Budget 2018 An overview. CA C Ramadurai FCA Membership no Chartered Accountant

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1 Budget 2018 An overview Membership no Chartered Accountant Finance Bill 2018 Analysis of Direct Tax amendments By CA Chandrasekaran Ramadurai M.Com; FCA; ACMA Chartered Accountant Insolvency Professional Mobile Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

2 Budget 2018 An overview Membership no Chartered Accountant 28th February Preface As a continuation of my last year efforts, I have attempted an understanding of the Direct Tax amendments proposed in the current Finance Bill These are basically undertaken from The Finance Bill 2018 Finance Minister s speech Notes on clauses as published by CBDT and The Memorandum of Finance Bill 2018 My reading shows: A. On the Direct Tax rates : 1. Health & Higher Education cess increased to 4% 2. Tax on Domestic companies having a turnover of up to Rs 250 Crores at 25% ( last year it was Rs 50 Crores) 3. Tax on LTCG Section 112A 10% of the gains in excess of Rs 1lacs 4. Exemption from the applicability of MAT provisions 115JB in respect of a foreign company engaged in the business of i. running ships 44B Tax shall 40% or 50% on 7 ½ % of gross receipts in India and overseas ii. oil exploration -44BB - Tax shall 40% or 50% on 10 % of gross receipts in India and overseas iii. running the business of operation of aircraft -44BBA - Tax shall 40% or 50% on 5 % of gross receipts in India and overseas iv. running the business of civil construction in case of turnkey projects -44BBBTax shall 40% or 50% on 10 % of gross receipts in India and overseas v. While all these sections were already there, MAT provisions applied to foreign companies. From AY , the MAT provisions shall not apply and tax will be computed under the provisions of 44 B to BBB 5. AMT on LLPs reduced under section 115JC to 9% if the unit is located in an International Financial Services Centre and derives its income solely in convertible foreign exchange 6. Tax on Distributed profits u/s 115-O which is in the nature of Deemed dividend distributed out of accumulated profits of the company of the nature referred to u/s 2(22)(e) of the company to be 30% while DDT on other dividends shall 15% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

3 Budget 2018 An overview Membership no Chartered Accountant B. On Direct Tax proposals: 1. On Deemed dividends u/s2(22(e), DDT u/s 115-O i. Accumulated profits of the amalgamating company shall be treated as accumulated profits of the amalgamated company ii. Any loans or advance to a shareholder or a concern in which he is substantially interested shall also suffer DDT in the hands of the loan issuing 30% u/s 115-O iii. While doing so, the dividend u/s 2(22)(e) shall not be grossed up 2. On 2(24) income when inventory is converted into Capital asset: i. When inventory is converted into Capital asset, the FMV of the inventory as on the date of conversion shall be included to be taxed as Profits and gains of business or profession [section 2(24) read with Section 28(via)] ii. When a Capital asset which was originally an inventory but converted into Capital asset at FMV as on date of conversion, the cost of acquisition shall be the FMV as on the date of such conversion ( section 49(9)) iii. The period of holding of such capital asset shall be reckoned from the original date of acquisition of the inventory [ section 2(42A)] iv. Compensation received for termination or change of contract relating to his business shall be taxed as Profits and Gains of business or profession ( section 28(ii)(e) v. But this compensation has to be included under Income u/s 2 ( which is not done) vi. Compensation received for termination or change in terms and conditions of employment shall be taxed as Income from Other sources ( section 56(2)(xi) Amendment of Section 9(1)(i) to consider a PE if it is through a Dependent Agent i. In line with OECD guidelines read with BEPS Action Plan 7 Amendment with reference to Business Connection through Significant Economic Presence in respect of digital transactions shall be treated to be deemed to accrue or arise in India u/s 9(1)(i) i. In line with OECD guidelines read with BEPS Action Plan 1 Long term Capital gains on transfer of a share in an Indian Company or a unit in a EOF or a business trust, whether STT is paid or not paid, shall not be eligible for exemption u/s 10(38); they will suffer 10 % u/s 112-A. the earlier existed exemption under section 10(38) is removed. In line with the above the income in the form of LTCG in the hands of a Foreign Institutional Investors arising out of transfer of a LTCA being a share in an Indian Company or a unit in an EOF or a unit in a business Trust in excess of Rs 1 lacs shall be 10% under section 115AD Following the above two amendments, distributed income from an EOF shall be taxed in the hands of the 10% and the same shall go through the process of grossing up section 115-R. The definition of Equity Oriented Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

