German Business Network (GBN) - Ernst & YoungFILE/ey-german-business-network-webcast-india-… · German Business Network (GBN) Webcast ... The Economic Survey for 2015-16 calls India

German Business Network (GBN) Webcast – India Budget & Current Developments 2016 March 4, 2016

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Your hosts today

4 March 2016 GBN Webcast - India - Budget Developments 2016

Dirk Egbers

Partner Global Leader of the German Business Network (GBN) Phone: +49 211 9352 18500 Mobile: +49 160 939 18500 Mail: [email protected]

Marita Maier Partner GBN Leader India

Phone: +91 22 6192 1020 Mobile: +91 91 6794 9459 Mail: [email protected]

Aashish Kasad

Partner Tax & Regulatory Services

Phone: +91 226 192 0630 Mobile: +91 9820 346073 Mail: [email protected]

Divyesh Lapsiwala Partner Indirect Tax

Phone: +91 226 192 2706 Mobile: +91 9820 442913 Mail: [email protected]

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German Business Network (‘GBN’)

GBN Webcast - India - Budget Developments 2016 4 March 2016

Marita Maier GBN Leader India Partner

Direct phone: +91 22 6192 1020 Mobile: +91 91 6794 9459 Mail: [email protected]

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Agenda


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Agenda

► Indian Economy Overview

► India’s attractiveness ► Foreign Direct Investment (‘FDI’) liberalisation ► Recent key initiatives of Government of India (‘GOI’) ► Economic overview

► Key policy amendments in Budget

► Key Direct Tax Budget proposals

► Key Indirect Tax Budget proposals

► Questions and Answers


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Indian Economy Overview


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India’s attractiveness


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India’s attractiveness (1/2)

India is the most attractive investment destination in 2015 as per EY’s India Attractiveness Survey 2015

100m new manufacturing jobs by 2022, through Make in India campaign

India’s pool of college educated talent to rise by more than 45m in 10 years

925m working age population (15-64 years) by 2020


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India’s attractiveness (2/2)

Germany has consistently been one of the 10 FDI players in India, currently it ranks 8th.

The vigour and anticipation in Indo-German ties is captured well in the joint statement issued during Prime Minister Modi’s visit to Germany in 2015.

IMF has hailed India as a 'bright spot' amidst a slowing global economy 94% of the surveyed CEOs/CFOs from leading German High-Tech companies stated – “India currently offers a better investment climate than other BRIC countries” [EY Delphi study, - released by Prime Minister Narendra during his recent visit to Germany]

The vigour and anticipation in Indo German ties is captured well in the joint statement issued during Prime Minister Modi’s visit to Germany in 2015.

“We view each other’s development as mutually reinforcing and offering significant opportunities for expanding cooperation between the two countries. Our common objective is to encourage greater synergies between German engineering, experience in sustainable development, innovation and skills, and the new opportunities available in India and through ‘Make in India’, ‘Clean India’, ‘Digital India’ and other initiatives towards achieving economic growth and sustainable development.” “Our strategic partnership is entering a new and more intensive phase.”


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FDI liberalisation


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FDI liberalisation

Emerged as the number one FDI destination in the world*

*Source: fDi Markets, May 2015 and September 2015

Defence Upto 49% stake allowed, subject to approval (up from 26%)

Construction FDI permitted under automatic route subject to conditions

Railways FDI permitted under automatic route in construction, operation and maintenance in specified Rail projects

Insurance Foreign ownership ceiling raised from 26% to 49%

LLP FDI permitted (including for downstream investment) under automatic route where 100% FDI is allowed


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Recent key initiatives of GOI


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Recent key initiatives of GOI

Make in India

► To increase share of manufacturing in Gross Domestic Product (‘GDP’) to 25% by 2022

► Job creation and skill enhancement ► Best-in-class manufacturing infrastructure with

emphasis on ease of doing business

Clean India

► Focus on building sanitation facilities, waste

disposal systems, village cleanliness, safe and adequate water supply

► Expected expenditure is ~US$10b ► World Bank approved a US$1.5b loan to

support

► Digital access to all - World’s most ambitious broadband project

► Rural internet coverage to be expanded to 250,000 villages by 2017

► In September 2015, Google announced it would make more than 500 Indian railway stations Wi-Fi enabled.

