable
institutions which undertake trade and business in the course
of advancing objects of general public utility such as sports
associations, chambers of commerce, etc.
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reassessment under section 147 or assessment under section 153A. As regards the
application before the Settlement Commission, it is proposed that interest will be
levied on the additional amount of Income Tax declared from the ?rst day of the
assessment year to the date of making an application to the Settlement Commission.
If the amount of total income disclosed in the application is increased by an order
of the Settlement Commission, then interest will be payable from the ?rst day of the
assessment year to the date of such order of the Settlement Commission.
This amendment will be effective from 1 June 2015.
TDS on interest (other than interest on securities)
• Currently, some co-operative banks do not deduct TDS on payment of interest to
depositors, in respect of interest on time deposits, claiming the bene?t of general
exemptions which are applicable on payments made by co-operative societies to
its members. It is proposed to expressly provide that the general exemption as
mentioned above will not be available in respect of payment of interest on time
deposits by co-operative banks to its members.
• TDS provisions are proposed to apply in respect of interest on ‘recurring
deposits’.
• Currently, the computation of interest threshold limit of `10,000 for deduction
of TDS by a banking company or co-operative bank or a public company is
made branch-wise. It is proposed that such computation will now be made by
aforesaid entities (and not branch-wise) which has adopted core
banking solutions.
• The existing provisions provide for deduction of TDS from interest paid or
credited exceeding `50,000 on compensation received from Motor Accident
Claim Tribunal, whichever is earlier. It is proposed that TDS shall be made at the
time of payment of such interest in a ?nancial year exceeding `50,000.
This amendment is effective from 1 June 2015.
TDS on payments made to transporters
Currently, tax is not required to be deducted on payments made to contractors of
plying, hiring and leasing of goods carriage if the contractors furnish their PAN.
It is proposed to be clari?ed that the said TDS exemption is only available to
transporters which own ten or less goods carriages at any time during the previous
year and furnish declaration to this effect along with PAN to the payer.
This amendment is effective from 1 June 2015.
No TDS to be made in certain cases
It is proposed that no tax will be deducted on payment of accumulated balance in a
recognized provident fund or any sum under life insurance policy to an individual if
the individual furnishes to the payer a declaration in writing in the prescribed form
(Form 15G/15H) stating that the tax on his/ her estimated total income will be NIL.
This amendment is effective from 1 June 2015.
Fee for late ?ling of TDS statement
It is proposed to provide that statement of TDS will be processed after taking into
account the fee under section 234E, if any, payable for late ?ling of TDS statement.
This amendment is effective from 1 June 2015.
Relaxation in the requirement of obtaining TAN for certain deductors
To reduce the compliance burden of obtaining TAN for certain types of deductors, it
is proposed that the requirement of obtaining and quoting of TAN shall not apply to
the deductors or collectors as may be noti?ed by the Central Government.
This amendment will take effect from 1 June 2015.
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32 Budget Analysis: Reform & Progress- The way forward
Recovery of tax liability from assets seized or requisitioned
Currently, any amount of existing income tax liability or wealth tax liability, or interest
or penalty levied under the Act, and any liability in respect of which the taxpayer is in
default, may be recovered out of the assets seized or requisitioned from the taxpayer.
It is now proposed that any liability arising on an application made before the
settlement commission can also be recovered from the assets seized or requisitioned.
This amendment will be applicable from 1 June 2015.

Settlement Commission
It is proposed that where a notice under section 148 is issued for any assessment
year, the tax payer can approach the Settlement Commission for other assessment
years as well even if notice under section 148 for such other assessment years has
not been issued; if the return of income for such other assessment years are ?led
under section 139 or in response to notice under section 142.
Currently, the Settlement Commission can amend its order within a period of six
months from the date of such order. However, there is no provision for additional
time wherein an application for recti?cation is ?led towards the end of the limitation
period. It is proposed that where a recti?cation application has been ?led, the order
can be recti?ed within a period of six months from the end of the month in which
such application for recti?cation has been ?led. However, no recti?cation application
can be ?led after the expiry of six months from the end of the month in which the
order was passed by the Settlement Commission.
Currently, the Settlement Commission has the power to grant immunity from
prosecution. It is now proposed that while granting immunity from prosecution to
any person, the Settlement Commission shall record the reasons in writing in the
order passed by it.
Currently, in certain situations, proceedings before the Settlement Commission
become abate. It is proposed that where an order has been passed without providing
the terms of settlement, the proceedings shall abate on the day on which such order
was passed by the Settlement Commission.
Currently, in certain situations a person is barred from making subsequent application
before the Settlement Commission. It is proposed that any person related to such
person who has been barred from approaching the Settlement Commission also
cannot approach the Settlement Commission. The term related person has been
de?ned.
These amendments will be effective from 1 June 2015.
Appeal against order denying approval to certain exempted institutions
Currently, order of the Chief Commissioner or Director General refusing to grant
approval to any university or other educational institution or any hospital or other
institution which enables them to claim exemption from Income Tax under section
10(23C)(vi) and section 10(23C)(via) are not appealable before the appellate
authorities.
It is proposed that an appeal can be ?led before the Tax Tribunal against the said
order denying approval to such institutions.
This amendment will be effective from 1 June 2015.
Income limit for disposal of cases by single member bench of the Tax
Tribunal
Currently, a single member bench may dispose of any case which pertains to the tax
payer whose assessed income does not exceed `500,000. It is proposed to increase
the threshold limit of assessed income to `1,500,000.
This amendment will be applicable from 1 June 2015.
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Revision of assessments
Currently, if the Commissioner considers that any order passed by the Assessing
Of?cer is erroneous in so far as it is prejudicial to the interests of the revenue, he may
pass an order modifying or cancelling the assessment and directing fresh assessment.