4 Budget 2018 An overview Membership no Chartered Accountant Fund given in Explanation (b) to section 115-T(2) shall be the same as defined under section 112A.- section 115T 8. U/s 10(23C) and section 11, unless the application is by digital means, it will not be treated as application for the objects for which the Institution or Trust has been created and consequentially will be chargeable to tax under income from business 9. Income in the form of Royalty or Technical Know-how fees paid by NTRO is exempt from tax u/s 10(6D) 10. Pension withdrawal not exceeding 40% of eligibility out of accumulations under NPS by any assessee is exempt u/s 10(12A) 11. GoI can appoint any Board, Body or authority with respect to any class of persons relating to AOP, BOI etc. u/s 10(46) 12. u/s10(48b), the sale of left over crude oil by a foreign operator at the time of termination of agreement shall be exempt ( previously it has to be at the time of expiry of the agreement) 13. Standard deduction of Rs 40,000 or salary whichever is lower in lieu of medical reimbursements and transport allowance is now available to salaried employees (section 16). Now on the reimbursement of medical expenses or transport allowance u/s 17 shall be treated as perquisite ( the section 17(2)(viii) allowing the exemption is removed) 14. ICDS, as notified and provided u/s 145(2) is granted legislative sanction. Now i. Marked to Market losses have to be determined in accordance with any standards under ICDS notified u/s 145(2) ii. Forex translations shall be treated as income or loss either on the date of conversion or settlement depending on whether it is for normal transactions or speculative or hedging transactions iii. Securities held as stock in trade shall follow ICDS VIII at cost or NRV whichever is lower iv. Construction contracts shall be recognised only by POC method v. Service contracts by either CCM or SLM vi. Govt. grants as per ICDS VII and not before certainty and not later than actual receipts. No amortization over a period 15. U/s 43(5) trading in agricultural commodity derivatives shall not suffer CTT and still be treated as non- speculative in nature 16. In 43CA, 50C and 56(2), where the difference between the stamp duty valuation of a capital asset being land or building and the actual consideration does not exceed 5% of the actual consideration, then no adjustment shall be made so far as to recognise i. Income u/s business u/s 43A and it shall be only the actual consideration ii. Income u/s 50C under Capital gains and the actual consideration only shall be considered for computation and iii. Under section 56(2) there will be no difference amount considered as Income from other sources 17. U/s 44AE, for heavy vehicle owners with not more than 10 such vehicles, the presumptive income per goods carriage vehicle is Rs 12,000 per month( instead of the earlier Rs 7,500/- per month) 18. Insertion of a new clause (viiab) to section 47 that exempts any capital gain arising out of transfer of a bond or a GDR or a derivative or a Rupee denominated bond transferred in the Gift City in the IFSC and where the consideration is paid in convertible foreign exchange in the hands of a non-resident Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

5 Budget 2018 An overview Membership no Chartered Accountant 19. In section 54EC in which capital gains arising from a LTCA being land or building can be invested to claim exemption, a new financial asset being a bond issued by NHAI or REC or any bond notified by the GoI and has a maturity period of 5 years has been added 20. Any change in shareholders in a company where public are not interested due to a resolution plan as approved under IBC code 2016 and after giving the Judicial Principal commissioner or commissioner a reasonable opportunity of being hear, the losses pertaining to year or years prior to the PY in which such change in shareholding happened shall continue to be allowed to be carried forward and set off in the PY and subsequent years section 79 C. Chapter VIA and special provisions for tax computation: 1. U/s 80AC from AY onwards unless the return u/s 139 is filed on or before the due date, no Chapter VIA C deductions shall be allowed 2. Deductions for medical Insurance for senior citizens and medical expenditure for self has been increased to Rs 50,000 under section 80D 3. Enhanced deduction to senior citizens for medical treatment of specified diseases Expenditure on special medical treatment shall enjoy a deduction u/s80ddb for senior citizens up to Rs 1,00,000 ( from the existing Rs 60,000) 4. Deduction in respect of interest income to senior citizen - Income from interest u/s 80TTB for senior citizens will be available up to Rs 50,000/5. No TDS on interest to senior citizens up to Rs 50,000 in respect of bank interest 194A 6. Under section 80-IAC start-ups can enjoy deduction from their total income 100% of their income from business provided they are i. Incorporated on or before 31st March 2021 ii. For 3 consecutive AYs out of 7 years starting from the date of incorporation iii. Whose turnover in any of the 7 years from the date of incorporation does not exceed Rs 25 Crores 7. Deduction of 30% of additional employee cost for a period of 3 AYs including the AY relevant to PY in which the employment is provided i. If employment is provided in the PY ending 31st March 2019 AY ; and ii. By a business engaged in the business of manufacture of apparel [ foot ware and leather products from 1st April 2019] iii. The employee has been employed for a period of not less than 240 days (150 days in the case of apparel, footwear and leather manufacture) and iv. The year of employment shall be the year in which the employment days are complied with and two more years next following for deduction 8. Deduction of 100% of profits and gains of business from total income in the case of a Producer company as defined u/s581a of Companies Act 1956 for a period of 5 AYs commencing from AY where the company does not have turnover above Rs 100 Crores 9. No expenditure or allowance or set off of any loss shall be allowed in respect of undisclosed income determined by the Assessing Officer under section 115BBE of the Act 115BBE(2) D. Return of Income and assessment procedure 1. Every person not being an individual who enters into a financial transaction amounting to Rs 250,000 or more shall apply for a PAN no. ; i. In the case of an entity above, every authorised person who can act on behalf of such above person like MD, CEO, Karta, Partner, and trustee of such Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

