On 28 February 2015, the new Government of India, represented by the Finance Minister, Mr. Arun Jaitley, announced its first full year budget 2015. While there does not seem to be any major changes on the direct tax front, the focus of the budget is to provide confidence in the tax system and to inspire economic growth.
This first full year budget proposal of the new Indian government was eagerly awaited, not only by Indian taxpayers but also by multinationals abroad. The budget contains business-friendly measures and clarifications.
Some of the important proposals in the Indian law which are relevant for multinational companies doing business in India are outlined – in summary – as follows:
- Corporate tax rates remain unchanged for all taxpayers with an increase in surcharge for domestic companies by 2 percentage points; i.e. from (i) 5% to 7% if the total income exceeds approx. EUR 0.15 million but does not exceed approx. EUR 1.5 million [i.e. effective tax rate 33.063%] and (ii) 10% to 12% where total income exceeds approx. EUR 1.5 million [i.e. effective tax rate 34.608%]; however, there would be progressive reduction from 30% to 25% over the next 4 years
- Surcharge on Dividend Distribution Tax (DDT) increased from 10% to 12% (i.e. effective DDT rate of 20.36%)
- Rate of taxation of Royalty/ Fee for Technical Services in the hands of non-residents has been reduced from 25% to 10% (irrespective of the date of agreement)
- Concept of Place of Effective Management (POEM) introduced to determine residential status of a company [a foreign company with its POEM in India at any time during the year would be considered as a resident of India]. A set of guiding principles to be followed for determination of POEM will be issued in due course
- Provisions of General Anti Avoidance Rules (GAAR) have been deferred by 2 years and would be applicable from Financial Year (FY) 2017-18 / Assessment Year (AY) 2018-19 [to be a part of comprehensive regime to deal with BEPS and aggressive tax evasion – No BEPS-related changes made in present budget]. Further, the provisions would not be applicable retrospectively on investments made up to 31 March 2017
- Provisions relating to taxation of indirect transfer of assets (in particular of shares in Indian investments) were clarified among other things [applicable prospectively from AY 2016-17], however further clarifications still have to be issued
- Threshold of Domestic Transfer Pricing increased from approx. EUR 0.72 Million to approx. EUR 2.88 Million
- For payments made to non-residents, information / details will have to be given by the tax payers to the authorities (to be prescribed) irrespective whether payment is chargeable to tax or not
- Service tax rate increased from 12.36% to composite 14%. The new Service Tax rate will come into effect after the enactment of the Finance Bill 2015. More information will follow from the Central Government
- VAT: Goods and Services Tax (GST) to be rolled out from 1 April 2016
- Ease of doing business – online time-bound registration, digitally signed invoices, maintenance of electronic records
Further information on the budget proposals can be found on the India Union Budget 2015 microsite which has been designed as a one-stop-shop for information regarding the Union Budget 2015 events, initiatives and social media activities at KPMG in India (e.g. link to a booklet highlighting the salient features of the Finance Bill 2015 with respect to key tax and regulatory proposals with economic indicators).