In order to provide clarity, it is proposed that an order passed by the Assessing Of?cer
shall be deemed to be erroneous in so far as it is prejudicial to the interests of the
revenue, if in the opinion of the Commissioner, the order is passed:
• without making inquiries or verifcation,
• allowing any relief without inquiring into the claim,
• not in accordance with any order, direction or instruction issued by Central Board
of Direct Taxes,
• not in accordance with any decision rendered by the jurisdictional High Court or
Supreme Court.
This amendment will be applicable from 1 June 2015.
Mode of acceptance or repayment of any sum of money in relation to the
transfer of an immovable property
Currently, no person is allowed to accept or repay any loans or deposits otherwise
than by an account payee cheque or bank draft or electronic clearing system through
a bank account, if the amount of such loan or deposit or aggregate of such loan
or deposit is `20,000 or more. Failure to comply with these provisions is liable for
penalty equal to amount of loan or deposit accepted or repaid.
In order to curb generation of black money by way of dealings in cash in immovable
property transactions, it is proposed to extend the above provision to include any
sum of money accepted or repaid whether advance or otherwise, in relation to the
transfer of an immovable property, whether or not the transfer takes place.
This amendment will be applicable from 1 June 2015.
Cash transactions on transfer of immovable
property restricted

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Accountant who is not independent is not eligible to provide audit or
certifcation services
Currently, section 288 de?nes the accountant, who can furnish audit reports and
issue certi?cates for ensuring correct reporting and computation of taxable income by
the tax payers.
In order to ensure the independence of the accountant, it is proposed to exclude
certain related speci?ed persons, except for purposes of representing the tax payer,
from the de?nition of accountant. In the case of a company this includes a person
who is not eligible for appointment as an auditor in accordance with section 141(3)
of the Companies Act, 2013.
This amendment will be applicable from 1 June 2015.
Procedure for appeal by tax authorities when an identical question of law
is pending before the Supreme Court
Currently, the assessee has an option to submit a claim before the Assessing Of?cer
or appellate authorities to keep the proceedings in abeyance and apply the decision
of the High Court/Supreme Court when such order is issued in the assessee’s own
case for previous years. There are no corresponding provisions for tax authorities to
not ?le an appeal for subsequent years where the department is in appeal on the
same question of law for an earlier year.
It is proposed that the tax authorities can ?le an application with the Tribunal (with
acceptance from the tax payer) in prescribed form stating that the appeal may be
?led when the decision on the identical question of law pending before the Supreme
Court becomes ?nal. Further, where the order of the Commissioner of Income Tax
(Appeals) is not in conformity with the ?nal order of the Supreme Court (Supreme
Court decides in favour of the Department), the tax authorities can ?le an appeal
before the Tribunal within 60 days from the date of communication of the order to
the tax authorities.
If the acceptance is not received from the tax payer, the tax authorities can ?le the
appeal before the Tribunal in the normal course of an appeal.
This amendment is effective from 1 June 2015.
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35 Budget Analysis: Reform & Progress- The way forward
Customs Duty
Import Duty
Rate Changes
• Peak rate of Basic Customs Duty (BCD) maintained at 10%
• Education cess and secondary and higher education cess continues to be levied
on Customs duty
Change in effective rate of duty
The following changes shall be effective from 1 March 2015.
• BCD on following goods retained at 10%
- Iron and steel and articles of iron and steel
- Motor vehicles for transport of 10 or more persons imported in a CKD
condition
- Motor vehicles for transport of goods imported in CKD condition
- Electrically operated vehicle (including in CKD condition) for transport of 10
or more persons
• The following goods have been exempted from BCD
- Evacuated tubes with three layers of solar selective coating for use in
the manufacture of solar water heater and system subject to actual user
condition
- Ulexite Ore
- Parts, components or accessories including their sub-parts for use in the
manufacture of tablet computer with actual user condition
- Speci?ed digital still image video camera including parts and components
thereof
- Panels of LCD, LED and OLED TV
- Black Light Unit Module used in manufacture of LCD and LED TV panels,
subject to actual user condition
- Magnetron used in manufacture of domestic microwave oven
- Arti?cial heart
- Speci?ed inputs used in manufacture of pacemakers subject to actual user
condition
- HDPE for use in the manufacture of telecom grade optical ?bre cable
• BCD increased on the following goods:
Description of Goods Upto 28
February
2015
From 1
March
2015
Metallurgical Coke 2.5% 5%
Motor vehicles for transport of 10 or more persons (non
CKD)
10% 20%
Motor vehicle for transport of goods (non CKD) 10% 20%
• BCD reduced on the following goods:
Description of Goods Upto 28
February
2015
From 1
March
2015
Liqui?ed Butane 5% 2.5%
Sulphuric acid for manufacture of fertilizers 7.5% 5%
Isoprene 5% 2.5%
Styrene, Ethylene Dichloride and Vinyl Chloride Monomer 2.5% 2%
Anthraquinone 7.5% 2.5%
Butyl acrylate 7.5% 5%
Water blocking tape, Ethylene-propylene-non conjugated
diene rubber and Mica glass tape used in the manufac-
ture of insulated wires and cables other those made of
copper subject to actual user condition
10% 7.5%
Metal parts for use in manufacture of electrical insulators
subject to actual user condition
10% 7.5%
Unwrought antimony, antimony powder, waste and
scrap
5% 2.5%
Ceria Zirconia, Cerium Compounds and Zeolite used in
the manufacture of washcoat for catalytic converters
subject to actual user condition
7.5% 5%
Budget Proposals
Indirect Taxes
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Description of Goods Upto 28
February
2015
From 1
March
2015
C-Block Compressor, Crank Shafts and over load