6 Budget 2018 An overview Membership no Chartered Accountant above person [who is transacting for an amount of Rs 250,000 or more] also shall be required to apply for PAN Where a company s application under IBC is admitted, the IP can verify the return of income [since the board would have been suspended]. This is clarificatory in nature. New procedure or scheme for completing the assessment of total income or loss u/s143(3) i. This also provides that where an assessee has declared his income in the return of income but there is a difference between what he has returned and what appears in the forms 26AS [consolidated summary of income paid and tax deducted from the person making the payment of income], form 16A and 16[ Certificate issued to assessee showing summary of income paid and Tds under other than salaries and under the head salaries], there will be no addition of missed out portion from the above certificates. ii. I am not able to understand the above point. We will need to wait till the schemes are notified. Tax on bonds issued by GoI with 7.75% interest if annual payment of interest exceeds Rs 10,000[earlier bond with 8% interest is being discontinued]- amendment to section 193 New authority for advanced rulings exclusively under Chapter V of the Customs Act amendment to section 245Q i. The current Authority for Advanced Rulings shall now become an Appellate Authority to hear appeals from Customs Authority for Advanced rulings from the date of such new customs authority for advanced ruling creation ii. The current Authority for Advanced rulings when hearing applications under the Income Tax Act, the revenue member shall be from IT department. Under section 271J, any wrong certificate or valuation report given by an Accountant or a Merchant banker is punishable with Rs 10,000 fine for each such wrong report r certificate. i. Such an order by the AO or Commissioner Appeals is appealable u/s 253 before the ITAT The section 271A read with section 285BA(1) applies to governmental agencies like Registrar or collector or Post Master general who is responsible to register a specified i. This is for parallel information gathering about specified financial transactions from agencies responsible for registering those transactions ii. If those agencies fail to submit the report expected of them, they will suffer fine at the rate of Rs 100 per day or Rs 500 per day as the case may be depending upon the section under 271A they are in default iii. Now the fine amount has been increased to Rs 500 per day and Rs 1000 per day to make compliance more stringent Prosecution shall lie against companies for non-filing of return irrespective of the fact that whether any tax is payable or not.- amendment to section 276CC a. This is in order to prevent abuse of the said proviso by shell companies or by companies holding Benami properties CbC Reporting (as indicated in Memorandum to Finance Bill 2018: Based on model legislation of Action Plan 13 of Base Erosion and Profit Shifting (BEPS) of the Organisation for Economic Co-operation and Development (OECD) and others, following amendments are proposed to be made so as to improve the effectiveness and reduce the compliance burden of such reporting: Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

7 Budget 2018 An overview Membership no Chartered Accountant i) the time allowed for furnishing the Country-by-Country Report (CbCR), in the case of parent entity or Alternative Reporting Entity (ARE), resident in India, is proposed to be extended to twelve months from the end of reporting accounting year; (ii) constituent entity resident in India, having a non-resident parent, shall also furnish CbCR in case its parent entity outside India has no obligation to file the report of the nature referred to in sub-section (2) in the latter s country or territory; (iii) the time allowed for furnishing the CbCR, in the case of constituent entity resident in India, having a non-resident parent, shall be twelve months from the end of reporting accounting year; (iv) the due date for furnishing of CbCR by the ARE of an international group, the parent entity of which is outside India, with the tax authority of the country or territory of which it is resident, will be the due date specified by that country or territory; (v) Agreement would mean an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A, and also an agreement for exchange of the report referred to in sub-section (2) and sub-section (4) as may be notified by the Central Government; (vi) reporting accounting year has been defined to mean the accounting year in respect of which the financial and operational results are required to be reflected in the report referred to in sub-section (2) and sub-section (4). Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

