[Link].
in
March 2016
Budget 2016
Snapshot
Digital Economy
Digital Economy in India Budget 2016 Tax and Regulatory Update
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Introduction
Growth of Digital Economy
Start-up Policy
India ranks third in technology start-ups and fifth in all start-ups globally,
and over the last few years, digital economy, primarily lead by eCommerce,
has witnessed a huge growth in the country
As per the Indian government, the digital/start-up ecosystem generates
employment, brings disruption as well as innovation and is expected to be
key for the Make in India programme
With around USD 5 billion worth investments flowing in 2015 and three to
four digital/startup companies emerging every day, the number of active
investors in the ecosystem has grown from 220 in 2014 to 490 in 2015,
depicting a 2.3x growth
With this backdrop, the Indian Government launched the 'Start-up India'
initiative in January 2016 aiming to boost entrepreneurship in India and
provide a wide range of incentives to the start-ups
Growth is driven by increasing digital consumer base, mobile-first population,
improving political environment, and high interest from global investors
Promising start-up verticals for 2015: eCommerce, IoT, Analytics, HealthTech, Fintech and Hyperlocal
The 'Start-up India Action Plan proposes a 19-point action list which will
enable setting up of incubation centres, easier patent filing, tax exemption
on profits, setting up a Rs.10,000 crore corpus fund, ease of setting-up of
business, a faster exit mechanism, among others (please see the annexure
for more details)
Budget 2016
No. of Start-ups in India
Total funding in Startups
Riding high on expectations, the Indian Government presented the Union
Budget 2016 in the Parliament on 29th February 2016
$4.9 bn
There are a number of significant changes quite a few forward looking
brought about by the Budget and number of schemes that the Government
has launched including implementation of the BEPS recommendations, etc.
Some key proposals relevant for digital/start-up companies are highlighted
for quick reference
12,000
$2.2 bn
4,200
2015
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2020E
2014
2015
Source: Nasscom
March 2016
Slide 2
Budget 2016 Snapshot Direct Taxes
Direct Taxes
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Indirect Taxes
Regulatory
Summary
Key direct tax proposals
A. Start-up defined
The Finance Bill 2016 has defined Eligible start-up to mean a company
engaged in eligible business which fulfils the following conditions:
D. Capital gains exemption in hands of investors
Investor acquiring at least 50% of share capital
Total turnover does not exceed INR 250 Million in any of the previous
years beginning on or after 1 April 2016 and ending on
31 March 2021;
Capital gains exemption to individual promoter (or HUF) on sale of a
residential house property, if the sale consideration received is utilized to
invest in atleast 50% stake in an eligible start-up
It holds a certificate of eligible business from the Inter-Ministerial Board
of Certification (IMBC), as constituted by the Department of Industrial
Policy and Promotion (DIPP)
Start-up to utlilse the above investment for purchase of new assets being
plant and machinery and computers or computer software (in case of
technology driven start-ups)
Exemption withdrawn if specified conditions not satisfied
It is incorporated on or after 1 April 2016 but before 1 April 2019;
Limited Liability Partnership will not qualify as Eligible Start up
B. Eligible business defined
Eligible business means a business which involves innovation,
development, deployment or commercialisation of new products, processes
or services driven by technology or intellectual property
Other investors
Capital gains exemption if long term capital gains proceeds are invested in
the units of a specified fund as may be notified by the Government of India
(Fund of funds as proposed in the Start-up India Action Plan to finance
start-ups)
Maximum investment of upto INR 5 Million, and amount to remain
invested for a period of 3 years
C. Tax incentive for eligible Start-ups
100% of the profits from eligible business shall be eligible for deduction for
a period of 3 consecutive years out of a 5 year period;
The start-up has the option to choose any consecutive 3 year period for the
tax deduction out of the block of 5 years, from its incorporation;
The start-up should not be formed by the splitting up or reconstruction of a
business already in existence, or by transfer of previously used plant and
machinery, subject to certain relaxations
No exemption from Minimum Alternate Tax (MAT)