protector for use in manufacture of refrigerator
compressor
7.5% 5%
Ball Screws, Linear Motion Guides and CNC systems for
use in the manufacture of CNC lathes or machine centres
with actual user condition
7.5% 2.5%
Active energy controller for use in manufacture of
renewable power system inverter subject to certi?cation
from Ministry of New and Renewable Energy
7.5% 5%
Speci?ed inputs for use in manufacture of Flexible
Medical Video Endoscope
5% 2.5%
• The following goods have been exempted from Additional Duty (Counterveiling
Duty -CVD)
- Parts, components or accessories including their sub-parts for use in the
manufacture of tablet computer
- Arti?cial heart
- Speci?ed inputs used in manufacture of pacemakers subject to actual user
condition
• Increase in Additional Duty of Customs (Road Cess) on following goods:
Description of Goods Upto 28 February
2015
From 1 March
2015
Motor Spirit `2 per litre `6 per litre
High Speed Diesel Oil `2 per litre `6 per litre
• The following goods have been exempted from Special Additional Duty (SAD):
- All goods (except populated Printed Circuit Boards) used in the manufacture
of ITA bound goods subject to actual user condition
- All goods used in the manufacture of pacemaker
- All inputs used in manufacture of LED driver, MSPCB for LED lights and
?xtures or LED lamps subject to actual user condition
• Rate of SAD reduced from 4% to 2% in respect of following goods:
- Naphtha, styrene, ethylene dichloride, vinyl chloride monomer for
manufacture of excisable goods subject to speci?ed conditions
- Melting scrap of iron and steel
- Stainless steel scrap, for the purpose of melting
- Scrap of copper, brass and aluminium
Miscellaneous Changes
• Concessional Customs duty on specifed goods for use in manufacture of
electrically operated vehicles and hybrid motor vehicles extended upto 31 March
2016 (effective from 1 March 2015)
• Cerifcate for claiming full exemption from BCD and CVD on life saving drugs
and medicines at the time of import by an individual for personal use shall be
valid for a period of one year in case of patients
• The period for which the importer has to furnish a bank guarantee or fxed
deposit receipt to avail bene?t of Nil BCD and CVD on speci?ed Mega Power
Projects having provisional certi?cate of Mega Power Project status has been
increased from 36 months to 66 months
Export Duty (effective from 1 March 2015)
• Export duty on specifed ilmenite reduced from 5% to 2.5%
Changes in Customs Act, 1962
The following changes will be effective from the date of enactment of the Finance
Bill, 2015.
• In cases not involving fraud or collusion or willful misstatement or suppression
of facts or contravention of any provisions of the Act or Rules with the intent
to evade payment of duty, penalty will not be levied and proceedings will be
deemed to be concluded if the amount of duty along with interest thereon is
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37 Budget Analysis: Reform & Progress- The way forward
paid within thirty days from the date of receipt of notice
• Mandatory penalty in cases involving fraud or collusion or willful misstatement
or suppression of facts or contravention of any provisions of the Act or Rules
with the intent to evade payment of duty, reduced from 25% to 15% if the duty
along with interest is paid within thirty days from the receipt of the notice
• In cases where notice for recovery of duties and interest is served and the order
determining duty has not been passed before the date of enactment of the
Finance Bill, 2015, proceedings will be deemed to be concluded if the amount
of duty along with interest and penalty is paid within thirty days from date of
enactment of the Bill
• Penalty in respect of improper importation or exportation of goods liable for
con?scation will be as under:
- 10% of duty involved or `5,000, whichever is higher
- Penalty to be restricted to 25% of such penalty so determined, if the duty
along with interest is paid within thirty days of communication of order
• Provisions relating to Settlement Commission not applicable to any proceeding
referred back to adjudicating authority by any court, Appellate Tribunal or any
other authority for fresh adjudication
The following change will be effective from 1 March 2015.
• Resident Firm including Limited Liability Partnership, Sole Proprietorship and One
Person Company noti?ed as eligible applicants for Customs Advance Rulings
Changes in Customs Tariff Act, 1975
• Tariff rate of BCD on bituminous coal revised from 55% to 10% with effect from
1 March 2015
Miscellaneous Changes
Offence of making false declaration/ documents under Customs will be treated as
a scheduled offence under the Prevention of Money Laundering Act, 2002. This
change will be effective from the date of enactment of the Finance Bill, 2015.
Penal provision rationalized
Rationalisation of penal provisions to encourage compliance and
early dispute resolution
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State of the Economy 3
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38 Budget Analysis: Reform & Progress- The way forward
Central Excise Duty
Following changes will be effective from 1 March 2015.
Rate
Standard ad valorem rate of Central Excise Duty on excisable goods increased from
12% to 12.5% and Education Cess and Secondary and Higher Education Cess are
subsumed in the said rate.
Speci?c rates of Basic Excise Duty on petrol, diesel, cement, cigarettes and other
tobacco products (other than biris) have been suitably amended.
Rate of excise duty on goods covered under Medicinal and Toilet Preparations Act,
1955 has been increased from 12% to 12.5% ad valorem.
Full exemption
Following goods have been fully exempted from payment of Central Excise Duty
(subject to conditions):
• Round copper wire and tin alloys for use in manufacture of solar PV ribbons for
manufacture of solar photovoltaic cells and modules.
• Specifed inputs used in manufacture of pacemakers.
• Parts, components and accessories to be used in manufacture of tablet
computers and sub-parts for use in manufacture of parts, components and
accessories of tablet computers.
• Parts for use in manufacture of solar water heater and system.
• Pig iron SG grade and Ferro-silicon-magnesium for manufacture of cast
components of wind operated electricity generators.
• Goods consumed within the factory of their production in the manufacture
of Agarbatti.