► To develop 100 smart cities in India by 2020 ► Urban infrastructure investment of ~US$650b

proposed over next 20 years ► In process of finalizing 500 cities for

upgrading them to smart city status

Digital India

Smart cities


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Economic overview


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Economic overview (1/2)

► The Budget came at a time of

unusual volatility in the international economic environment

► Indian capital markets had begun to swing on fears that the global recovery may be faltering, while risks of extreme events are rising.

► Fiscal target of 3.9% of GDP for financial year (‘FY’) 2015-16 achieved, target retained at 3.5% for FY 2016-17

► The Economic Survey for 2015-16 calls India “… a haven of stability and an outpost of opportunity”.

► India’s economic growth is amongst the highest in the world

Source: International Monetary Fund (‘IMF’), World Economic Outlook, October 2015

*For India, data corresponds to the financial year, starting in April and ending in March


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Economic overview (2/2)

Indicator FY14 FY15 FY16P† FY17†

Growth indicators

GDP growth (%)* 6.9 7.3 7.5 7.5

Index of industrial production (%) -0.1 2.8 4.1 5.8

External sector

Exports (% y–o–y) 4.9 (1.8) (9.1) 7.6

Imports (% y–o–y) (8.4) (0.4) (8.0) 10.9

Current Account Deficit (US$b) 32.4 27.5 16.4 34.3

Current Account Deficit (as a % to GDP) 1.7 1.3 0.8 1.5

Monetary indicators

Inflation – WPI (% y–o–y) 6.0 2.0 (1.7) 3.9

Inflation – CPI (% y-o-y) 10.0 5.9 4.9 5.4

*Growth numbers calculated on FY12 base year Source: IMF WEO Oct’15; CMIE online database, accessed 16 December 2015 †CMIE projections

India is expected to clock more than 7% growth in the coming years. Key drivers: ► Rising domestic demand ► Policy reforms

In the short term, India’s trade to be impacted by world trade slowdown: ► World Trade Organization

reduced global trade growth forecast to 2.8% in 2015 from 3.3% earlier

► India to experience muted trade growth in FY16 as demand from key exports markets have reduced


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Key policy amendments in Budget


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Union Budget 2016 theme – “Transform India”

1. Agriculture and Farmers' Welfare focus on doubling farmers' income in five years

3. Social Sector including Healthcare cover all under welfare and health services

2. Rural Sector emphasis on rural employment and infrastructure

4. Education, Skills and Job Creation to make India a knowledge based and productive society

6. Financial Sector Reforms to enhance efficiency and quality of life

5. Infrastructure and Investment to enhance efficiency and quality of life

7. Governance, Ease of Doing Business to bring transparency and stability

9. Tax Reforms to reduce compliance burden with faith in the citizenry

8. Fiscal Discipline prudent management of Government finances and delivery of benefits to the needy


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Key policy amendments in Budget

Sector Existing Proposed

► Marketing of food products, produced and manufactured in India

Not permitted 100% allowed under approval route

► Insurance and Pension sectors

49% under approval route FDI cap of 49% in under automatic route

► Instrument for FDI Equity, Compulsorily Convertible Preference Shares, Compulsorily

Convertible Debentures

Hybrid instruments

► Amendments in FDI regulations

► Other key policy amendments ► Foreign investors will be accorded Residency Status subject to certain conditions.