8 Budget 2018 An overview Membership no Chartered Accountant Part A Direct Tax rates for AY Tax Rates for payment of Advance Tax, TDS and payment of taxes under specific chapters or sections in the ITA as indicated in the Schedule to the Finance Bill 2018 and rates for self-assessment for AY Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

9 Budget 2018 An overview Membership no Chartered Accountant i. ii. Amendments to Direct Taxes shall come into force from 1st April 2018 Rates of Income Tax Act, 1961: i. Individuals/HUF/AOP/BoI Income limit Up to Rs 2,50,000 From Rs 250,000 to Rs 500,000 From Rs 500,000 to Rs 10,00,000 Above Rs 10 Lacs AY (Refer Para A of Part III of I Schedule) Nil 5% on income over Rs 250,000 Rs 12,500 plus 20% of income over Rs 5lacs Rs 112,500 plus 30% of income over Rs 10 lacs AY (Refer Para A of Part III of I Schedule) Nil 5% on income over Rs 250,000 Rs 12,500 plus 20% of income over Rs 5lacs Rs 112,500 plus 30% of income over Rs 10 lacs Individuals over 60 years of age but less than 80 years of age Income limit Up to Rs 300,000 From Rs 300,000 to Rs 500,000 From Rs 500,000 to Rs 10,00,000 Above Rs 10 Lacs AY (Refer Para A of Part I of First Schedule) Nil 5% on income over Rs 300,000 Rs 10,000 plus 20% of income over Rs 5lacs Rs 110,000 plus 30% of income over Rs 10 lacs AY (Refer Para A of Part III of I Schedule) Nil 5% on income over Rs 300,000 Rs 10,000 plus 20% of income over Rs 5lacs Rs 110,000 plus 30% of income over Rs 10 lacs Individuals over 80 years of age Income limit Up to Rs 500,000 From Rs 500,000 to Rs 10,00,000 Above Rs 10 Lacs Surcharge AY (Refer Para A of Part I of First Schedule) Nil 20% of income over Rs 5lacs AY (Refer Para A of Part III of I Schedule) Nil 20% of income over Rs 5lacs Rs 100,000 plus 30% of income over Rs 10 lacs Rs 100,000 plus 30% of income over Rs 10 lacs AY (Refer Para A of Part I of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 50 Lakhs but not AY (Refer Para A of Part I of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 crore: AY (Refer Para A of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds AY (Refer Para A of Part III of I Schedule) Surcharge on Income Tax where Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

10 Budget 2018 An overview Membership no Chartered Accountant exceeding Rs 1 crore: On Total Income Tax computed under para A Tax on income of : Difference between Income Tax plus Sur Charge on the total income and Income tax on Rs 1 crores should not be more than Difference between Income Tax plus Sur Charge on the total income and Income tax on Rs 50 lacs should not be more than Difference between Income Tax plus Sur Charge on the total income and Income tax plus Sur Charge on Rs 1 crores should not be more than Add : 10 % of the Total Income Tax Total = Total IT+SC Add : 15 % of the Total Income Tax Total = Total IT+SC Subject to the following limits: Total income tax Total income tax on Rs 50 lacs on Rs 1 Crores Difference between Total income and Rs 50 lakhs Rs 50 Lakhs but not exceeding Rs 1 crore: the total income exceeds Rs 1 crore: Add : 10 % of the Total Income Tax Total = Total IT+SC Add : 15 % of the Total Income Tax Total = Total IT+SC Total income tax on Rs 50 lacs Total income tax on Rs 1 Crores Difference between Total income and Rs 50 lakhs Difference between Total income and Rs 1 crores Difference between Total income and Rs 1 crores The provisions for Educational Cess & Additional Sur Charge remain as they were for AY For the AY , Educational Cess and Additional SC are not dependent on the person status of the assessee like individual, HUF, Co-operative society or firm or domestic company or foreign company. It is based on the Residential status of the person whose income is chargeable to tax or subject to TDS or chargeable to advance tax or subject to TCS provisions Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

