Key tax proposals effective after the enactment of the Finance Bill, 2016

The Finance Bill, 2016 (‘the Bill’) has been enacted into the Finance Act, 2016 after receiving the Presidential assent on May 14, 2016 (‘the date of enactment’). Consequent to this, the key direct and indirect tax provisions which shall become operational have been outlined along with any changes that are made in the proposals made in the Finance Bill at the time of presentation of Union Budget.

Direct Tax 

The key amendments carried out in the provisions of Income Tax Act (IT Act) with the passage of Finance Act, 2016 are given below:

  • Unlisted shares now would be treated as long term capital asset if held for more than 24 months instead of 36 months earlier. 
  • LLPs also included in section 80-IAC of the IT Act to be eligible startups in addition to the companies. 
  • It is clarified that tax on dividend would be chargeable only on the dividend in excess of Rs. 10 lacs at the rate of 10%.
  • Short-term capital gains to be taxed @ 15% if the transaction is undertaken in foreign currency through a recognized stock exchange located in an International Financial Services Center, even if STT is not paid to bring in line with long-term capital gains.
  • Benefit of reduced rate of MAT from 18.5% to 9% also given to those units which have been set up in International Financial Services Center before April 1, 2016. 
  • Benefit of 25% tax to be extended to those domestic companies engaged in research in relation to or distribution of article or thing manufactured or produced by it, in addition to those engaged in the business of manufacturing or production of any article or thing, on the basis of exercise of option before filing of ITR.
  • Tax shall be collected at the rate of 1% on sale of motor vehicle value exceeding ten lakh rupees, at the time of receipt of consideration.
  • Any contribution by employer in excess of 12% of salary to the recognized provident fund account of the employees shall be deemed as income of employee.
  • The processing of return is not necessary before the expiry of one year from the end of the financial year in which return is furnished, where a notice is issued for scrutiny assessment under Section 143(2).
  • Section 115BBF of the IT Act has been inserted in the Finance Bill, 2016 to tax royalty income in respect of a patent developed and registered in India. Such income will be taxed at the rate of 10% on gross basis. The amendment clarifies that for the purposes of the condition of the patents being “developed in India” 75% of the expenditure should be incurred in India.
  • Deduction allowed under section 35CCC of the IT Act from existing limit of 150% to 100% has been deferred from April 1, 2018 (Assessment Year 2018-19) to April 1, 2021 (Assessment Year 2021-22).

Indirect Tax 

Customs duty

Amendments in the Customs procedure relating to Warehousing operational with effect from the date of enactment:

  • Concept of appointing warehousing stations under the Customs Act, 1962 (‘the Customs Act’) done away with.
  • New class of Special warehouses introduced in addition to already existing Public and Private warehouses for storing specific goods, requiring physical control by the customs department. Pursuant to this, the specific classes of goods have been notified which shall be deposited in such special warehouses. Such specific goods shall include gold, silver, other precious / semi – precious metals, goods for supply to duty free shops in customs area, goods for supply as stores to vessels or aircrafts and goods for supply to foreign privileged persons.
  • Warehousing bond submitted by Importers for clearance of imported goods to warehouses, shall now be for an amount equal to three times the duty involved, as compared to current requirement of twice the duty involved.
  • Warehousing permitted for all inputs and capital goods used by 100% EOUs, EHTPs and STPs having permission for manufacturing under bond, till the clearance of such inputs / capital goods from warehouse, as against the earlier allowed period of 3 years and 5 years, respectively.
  • Provisions relating to rent and warehouse charges have been suitably omitted / amended, in view of privatization of services, and free market determination of rates.
  • Warehoused goods shall remain in custody of person granted the warehousing license, before the goods are exported / cleared for home consumption / transferred or otherwise removed, and such licensee shall be liable to pay duty along with applicable interest, fine and penalties, in case the goods are improperly removed from the warehouse.

Service tax

Amendments in the Finance Act, 1994 (‘the Finance Act’) effective from the date of enactment are enlisted below:

  • Exemptions from Service tax restored till March 31, 2020 in respect of services of construction contracts relating to original works pertaining to Government schools, residential complex meant for self-use or use of employees, hospitals, airport, port, etc. provided to the Government, local authority or a Government authority under contracts entered into during period prior to February 29, 2016.
  • Retrospective exemption extended to the services provided during the period July 01, 2012 to January 29, 2014 by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of canal, dam or other irrigation works to entities set up by Government or under an Act of Parliament.         Accordingly, refund of Service tax paid on such services during the aforesaid period shall be allowed.
  • Section 67A of the Finance Act amended to empower the Government to make specific rules in the Point of Taxation Rules, 2011 to determine the point in time when service is provided or agreed to be provided, or in other words, to determine the time when Service tax liability becomes due.
  • Assignment of the Right to use the Radio-frequency Spectrum and subsequent transfers thereof by the Government included as a ‘Declared Service’ under Section 66E of the Finance Act.