Currently, these investors are granted business visa only up to 5 years at a time ► Signing of Centre State Investment Agreement

► GOI to introduce a bill to amend the Companies Act, 2013 in the current Budget Session of the Parliament. To propose for registration of companies in one day


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Key Tax proposals


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Key Tax proposals

► The Tax proposals announced in the budget cater to the following nine categories: 1. Incentivizing domestic value addition to help Make in India 2. Measures to boost growth and employment generation 3. Additional resource mobilization for agriculture, rural economy and clean

environment 4. Reducing litigation and providing certainty in taxation 5. Simplification and rationalization of taxation 6. Use of Technology for creating accountability 7. Relief to small tax payers 8. Measures for moving towards a pensioned society 9. Measures for promoting affordable housing


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Key Direct Tax Budget proposals


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Proposals relating to Corporate Tax rates and phasing out of incentives/deductions


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Corporate Tax Rates for FY 2016-17

► Corporate tax remain unchanged for both domestic (30%) and foreign companies (40%) except for domestic companies engaged in: ►Manufacturing activities and set-up and registered in India after 1 March 2016 and does not claim

specified tax incentives - 25% ►having total turnover or gross receipts in the FY 2014-15 <= INR 50 million - 29%

Description Rate (%) when the total taxable income is

> INR 100 million > 10 million and =< INR 100 million

=< INR 10 million

A) Domestic company

Turnover > INR 50 million 34.608 33.063 30.90 Turnover <= INR 50 million 33.454 31.96 29.87 Newly set up manufacturing company (optional)

28.84 27.55 25.75

MAT (Regular) 21.34 20.389 19.055 DDT 20.358 Buy Back Tax 23.072 B) Foreign company on business income in India

43.26 42.024 41.2

Step towards achieving of reducing corporate tax rate to 25% in coming years


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Phasing out of incentives/deductions (1/2)

Particulars Incentive currently available subject to specified conditions

Proposed deduction/ sunset clause

Units undertaking manufacturing or production or provision of services in Special Economic Zones

- 100% of profits for first 5 years - 50% of profits for next 5 years

No deduction if commencement of

activity is on or after 1 April 2020

Expenditure on specified social development projects or schemes

Deduction available on certain eligible social development

project or scheme

No deduction from 1 April 2017

Expenditure incurred on any notified skill development project by a company

Weighted deduction of 150% 100% from 1 April 2020


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Phasing out of incentives/deductions (2/2)

Particulars Incentive currently available subject to specified conditions

Proposed deduction/ sunset clause

Development, operation and maintenance of an infrastructure facility 100% of profit eligible for

deduction for specified period

No deduction if specified activity

commences on or after 1 April 2017

Development of SEZ Production of mineral oil and natural gas Amount paid to specified/ approved institutions for scientific research/ scientific research in approved in-house research facility

Weighted deduction ranges from 150%/ 175%/ 200%

150% up to 31 March 2020 and 100%

thereafter

Important tax reform to meet objectives of reducing corporate tax rates, simplification of tax laws, reduction of

litigations


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Clarity on implementation of internationally accepted concept of POEM and GAAR


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Clarity on implementation of internationally accepted concept of POEM and GAAR

Place of Effective Management (‘POEM’) ► The concept of deeming a foreign company to be a resident in India if its place of

effective management (‘POEM’) in that year is in India was introduced in the Budget 2015 with effect from 1 April 2016

► It is proposed to defer the effective date of implementing this provision to 1 April 2017 to bring clarity regarding the guidelines and on applicability of the other provisions where the foreign company becomes resident for first time due to POEM

General Anti-Avoidance Rules (‘GAAR’)

► GAAR was earlier deferred by 2 years and was proposed to be made effective from 1 April 2017 to enable the taxpayers to be well versed with the provisions

► The Budget clarifies the commitment to implement GAAR from 1 April 2017


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Proposals driven by Base Erosion Profit Sharing (‘BEPS’) Action Plan


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Proposals driven by BEPS Action Plan (1/3)

BEPS – Action Plan 1 - Equalisation levy ► To address the challenge relating to taxation of digital transactions

► Equalization levy to be 6% of amount received by a non-resident for specified services

provided to a resident in India or a non-resident having a permanent establishment in India

► “Specified services” to cover online advertisements, provision for digital advertising space or any other facility or service for the purpose of online advertisements or any other notified services

► Not applicable if aggregate consideration for the specified service is less than INR 0.1 million

► New set of provisions to be introduced (defining terms, collection procedures,

compliance rules, etc) and notified


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BEPS – Action Plan 5 ► Nexus approach – income arising from exploitation of Intellectual property should be

attributed and taxed where substantial research and development activities are undertaken