11 Budget 2018 An overview Membership no Chartered Accountant and also the nature of income. Hence these are discussed after the tax rates and SC for all categories of persons are discussed. ii. Cooperative Society Income limit Up to Rs 10,000 From Rs 10,000 to Rs 20,000 Above Rs 20,000 AY ( Refer Para B of Part I of I Schedule) 10% of Total income Rs.1,000 plus 20% on income over Rs 10,000 Rs 3,000 plus 30% of income over Rs 20,000 AY ( Refer Para B of Part III of I Schedule) 10% of Total income Rs.1,000 plus 20% on income over Rs 10,000 Rs 3,000 plus 30% of income over Rs 20,000 Surcharge AY (Refer Para B of Part I of First Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 Crore: AY (Refer Para B of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 crores: On Total Income Tax computed under para B Add : 12 % of the Total Income Tax ; Total = Total IT+SC Add : 12 % of the Total Income Tax ; Total = Total IT+SC Subject to the following limits: Tax on income of : Total Income tax on Rs 1 crores Difference between Income Difference between Total Tax plus Sur Charge on the income and Rs 1 crores total income and Income tax on Rs 1 crores should not be more than iii. Total income tax on Rs 1 crores Difference between Total income and Rs 1 crores Firms Income limit Total income of the firm Surcharge AY ( Refer Para C of Part I of First Schedule) 30% of total income AY ( Refer Para C of Part III of I Schedule) 30% of total income AY ( Refer Para C of Part I of First Schedule)Surcharge on AY ( Refer Para C of Part III of I Schedule)Surcharge on Income Tax where the total Income Tax where the total Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

12 Budget 2018 An overview Membership no Chartered Accountant On Total Income Tax computed under para C income exceeds Rs 1 Crore: income exceeds Rs 1 crores: Add : 12 % of the Total Income Tax ; Total = Total IT+SC Add : 12 % of the Total Income Tax ; Total = Total IT+SC Subject to the following limits: Tax on income of : Total Income tax on Rs 1 crores Difference between Income Difference between Total Tax plus Sur Charge on the income and Rs 1 crores total income and Income tax on Rs 1 crores should not be more than iv. Total income tax on Rs 1 crores Difference between Total income and Rs 1 crores Local authority Income limit Total income of the firm AY ( Refer Para D of Part I of First Schedule) 30% of total income AY ( Refer Para D of Part III of I Schedule) 30% of total income Surcharge AY (Refer Para D of Part I of First Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 Crore: AY (Refer Para D of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 crores: On Total Income Tax computed under para D Add : 12 % of the Total Income Tax ; Total = Total IT+SC Add : 12 % of the Total Income Tax ; Total = Total IT+SC Subject to the following limits: Tax on income of : Total Income tax on Rs 1 crores Difference between Income Difference between Total Tax plus Sur Charge on the income and Rs 1 crores total income and Income tax on Rs 1 crores should not be more than v. Total income tax on Rs 1 crores Difference between Total income and Rs 1 crores Domestic Company Income limit AY ( Refer Para E of AY ( Refer Para E of Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

13 Budget 2018 An overview Membership no Chartered Accountant Where the Total Turnover or Gross Receipts for the FY is Rs 50 Crores or less Where the Total Turnover or Gross Receipts for the FY is Rs 250 Crores or less Where the Total Turnover or Gross Receipts for the FY exceeds Rs 50 Crores Where the Total Turnover or Gross Receipts for the FY is Rs 250 Crores or less Surcharge where total income does not exceed Rs 10 crores On Total Income Tax computed under para E Part I of First Schedule) 25 % of total income Part III of I Schedule) 25 % of total income 30 % of total income 30 % of total income 30 % of total income AY (Refer Para E of Part I of First Schedule) AY (Refer Para E of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 Crore but not exceeding Rs 10 Crores: Surcharge on Income Tax where the total income exceeds Rs 1 Crore but not exceeding Rs 10 Crores: Add : 7 % of the Total Income Tax ; Total = Total IT+SC Add : 7 % of the Total Income Tax ; Total = Total IT+SC Subject to the following limits: Total Income tax on income Rs 1 crores Rs 1 crores of Difference between Income Difference between Total Difference between Total Tax plus Sur Charge on the income and Rs 1 crores income and Rs 1 crores total income and Income tax on Rs 1 crores should not be more than Surcharge where total income exceeds Rs 10 Crores AY (Refer Para E of Part I of First Schedule) AY (Refer Para E of Part III of I Schedule) Surcharge on Income Tax Surcharge on Income Tax Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

