CII Communique August 2016 (Vol.38 No.8)

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Our recent issue of Communique August 2016 discusses how the Indian taxation system has undergone tremendous reforms during the last decade. The tax rates have been rationalized and tax laws have been simplified, resulting in better compliance, ease of tax payment and improved enforcement. The international taxation scenario, too, has evolved in recent times.
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  • 1. Edited, printed and published by Chandrajit Banerjee, Director General, CII, on behalf of Confederation of Indian Industry fromThe Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi-110003, Tel: 91-11-24629994-7, Fax: 91-11-24626149, Email: info@cii.in, Website: www.cii.in Printed at Lustra Print Process Pvt. Ltd., K No. 51/21, Rohad, Bahadurgarh (Haryana), PIN Code-124507  Registration No. 34541/79 Journal of the Confederation of Indian Industry We welcome your feedback and suggestions. Do write to us at communique@cii.in Contents Volume 38  No. 8  August 2016 cover story 05 Current Scenario and Recent Developments    The Indian taxation system has undergone tremendous reforms during the last decade. The tax rates have been rationalized and tax laws have been simplified, resulting in better compliance, ease of tax payment and improved enforcement. The international taxation scenario, too, has evolved in recent times. Our cover story looks at the dynamic tax scenario, encompassing interesting contemporary topics like tax policy, BEPS, GST, and PoEM, to provide an insightful overview of the tax arena in the country. panorama 03 Prime Minister Modi addresses India-South Africa Business Forum Mindspace 15 The Financial Architecture for MSMEs in India 21 Inspections and Regulatory Enforcements for MSMEs PERSPECTIVE 26 ‘A pre-paid energy regime could be a game-changer’ focus 29 Global Slowdown could challenge India’s Exports plus... sECTORSCAPE engaging with the world Portfolio REGIONAL REVIEW ... AND MORE % % % % % %%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%%%% % % % % % % % % %%%%%%%%% %%%% %%%%%%%%%%%%% %%%%% %%%%%%%%% %%%% % % % % %%%%%%%%%%%%%%%%% %%%% % % % % %%%%%%%%%%%%%%%%% %%%% %%%%% % % % %%%%%%%%%%% %%%%%%%%%%%% %%%%%%%%%%%%%%%% %%%%%%%%%%% %%%%%%%%%%%% % %%%%%%%%% %%%%% % %%%%%%%%%%%% % %%%%%%%%%%%%%%%%%%%%%%% %%%%%%%%%%%%% % % %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% % % % % % %%% %%%%%%%%%%%%%%%%%%%%%%%% % % % % %%%%%%%%%% %%% %%%%%%% %%%%%% %%%%%%%% %%%%%%%%%%% %%% %%%%%%% %%%%%% %%%%%%%% %%%%%%%%%%%%%%%%% %%%%%%% %%%%%%%%%%%%%%%%%%% Taxation in INdia Taxation in INdia
  • 2.      Communiqué August 2016  |  3 panorama india and the world C II led a 54-member delegation, including 22 CEOs, to South Africa, on the occasion of the visit of Mr Narendra Modi, Prime Minister of India, on 8 July.The delegation comprised of senior representatives from member companies representing sectors such as FMCG, healthcare, banking and finance, mining, water management, infrastructure, manufacturing, power and energy, and agriculture, among others. Mr Narendra Modi and Mr Jacob Zuma, President of South Africa, addressed more than 250 business leaders from both countries at the India – South Africa Business Forum.The Prime Minister highlighted the existing Indian investment in South Africa and the immense potential to strengthen it further. He invited businesses on both sides to find new ways to diversify the trade basket in order to complement each others’ needs, and thereby benefit the people of both countries. Echoing and adding to Prime Minister Modi’s sentiments, President Zuma announced that the two leaders have set an ambitious goal to increase bilateral trade to $18 billion by the year 2018. Achieving this target will require an increase in private sector deliberations as well as government focus on the resolution of barriers that are impeding the expansion of trade, he said. Earlier, the India-South Africa CEOs Forum met in Pretoria. Fourteen CEOs from the Indian side and more than 30 CEOs from South Africa discussed issues impacting