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E. Deduction for employment generation
Benefits extended to all tax payers subject to tax audit
Additional deduction of 30% of employee cost for a 3 year period
Benefit not available where total emoluments exceed INR 25,000 per
month and where contribution under EPS is paid by Government
March 2016
Slide 3
Budget 2016 Snapshot Direct Taxes
Direct Taxes
Home
Indirect Taxes
Regulatory
Summary
Key direct tax proposals
F. Patent Box Regime
Concessional tax regime in respect of income attributable to a patent
developed and registered in India
Royalty income on such patent liable to tax at 10% (plus surcharge /cess)
No MAT to apply on such income
No expenditure or allowance in respect of such royalty income is allowed
Person resident in India should be the patentee
H. Clarification on 10% capital gains tax on transfer of unlisted shares by nonresident
The ambiguity in relation to applicability of 10% capital gains tax in relation
to long term capital gains on transfer of unlisted private company shares by
a non-resident has been clarified
Going forward, the 10% tax rate would apply on long term gains arising on
transfer of unlisted company shares by foreign shareholders
I. Period of holding for long term capital gains
G. Equalization Levy on foreign eCommerce companies
Payments made towards online advertisement/ digital advertisement
services to non-residents not having a Permanent Establishment (PE) in
India will attract Equalization Levy at 6%
The payer can be an India tax resident carrying out business or profession
or a nonresident having a PE in India
No requirement of Equalization Levy if the total specified payments by a
payer to a particular non-resident payee in a year is less than INR 100,000
Disallowance to the extent of 30% of expenditure, if payer fails to deduct
levy and deposit it in due time with Government
There are tax filing obligations on the payer and interest/penal
consequences are also provided for any non compliances by the payer
There are interpretation issues which would needs further evaluation i.e.
availability of credit for the non-resident payee in home country, etc.
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There is ambiguity on whether the period of holding for unlisted companys
shares has been reduced from 3 years to 2 years for classification as long
term capital gains while the Finance Ministers Budget speech did
mention this, there is no express provision to this effect in the fine print of
the Finance Bill, 2016
J. Place of Effective Management (PoEM)
The Place of Effective Management provisions for determination of tax
residential status of foreign companies, have been deferred by one year to
FY 2016-17
Transitional provisions to be introduced and income computation and
related compliance mechanism to be notified
L. General Anti Avoidance Regulations (GAAR)
GAAR provisions have not been deferred. GAAR will be effective from 1
April, 2017
March 2016
Slide 4
Budget 2016 Snapshot Direct Taxes
Direct Taxes
Home
Indirect Taxes
Regulatory
Summary
Key direct tax proposals
L. Other Key provisions
No change in slab rates for personal taxation. Surcharge increased from
12% to 15% for individuals with income exceeding INR 10 million
A higher rate of withholding tax will not be applicable to a non-resident not
having a Permanent Account Number subject to certain prescribed
conditions
10% additional tax proposed on individuals, Hindu Undivided Family
(HUF) and firms on receipt of dividends from a domestic company, where
such dividend exceeds INR 1 million
Corporate tax reduced to 25% (from 30%) for 'domestic' companies setting
up new manufacturing units in India after 1 March 2016 subject to certain
conditions
Reduced Corporate tax rate of 29% (plus surcharge and cess) for Domestic
Companies with turnover upto INR 50 mn of the immediately preceding
financial year
Minimum Alternative Tax (MAT) provisions not applicable to foreign
companies having no business presence in India
Buy-back tax scope widened. Not restricted to buy backs under section 77A
of the Companies Act, 1956
Right of the tax department to appeal against the directions of the Dispute
Resolution Panel to be withdrawn w.e.f. 1 June 2016
Disputed tax demand to be stayed pending the resolution of first appeal
upon payment of 15% of disputed demand
Revision of entire penalty scheme on concealment of income
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A special window has been provided to settle pending cases at first
appellate level. Final settlement would entail payment of tax and interest
till the date of assessment and payment of 25% penalty (in specified cases).
This would also result in immunity from prosecution.