► To provide an additional incentive for companies to retain and commercialize existing patents and to develop new innovative patented products

► A concessional tax rate of 10% (plus applicable surcharge and cess) on royalty income of an eligible assessee from patents developed and registered in India is introduced

► No MAT will be applicable on such income

► Eligible assessee is inter-alia, defined as the person resident in India who is true and first inventor of the invention and whose name is entered on patent register as the patentee under Patents Act, 1970


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BEPS – Action Plan 13 – Country by Country Reporting (‘CbCR’) ► CbCR proposed to be applicable, w.e.f FY 2016-17, to:

► The Indian parent of the international group or Indian designate entity of the foreign

parent ► In the case of foreign parent, who has to furnish CbC report in another country, then

any constituent entity in India will furnish information regarding the country or territory of residence of the parent of the international group to which it belongs

► An entity in India belonging to an international group shall be required to furnish CbCR

to the prescribed authority if the parent entity of the group is:

► In a country with which India does not have an arrangement for exchange of CbCR ► such country is not exchanging such information ► this fact has been intimated to the entity by the prescribed authority


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New Tax exemptions for specified business


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New Tax exemptions for specified business

► Subject to certain conditions, a foreign company earning income shall not be taxable in India ► on account of storage of crude oil in a facility in India and sale of crude oil

therefrom to any person resident in India. This amendment shall be effective from financial year 2015-16 onwards

► from activities limited to display of uncut and un-assorted diamond in any Special

Zone notified by the Central Government

► These amendment will take effect from financial year 2015-16 onwards

► Start-ups - deduction of 100% of profits for any 3 consecutive years out of first five years subject to certain conditions

► Start-ups defined as business undertaking innovation, development, deployment or

commercialization of new products, processes or services driven by technology or intellectual property; total turnover should not exceed INR 250 million per annum


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Reducing litigations and use of technology


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Reducing litigations and use of technology (1/2) ► No Minimum Alternate Tax (‘MAT’) on foreign companies – clarity brought to provide the

said benefit to taxpayer retrospectively

► Assurance for no retrospective amendment to provide a stable and predictable taxation regime

► Disputes relating to indirect transfer of shares - one-time scheme of Dispute Resolution, in which, subject to agreeing to withdraw any pending case lying in any Court or Tribunal or any proceeding for arbitration, mediation etc. under BIPA, a case can be settled by paying only the tax arrears in which case liability of the interest and penalty shall be waived

► Introduction of Direct Tax Dispute Resolution Scheme (‘DTDRS’) ► Under this scheme, the taxpayer at his option, whose appeal is pending before the first

appellate authority, may settle the dispute by paying taxes and concessional penalty

► No appeal to be filed by Tax Department against the order of first appellate authority (i.e. Dispute Resolution)

► Notices and document request can be issued by an Tax Department in electronic form


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Reducing litigations and use of technology (2/2) ► Non-applicability of higher rate of withholding tax on payments to non-residents in

absence of a Permanent Account Number. Alternate document as may be prescribed could be submitted

► Clarification on concessional rate of capital gains tax ► Definition of ‘Unlisted Securities’ for computation of capital gains to include ‘shares

of private companies’

► Thus, concessional rate of long term capital gain tax @10% (excluding surcharge and cess) available to non-residents on sale of shares of a private company

► It is proposed to reduce holding period from three to two years to get benefit of long term capital gain regime in case of unlisted companies


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Key Indirect Tax budget proposals


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Proposals follow a definitive theme


Incentivizing Make in India

Simplification and rationalization

Reducing litigation and

providing certainty in

taxation

Overcoming technology glitches and

controversial provisions

Although a few devils in the fine print

do exist!

