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Impact For Individual Tax Payers

To promote affordable housing, it has been proposed to increase the deduction of rent from the existing limit of Rs 24,000 to Rs 60,000 per annum.

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Individual Tax Payers

a. Increase in the rate of Surcharge for Income exceeding Rs 1 cr

While there has been no change of Income tax slab rates of individual tax payers, however an additional tax burden has been cast for high income individuals on account of proposed increase of surcharge from 12 per cent to 15 per cent for income exceeding Rs 1 crore. On account of this change, a tax impact would be of Rs 96,563, for an individual with taxable income of Rs 1.10 cr

b. Rebate for a small tax payer u/s 87A by Rs 3,000

The Government has proposed an increase in the existing limit of tax rebate under section 87A from Rs 2000 to Rs 5000 for an individuals with income less than Rs 5 lakh. This provides relief in tax relief up to Rs 3,000 for such cases.

c. Promoting housing incentives:

i. Additional deduction u/s Section 80GG to incentivize investment in housing

To promote affordable housing, it has been proposed to increase the deduction of rent from the existing limit of Rs 24,000 to Rs 60,000 per annum. Such amendment provides tax deduction up to maximum of Rs 12,000 (excluding surcharge and cess) to the individuals living in rented house and to non-salaried tax payers who do not receive House rent Allowance from their employer.

ii. Interest deduction for first home buyers

The existing provisions of section 80EE provide a deduction of up to Rs 1 lakh in respect of interest paid on loan by an individual for acquisition of a residential house property. This benefit is available for the two assessment years beginning on the 1st day of April 2014 and on the 1st day of April 2015. In such cases, an additional deduction of Rs 50,000 per annum towards interest on housing loan to 'first home buyers' is proposed. This amendment would provide additional tax benefit of maximum Rs 15,000 (excluding surcharge and education cess) to the tax payers who own house property of a value less than 50 lacs in respect of which a loan of an amount not exceeding 35 lacs has been borrowed during the period from the 1st day of April, 2016 to the 31st day of March, 2017.

d. Rationalisation of Social Security Regime
There was high expectation to make the tax treatment of National Pension System (NPS) as Exempt, Exempt and Exempt (EEE) as against the current taxation principle of Exempt, Exempt and Exempt (EET). Towards this the Government has provided a partial relief by proposing to exempt 40 per cent of the accumulated balance of NPS at the time of withdrawal. This would make the scheme attractive and would go a long way towards boosting investments.

e. Reducing litigation and curbing Black Money
To curb domestic Black Money, the Government has proposed to provide compliance window to encourage the taxpayers to voluntary disclose unreported income. This is a limited voluntary compliance window available from 1 June 2016 to 30 September 2016 to declare the undisclosed income and deposit tax including surcharge and penalties at 45 per cent (30+7.5% surcharge+7.5% penalty). The said amendment will result in no scrutiny or enquiry regarding income declared above and would also provide immunity from prosecutions.

Corporate Tax Payers

a. Reduction in corporate tax rates and phasing out of deductions

The corporate tax rate was proposed to be reduced from 30 per cent to 25 per cent over next four years vide Finance Act 2015 accompanied by rationalization and removal of various kinds of tax exemptions and incentives for corporate taxpayers. Although there are no changes proposed in the corporate tax rates, relief have been given to certain categories. Newly setup domestic companies engaged solely in the business of manufacture or production shall be eligible to avail an option of being taxed at the rate of 25 per cent (plus applicable surcharge and cess) if such company is incorporated on or after 1 March 2016 and it does not claim profit linked or investment linked deductions and does not avail of investment allowance and accelerated depreciation. Further, small enterprises i.e. companies with turnover not exceeding Rs 5 crore shall be subject to tax rate of 29 per cent plus applicable surcharge and cess (instead of 30 per cent).

Phasing out of deductions is being implemented with reference to certain guiding principles and the response from stakeholders. The following incentives, inter alia, are proposed to be phased out:

" Special provision in respect of newly established units in Special Economic Zones (section 10AA) - no deduction to be available to units commencing manufacture or production or start providing services on or after 1 April 2020
" Accelerated depreciation - highest rate of depreciation to be restricted to 40 per cent from 1 April 2017
" weighted deductions of 175 per cent and 200 per cent to be restricted to 150% from 1 April 2017 to 31 March 2020 and restricted to 100% from 1 April 2020
" weighted deductions of 125 per cent and 150 per cent to be restricted to 100% from 1 April 2017
However, in order to provide an impetus to start-ups, it is proposed to provide a deduction of 100 per cent of the profits and gains derived by an eligible start-up which is set up before 1 April 2019.

Whilst non-reduction of tax rate may disappoint the corporate sector in general, relief proposed for newly set up domestic companies and small enterprises is certainly a welcome move.

b. Equalisation Levy
Currently in the digital domain, business may be conducted without regard to national boundaries and may dissolve the link between an income producing activity and a specific location. In Action Plan 1 of Base Erosion and Profit Shifting (BEPS) project, the Organization for Economic Cooperation and Development (OECD) has recommended, several options to tackle the direct tax challenges of new digital economy. In order to address these challenges, it is proposed to insert a new Chapter titled "Equalisation Levy" in the Finance Bill, to provide for an equalisation levy of 6 per cent of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment (PE) in India.

Due to above, companies would no longer be in a position to escape tax on certain services taking shelter of no PE relying on the principles of physical presence.

c. Taxation of Income from 'Patents'
In order to encourage indigenous research & development activities and to make India a global Research & Development (R & D) hub, the Government has decided to put in place a concessional taxation regime for income from patents. In Action Plan 5 of BEPS project, the OCED has recommended the nexus approach which prescribes that income arising from exploitation of Intellectual property (IP) should be attributed and taxed in the jurisdiction where substantial R&D activities are undertaken. Accordingly, in case of eligible assesse, it is proposed to tax income by way of royalty in respect of a patent developed and registered in India at the concessional rate of ten per cent (plus applicable surcharge and cess) on the gross basis.

This is positive move which will encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in India.

d. Place of Effective Management (PoEM) based residence rule
Finance Act, 2015 amended the provisions pertaining to residential status of a company so as to provide that a company would be resident in India in any previous year if it is an Indian company or its PoEM in that year is in India. Considering various issues relating to the implementation of PoEM based residence rule and the representations made by stakeholders, it is proposed to defer the applicability of PoEM based residence test by one year. In order to provide clarity, it is also proposed to provide a transition mechanism for a company which is incorporated outside India and has not earlier been assessed to tax in India.

The proposed deferral and amendments will give some breathing space to corporates as well as tax authorities to prepare for the new regime.

e. 100 per cent deduction of profits for affordable housing sector
It is proposed to provide for hundred per cent deduction of the profits of an assessee developing and building affordable housing projects subject to the approval of the housing project by the competent authority before the 31st March, 2019 and certain other conditions. This is likely to be a boon for real estate development companies engaged in affordable housing sector.

With inputs from Lakshit Desai, Senior Manager, Deloitte Haskins & Sells LLP

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Tags assigned to this article:
Budget 2016-17 tax payers income tax corporate tax

Anjana Singh

The author is Director, Deloitte Haskins & Sells LLP

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