bilateral trade and investment, and made recommendations to enhance collaboration in sectors like financial services, pharmaceuticals and healthcare, mining, manufacturing, infrastructure and energy, and education and medical schools. Mr Adi Godrej, Past President, CII, and Chairman, Godrej Group, who was the Indian Co-Chair of the Forum, and his South African counterpart, Mr Vivian Reddy, Founder, Edison Group, later reported back on the discussions to the leaders at the India-South Africa Business Forum. Mr Ramesh Abhishek, Secretary, Department of Industrial Policy and Promotion (DIPP), addressing the CEOs Forum, provided the perspective of the Indian Government on future economic engagement with South Africa. Earlier, the Indian members of the CEOs Forum had an exclusive interaction with representatives of DIPP, to discuss specific issues they are facing while doing business with South Africa. The deliberations in both Forums positively expressed the need and openness to collaborate between Indian and South African companies. During the visit, eight MoUs were signed between Indian and South African companies, a testimony to the keenness of India and South Africa to engage with each other. Prime Minister Modi addresses India-South Africa Business Forum Narendra Modi, Prime Minister of India; and Jacob Zuma, President of South Africa, with Adi Godrej, Past President, CII, India Co-Chair, India-South Africa CEOs Forum, and Chairman, Godrej Group (left), and Vivian Reddy, South Africa Co-Chair, India-South Africa CEOs Forum, and Chairman, Edison Power Group (right) at the India-South Africa Business Forum in Pretoria Ramesh Abhishek, Secretary, DIPP; Adi Godrej, and Chandrajit Banerjee, Director General, CII, at the India-South Africa CEOs Forum in Pretoria
  • 3.      Communiqué August 2016  |  5 COVER STORY taxation The Indian taxation system has undergone tremendous reforms during the last decade. Tax rates have been rationalized and tax laws have been simplified, resulting in better compliance, ease of tax payment, and better enforcement. To top it all, the passage of the 122nd Constitutional Amendment Bill on the Goods and Services Tax (GST) in Parliament offers hopes that the much-awaited GST implementation in April 2017 may become a reality. The international taxation scenario has also evolved, with India playing an active role in the Base Erosion and Profit Shifting (BEPS) initiative, and gradually making BEPS a part of the Indian tax curriculum. Corporate residence now has a new determining parameter, where its Place of Effective Management (PoEM), in that year is. In this dynamically-evolving tax scenario, our cover story encompasses interesting contemporary topics like tax policy, BEPS, GST, and PoEM, to provide an insightful overview of the tax arena in the country. % % % % % %%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%%%% % % % % % % % % %%%%%%%%% %%%% %%%%%%%%%%%%% %%%%% %%%%%%%%% %%%% % % % % %%%%%%%%%%%%%%%%% %%%% % % % % %%%%%%%%%%%%%%%%% %%%% %%%%% % % % %%%%%%%%%%% %%%%%%%%%%%% %%%%%%%%%%%%%%%% %%%%%%%%%%% %%%%%%%%%%%% % %%%%%%%%% %%%%% % %%%%%%%%%%%% % %%%%%%%%%%%%%%%%%%%%%%% %%%%%%%%%%%%% % % %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% % % % % % %%% %%%%%%%%%%%%%%%%%%%%%%%% % % % % %%%%%%%%%% %%% %%%%%%% %%%%%% %%%%%%%% %%%%%%%%%%% %%% %%%%%%% %%%%%% %%%%%%%% %%%%%%%%%%%%%%%%% %%%%%%% %%%%%%%%%%%%%%%%%%% Taxation in India Taxation in India ‘GST is India's most significant tax reform in decades. It is expected to usher in a harmonized national market of goods and services and shall lead to a simplified, assesse-friendly tax administration system. Once implemented, it will subsume all of the central and State-level duties and taxes, thus making the country a national market, and would contribute significantly to the growth of the economy. CII anticipates that the implementation of GST would reduce transaction costs and boost GDP by 1.5 to 2%.’ Dr Naushad Forbes, President, CII, and Co-Chairman, Forbes Marshall
