24 March 2016
Indian Budget Raises Excise Duties on Branded Clothes and Introduces New Tax Regime for Multinationals
India’s 2016-17 budget is set to introduce a new excise duty on clothing exported to the country and change the tax regime for digital media services and foreign multinational corporations (MNCs). It is also said to outline the country’s future growth priorities.
The key elements of the budget include:
- Excise Duty on Branded Clothes
Excise duty has been raised on branded clothes retailing at US$14.85 (Rs 1000) and above. The duty has been increased from zero to 2% (without Central Value Added Tax/Cenvat credit) and from 6% to 12.5% (with Cenvat credit). Additionally, the presumptive tariff rate for excise/countervailing duties on readymade clothes and other textiles has been raised to 60% from 30% of the retail sale price.
The excise duty on polyester staple fibre (PSF) and polyester filament yarn (PFY) will be increased from 6% to 12.5% for those manufacturers who claim input tax credit (ITC)/Cenvat. Excise duty for those who do not claim ITC will remain at 2%.
- Taxes on Foreign Online Ads and Digital Media Services
An equalisation levy of 6% has been introduced on business-to-business (B2B) digital transactions of foreign advertising and marketing firms. The controversial move finally brings the digital economy under India’s tax net and is in line with the Base Erosion and Profit Shifting (BEPS) action plan issued by the Organisation for Economic Cooperation and Development (OECD) for G20 countries.
The levy will, however, not affect small players in the digital domain, as the aggregate amount of consideration must exceed US$1,484 (Rs 1 lakh) annually. To ensure effective compliance, the Indian government will impose a penalty or prosecute all defaulters.
- New International Tax Norms for MNCs
MNCs operating in India, including foreign subsidiaries, will have to meet new Country-by-Country (CbC) reporting standards as of 1 April 2016. The new international tax norms are in line with the BEPS guidelines set by the OECD for G20 countries.
The 2016 Finance Bill affirmed the BEPS action plan, laying down a three-tiered transfer pricing documentation structure for MNCs. Documents required include a master file, a local file, and a CbC report. In cases where the MNC has a global consolidated turnover of more than US$874 million (Euro 750 million), the parent company will have to file the CbC report with its respective tax authority.
The budget was presented by Finance Minister Arun Jaitley on 29 February, and also outlines growth and investment priorities in the public infrastructure, manufacturing, and rural economy sectors. The proposed fiscal deficit target for 2016-17 has been set at 3.5% to 3.9% of GDP , indicative of a flexible yet cautious budgetary forecast.