Decrease in rates
Description of the goods Till 28
February
2015
With
effect
from 1
March
2015
Leather footwear classi?ed under Central Tariff Heading
6403 and 6405 of retail sale price exceeding `1000 per
pair
12% 6%
Wafers for use in manufacture of Integrated Circuit
modules for smart cards subject to actual user condition
12% 6%
All inputs used for manufacture of Light Emitting Diode
(LED) driver or Metal Core Printed Circuit Board (MCPCB)
for LED lights and ?xtures or LED Lamps
12% 6%
Chassis for use in manufacture of motor vehicles classi-
?ed under Central Excise Tariff Heading 8702 and 8703
cleared as ambulance
24% 12.5%
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39 Budget Analysis: Reform & Progress- The way forward
Increase in rates
Description of the goods Till 28
February
2015
With effect from 1
March 2015
Cut-tobacco `60 per kg `70 per kg
Waters including mineral waters and
aerated waters, containing added
sugar or other sweetening matter or
?avoured
12% 18%
Goods falling under Central Excise
Tariff Heading 252329 such as
Ordinary Portland cement, dry or
colored, Portland pozzolana cement
or slag cement
`900 per tonne `1000 per tonne
All goods, manufactured and cleared
in packaged form:
(i) From a mini cement plant
(ii) Other than from a mini
cement plant
6% + Rs. 120
PMT
12% + Rs. 120
PMT
6% + Rs. 125 PMT
12.5% + Rs. 125 PMT
Sacks and bags of polymers of
ethylene other than for industrial use
12% 15%
Condensed milk put up in unit
containers
Nil 2 % (without CENVAT) /
6 % (with CENVAT)
Retail Sale Price (RSP) based assessment
• Mechanism for valuation of following products has been shifted from transaction
value based to RSP based:
- Condensed milk put up in unit containers with an abatement @ 30%
- All goods covered under Central Excise Tariff Heading 210120 such as
extracts, essences or concentrates of tea or mate and preparations with a
basis of these goods including iced tea with an abatement @ 30%
- Waters containing added sugar or other sweetening matter of ?avored and
other non-alcoholic beverages except mineral water and aerated drinks with
an abatement @ 35%
- LED lights or ?xtures including LED lamps with an abatement @ 35%.
• Percentage abatement prescribed for RSP based valuation of all footwear falling
under Chapter 64 of Central Excise Tariff has been changed from 35% to 25%.
Other Changes
• Additional duty of excise levied on waters, including aerated waters, containing
added sugar abolished.
• Excise duty on mobile handsets including cellular phone has been changed from
1% without CENVAT credit or 6% with CENVAT credit to 1% without CENVAT
credit or 12.5% with CENVAT credit.
• Option of concessional Excise Duty of 2% without CENVAT credit and 12.5%
with CENVAT credit prescribed for tablet computers.
• Option of ‘Nil’ excise duty without CENVAT credit and 12.5% with CENVAT credit
provided for solar water heater and system.
• Notifcation No. 12/2012 – Central Excise dated 17 March 2012 has been
retrospectively amended to grant exemption from excise duty to railway or
tramway construction material of iron and steel during period 17 March 2012 to
2 February 2014, subject to conditions.
• Concessional excise duty of 6% granted to specifed goods used in
manufacturing electrically operated vehicles and hybrid vehicles has been
extended upto 31 March 2016.
• Maximum speed of packing machine for packages of notifed goods of
various retail sale prices is being speci?ed as a factor relevant to production
for determining excise duty payable under the Compounded Levy Scheme, as
presently applicable to pan masala, gutkha and chewing tobacco.
• The conditions to be complied under customs legislation for claiming an
exemption on import of the goods are required to be adhered for claiming an
exemption from excise duty in respect of the same goods supplied under the
contract awarded under international competitive basis.
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• Period of bank guarantee or fxed deposit receipt to be furnished in order to
claim exemption for goods supplied to a project, for which Ultra Mega Power
project status is provisional, has been increased from ‘36 months or more’ to 42
months.
• Period of bank guarantee or fxed deposit receipt to be furnished in order to
claim exemption for goods supplied to a project, for which Mega Power project
status is provisional, has been increased from ‘36 months or more’ to 66 months.
Clean Energy Cess
• Effective rate of Clean Energy Cess levied on coal, lignite and pear has been
increased from `100 to `200 per tonne.
• Education Cess and Secondary and Higher Education Cess levied on Clean Energy
Cess are exempted.
Changes in the Central Excise Act, 1944
Following changes are proposed in the Central Excise Act, 1944 and will be effective
from the date of enactment of the Finance Bill, 2015.
• Provision relating to recovery of duties:
- Special treatment of cases where there is existence of fraud, collusion, etc.
but the transactions are recorded in the speci?ed records has been dispensed
with;
- Relevant date for invoking extended period of limitation where return has
been ?led would be the date when the return has been ?led and not the due
date of ?ling return;
- Relevant date for invoking extended period of limitation where only interest
is recoverable, has been prescribed to be date of payment of duty to which
such interest relates;
- The provision related to recovery of duty is proposed to be made inapplicable
where duty amount in dispute is shown as payable in the periodic returns
?led by the assessee. The manner in which recovery of disputed duty would
be made in such cases will be prescribed.
• Penalty provisions pertaining to cases not involving fraud, collusion, etc.
introduced as under:
- Penalty not exceeding 10% of the duty determined or `5,000 whichever is
higher would be payable;
- Penalty would not be payable where duty and interest are paid before
issuance of show cause notice or within 30 days of issuance of show
cause notice;
- Reduced penalty at 25% of penalty imposed, provided demanded duty,
interest and reduced penalty are paid within 30 days of communication of
order;
- If on appeal, duty amount gets increased, bene?t of reduced penalty (25%
of penalty imposed) would be available provided duty, interest and reduced
penalty are paid within 30 days of communication of appellate order;
- Proceedings in pending show cause notices can be closed on payment of
duty and interest within 30 days of the Finance Bill 2015 receiving the assent
of the President;
- Proceedings in pending show cause notices which are adjudicated after
the Finance Bill 2015 receives the assent of the President can be closed on
payment of duty, interest and 25% of the penalty imposed within 30 days of
communication of adjudication order.