  • 4. 6  |  August 2016 Communiqué COVER STORY T axes are a necessary compulsion for citizens and entities earning revenues. With dynamic and buoyant tax revenues, a nation can undertake the imperatives of poverty elimination, social security, and creation of public goods such as infrastructure, education and healthcare. India’s gross tax revenues to the Central Government have more than doubled from ` 6.2 lakh crore in 2009-10 to ` 14.6 lakh crore in 2015-16. The ratio of gross tax revenue to Gross Domestic Product (GDP) has drifted upwards from 9.87% in 2011-12 to 10.74% in 2015-16. Within this, the shares of direct taxes and indirect taxes have remained more or less constant. Corporate taxes contribute more than a third of the total gross tax revenues, while customs duties, union excise duties and service taxes bring in about 44%. Recognizing the need for widening the tax base, the Government has progressed towards simplification of tax administration and improving tax dispute resolution. Thus, the Indian taxation system has undergone tremendous reforms during the last decade. Tax rates have been rationalized while tax laws have undergone simplification, resulting in better compliance, ease of tax payment, and better enforcement. The process of rationalization of tax administration is on-going as well. The introduction of the Income Disclosure Scheme 2016 to provide an opportunity to assessees to come forward and disclose their income and assets is another step forward. CII is greatly enthused by the outcome of the recent meetings of the Empowered Committee of State Finance Ministers, and welcomes the release of the Model Goods and Services Tax (GST) Law. The passage of the Bill by both Houses of Parliament is indeed major progress in the implementation of the much-awaited GST, and encourages Industry to plan for India’s most significant tax reform in decades to become a reality with effect from 1 April 2017. During the last few months, the Government has been dynamic in its approach, and has invited comments and suggestions from Industry on a number of taxation matters ranging from GST to Place of Effective Management (PoEM), Real Estate Investment Trusts (REITs), Income Computation and Disclosure Standards (ICDS),Corporate Social Responsibility (CSR), Safe Harbour rules, the Justice R V Easwar Committee on Income Tax Simplification, Foreign Tax Credit, Minimum Alternate Tax (MAT) for IndAS compliant companies, Indirect Transfer Provisions, General Anti-Avoidance Rules (GAAR) and the India-Mauritius Double Taxation Avoidance Agreement. CII has submitted detailed suggestions on each of these issues, capturing industry perspectives. Through its pre and post-Budget memoranda each year, CII also compiles, evaluates and shares recommendations with the Government. CII supports the Government agenda for bringing in a stable and predictable system of tax reforms and many of our recommendations have found place in the final legislations. For example, CII has been advocating the deferment of ICDS for another year, and the Government has agreed to postpone its applicability with effect from 1 April, 2016. CII has made many key recommendations on Direct Taxes to the Government, which include: • The corporate tax rate should be brought down to 22% (all inclusive). • Minimum Alternate Tax (MAT) should be abolished in view of the removal of all incentives or, alternatively, the rate should be brought down to 10%. • The backlog in relation to pending applications to the Authority for Advance Rulings (AAR) and Advance Pricing Agreements (APA) should be cleared to strengthen the investor community’s confidence in the ability of the system to provide clarity expeditiously. • Rollback provisions in the APA scheme should be issued at the earliest, as these are effective October 2014 as per statute. Also, the draft provisions should Current Scenario and Recent Developments % % % % % %%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%%%% % % % % % % % % %%%%%%%%% %%%% %%%%%%%%%%%%% %%%%% %%%%%%%%% %%%% % % % % %%%%%%%%%%%%%%%%% %%%% % % % % %%%%%%%%%%%%%%%%% %%%% %%%%% % % % %%%%%%%%%%% %%%%%%%%%%%% %%%%%%%%%%%%%%%% %%%%%%%%%%% %%%%%%%%%%%% % %%%%%%%%% %%%%% % %%%%%%%%%%%% % %%%%%%%%%%%%%%%%%%%%%%% %%%%%%%%%%%%% % % %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% % % % % % %%% %%%%%%%%%%%%%%%%%%%%%%%% % % % % %%%%%%%%%% %%% %%%%%%% %%%%%% %%%%%%%% %%%%%%%%%%% %%% %%%%%%% %%%%%% %%%%%%%% %%%%%%%%%%%%%%%%% %%%%%%% %%%%%%%%%%%%%%%%%%% Taxation in INdia Taxation in INdia
