How do the new Direct & Indirect taxes affect entrepreneurs?

Amid high expectations from everyone, the Union Budget was presented on February 28, 2015. The Economic Survey that was presented a day earlier noted India is in a better financial health based on macro-economic indicators like tapering down of inflation, drop in global crude prices, reduction in fiscal deficit and stabilisation of the Rupee. The Budget largely focused on governance, subsidy rationalisation and supporting initiatives of the incumbent government.

Image credit "Shutterstock"

We attempt to capture the main highlights that could affect startups/ entrepreneurs both on the direct and indirect tax fronts. First we present the highlights for individual assessee’s:

1. No change in the tax slabs for individuals. However, transport allowance exemption which was at INR 800 per month has been increased to INR 1600 per month.
2. Surcharge has been increased by 2%. All entrepreneurs earning big bucks (taxable total income more than INR 1 crore) will have to shell out surcharge @ 12% as against 10% this year.
3. Deduction under Section 80D (payment of health insurance premium) has been increased to INR 25,000 from INR 15,000 (for assessee’s below the age of 60, for senior citizens the limit has been increased to INR 30,000)
4. Deduction under Section 80 DD in respect of maintenance, including treatment of a dependant who is a person with disability, has been enhanced to INR 75,000. This amount is increased to INR 125,000 in case the dependant has a serious disability.
5. Donations made to National Fund for Drug Abuse, SwachBharathKosh and Clean Ganga Fund will be eligible for 100% deduction under Section 80G.
6. Deductions for persons with disability has been increased to INR 75,000 under Section 80U. In case of persons with severe disability this amount is increased to INR 125,000.

The highlights for corporates are as follows:

A: Direct Taxes

1. Rate of surcharge of domestic companies is increased by 2% for companies whose taxable total income exceeds INR 1 crore. Surcharge for foreign companies continues to remain the same.
2. Tax rates would reduce from 30% to 25% in a phased manner over the next four years. This will predictable be accompanied by removal of certain incentive provisions.
3. As part of the government’s Make in India initiative, deduction under Section 80JJAA is provided to companies at the rate of 30% of additional wages paid to new regular workmen in excess of 50.
4. General Anti Avoidance Rules (GAAR) has been deferred by two years. Further for the sake of clarity it has been confirmed that GAAR, when implemented, would only apply to investments made after April 2017.
5. TDS rates on payment of royalty and fees for technical services to non resident individuals and foreign companies is proposed to be reduced to 10%.
6. The limit for applicability of Transfer pricing regulations on domestic company transactions between related parties has been increased to INR 20 crores. This amendment will be effective from April 1, 2016.

B: Indirect Taxes

1. Education cess and Secondary and Higher education cess to be subsumed in Central Excise duty and the basic levy has been increased to 12.5%. (This is effective from March 1, 2015).
2. Time limit for claiming CENVAT credit on inputs and input services has been increased to 12 months from the existing 6 months.
3. Central Excise and Service Tax assessee’s will be allowed to use digitally signed invoices and maintain records electronically for complying with the indirect tax provisions.
4. In order to enhance the ease of doing business in India, Central Excise and Service tax registrations would enabled online and completed in two working days.
5. Service tax rates to be increased to 14% (education and secondary and higher education cess to be subsumed). This rate would come into effect from a date to be notified by the government.
6. To give its ‘SwachhBharathAbhyan’ a fillip, a cess @ 2% would be collected on all or any taxable services. This cess would be effective from a date to be notified by the government. This could push up the service tax rate to 16%.
7. Goods and Services Act (GST) would be implemented with effect from April 1, 2016.

Only certain select provisions have been highlighted in this article keeping in mind what could impact entrepreneurs and startups. Through the Budget, the government has made efforts to walk the talk that was broadcasted during its entire election campaign. While the intent is clear, it is time for translating the same into action.