14 Budget 2018 An overview Membership no Chartered Accountant On Total Income Tax computed under para E where the total income exceeds Rs 10 Crores: where the total income exceeds Rs 10 crores: Add : 12 % of the Total Income Tax ; Total = Total IT+SC Add : 12 % of the Total Income Tax ; Total = Total IT+SC Subject to the following limits: Rs 10 crores Rs 10 Crores Total Income tax plus Sur Charge on Difference between Income Difference between Total Tax plus Sur Charge on entire income and Rs 10 crores Total income and income tax plus SC on Rs 10 crores should not be more than vi. Difference between Total income and Rs 10 crores Company other than a Domestic Company Income limit On income consisting of Royalties and Fees for rendering technical services On the balance of total income Surcharge where total income does not exceed Rs 10 crores On Total Income Tax computed under para E Total Income tax on income of Difference between Income Tax plus Sur Charge and AY ( Refer Para E of Part I of First Schedule) 50 % of total income AY ( Refer Para E of Part III of I Schedule) 50 % of total income 40 % of total income 40 % of total income AY (Refer Para E of Part I of First Schedule) AY (Refer Para E of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 Crore but not exceeding Rs 10 Crores: Surcharge on Income Tax where the total income exceeds Rs 1 crores but not exceeding Rs 10 crores: Add : 2 % of the Total Income Tax ; Total = Total IT+SC Add : 2 % of the Total Income Tax ; Total = Total IT+SC Subject to the following limits: Rs 1 crores Rs 1 Crores Difference between Total income and Rs 1 crores Difference between Total income and Rs 1 crores Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

15 Budget 2018 An overview Membership no Chartered Accountant Income tax on Rs 1 crores should not be more than Surcharge where total income exceeds Rs 10 Crores On Total Income Tax computed under para E AY (Refer Para E of Part I of First Schedule) AY (Refer Para E of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 10 Crores: Surcharge on Income Tax where the total income exceeds Rs 10 crores: Add : 5 % of the Total Income Tax ; Total = Total IT+SC Add : 5 % of the Total Income Tax ; Total = Total IT+SC Subject to the following limits: Rs 10 crores Rs 10 Crores Total Income tax plus Sur Charge on Difference between Income Difference between Total Tax plus Sur Charge on entire income and Rs 10 crores Total income and income tax plus SC on Rs 10 Crores should not be more than Difference between Total income and Rs 10 crores For the AY , Educational Cess and Additional SC are not dependent on the person status of the assessee like individual, HUF, Co-operative society or firm or domestic company or foreign company. It is based on the Residential status of the person whose income is chargeable to tax or subject to TDS or chargeable to advance tax or subject to TCS provisions and also the nature of income. Hence these are discussed here for all categories of persons. Educational Cess & Additional Sur Charge Refer section 2(11) & 2(12) of Finance Bill 2018 AY (Refer Part I of First Schedule) in all cases Education cess On Income tax including SC ( wherever applicable) at the rate of 2 % On Income tax including SC ( wherever applicable) at the rate of 1 % Secondary and Higher Education Cess on income-tax Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

16 Budget 2018 An overview Membership no Chartered Accountant Rates of Tax and SC applicable for the AY shall be as per Para A to E of Part I to First Schedule to FA Educational Cess and Secondary Educational Cess on IT and SC Refer 2(11) & 2(12) of Finance Act 2018 Refer Sections 2(1) (2) & (3) of FA In cases to which the provisions of the following Chapters and Sections of the Income-tax Act, 1961 and with reference to the rates imposed by sub-section (1) or the rates as specified in that Chapter or section, as the case may be and the applicable Sur Charge and the applicable Health & Educational Cess on Income Tax plus SC. Refer Section 2(3) of Finance Bill 2018: Section 110 Determination of tax when total income includes income on which no tax is payable Section 111 Tax on accrued balance of Recognized PF Section 111 A - Tax on short-term capital gains in certain cases. For the AY Tax chargeable as per Sur Charge on Tax chargeable Educational Cess on provisions of Section 2(3) of as per provisions of Section Income Tax calculated Finance Bill (3) of Finance Bill 2018 on IT and SC and Additional Educational Cess on IT and SC ( without any differentiation as to the income being payable to a resident or NonResident Chapter XII (tax rates, SC and ED Cess and Addl Cess based on either the chapter or Section or Part I of First Schedule). If the First schedule does not give any rate then refer the section. If the section is amended in the current Finance bill, refer to the Bill else the existing ITA) As per rates of income tax SC shall be as referred to in 2% on IT+SC and 1% on indicated in Part I of First Para A,B,C,D,E or F of Part I of IT+SC Schedule ( applicability of Para First Schedule A,B,C, D, E or F depends on the category of the Person) As per Rule 9(1) or Rule 9(2) of SC shall be as referred to in 2% on IT+SC and 1% on Part A to Fourth Schedule to Para A of Part I of First IT+SC the IT Act 1961 Schedule 15% of such STCG SC shall be as referred to in 2% on IT+SC and 1% on Para A,B,C,D,E or F of Part I of IT+SC First Schedule Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