  • 5.      Communiqué August 2016  |  7 be circulated to the public for consultation. • The Tax Administration Reform Commission (TARC) recommendations should be implemented. • The fiscal benefit available to new infrastructure is very clear in Section 80IA of the Income Tax Act in the present form. However, suitable clarity is required as to whether the Section extends to cases of upgrading the existing set up, as well. The Government should make suitable amendment in the Section to make it amply clear that the upgradation of existing infrastructure is also eligible for the benefit of Section 80IA, so that there is no ambiguity with regard to claims. • It will be extremely useful if the authorities can put together a handbook on Transfer Pricing guidelines/ methods, on a few significant issues like intangibles, inter-group and intra-group services, selection of comparable and appropriate methods, etc, in line with the Organization for Economic Co-operation and Development (OECD) guidelines. • The investments made by Alternate Investment Funds (AIF) should be deemed ‘capital assets’ (similar to the amendment made by the Finance (No 2) Act, 2014) in the definition of capital assets under Section 2(14) of the Act, to include securities held by foreign portfolio investors. Accordingly, the income earned by the AIFs therefrom should be taxable under the head ‘capital gains’ or ‘income from other sources’ and not ‘business income.’ • Dividend Distribution Tax (DDT) rate should be reduced from 15% to 10%. On Indirect Taxes, CII has made, inter alia, the following recommendations to the Government, which are yet to be effected: • Continuation of 10% peak rates of customs duty to provide protection to indigenous industry which suffers from certain disadvantages like higher rates of interest and power, etc. • When the duty rate on inputs is higher than the duty rate on finished products, the duty structure becomes anomalous, which needs to be corrected. • Continue the general rate of 12.5% excise duty. • Allow credit of the Swachh Bharat cess and its utilization against payment of excise duty/ service tax. • Withdraw the National Calamity Contingent Duty on motor vehicles and crude oil. CII is hopeful that these, as well as other recommendations, which benefit both Government and Industry, would be evaluated and considered by the Government on a continuous basis. CII will continue to support the Government in its journey towards tax reforms in the country, and bring to light the views of Industry, for mutual benefit. % % % % % %%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%%%% % % % % % % % % %%%%%%%%% %%%% %%%%%%%%%%%%% %%%%% %%%%%%%%% %%%% % % % % %%%%%%%%%%%%%%%%% %%%% % % % % %%%%%%%%%%%%%%%%% %%%% %%%%% % % % %%%%%%%%%%% %%%%%%%%%%%% %%%%%%%%%%%%%%%% %%%%%%%%%%% %%%%%%%%%%%% % %%%%%%%%% %%%%% % %%%%%%%%%%%% % %%%%%%%%%%%%%%%%%%%%%%% %%%%%%%%%%%%% % % %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% % % % % % %%% %%%%%%%%%%%%%%%%%%%%%%%% % % % % %%%%%%%%%% %%% %%%%%%% %%%%%% %%%%%%%% %%%%%%%%%%% %%% %%%%%%% %%%%%% %%%%%%%% %%%%%%%%%%%%%%%%% %%%%%%% %%%%%%%%%%%%%%%%%%% % % % % % %%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%% % % % % % % % % %%%%%%%%% %% %%%%%%%%%%%%% %%%%% %%%%%%%%% %% % % % % %%%%%%%%%%%%%%%%% %% % % % % %%%%%%%%%%%%%%%%% %% %%%%% % % % %%%%%%%%%%% %%%%%%%%%% %%%%%%%%%%%%%%%% %%%%%%%%%%% %%%%%%%%%% % %%%%%%%%% %%%%% % %%%%%%%%%% % %%%%%%%%%%%%%%%%%%%%%%% %%%%%%%%%%%%% % %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% % % % % %%% %%%%%%%%%%%%%%%%%%%%%%%% % % % %%%%%%%%%% %%% %%%%%%% %%%%%% %%%%%% %%%%%%%%%%% %%% %%%%%%% %%%%%% %%%%%% %%%%%%%%%%%%%%%%% %%%%%%% %%%%%%%%%%%%%%%%% Taxation in INdia Taxation in INdia COVER STORY India Inc pins hopes on tax reforms Industry is looking forward to a clear roadmap for a transparent, stable and certain tax environment