Incentives and deduction to be phased out by providing sunset clause
starting from 1st Aril 2017 onwards
Processing of tax returns filed by taxpayers not to be withheld merely
because the tax assessment has been initiated for that year
A legislative framework has been introduced to create an electronic
interface between taxpayers and tax authorities
Withholding tax provisions will be rationalised effective 1 June 2016 to
provide relief to small taxpayers
March 2016
Slide 5
Budget 2016 Snapshot Indirect Taxes
Direct Taxes
Home
Indirect Taxes
Regulatory
Summary
Key indirect tax proposals
No change in the standard rate of Service tax, Central Excise duty and basic
Customs duty
Krishi Kalyan Cess @ 0.5% on the value of all taxable services proposed to
be introduced. Effective rate of service tax would be 15%. Credit of this cess
would be available to discharge liability of this cess alone
Affirmation on the efforts towards passage of the Constitutional
Amendment Bill to enable the implementation of Goods & Service Tax
Filing of Annual Return by all assessees introduced under the service
tax provisions specific exception in this regard to be introduced
subsequently
With view to support the export sector, the duty drawback scheme has
been widened and deepened to include more products and countries.
CENVAT Credit
Various amendments in the rate of Customs duty and Central Excise duty
mainly with a view to promote "Make in India"
Credit of Capital goods of value up to INR 10,000 per piece to be
availed as inputs.
Import of IT software with MRP applicable under Legal Metrology Act to be
leviable only to Customs duty and not Service tax. IT software without MRP
under Legal Metrology Act to be leviable to Service tax and not Customs
duty.
Mechanism for proportionate availment of credit on common input
services in case of exempted and non-exempted final products /
services provided
CENVAT credit distribution mechanism has been introduced for
common warehouse of manufacturers having more than one
warehouse / factory
Excise duty introduced at 2% (without CENVAT) for readymade garments
and made up articles of textile, and at 1% (without CENVAT) on articles of
jewellery other than studded with diamond/ precious stones
Indirect tax Dispute Resolution Scheme, 2016 introduced for fast tracking
disposal of appeals at Commissioner (Appeals) level
Recognition of one person company (OPC) under the Service tax
provisions giving the same treatment as applicable to individuals and
partnership firms made applicable in case the aggregate value of services
provided is up to INR 5 Million in the previous financial year
Interest rate on account of delayed payment of tax rationalized and fixed @
15% for all indirect taxes, except in cases where service tax is collected and
not deposited the rate of interest would be 24%
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March 2016
Slide 6
Regulatory matters
Direct Taxes
Home
Indirect Taxes
Regulatory
Summary
Key regulatory developments
The Government has notified regulations relating to Start-ups on
17 February 2016
the basket of eligible FDI instruments will be expanded under Foreign
Exchange Management Act (FEMA) regulations to include hybrid
instruments subject to certain conditions
The Start-up Policy has defined Start-up as a Private Limited Company or
a Limited Liability Partnership or a registered Partnership firm and shall be
considered as such if:
a bill will be introduced to amend the Companies Act, 2013, in the
current Budget Session of the Parliament for further simplification,
including creating an enabling framework for start-ups and speeding the
incorporation of company (as fast as one day)
5 years has not elapsed from its date of incorporation/ registration
The turnover in any year does not exceed INR 250 Million
It is working towards innovation, development, deployment or
commercialization of new products, processes or services driven by
technology or intellectual property
Certificate to be obtained from IMBC by filing a simple online application
on the portal/ app of the DIPP along with any of the following documents:
Expert Committee Report recommendations
The Expert Committee constituted by DIPP had reviewed the possibility of
replacing multiple prior permissions in April 2015, and had submitted its
key recommendations including suggestions to create a suitable
environment for Start-ups
The Committee had recommended that an enterprise be treated as a Startup for a period of 3 years from the date of commencement of its activities or
till it crosses:
Recommendation letter from an Incubator set up in any Post Graduate
College in India, or a letter of support from an Incubator funded by the
Government of India or State Government;
A letter of funding of at least 20% in equity by an Incubation Fund/
Angel Fund/ Private Equity Fund/ Accelerator duly registered with
SEBI
(i) workforce of 100 workers; (ii) investment of INR 200 Million; (iii)
turnover of INR 300 Million; (iv) profit of INR 100 Million
The Committee had recommended promotion of Incubation centres
providing plug-n-play facilities to Start-ups
Separate Green areas to be demarcated in proposed Smart cities and
AMRUT cities where municipal licenses and Pollution Control Boards
permissions would not be required for Start-ups
The Committee had recommended to ease existing labour laws which are
critical for start-ups & employment generation
The Committee had suggested tax exemption on profits for first 3 years or
till profits exceeds INR 10 Million, an exemption from service tax levy, and
from excise duty/ VAT scrutiny
March 2016
Slide 7
A letter of funding by Government of India or any State Government or
a patent filed and published in the Journal by India Patent Office
Real time recognition number issued to Start-up
If any discrepancies are found on subsequent verification, the applicant will
be liable to a fine of 50% of share capital of the start-up, with a minimum
fine of at least INR 25,000
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In his Budget 2016, the Finance Minister has proposed that:
Summary
Home
Concluding thoughts
In line with the Start-up India Action Plan, the Union Budget 2016 provides for a 100% income tax exemption for a period of 3 years. This comes as a boost for startups set-up after 1 April 2016. Introduction for specific capital gains tax exemption for investment in start-ups is an added advantage.
