India Regulatory Brief: Government Retracts Pension Tax, Regulator Improves Taxpayer Services

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Government Retracts Pension Tax Introduced in Budget

Indian Finance Minister, Arun Jaitely, has withdrawn a proposal aimed at taxing withdrawals beyond 40 percent of the Employment Provident Fund (EPF) corpus in the Union Budget for 2016-17. Jaitely initially argued that this would discourage full withdrawals and help create a pension society in India. Taking salaried tax payers by surprise, the government was almost immediately inundated with heavy criticism from all political quarters. Assessing this overwhelmingly negative feedback, and with the fear it would hold up key legislation stated for the Budget session, the Prime Minister’s Office (PMO) recommended the complete withdrawal of the proposal. The Labor Ministry also stated its opposition to any kind of taxation on the EPF after coming under fire from trade unions and opposition parties.

In response to the public review, the finance ministry has rolled back both its decisions – to tax EPF withdrawals and the proposal to limit tax-free contribution by the employer to the EPF to US $2270 (Rs 1.5 lakh) per annum. Additionally, the proposal to offer 40 percent rebate on the already taxable National Pension System (NPS) stays in place, bringing relief to NPS subscribers.

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Tax Relief for Infrastructure Developers in India

Infrastructure developers who are part of a consortium will now be taxed as separate units in a move by the Central Board of Direct Taxes (CBDT). Normally, consortiums are formed to implement large-scale infrastructure or turnkey projects where multiple firms are engaged in engineering, procurement, and construction (EPC). CBDT shall now look at such firms separately as long as each member-company is independently responsible for implementing its share of work, earns a profit or loss for that work, and employs its own personnel. This also means that control and management of the consortium must not be unified.

Earlier these companies would be identified as a single taxable unit or ‘association of persons’ (AOP), and were thus subject to the highest income taxes. This is why the sector had a high incidence of tax disputes that were aggravated by differing court verdicts increasing uncertainty and overall costs. The new system amply benefits infrastructure firms and vendors who can now offset losses from other projects as they no longer attract the maximum marginal rate of taxation, and have access to more credit options (in case of nonresidents). The changes in the tax rules will certainly improve the ease of doing business in the construction sector, which will promote greater foreign investment.

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Tax Regulator Improves Taxpayer Services

The Central Board of Direct Taxes (CBDT) on March 7 announced the creation of two directorates to ease taxpayer grievances in India. These are the Directorate of Tax Payer Services I and the Directorate of Tax Payer Services II.

The two directorates will be responsible for the delivery and monitoring of taxpayer services in field offices. They will also provide E-services delivered through various electronic platforms. Timely complaint redressal has been sought by the Income Tax department via the Central Processing Centre (CPC) and the Aayakar Seva Kendras (ASKs). ASKs are single window systems for the registration of all taxpayer applications/returns. Additionally, the Centralized Public Grievance Redress and Monitoring System (CPGRAMS) will allow for the easy upload of required documents.

The above developments are positive as they meet some of the reform proposals in the Tax Administration Reforms Commission’s (TARC) report, which called for customer-focused taxpayer services. In an additional improvement of services, the CBDT also announced that the processing time of tax-refund related complaints will be reduced from 30 days to 15 days.

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