I n the current difficult global environment, India has the fortune to stand out for a growth that’s amongst the highest in the world.The sound economic growth has been built on the foundation of well-crafted macro- economic policies and the Government’s commitment to do what is needed to provide an enabling environment for investments. Taxation policies have been an integral part of the reform measures undertaken by the Government towards this objective. India’s tax policy is guided by a multiplicity of objectives. In line with global trends, India has announced its intent to lower the tax rates. To enhance its tax-GDP ratio to fund social and infrastructure programs, a concurrent focus has been on expanding the base and preventing base erosion. Significant effort is also being made towards lowering tax uncertainty, improving the ease of paying taxes, and providing a transparent, stable and certain tax environment for attracting investments. Undeniably, the most awaited reform is the implementation of the Goods and Services Tax (GST). The consultative approach of the Government while framing the laws and regulations has been noteworthy. There is active discussion between the Government and the stakeholders on issues in the current draft which need to be ironed out. The Finance Minister has announced the
  • 6. 8  |  August 2016 Communiqué COVER STORY rationalization of corporate tax rates from 30% to 25%, along with a gradual removal of various incentives in the next 3-4 years. Industry is now looking for a clear roadmap that will include the removal of the legacy surcharges that add 3-4% to the tax burden. The Dividend Distribution Tax and the Minimum Alternate Tax (MAT), with a creeping increase to nearly 20%, significantly enhance the effective corporate tax burden. It may be time to re-visit the classical system of dividend taxation, namely taxing shareholders at applicable slab rates above the minimum threshold, so as not to burden small shareholders. Also, clear indication about the phased removal of MAT accompanying the reduction in the corporate tax rate will make the corporate tax system simpler and more attractive. It is notable that, in recent months, the Government has kept its word about following a non-adversarial tax regime. Any issues that created uncertainty, such as the levy of MAT on Foreign Institutional Investors, were quickly resolved. Similarly, the Government took Cabinet approval not to appeal against a favorable order passed by the Bombay High Court ruling against the transfer pricing adjustments carried out by the tax administration in respect of the fresh issue of shares by a subsidiary of a foreign company in India. To bring about simplification and certainty, the tax department has issued a number of clarifications on contentious issues. There is now greater certainty on the characterization of the investment portfolio of the tax-payer as capital gains instead of business income, rather than leaving it to the discretion of the assessing officer. Similarly, there is clarity on automatic stay of the tax demanded on assessment upon payment of 15% of the demand, if the tax-payer prefers an appeal against the assessment. Also welcome is the substitution of the low threshold with a risk-based evaluation for the selection of cases for transfer pricing scrutiny, putting greater emphasis on qualitative rather than quantitative factors. Rules have been issued for a special taxation regime to facilitate the location of fund managers of offshore funds in India. The consultative approach of the Central Board of Direct Taxes on the applicability of the proposed General Anti Avoidance Rules (GAAR) effective 1 April, 2017 is also welcome. Many recommendations of the Easwar Committee for simplification of laws have been adopted by the Income Tax Department. It is hoped that its suggestions such as withdrawal of provisions on ICDS, which have the potential for creating litigation and uncertainty for tax- payers and conflict with Government’s objective of creating an environment for ease of doing business in
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