• Penalty provisions pertaining to cases involving fraud, collusion, etc. proposed to
be amended as under:
- Penalty equal to duty determined would be imposed;
- Reduced penalty @ 15% of the duty demanded, provided that the duty,
interest and penalty are paid within 30 days of communication of notice;
- Reduced penalty @ 25% of the duty determined, provided duty, interest and
reduced penalty are paid within 30 days of communication of order;
- If on appeal, duty amount gets increased, then bene?t of reduced penalty
(25% of duty determined) available provided duty, interest and reduced
penalty are paid within 30 days of communication of appellate order;
- If the duty amount gets modi?ed in any appellate proceeding, then the
penalty amount would also get modi?ed accordingly;
- Proceedings in pending show cause notices can be closed on payment of
duty, interest and penalty @ 15% of the duty within 30 days of the Finance
Bill 2015 receiving assent of the President;
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- Proceedings in pending show cause notices which are adjudicated after the
Finance Bill 2015 receives assent of the President can be closed on payment
of duty, interest and reduced penalty @ 25% of the duty within 30 days of
communication of the adjudication order.
Cases where no show cause notice has been issued prior to the date on which
Finance Bill, 2015 receives the assent of the President, shall be governed by the new
penal provisions as elucidated above.
• Where any proceeding in appeal or revision or otherwise before any Court,
Appellate Tribunal Authority or any other authority is referred back to the
adjudicating authority for a fresh adjudication or decision, there would be no
option of settlement. Prior to this amendment, non-availability of settlement
option was restricted to those proceedings which were so referred back in appeal
or revision only.
Following changes will be effective from 1 March 2015.
• Scheme of Advance Rulings has been extended to resident frms.
• Following products have been either brought under Schedule III (relating to
deemed manufacture) to the Central Excise Act, 1944 or the existing entries in
the said Schedule have been modi?ed:
- Extracts, essences and concentrates, of tea or mate, and preparations with
a basis of these extracts, essences or concentrates or with a basis of tea or
mate;
- Waters, including mineral waters and aerated waters, containing added
sugar or other sweeting matter or ?avoured, and other non-alocholic
beverages, not including fruit or vegetable juices speci?ed in Central Excise
Tariff Heading 2009;
- All goods falling under Central Excise Tariff Heading 8539 (Electrical ?lament
or discharge lamps, including sealed beam lamp units and ultra – violet
or infra-red lamps; arc lamps except lamps for automobiles), LED lights or
?xtures including LED lamps falling under Chapter 85 or Central Excise Tariff
Heading 9405.
Amendments in the Central Excise Rules, 2002
The following changes will be effective from 1 March 2015.
• Following provisions of Central Excise Rules, 2002 shall apply mutatis mutandis to
registered importer:
- Imposition of restrictions in case of evasion of duty, default in payment of
duty, irregular availment of CENVAT credit, etc.
- Access to registered premises of importer by Central Excise of?cer for scrutiny
and veri?cation of records.
- Con?scation and penal provisions for contravention of any provisions of
Central Excise Rules, 2002.
• Manufacturer is allowed to issue digitally signed invoices and preserve records in
electronic form.
• Penalty of Rs.100 per day subject to maximum of `20,000 is payable for delay
in ?ling of return including Annual Financial Information Statement, Annual
Installed Capacity Statement and other returns by Manufacturer or 100% EOU
• Registration process under Central Excise is being simplifed to ensure that
registration is granted within two working days of the receipt of the duly
completed online application form. Veri?cation of documents and premises, as
applicable, would be carried out subsequent to grant of the registration.
Amendments in the Central Excise (Removal of Goods at Concessional Rate
of Duty for Manufacture of Excisable Goods) Rules, 2001
The following change will be effective from 1 March 2015.
• Beneft of concessional rate of duty on inputs can now be availed on the basis of
letter of undertaking instead of execution of bond with surety or security, in case
where no show cause notice had been issued to the manufacturer.
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Service Tax
The following changes will be effective from date to be noti?ed after enactment of
Finance Bill, 2015.
• Rate of service tax increased from 12% to 14%.
• Ecess and SHE Cess subsumed in the revised rate of service tax.
Swachh Bharat Cess
The following changes will be effective from a date to be noti?ed after enactment of
Finance Bill, 2015.
Changes in the Negative List
The following changes will be effective from a date to be noti?ed after enactment of
Finance Bill, 2015.
• Access to amusement facility will attract service tax;
• Admission to entertainment events will attract service tax;
• Any process carried out to manufacture or produce alcoholic liquor for human
consumption will attract service tax; and
• Services, including support services, rendered by Government or local authority
to a business entity will attract service tax
Change in Exemption
The following changes will be effective from 1 April 2015.
• Exemption withdrawn on services provided to Government, local authority
or governmental authority by way of construction, erection, commissioning,
installation, completion in relation to the following:
- Civil structure or any other original works meant predominantly for use other
than for commerce, industry or any other business or profession;
- Structure meant predominantly for use as i) an educational (ii) clinical (iii) an
art of cultural establishment; and
- Residential complex predominantly for self use or the use of employees etc.
• Exemption withdrawn on the following services:
- Services provided by mutual fund agent to a mutual fund or asset
management company;
- Services provided by distributor to mutual fund or asset management
company;
- Services provided by selling or marketing agent of lottery ticket to a
distributor;
- Services by way of making telephone calls from hospitals, airports etc;
- Services of a performing artist in folk or classical art forms of music, dance
or theatre where consideration charged for the performance is more than
`100,000.