The Budget however does not address if tax exemptions are available for existing start-ups. Further, given that start-ups usually incur losses in the initial years given
the investment in technology and other development costs, one would have hoped for concessions in terms of an extended period for carry forward of losses which
could be used for set-off against future profits. Start-ups could also have benefitted from a provision that does not impact its losses in the event of a change in
shareholding. Further, introduction of the equalisation levy@ 6% on foreign eCommerce companies in relation to online advertisement revenue under a separate
Chapter (and not under the Income-tax Act) has raised several issues and added to the cost of doing business in India.
From an ease of doing business perspective, the plan to introduce a bill to amend the Companies Act, 2013 for further simplification and creating an enabling
framework for start-ups by speeding the incorporation of company (as fast as one day), is a welcome move and showcases the Governments commitment to the
start-up community.
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March 2016
Slide 8
Annexure Start-up Policy
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Prime Minister Narendra Modi unveiled an Action Plan for Startups on 16 January, 2016 highlighting various
initiatives and schemes being proposed by the Government of India to build a strong eco-system for nurturing
innovation and empowering Startups in the country.
The Action Plan proposes a 19-point action list which will enable setting up of incubation centres, easier patent filing,
tax exemption on profits, setting up a Rs.10,000 crore corpus fund, ease of setting-up of business, a faster exit
mechanism, among others.
General Initiatives
Regulatory
1.
Compliances based on Self-Certification
13.
Mobile App and Portal for easy accessibility
2.
Startup India hub
14.
Faster Exit for Startups
3.
Establishment of Fund of Funds with a corpus of Rs.10,000 crore
15.
Legal support and fast-tracking patent application
4.
Credit Guarantee Fund for Startups
16.
Relaxed Norms of Public Procurement for Startups
5.
Startup fests
6.
Launch of Atal Innovation Mission (AIM)
Tax
7.
Set up of Incubators
17.
Capital gains tax exemptions
8.
Innovation centres
18.
Income-tax exemption for 3 years
9.
Research Parks
19.
10.
Promote entrepreneurship in biotechnology
Tax exemption for investments made above Fair Market Value
(FMV)
11.
Innovation focused programs for students
12.
Annual Incubator Grand Challenge
Start-up India Action Plan: a good start, but Govt apathy, big corporates a hurdle.
Will need continued support and evolution to make it a successful program
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March 2016
Slide 9
Contacts
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Gautam Mehra
Partner, Leader - Tax and Regulatory Services
Email: [Link]@[Link]
Office: +91 22 6689 1155
Sandeep Ladda
Partner, Leader - Technology & eCommerce
Email: [Link]@[Link]
Office: +91 22 6689 1444
Akash Gupt
Partner, Leader - Regulatory Services
Email: [Link]@[Link]
Office: +91 124 330 6509
Abhishek Goenka
Partner, Tax and Regulatory Services
Email: [Link]@[Link]
Office: +91 80 4079 6279
Sriram Ramaswamy
Partner, Tax and Regulatory Services
Email: [Link]@[Link]
Office: +91 80 4079 6004
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