17 Budget 2018 An overview Membership no Chartered Accountant Section 112 -Tax on long-term capital gains. 20 % of such STCG SC shall be as referred to in Para A,B,C,D,E or F of Part I of First Schedule 2% on IT+SC and 1% on IT+SC Section 112A -Tax on long term capital gains in certain cases. ( amended by FA 2018) LTCG arising from transfer of LTCA being equity shares in a company or units in an Equity oriented fund or a unit in a business trust The STT has been paid both at the time of acquisition and transfer in the case of Equity shares and at the time of transfer in the case of units in an equity oriented fund or business trust This section was not in existence for AY So not applicable Section 113 -Tax in the case of block assessment of search cases. The total undisclosed income of the block period, determined under section 158BC, shall be chargeable to tax at the rate of 60 % (sixty per cent) Section 114-Tax on capital gains in cases of assessees other than [Omitted by the Finance (No. 2) Act, 1967, w.e.f and reintroduced with material modifications in section 80T.] companies. Section Tax on capital gains in case of companies. Tax chargeable under this section shall be increased by a surcharge, if any, levied by any Central Act and applicable in the assessment year relevant to the previous year in which the search is initiated under section 132 or the requisition is made under section 132A. 2% on IT+SC and 1% on IT+SC [Omitted by the Finance Act, 1987, w.e.f ] Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

18 Budget 2018 An overview Membership no Chartered Accountant Section 115A - Tax on dividends, royalty and technical service fees in the case of a non-resident (not being a company) or of a foreign company. Under Section 115-A(1)(a) - (i) dividends other than dividends referred to in section 115-O ; or (ii) interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency not being interest of the nature referred to in sub-clause (iia) or sub-clause (iiaa); or (iia) interest received from an infrastructure debt fund referred to in clause (47) of section 10; or (iiaa) interest of the nature and extent referred to in section 194LC; or (iiab) interest of the nature and extent referred to in section 194LD; or (iiac) distributed income being interest referred to in subsection (2) of section 194LBA; (iii) income received in respect of units, purchased in foreign currency, of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India Under section 115A-(1)(b) (A) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, (B) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, 20% 20% 5% the rate mentioned in Para A of Part I to First Schedule (10% or 15% based on total income ) or sub clause II of Para E of Part I of First Schedule ( 2 % or 5% depending on the Total income) 2% on IT+SC and 1% on IT+SC 5% 5% 5% 20% the rate mentioned in Para A of Part I to First Schedule (10% or 15% based on total income ) or sub clause II of Para E of Part I of First Schedule ( 2 % or 5% depending on the Total income) 2% on IT+SC and 1% on IT+SC 2% on IT+SC and 1% on IT+SC Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

19 Budget 2018 An overview Membership no Chartered Accountant 37 10% (at the rate of [ten] per cent ;) 37 10% ( at the rate of [ten] per cent) the rate mentioned in sub clause II of Para E of Part I of First Schedule ( 2 % or 5% depending on the Total income) the rate mentioned in sub clause II of Para E of Part I of First Schedule ( 2 % or 5% depending on the Total income) 2 % on IT+SC and 1% on IT+SC2% on IT+SC and 1% on IT+SC Section 115AB In respect of the total income of an assessee, being an overseas financial organisation (hereinafter referred to as Offshore Fund) Tax on income from units purchased in foreign currency or capital gains arising from their transfer. Section 115AB(1)- (a) income received in respect of units purchased in foreign currency; or (b) income by way of long-term capital gains arising from the transfer of units purchased in foreign currency, 10% the rate mentioned in sub clause II of Para E of Part I of First Schedule ( 2 % or 5% depending on the Total income) the rate mentioned in sub clause II of Para E of Part I of First Schedule ( 2 % or 5% depending on the Total income) 2% on IT+SC and 1% on IT+SC Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