• Exemption to transportation services by rail, vessel or road of food stuffs is now
restricted to food grains including ?ours, pulses and rice, milk and salt.
• Scope of exemption widened to cover the following:
- All ambulance services for transportation of patient.
- GTA services for transport of export goods from place of removal to land
customs station.
Introduction of Swachh Bharat Cess will make the effective service
tax rate to 16%
Construction related services of port and airport will now attract
service tax and increase incidence of tax for
infrastructure industry
Central Government empowered to impose
Swachh Bharat Cess on taxable services at
the rate of 2% on value of services .
Construction , erection, commissioning
or installation services of original works
pertaining to airport and port;
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
43 Budget Analysis: Reform & Progress- The way forward
• Exemption will be extended to the following services:
- Operator of common ef?uent treatment plant for treatment of ef?uent;
- Pre-conditioning, pre-cooling, ripening, waxing, retail packing, labelling
of fruits and vegetables which do not change or alter the essential
characteristics of the fruits or vegetables;
- Admission to a museum, national park, wild life sanctuary, tiger reserve
or zoo;
- Exhibition of movie by an exhibitor to the distributor or AOP consisting
exhibitor as one of its members; and
- Life insurance business services for Varishtha Pension Bima Yojana.
The following changes will be effective from a date to be noti?ed.
• Exemption will be extended to the following services by way of admission to:
- Exhibition of cinematographic ?lm, circus, dance or theatrical performance
including drama or ballet
- Recognized sporting event
- Award function, concert, pageant, musical performance, or any sporting
event other than a recognised sporting event, where consideration for
admission is not more than `500 per person.
Change in Reverse Charge mechanism
The following changes will be effective from 1 March 2015.
• Full reverse charge introduced in case of services provided or agreed to be
provided by a person involving an aggregator
The following changes will be effective from 1 April 2015.
• Services provided by way of supply of manpower and security services amended
to attract full reverse charge as against current partial reverse charge on 75%.
• Full reverse charge provisions introduced on following cases:
- Services provided by mutual fund agent or distributor to mutual fund or
asset management company
- Services provided by selling or marketing agent of lottery tickets to a lottery
distributor or selling agent
Changes in Abatement
The following changes will be effective from 1 April 2015.
• Uniform abatement rate of 70% and conditions prescribed for transport of
goods and passenger by rail, transport of goods by road and transport of goods
by vessel.
• Abatement rate introduced based on class of travel in case of transport of
passengers by air. Service tax payable on 60% of value in case of travel by other
than economy class and 40% in case of travel by economy class.
• Abatement withdrawn for services provided in relation to chit fund consequently
making the entire fee liable to service tax.
Other Legislative changes
The following changes will be effective on enactment of Finance Bill, 2015.
• Defnition of ‘Government’ introduced to address interpretational issues arising
under the negative list and exemption noti?cation
• Suitable amendments made to provide that activities undertaken by chit fund
foremen and lottery distributors and selling agents are taxable
• Defnition of consideration amended by inserting an explanation to include:
- all reimbursable expenditure/ cost incurred by service provider, except as may
be prescribed; and
- amount retained by distributor or selling agent of lottery being the
difference in the face value of lottery ticket and the price at which the
distributor or selling agent gets such tickets
Jobwork activity carried out for producing alcoholic liquor for
human consumption will now attract service tax
Need to re-examine positions on applicability of service tax on re -
imbursements of expenses
Exemption withdrawn on intermediate
production process of alcoholic liquor for
human consumption .
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
44 Budget Analysis: Reform & Progress- The way forward
• Unpaid amount of service tax declared in the return will be recovered without
issuance of show cause notice.
• Appeal against order of Commissioner (Appeals) in cases involving service tax
rebate to be referred to Central Government (and not to Tribunal). Further, all
pending service tax rebate cases ?led from 17 July 2012 and pending before the
Tribunal to be transferred to Central Government
• Provisions relating to Settlement Commission not applicable to any proceeding
referred back to adjudicating authority by any court, Appellate Tribunal or any
other authority for fresh adjudication
Penalty Provisions
The following changes will be effective on enactment of Finance Bill, 2015.
• Penalty provisions pertaining to cases not involving fraud, collusion substituted:
- Penalty not to exceed 10% of service tax amount;
- Penalty not applicable where service tax and interest paid within thirty days
of issuance of notice;
- Reduced penalty at 25% of penalty imposed provided service tax and
interest and reduced penalty paid within thirty days of issuance of order;
- If on appeal, service tax amount gets reduced, then bene?t of reduced
penalty of 25% of penalty imposed provided service tax, interest and
reduced penalty paid within thirty days of appellate order.
• Penalty provisions pertaining to cases involving fraud, collusion etc substituted:
- Penalty to be levied at 100% of service tax amount;
- Reduced penalty at 15% of service tax amount applicable provided service
tax, interest and reduced penalty paid within thirty days of issuance
of notice;
- Reduced penalty at 25% of the service tax amount provided service tax,
interest and reduced penalty paid within thirty days of issuance of notice;
- If on appeal, service tax amount gets reduced, then bene?t of reduced
penalty of 25% of penalty imposed provided service tax, interest and
reduced penalty paid within thirty days of appellate order.
• Transition provisions introduced in connection with aforesaid new
penalty provisions
• Benefcial provision of paying reduced penalty upto 25% of tax amount (during
audit / investigation) in cases involving fraud, collusion done away with
The following changes will be effective from 1 March 2015.