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Infrastructure Cess - Levied on certain motor vehicles at

0-4% depending upon variant and fuel type effective 1 March 2016

- Payable in cash & has an inflationary impact

- Automobile manufacturers already increasing prices in domestic market

- Mood dampener in already slowing growth in automobile sector

Krishi Kalyan Cess - Proposed to be levied on all the

taxable services at 0.5%

- To be collected as service tax and thus, inflates effective service tax rate from existing 14.5% to 15%

- Effective 1 June 2016

- Creditable for service providers; cost for others


Four months & three cesses

NEW NEW

Swachh Bharat Cess Much anticipated creditability not

proposed

Abolition of 13 cesses, where the overall annual collections were not

significant

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Incentivizing Make in India

Lowering custom duty and excise duty rates for inputs/ parts/ components used in certain industries as well as final products thereof


Information technology hardware

Renewable Energy

Maintenance, repair and

overhaul (MRO) of aircrafts

Ship repairing

Machinery Food processing Fertilizers

Textiles - Specified fibres

and yarns

Mineral fuels and mineral oils

Chemicals and petrochemicals

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Ease of doing business in India


Deferred payment of custom duty *

Simplified self-declaration mechanism for importing goods at concessional rate of duty for

manufacture and export of goods *

Baggage rules simplified *

No change in peak rate of customs duty

Permission based duty exemption under replaced with self-

declaration *

Manufacturers with multiple factories now permitted to transfer and avail credits for inputs stored

in a common warehouse *

Provisions with regard to utilisation of credits based on

FIFO basis now deleted *

No change in median rate of excise duty

CUSTOMS DUTY EXCISE DUTY

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Services bought under service tax levy


► Ocean freight for import consignments liable to service tax wef 1 June 2016 ► Impact on domestic service providers/ to be evaluated vis-à-vis both

taxability of output and creditability of taxes on service of shipping lines ► Potential double tax as freight included in value of goods for import duties ► Inbound air freight continues to remain outside tax net

► Assignment by the Government of the right to use the radio-frequency spectrum and subsequent transfers to be declared as deemed service wef ratification date of budget proposals

► No clarity on treatment of transfers completed prior to ratification of proposal above

► Eligibility for credits in hands of recipient distributed over period to which the right relates - triggering negative cash flow impact

► Cenvat credit of monthly or annual user charges in respect of service by way of assignment of right to use natural resources allowed in year of payment itself

Rule regarding applicability of tax on activities over transition period tweaked to narrow benefit and could thus trigger litigation

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Clarificatory amendments


Taxation of software in certain cases

► IT software (bearing retail sale price basis(RSP)) recorded on media exempt from service tax subject to payment of excise duty/ customs duty (1 March 2016)

► On customised software (where no RSP required) excise duty to apply on value of media and service tax on residual value

Incentives to air travel agent

► Incentives received by air travel agent from companies providing computer reservation systems clarified to be taxable

► Similar/ comparable items prevail in other industries as well – tax positions likely to be impact and thus, need to be revisited

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Services by Government/ Local Authority


Comply Evaluate Identify

All services received from Government taxable under reverse charge

(1 April 2016)

Identifying all such payments

Evaluate taxability of each items

Set up systems for tracking and other

controls

Likely HUGE impact | Certain services exempted

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► Items available for credit expanded example specified wagons, office equipment

► ‘Capital goods’ of specified threshold (Rs 10,000 per piece) reclassified as ‘inputs’ – credit available immediately on receipt but also subject to reversals

► Common credits allowed to be distributed to outsourced manufacturing units through Input Service Distributor (ISD) mechanism

► Cenvat credit mechanism for taxpayers engaged in taxable/ exempted activities at parallel ► Option to maintain separate books withdrawn ► Ad-hoc payments vs reversals in lieu of availment of credit vis-à-vis

exempted activities ► Scope of exempted services widened

► Credit now allowed to be availed on an invoice issued by a service provider for clearance of goods

Rationalization – CENVAT Credit


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Reporting through returns

► Central Excise ► Substantial reduction in number of returns to be filed (27 to 13) ► Revision of return enabled

► Service tax and CENVAT ► Requirement of annual return by 30 November of subsequent financial

year ► Requirement comes in force effective 1 April 2016 ► Clarity on whether annual return for FY16 to be filed shall emerge in due

course


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Exemption overhaul - customs


