29th February’2016 i.e. Budget day (2016) was ardently awaited by organizations and industries with great anticipations and expectations. Amongst a gamut of policy-related measures and amendments in taxation laws, it has laid greater emphasis on supporting Indian Start-up enterprises, Make in India Program, FDI, Financial Service Sectors and Agricultural growth.
In India, the approximate total value of Indian Legal Market as of 2010 is about 1.25 Billion which highlights that legal industry holds a significant share of the total service sector. This Budget has introduced acute reforms, policies and regulations, which directly or indirectly, impact the legal industry in India.
Let’s take a quick look at the Budget Snapshot to understand its plausible impact on legal industry in particular.
Snapshot of Budget’2016……how it is impacting Legal Industry?
The Ministry of Finance has launched its much awaited ‘Start up India Action Plan’ to boost entrepreneurship and to foster global investments. It has proposed a 19 point action list which includes setting up of incubation centers, patent filing, tax exemption on profits, ease of setting up of business etc.
Opportunities for Legal Industry:
In order to encourage new business ventures, the Government of India has introduced direct tax proposals, indirect tax proposals, Regulatory developments that have included exemptions, concessions, criterions, online applications and action list to ease the setting up as well as modus operandi of start-ups. It requires complete legal understanding in the beginning especially and, thus, start-up lawyers or professionals will be in high demand.
Challenges to Legal Industry:
The objective of this plan in the budget is to liberalize norms and regulations. The budget has provided 100% IT exemption for initial period of 3 years and special capital gain tax exemption for new startups starting after 1st April’2016. Moreover, there is a proposal of further amendment in Companies Act, 2013 to simplify legal framework. The new companies can easily file their application online for setting up, copyrights/patents, industrial approvals/licenses etc. which doesn’t necessarily involve lawyers or professional service.
Direct Tax Proposals:
This budget has introduced a series of new amendments that will provide a legal framework for paperless assessment.
- Along with that the Government of India has laid emphasis on Direct Tax Dispute Resolution Scheme that will be effective from 1st June, 2016, whereby existing appeals will be deemed from withdrawing and new time limit is proposed to complete assessment/reassessment proceedings.
- The Finance Minister has proposed key amendments in RBI Act, 1934 and SEBI Act. There is an increase of STT and also that the dividend income exceeding Rs.1 million will be taxable. Moreover, there are certain tax incentives and exemptions that are announced under Banking and Capital Markets.
- Under Asset management Segment, the budget has introduced certain relaxation proposals for FPI Investments in order to facilitate investments. Under Mutual Funds, the Government will not regard the transfer of units, if they are held as capital assets, as a taxable transfer.
- The Budget has proposed Capital Gains Tax Rates for Non-resident & Foreign Companies, introduction of Buy Back tax, allowable and non allowable tax deductions for eligible start-ups, Applicability of MAT, period of holding with regard to long term status of shares is proposed to be reduced from 36 months to 24 months.
- With regard to housing loans, the Budget has proposed an additional interest deduction for first time buyers upto Rs.50, 000/- on fulfillment of certain conditions, increase in time limit from 3 years to 5 years for acquisition or construction of self-occupied house property in order to claim interest on capital borrowed and many more propositions & announcements that affect the people under all income groups.
- There is a deduction in TDS from 2 to 1% in case of any payment under LI Policy after 1st June ’2016 and 40 % tax exemption under National Pension Scheme only.
- Introduction of Country –by-Country Reporting (CBCR) and requirement of maintaining as well as filing 3 layered documentation to the respective authority.
Opportunities for legal industry:
The launch of different tax reforms, incentives and proposals are new for business enterprises. Legal experts have the apt wisdom and experience of implementing them better as per the applicability on different person as defined under IT Act. The understanding of Direct Tax proposals will require the forte of tax law experts and thus, can foresee growth in their business. Moreover, the launch of CBCR under BEPS Action Plan 13 in an entirely new concept for India Inbound Companies and will attract penalties for misreporting & non-reporting of information.
Challenges for Legal Industry:
The Direct Tax Dispute resolution Scheme will relieve the tax payers from existing appeals, which is good for them but it will negatively affect the legal industry; thus losing business. For the law experts also, it would be a challenge to learn and understand new policies, launches and reforms in detail in order to give apt advice to their clients.
Indirect Tax Proposals:
Budget, 2016 has proposed an option for manufacturing companies which are established after 1st March’2016, whereby the tax rate will be reduced to 25% provided they don’t claim any profit or investment linked deductions.
- Then, the Finance Minister has announced different Cess i.e. Krishi Kalyan Cess (KKC) as effective from 1st June’2016. It will increase the current service tax rate upto 15%. The credit of said Cess paid on input services will be allowed to be used for payment of KKC.
- The levy of infrastructure Cess on manufacture of Motor Vehicles and Clean Energy Cess is entirely new.
- The launch of Make in India program has brought several amendments in Indirect taxes especially custom duties & excise tax. The excise tax on readymade garments is increased if the retail price of the garment is more than Rs.1000/-
- Then, in order to promote the marketing of food products that are manufactured or produced in India, the budget has allowed 100% FDI under the approval Route.
Apart from that, there have been significant amendments in CENVAT rules which require in-depth understanding.
With changes in Indirect Tax Acts and Provisions, organizations need expert guidance to understand the applicability as well as impact of such amendments on them. Law experts will have an array of opportunities in the industry to explore, practice and consult.
With introduction of Cess, the legal services will be more costly and will compel the clients to seek electronic ways to find solutions to their legal complications. It could be extremely challenging for professionals and firms to retain their clients at higher service cost.
The focus of Budget’ 2016 is to give ease in doing or starting business and thus, it has introduced a proposal under which an electronic interface will be created between tax-payers and tax authorities. It may have deep impact on the legal industry which acts as a mediator, consultant and advocate to its client when it comes to paying taxes, filing returns, appeals or for resolving disputes, providing legal consultation etc. However, it is still unclear to judge whether this is a positive or a negative change.