2014 Budget Speech Extracts of Sri Arun Jaitely, Finance Minister, India relating to Direct Tax Proposals

I do not propose to make any change in the tax rate.  However, with a view to provide relief to small and marginal taxpayers and senior citizens, I propose to increase personal income tax exemption limit by `50,000 that is, from `2 lakh to `2.5 lakh in the case of individual taxpayers who are below the age of 60 years.  Similarly, I also propose to raise the exemption limit from `2.5 lakh to `3 lakh in the case of senior citizens.

I do not propose to make any change in the rate of surcharge either for the corporates or the individuals, HUFs, firms etc.

The education cess for all taxpayers shall continue at 3 percent.

In the year 2012-13 the gross domestic savings were 30.1% of the GDP as compared to 33.7% in the year 2009-10.  Increase in savings and their productive use leads to higher economic growth.  The households are the main contributors to savings.  Therefore, to encourage domestic investment in long term savings, I propose to increase the investment limit under section 80C of the Income-tax Act from `1 lakh to `1.5 lakh. 

Housing continues to be an area of concern for middle and lower middle class due to high cost of financing.  Therefore, to reduce this burden, I propose to increase the deduction limit on account of interest on loan in respect of self occupied house property from `1.5 lakh to `2 lakh. 

Infrastructure and construction sectors have a significant role in the economy.  Growth in these sectors is necessary to revive the economy and generate jobs for millions of our young boys and girls. As stated earlier and with a view to attract large scale investment in these sectors, I have provided a conducive tax regime for Infrastructure Investment Trusts and Real Estate Investment Trusts to be set up in accordance with regulations of the Securities and Exchange Board of India.

The manufacturing sector is of paramount importance for the growth of our economy.  This sector has multiplier effect on creation of jobs. Last year, an incentive in the form of investment allowance to a manufacturing company that invests more than `100 crore in plant and machinery during the period from 01.04.2013 to 31.03.2015 was announced.  Considering the need to incentivize smaller entrepreneurs, I propose to provide investment allowance at the rate of 15 percent to a manufacturing company that invests more than `25 crore in any year in new plant and machinery. This benefit will be available for three years i.e. for investments upto 31.03.2017.  The Scheme announced last year will continue to operate in parallel  till 31.03.2015.

I also propose to extend the investment linked deduction to two new sectors, namely, slurry pipelines for the transportation of iron ore, and semi-conductor wafer fabrication manufacturing units.  This will boost investment in these two critical sectors. 

Supply of power continues to be a major area of concern for the country. Therefore, instead of annual extensions, I propose to extend the 10 year tax holiday to the undertakings which begin generation, distribution and transmission of power by 31.03.2017. This stability in our policy will help the investors to plan their investments better.

Foreign Portfolio Investors (FPIs) have invested more than `8 lakh crore (about 130 billion US $) in India.  One of their concerns is uncertainty in taxation on account of characterization of their income.  Moreover, the fund managers of these foreign investors remain outside India under the apprehension that their presence in India may have adverse tax consequences.  With a view to put an end to this uncertainty and to encourage these fund managers to shift to India, I propose to provide that income arising to foreign portfolio investors from transaction in securities will be treated as capital gains.

The concessional rate of tax at 15 percent on dividends received by Indian companies from their foreign subsidiaries has resulted in enhanced repatriation of funds from abroad. I propose to continue with this concessional rate of 15 percent on foreign dividends without any sunset date.  This will ensure stability of taxation policy.

In order to augment low cost long term foreign borrowings for Indian companies, I propose to extend the eligible date of borrowing in foreign currency from 30.06.2016 to 30.06.2017 for a concessional tax rate of 5 percent on interest payments.  I also propose to extend this tax incentive to all types of bonds instead of only infrastructure bonds.  I hope this measure will enable the companies to step up their investments in India.

In order to reduce litigation on transfer pricing issues, I propose to make certain changes in Transfer Pricing regulations.

(1)   An Advance Pricing Agreement (APA) scheme was introduced in the year 2012. It has received good response. I propose to strengthen the administrative set up of APA to expedite disposal of applications. Further, I propose to introduce a “Roll Back” provision in the APA scheme so that an APA entered into for future transactions may also be applied to international transactions undertaken in previous four years in specified circumstances.

(2)   In order to align Transfer Pricing regulations in India with the best available practices, I propose to introduce range concept for determination of arm’s length price. However, the arithmetic mean concept will continue to apply where number of comparable is inadequate. The relevant data is under analysis and appropriate rules will be prescribed.

(3)   As per existing provisions of Transfer Pricing Regulations, only one year data is allowed to be used for comparable analysis with some exception. I propose to amend the regulations to allow use of multiple year data.

            Necessary legislative amendments to give effect to the above proposals including those relating to the Authority for Advance Rulings and Income-tax Settlement Commission will be moved in the current session of the Parliament.

In the case of Mutual Funds, other than equity oriented funds, the capital gains arising on transfer of units held for more than a year is taxed at a concessional rate of 10% whereas direct investments in banks and other debt instruments attract a higher rate of tax.  This allows tax arbitrage opportunity.  This arbitrage has hardly benefitted retail investors as their percentage is very small among such Mutual Fund investors.  With a view to remove this tax arbitrage, I propose to increase the rate of tax on long term capital gains from 10 percent to 20 percent on transfer of units of such funds.  I also propose to increase the period of holding in respect of such units from 12 months to 36 months for this purpose.

In the year 2003, the tax liability on income by way of dividends was shifted from the shareholder to the company. The shareholder was required to pay tax on the gross dividends, but now the company pays tax on the dividend amount net of taxes.  Similarly, in the case of Mutual Fund, income distribution tax is paid on the income distributed net of taxes.  I propose to remove this anomaly both in the case of the company and the Mutual Fund.

Currently, where an assessee fails to deduct and pay tax on specified payments to residents, 100 percent of such payments are not allowed as deduction while computing his income.  This has caused undue hardship to taxpayers, particularly where the rate of tax is only 1 to 10%.  Hence, I propose to provide that instead of 100 percent, only 30% of such payments will be disallowed.

The Direct Taxes Code Bill, 2010 has lapsed with the dissolution of the 15th LokSabha.  Having considered the report of the Standing Committee on Finance and the views expressed by the stakeholders, my predecessor had placed a revised Code in the public domain in March, 2014.  The Government shall consider the comments received from the stakeholders on the revised Code.  The Government will also review the DTC in its present shape and take a view in the whole matter.

Income-tax Department is expected to function not only as an enforcement agency but also as a facilitator.  A number of AykarSevaKendras (ASK) have been opened in different parts of the country.  I propose to extend this facility by opening 60 more such SevaKendras during the current financial year to promote excellence in service delivery. 

The focus of any tax administration is to broaden the tax base. Our policy thrust is to adopt non intrusive methods to achieve this objective. In this direction, I propose to make greater use of information technology techniques.