New exemptions/ concessions Exemptions withdrawn 1. Basic customs duty (BCD) and

countervailing duty (CVD) exemption on import of specified goods required for exploration and production of hydrocarbon

2. BCD exemption and 6% CVD on engine for hybrid electric vehicles

3. BCD reduced for refrigerated containers from 10% to 5%

4. BCD reduced for cold chain including pre-cooling unit, packhouses, sorting and grading lines and ripening chambers from 10% to 5%

5. Custom duty exemption on certain dialysis equipment

1. CVD exemption withdrawn on specified machinery required for construction of roads

2. BCD, CVD and special additional duty (SAD) exemption withdrawn on charger / adapter, battery and wired headsets / speakers for manufacture of mobile phone

3. SAD exemption withdrawn on populated PCBs for manufacture of personal computers (laptop or desktop) and mobile phone/tablet computer

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Exemption overhaul - customs


New exemptions/ concessions Exemptions withdrawn 1. Basic customs duty (BCD) and

countervailing duty (CVD) exemption on import of specified goods required for exploration and production of hydrocarbon

2. BCD exemption and 6% CVD on engine for hybrid electric vehicles

3. BCD reduced for refrigerated containers from 10% to 5%

4. BCD reduced for cold chain including pre-cooling unit, packhouses, sorting and grading lines and ripening chambers from 10% to 5%

5. Custom duty exemption on certain dialysis equipment

1. CVD exemption withdrawn on specified machinery required for construction of roads

2. BCD, CVD and special additional duty (SAD) exemption withdrawn on charger / adapter, battery and wired headsets / speakers for manufacture of mobile phone

3. SAD exemption withdrawn on populated PCBs for manufacture of personal computers (laptop or desktop) and mobile phone/tablet computer

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Litigation related proposals

► Indirect Tax Dispute Resolution Scheme, 2016 (1 June 2016) ► Applicable to Customs, Excise and Service tax laws ► Dispute pending before Commissioner (Appeals) for cases of tax / duty up to

Rs 5 million ► Requires payment of tax, interest and 25% penalty ► Window closes on 31 December 2016


► Limitation period in cases of non-evasion of tax/ duty increased by one year across customs/ excise/ service tax (from enactment) ► More handle to tax authority ► Stricter norms being codified to encourage greater degree of self-

compliance ► No change in Limitation period for cases allegedly involving evasion

of tax/ duty ► Pegged at 5 years

AMNESTY

LOOK BACK

Limitation period under service calculated from the return filing date. New requirement of annual return could have a bearing in this regard

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Litigation related proposals

► Interest rates on delayed payments on tax/ duty rationalized (from enactment) ► Customs/ excise - reduced from 18% to 15% ► Service tax - maximum interest reduced from 30% to 15%, except in case of

taxes collected but not deposited, where it would be 24%


► Service tax arrest and prosecution (from enactment) ► Limit for launching prosecution raised from Rs 10 million to Rs 20

million for service tax evasion ► Power to arrest restricted only where tax collected but not deposited

exceeds Rs 20 million

► Prosecution proceedings to be withdrawn for excise duty < Rs 0.5 million and pending >15 years by administrative instruction

INTEREST RATES

PROSECUTION

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Goods and Service Tax

► Commitment to implement GST regime

► Constitution amendment current roadblock

► Preparedness otherwise ► Business process documents issued ► Tender for GST Network (GSTN – compliance/ administrative portal) awarded ► Department architecture (hierarchy/ number of officer, etc) at draft stage

► Informal advocacy window available


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Critical success factors for GST implementation


Real time data processing and

multi system interface

Structured data collection

Maximum possible efficiency

project management disciplines

Clarity on roles and responsibilities

Standard operating procedures

Controlling work flow centrally

Sponsorship from the highest

executive level

ownership and accountability

Need Assessment and

resource mapping

Comprehensive technology solution

for business and customers

Commitment Centralization

and Standardization

Project Management

Resource Planning

Enabling Technology

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For more information, please follow us on

www.ey.com/budgetconnect2016

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.


http://www.ey.com/budgetconnect2016

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Questions and Answers


Thank you!

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