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Acknowledging fiscal deficit, inflation and current account deficit as the stumbling blocks to economic growth, Finance Minister described the goal of budget 2013 to be ‘higher growth leading to inclusive and sustainable development’.
MPC Legal Partner Aseem Chawla and his team share certain key proposals brought forth in the Union Budget 2013-14.
Acknowledging fiscal deficit, inflation and current account deficit as the stumbling blocks to economic growth, the Finance Minister described the goal of budget 2013 to be ‘higher growth leading to inclusive and sustainable development’.
Resisting the temptation of a populist budget before elections, the Finance Minister left the personal income slabs unchanged, with a minor relief of tax credit of Rs. 2,000/- for small tax payers. The basic rate of Excise, customs and service tax has also been left unchanged.
With proposed expenditure of Government to rise as envisaged in the Budget, the Finance Minister in order to raise revenue without changing the basic rates of tax turned to encouraging liquidation of outstanding service tax dues through an amnesty scheme, checking tax leakage by introducing stringent Tax Residency norms and introducing tax based incentives to mobilising national savings. In the succeeding paragraphs, we have shared certain key proposals brought forth in the budget 2013 in this regard.
Service Tax Amnesty Scheme- A Welcome Gesture
The Finance Minister has come out with a one-time amnesty scheme under service tax to encourage voluntary compliance by non-filers of service tax return or non-registrants or service providers who have not disclosed true liability in the returns filed by them. The scheme provides for immunity from penalty, interest and any other proceedings as may be applicable to the person who so declares his tax dues. The amnesty scheme covers period commencing from October 1, 2007 and ending on December 31, 2012.
The scheme has been extended to all persons and anyone can make a declaration to the designated authority to declare his tax dues subject to the following conditions:
(i) Declaration could be made only with respect to those tax dues in respect of which no notice or an order of determination has been issued or made before March 1, 2013.
(ii) Declaration could not be made by a person who has furnished return and has disclosed his true liability, but has not paid the disclosed amount of service tax.
It follows from above that the liability disclosed in return, if not paid could not be settled through amnesty scheme and only that liability which has not been declared under the returns could be settled through amnesty scheme.
(iii) Declaration could not be made of the tax dues on an issue for any subsequent period where a notice or an order of determination has already been issued in respect of any prior period for that issue.
(iv) Declaration if made by a person against whom an inquiry or investigation for short levy or non levy or short payment of service tax has been initiated by way of search of premises, summons issued under Section 14 of Central Excise Act, 1944 or requiring production of accounts, documents or other evidence is sought or an audit has been initiated and is pending as on March 1, 2013, the designating authority shall reject such declaration.
The last date of making the declaration under the scheme would be December 31, 2013. Every declarant has to deposit 50% of the tax so declared on or before December 31, 2013 and rest 50% on or before June 30, 2014.
In case of failure in deposit of the tax so declared on such dates, the declarant shall pay the same on or before December 31, 2014 alongwith interest thereon, for the period of delay starting from July 1, 2014.
The scheme shall come into effect with enactment of Finance Bill and is a welcome gesture to build the trust amongst the tax payer and the exchequer at the same time supplementing the revenue needs of the Government.
Household Savings: An Incentive to Dissuade Gold
Economic Surveys show that Indians save one-third of their earnings and the challenge before Finance Minister was to successfully mobilizing these Savings towards our Nation Building exercise.
Notably, the budget, 2013 has made few interesting Taxation moves to incite Households for housing their savings in financial instruments. The Rajiv Gandhi Equity Scheme allows first time investors a deduction of Rs. 50,000 over and above the Rs. 1,00,000 deduction available under Section 80C, for investment in select equity and mutual fund schemes has now been extended to annual income limit of Rs. 12,00,000 and for three years.
Household savings, which constitute the large chunk of our National Savings, are normally housed in “safe” yet non-productive investments like Gold. It is estimated that 1% of the world’s Gold is mined in India, while it consumes nearly 10% of the world demand. In fact, the Reserve Bank of India, in the Annual Report 2011-12, outlined import of Gold as the major factor behind India’s Current Account Deficit.
It is essential to appreciate the divergence that exists in the perception of Gold between the investors and the Government. While the Finance Minister believes that the same is a disposition of income, investors treat it as a saving tool.
To the relief of first time home buyers, they can claim a deduction of Rs. 1,00,000 for interest payments for a loan upto Rs. 25 lacs, raised during this fiscal. The Budget speech also introduced inflation indexed bonds and saving certificates, to be designed in consultation with the Reserve Bank of India. Such instruments will offer some respite to investors, addressing atleast the erosion of capital concerns of an investor.
Though, the response of cautious Indian savers to Chidambaram’s proposals remains to be seen, it is unlikely to be over-whelming.
Tax Residency Certificate – Another means to override tax treaty
The Budget 2013 proposes that a valid Tax Residency Certificate obtained by a foreign tax payer shall be a necessary, though insufficient condition for claiming treaty benefits.
The Finance Act 2012 made it mandatory for foreign tax payers to furnish proof of residency for claiming treaty benefits, an amendment which did not go down well with foreign investors, primarily due to the practical difficulties surrounding the process of obtaining of tax residency certificates from treaty countries.
The amendment by the Finance Act 2012 per se, would not have impacted investments routed through tax friendly jurisdictions such as Mauritius, which are known to issue tax residency certificates with relative ease. However, the proposed amendment may put to test, the immensely popular Mauritius Route.
The proposed amendment comes as a direct attack to the ratio laid down by the Apex Court in the case of Azadi Bachao Andolan v UOI (2003) 263 ITR 706, wherein, it was held that treaty shopping is permissible. The decision was delivered in the context of a CBDT Circular issued in the year 2000, which clarified that capital gains by a resident of Mauritius would not be taxable in India as long as a valid Tax Residency Certificate is issued in place.
This new proposal may add to the nervousness amongst foreign investors seeking investment in India.
The proposals discussed above are amongst few of the proposals which have been introduced in the proposed budget 2013 to plug the fiscal deficit. In the backdrop of declining revenue sources for Government and increased planned expenditure, it would be interesting to see the public’s reaction/acceptance to the Finance Minister’s optimistic proposals.
Disclaimer: This article is for discussion and general guidance purposes only. It may not be used for any other purpose without seeking our prior written consent. No party should rely on this article without taking necessary prior professional advice.