Union Budget 2016-17: Tax Reforms – II

It lists out initiatives proposed in the Budget 2016-17 that are related to pensions, provision of affordable housing and mobilization of resources for agriculture, rural economy and clean environment.

Created On: Mar 2, 2016 13:27 ISTModified On: Mar 2, 2016 15:31 IST

The Union Finance Minister Arun Jaitley on 29 February 2016 presented the Annual Financial Statement or the Union Budget for 2016-17 in the Lok Sabha. In his budget speech the minister listed nine pillars on which the Government will focus on in order to transform India into a developed nation.

The nine pillars are - Agriculture and farmers' welfare, rural sector, social sector including healthcare, education, skills and job creation, infrastructure and investment, financial sector reforms, governance and ease of doing business, fiscal discipline, tax reforms to reduce compliance burden.

In the tax reforms segment, the following new initiatives were proposed in the Budget 2016-17. Broadly, the provisions are related to pensions, provision of affordable housing and mobilization of resources for agriculture, rural economy and clean environment.

Moving towards a pensioned society

Withdrawal up to 40 percent of the corpus at the time of retirement to be tax exempt in the case of National Pension System (NPS). Annuity fund which goes to legal heir will not be taxable.

• In case of superannuation funds and recognized provident funds, including Employees' Provident Fund (EPF), 40 percent of corpus will be tax free in respect of corpus created out of contributions made after 1 April 2016.

The above two measures were announced to achieve the objective of uniform tax treatment across different defined benefit and defined contribution pension plans. However, the PFO related measure became controversial as millions of middle class salaried employees in the private sector will be effected it.

• Monetary limit for contribution of employer in recognized Provident and Superannuation Fund was proposed at 1.5 lakh per annum for taking tax benefit.

• Exemption will be made from service tax for Annuity services provided by National Pension Scheme (NPS) and services provided by EPFO to employees.

• Service tax on Single premium Annuity (Insurance) Policies will be reduced from 3.5 to 1.4 percent of the premium paid in certain cases.

Measures for promoting affordable housing

100 percent deduction for profits to an undertaking from a housing project for flats up to 30 sq. metres in four metro cities and 60 sq. metres in other cities, approved during June 2016 to March 2019, and is completed within three years of the approval. Minimum Alternate Tax will, however, apply to these undertakings.

Deduction for additional interest of 50000 per annum for loans up to 35 lakh rupees will be sanctioned in 2016-17 for first time home buyers, where house cost does not exceed 50 lakh rupees.

• Distribution made out of income of Special Purpose Vehicles (SPVs) to the Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (INVITs) having specified shareholding will not be subjected to Dividend Distribution Tax, in respect of dividend distributed after the specified date.

• Exemption from service tax on construction of affordable houses up to 60 square metres under any scheme of the Central or State Government including Public-private partnership (PPP) Schemes.

Resource mobilization for agriculture, rural economy & clean environment

Additional tax at the rate of 10 percent of gross amount of dividend will be payable by the recipients receiving dividend in excess of 10 lakh per annum. It will be in addition to the Dividend Distribution Tax (DDT) that uniformly applies to all investors irrespective of their income slabs. This measure was announced in tune with the progressive taxation philosophy.

• Surcharge to be raised from 12 percent to 15 percent on persons, other than companies, firms and cooperative societies having income above 1 crore rupees.

• Securities Transaction tax in case of Options was proposed to be increased from .017 to .05 percent.

Equalization levy of 6 percent of gross amount for payment made to non-residents exceeding 1 lakh rupees a year in case of Business-to-Business transactions. This was announced in order to tap tax on income, especially on online advertisements, accruing to foreign e-commerce companies from India like Google, Facebook, etc. In informal sense it is referred to as “Google Tax”.

Krishi Kalyan Cess (KKC), at 0.5 percent will be imposed on all taxable services starting from 1 June 2016. Proceeds would be exclusively used for financing initiatives for improvement of agriculture and welfare of farmers. Input tax credit of this cess will be available for payment of this cess.

Infrastructure cess, of 1 percent on small petrol, LPG, CNG cars, 2.5 percent on diesel cars of certain capacity and 4 percent on other higher engine capacity vehicles and Sports Utility Vehicles (SUVs). No credit of this cess will be available nor credit of any other tax or duty be utilized for paying this cess.

Excise duty of 1 percent without input tax credit or 12.5 percent with input tax credit on articles of jewellery [excluding silver jewellery, other than studded with diamonds and some other precious stones], with a higher exemption and eligibility limits of 6 crores and 12 crores respectively was proposed.

• Excise on readymade garments with retail price of 1000 or more raised to 2 percent without input tax credit or 12.5 percent with input tax credit.

Clean Energy Cess levied on coal, lignite and peat renamed to Clean Environment Cess and rate increased from 200 per tonne to 400 rupees per tonne.

• Excise duties on various tobacco products other than beedi raised by about 10 to 15 percent. This measure was announced in order to discourage consumption of tobacco products that kill around 1.5 million Indians per annum.

• Assignment of right to use the spectrum and its transfers has been deducted as a service leviable to service tax and not sale of intangible goods.

An amendment to the Finance Act, 1994 was proposed in order to make it clear that assignment of right to use the spectrum is a service leviable to service tax and not sale of intangible goods. With this amendment the Government is expected to generate 50000 crore rupees additional revenue.

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