• An aggregator will be liable to pay service tax on services rendered where
brand name or trade name of aggregator is used. In case the aggregator does
not have any presence in India, any person acting as an agent, else a person
appointed by such aggregator will be liable to pay tax.
• Resident Firm including Limited Liability Partnership, Sole Proprietorship and One
Person Company noti?ed as eligible applicants for Customs Advance Rulings
Indirect introduction of concept of mens rea
Advance Ruling provisions widened to make resident frms also
eligible for making application
Provisions granting waiver from penalty
when there was reasonable cause for
failure omitted
Print this page
Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
45 Budget Analysis: Reform & Progress- The way forward
The following changes will be effective from a noti?ed date.
• Change in service tax (optional rate) on certain specifed services (consequential
to revision in the service tax rate)
Nature of
service
Particulars Service tax
currently
applicable
Proposed service
tax
Air travel agent Domestic booking 0.6% of basic fare 0.7% of basic fare
International
booking
1.2% of basic fare 1.4% of basic fare
LIC agent
services (where
the investment
amount is not
intimated to the
policy holder)
Money changing
business
In the ?rst year 3% of premium
charged
3.5% of the
premium charged
In subsequent
years
1.5% of premium
charged
1.75% of the
premium charged
Gross amount
of currency
exchanged is upto
`100,000
0.12% of the gross
amount charged or
`30 whichever is
lower
0.14% of the gross
amount charged or
`35 whichever is
lower
Gross amount
of currency
exchanged is more
than `100,000
but less than
`1000,000
`120 and 0.06%
of the gross
amount of currency
exchanged for an
amount exceeding
`100,000 and upto
`1,000,000
`140 and 0.07%
of the gross
amount of currency
exchanged for an
amount exceeding
`100,000 and upto
`1,000,000
Nature of
service
Particulars Service tax
currently
applicable
Proposed service
tax
LIC agent
services (where
the investment
amount is not
intimated to the
policy holder)
Money changing
business
Gross amount
of currency
exchanged is
greater than
1000,000
`660 and 0.012%
of the gross
amount of currency
exchanged for an
amount exceeding
`1,000,000 subject
to a maximum
amount of Rs 6,000
`770 and 0.07%
of the gross
amount of currency
exchanged for an
amount exceeding
`1,000,000 subject
to a maximum
amount of Rs 7,000
Lottery distrib-
utor or selling
agent
If the lottery or
lottery scheme
is one where the
guaranteed prize
payout is more
than 80%
`7,000 on every
Rs 1,000,000 (or
part of `1,000,000)
of aggregate face
value of lottery
tickets printed by
the organising State
for a draw
`8200 on every
`1,000,000 (or
part of `1,000,000)
aggregate face
value of lottery
tickets printed by
the organising State
for a draw
If the lottery or
lottery scheme
is one where the
guaranteed prize
payout is less than
80%
`11,000 on every
`1,000,000 (or
part of `1,000,000)
of aggregate face
value of lottery
tickets printed by
the organising State
for a draw
`12,800 on every
`1,000,000 (or
part of `1,000,000
of aggregate face
value of lottery
tickets printed by
the organising State
for a draw
Print this page
Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
46 Budget Analysis: Reform & Progress- The way forward
Changes in Procedures
The following changes will be effective from 1 March 2015.
• Single service tax registration to be granted online within two working days of
?ling complete application.
• Provisions for issuing digitally signed invoices introduced along with option of
maintaining records in electronic form and their authentication by means of digital
signature.
Amendments in the CENVAT Credit Rules, 2004
The following changes will be effective from 1 March 2015:
• CENVAT credit may be taken by the manufacturer or provider of output service
immediately on receipt of inputs directly in the premises of the job worker.
• CENVAT credit on capital goods can be taken by the manufacturer or provider of
output service in respect of goods received directly in the premises of job worker,
not exceeding 50% in the ?rst year.
• Time limit for availing CENVAT credit on inputs and input services is enhanced from
six months to one year from the date of CENVAT document.
• In case of CENVAT credit on inputs / capital goods sent to job worker:
- CENVAT credit on inputs to be allowed where inputs are sent directly to job
worker, subject to receipt of processed inputs within 180 days from the date of
receipt of such inputs by job worker.
- CENVAT credit on inputs to be allowed where the processed inputs are sent
from one job worker to the another job worker for further processing, subject
to receipt of processed inputs within 180 days from the date of sending inputs
from the factory of manufacturer or premises of provider of output service.
- CENVAT credit on capital goods to be allowed where capital goods are sent by
manufacturer or provider of output service to the job worker, subject to receipt
of capital goods within a period of two years from the date of sending such
capital goods from the factory of manufacturer or provider of output service.
- CENVAT credit on capital goods to be allowed where capital goods are sent
directly to a job worker, subject to receipt of such capital goods within a period
of two years from the date of receipt of capital goods by the job worker.
• Exempted goods or fnal products would include non-excisable goods cleared for a
consideration from the factory for the purposes of CENVAT credit reversal.
• Importer issuing invoices on which CENVAT credit can be taken is required to
comply mutatis mutandis with the provisions applicable to ?rst stage dealer or
second stage dealer issuing such invoices.
• Manufacturer or provider of output service would not be required to pay interest in
cases where CENVAT credit has been wrongly availed but not utilized.
• Manufacturer or provider of output service would be required to pay interest in
cases where CENVAT credit has been wrongly availed and utilized.
• For the purpose of recovery of wrongly utilized CENVAT credit, the manner of
determining the utilization of credit is prescribed.
The following change will be effective from 1 April 2015.
• Where service recipient is liable to pay service tax under partial reverse charge,
CENVAT credit can be availed on discharge of such service tax liability without
waiting for payment to provider of output service.
The following change will be effective from the date on which the Finance Bill, 2015
receives the assent of the President.