Amendments effective from June 01, 2016 are given below:

  • ‘Krishi Kalyan Cess’ (‘KK Cess’) to be recovered as Service tax at the rate of 0.50 per cent on the value of all taxable services introduced to finance and promote initiatives to improve agriculture. Therefore, the effective rate of Service tax on taxable services shall be 15 per cent (including Swachh Bharat Cess of  0.50 per cent and KK Cess of 0.50 per cent). Cenvat credit of the KK Cess paid on input services shall be allowed to be utilized for payment of KK Cess on taxable output services.
  • Services by way of transportation of passengers by air conditioned stage carriage presently exempt from the levy of Service tax in terms of the Negative List shall be subject to Service tax at an abated value of 40 per cent, subject to non-availment of Cenvat credit. However, services by way of transportation of passengers by non-air conditioned stage carriage shall continue to remain exempt from the levy of Service tax.
  • Services provided by Shipping lines by way of transportation of goods by a vessel from outside India up to the Customs station in India shall be subject to Service tax. Service tax shall be levied under the reverse charge for the services provided by the Foreign Shipping lines, whereas the Indian Shipping lines will pay Service tax under the forward charge. Indian Shipping lines may avail and utilize Cenvat credit of eligible inputs, capital goods and input services used for providing such taxable output services.
  • Services provided by Indian Shipping lines by way of transportation of goods by a vessel from India to outside India made ‘zero-rated’ with Nil rate of Service tax. Such Shipping lines may avail Cenvat credit in respect of inputs and input services used in providing such services.

Procedural changes for Customs duty, Excise duty, Service tax and other Indirect tax statutes

Procedural changes for Indirect tax statutes effective from the date of enactment are listed below:

  • Facility for deferred payment of Customs duties to be provided for specified assessees having good track record. 
  • Enabling provisions introduced in the Customs Act, to allow Board to prescribe conditions for permitting transit of certain goods and conveyances, without payment of Customs duty.
  • Retrospective amendments made in Notifications pertaining to Advance License and Duty Free Import Authorization Schemes, to clarify that exemption from safeguard duty under Section 8B of the Customs Tariff Act, 1975, available since the date of issuance of these Notifications. 
  • The normal period of limitation for raising a demand for arrears of Excise /Customs duties not involving fraud, suppression of facts etc. increased to 2 years from 12 months at present. 
  • Rate of interest on delayed payment of Service tax reduced to 15% except for cases where Service tax is collected and not deposited with the Government, where interest shall be levied at 24%. 
  • For Service tax, the demands can be raised within a period of 30 months, instead of 18 months at present. 
  • Refund of Service tax on services used beyond factory or any other place of removal for export of goods is proposed to be retrospectively allowed with effect from 1 July 2012. 
  • Monetary limit for launching prosecution for cases involving evasion of Service tax increased from Rs. 1 crore to Rs. 2 crore. 
  • Power to arrest an assessee for non-payment of Service tax to be exercised only in cases where assessee has collected Service tax but not deposited the same with the Government, where the unpaid Service tax exceeds Rs. 2 crore. 
  • Proceedings against the co-noticees to be dropped, once the proceedings against the main noticee for non-payment of Service tax are closed. 
  • 13 Cesses levied under various Acts, including Cesses applicable under the following legislations have been repealed / amended:

                   - The Salt Cess Act, 1953,
                   - The Tobacco Cess Act, 1975,
                   - The Mica Mines Labour Welfare Fund Act, 1946,
                   - The Merchant Shipping Act, 1958,
                   - The Textiles Committee Act, 1963,
                   - The Limestone and Dolomite Mines Labour WelfareFund Act, 1972,
                   - The Iron Ore Mines, Manganese Ore Mines and Chrome Ore Mines Labour Welfare Cess Act, 1976,
                   - The Cine-workers Welfare Cess Act, 1981,
                   - The Limestone and Dolomite Mines Labour Welfare Fund Act, 1972, and
                   - The Beedi Workers Welfare Cess Act, 1976.

  • Section 3 of the Central Sales Tax Act, 1956 amended to clarify that the Gas sold or purchased and transported through a common carrier pipeline or any other common transport distribution systems,becomes co-mingled and fungible with other gases in the pipeline system and such gas is introduced into the pipeline system in one State and is taken out from the pipeline in another State, such sale or purchase of gas shall be deemed to be an inter-state movement of goods.
  • Indirect tax Dispute Resolution Scheme, 2016’, to be introduced (with effect from June 01, 2016), in respect of cases pending before Commissioner (Appeals), where the proceedings against the Assesse may be closed with immunity from prosecution, after the duty and interest along with penalty equal to 25% are paid and a declaration is filed in this regard.