• Penal provisions relating to wrong availment and utilization of CENVAT credit have
been amended to align with certain speci?ed penal provisions under Central Excise
and Service tax laws.
Goods and Services Tax (GST)
• The statement of Hon’ble Finance Minister, emphasizing importance of GST for
Indian economy and its development, from his budget speech is reproduced
below:
“GST is expected to play a transformative role in the way our economy
functions. It will add buoyancy to our economy by developing a common Indian
market and reducing the cascading effect on the cost of goods and services. We
are moving in various fronts to implement GST from the next year.”
Digitalization as a move towards GST
• Penal provisions have been rationalized
• CENVAT credit provisions are relaxed for manufacturer, provider of
output service and job workers
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
47 Budget Analysis: Reform & Progress- The way forward
Direct Taxes
• Proposal to reduce corporate tax from 30% to 25% over the next four years,
starting from next ?nancial year.
• Rationalisation and removal of various tax exemptions and incentives to reduce
tax disputes and improve administration.
• Bill for comprehensive new law to deal with black money parked abroad to be
introduced in the current session.
• Key features of new law on black money:
- Evasion of tax in relation to foreign assets to have a punishment of rigorous
imprisonment upto 10 years, be non-compoundable, have a penalty rate of
300% and the offender will not be permitted to approach the Settlement
Commission.
- Non-?ling of return/?ling of return with inadequate disclosures to have a
punishment of rigorous imprisonment upto 7 years.
- Undisclosed income from any foreign assets to be taxable at the maximum
marginal rate.
- Mandatory ?ling of return in respect of foreign assets.
- Entities, banks, ?nancial institutions including individuals also liable for
prosecution and penalty.
- Concealment of income/evasion of income in relation to a foreign asset to
be made a predicate offense under PML Act, 2002.
- PML Act, 2002 and FEMA to be amended to enable administration of new
law on black money.
• Benami transactions (Prohibition) Bill to curb domestic black money to be
introduced in the current session of Parliament.
• Third party reporting entities would be required to furnish information about
foreign currency sales and cross border transactions.
• Leverage of technology by CBDT and CBEC to access information from either’s
data bases.
Agriculture
• Major steps taken to address the two major factors critical to agricultural
production, that of soil and water.
• Focus on improving the quality and effectiveness of activities under MGNREGA.
• Need to create a National Agriculture Market for the beneft farmers, which will
also have the incidental bene?t of moderating price rises. Government to work
with the States, in NITI, for the creation of a Uni?ed National Agriculture Market.
Infrastructure
• Sharp increase in outlays of roads and railways. Capital expenditure of public
sector units to also go up.
• PPP mode of infrastructure development to be revisited and revitalized.
• An expert committee to examine the possibility and prepare draft legislation
where the need for multiple prior permission can be replaced by a pre-existing
regulatory mechanism. This will facilitate India becoming an investment
destination.
• 5 new Ultra Mega Power Projects, each of 4000 MW, in the Plug-and-Play mode.
Financial Markets
• Public Debt Management Agency (PDMA) bringing both external and domestic
borrowings under one roof to be set up this year.
• Enabling legislation, amending the Government Securities Act and the RBI Act
included in the Finance Bill, 2015.
• Section 6 of the FEMA to be amended through the Finance Bill, 2015 to provide
that control on capital ?ows as equity will be exercised by the Government in
consultation with RBI.
• Proposal to create a Task Force to establish sector-neutral fnancial redressal
agency that will address grievance against all ?nancial service providers.
• Government to bring enabling legislation to allow employee to opt for EPF or
New Pension Scheme. For employee’s below a certain threshold of monthly
income, contribution to EPF to be optional, without affecting employees
contribution.
Policy Proposals
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Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
48 Budget Analysis: Reform & Progress- The way forward
Education
• A national skill mission to consolidate skill initiatives to spread across several
ministries to be launched.
• A student Financial Aid Authority to administer and monitor the front-end all
scholarship as well as Educational Loan Schemes through the Pradhan Mantri
Vidya Lakshmi Karyakram.
• An IIT to be set up in Karnataka and Indian School of Mines, Dhanbad to be
upgraded in to a full- ?edged IIT.
• New All India Institute of Medical Science (AIIMS) to be set up in J&K, Punjab,
Tamil Nadu, Himachal Pradesh and Assam.
Print this page
Direct Taxes 17
Indirect Taxes 35
Foreword 1
Policy Proposals 47
Glossary 49
State of the Economy 3
Budget Proposals 17
REFORMS & PROGRESS THE WAY FORWARD
BUDGET2 15
49 Budget Analysis: Reform & Progress- The way forward
AIF Alternate Investment Funds
AOP Association of Persons
ADR American Depository Receipt
CBDT Central Board of Direct Taxes
CSR Corporate Social Responsibility
DDT Dividend Distribution Tax
Ecess Education cess
FEMA Foreign Exchange and Management Act, 1999
EPFS Employee Provident Fund Scheme, 1952
FII Foreign Institutional Investor
FTS Fees for technical services
GAAR General Anti Avoidance Rule
GDR Global Depository Receipt
GTA Goods Transport Agent
HUF Hindu Undivided Family
InviT Infrastructure Investment Trust
MAT Minimum Alternate Tax
PAN Permanent Account Number
PoEM Place of Effective Management
PE Permanent Establishment
QFI Quali?ed Foreign Investor
R&D Research and Development
REIT Real Estate Investment Trust
SEBI Securities and Exchange Board of India
SHE cess Secondary and higher education cess
SME Small and Medium Enterprise
SPV Special Purpose Vehicle
STT Securities Transaction Tax
TAN Tax Deduction Account Number
TDS Tax Deducted at Source
VCF Venture Capital Fund
Glossary
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50 Budget Analysis: Reform & Progress- The way forward
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