20 Budget 2018 An overview Membership no Chartered Accountant Section 115 AC-Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer, In the case of the total income of an assessee, being a non- resident. 115AC(1)- (i) the amount of income-tax calculated on the income by way of interest or dividends, other than dividends referred to in section 115-O, as the case may be, in respect of bonds referred to in clause (a) or Global Depository Receipts referred to in clause (b), if any, included in the total income, (ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (c), if any, At the rate of ten per cent (10%) At the rate of ten per cent (10%) the rate mentioned in Para A of Part I to First Schedule (10% or 15% based on total income ) or sub clause II of Para E of Part I of First Schedule ( 2 % or 5% depending on the Total income) 2% on IT+SC and 1% on IT+SC Section 115ACA Tax on total income of an assessee, being an individual, who is a resident and an employee of an Indian company engaged in specified knowledge based industry or service, or an employee of its subsidiary engaged in specified knowledge based industry or service (hereafter in this section referred to as the resident employee - i) the amount of income-tax calculated on the income by way of dividends, other than dividends referred to in section 115-O, in respect of Global Depository Receipts referred to in clause (a), if any, included in the total income,; Para A of Part I to First Schedule : (a) On total income exceeding fifty lakh rupees but not exceeding one crore rupees, at the rate of ten per cent of such income-tax; and 2% on IT+SC and 1% on IT+SC Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

21 Budget 2018 An overview Membership no Chartered Accountant (ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, at the rate of ten per cent At the rate of ten per cent (10%) At the rate of ten per cent (10%) (b) On a total income exceeding one crore rupees, at the rate of fifteen per cent of such income-tax: Section 115AD (amended by FA 2018) Tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer. (i) the amount of income-tax calculated on the income in respect of securities referred to in clause (a) [(a) income other than income by way of dividends referred to in section 115-O received in respect of securities (other than units referred to in section 115AB)], if any, included in the total income, at the rate of twenty per cent : Provided that the amount of income-tax calculated on the income by way of interest referred to in section 194LD shall be at the rate of five per cent; (ii) the amount of income-tax calculated on the income by way of short-term capital gains referred to in clause (b) [(b) income by way of short-term or long-term capital gains arising from the transfer of such securities], if any, included in the total income, at the rate of thirty per cent Provided that the amount of income-tax calculated on the income by way of short-term capital gains referred to in section 111A shall be at the rate of fifteen per cent; (iii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per 20% 5% 2% on IT+SC and 1% on IT+SC 30% Per sub clause II of Para E of Part I of First Schedule ( 2 % or 5% depending on the Total income) 15% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

22 Budget 2018 An overview Membership no Chartered Accountant cent Provided that in case of income arising from the transfer of a long-term capital asset referred to in section 112A, income-tax at the rate of ten per cent. shall be calculated on such income exceeding one lakh rupees 10% 10% on LTCG exceeding Rs 1 lacs Section 115B- Tax on profits and gains of life insurance business. 115B(1) (i) the amount of income-tax calculated on the amount of profits and gains of the life insurance business included in the total income, at the rate of twelve and one-half per cent Section 115BA -Tax on income of certain domestic companies -( subject to conditions mentioned under sub-section (2) and subject to sections 111A and 112 in this chapter) 12 ½ % of such income from Insurance business 25% of the income Per sub clause I of Para E of Part I of First Schedule ( 7 % or 12% depending on the Total income) since Insurance companies in India are Domestic companies only Per sub clause I of Para E of Part I of First Schedule ( 7 % or 12% depending on the Total income) since Insurance companies in India are Domestic companies only 2% on IT+SC and 1% on IT+SC 2% on IT+SC and 1% on IT+SC Section 115 BB-Tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever. (i) the amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at the rate of thirty per cent Refer Para A to E of Part I of First Schedule to FA % 2% on IT+SC and 1% on IT+SC 10% or 15% in the case of individuals & HUFs; 12 % in the case of Cooperative Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

23 Budget 2018 An overview Membership no Chartered Accountant society, Firm or local authority ; 7 % or 12% in the case of domestic company and 2 % or 5 % in the case of foreign company Section 115BBA-Tax on non-resident sportsmen or sports associations. (1) Where the total income of an assessee, (a) being a sportsman (including an athlete), who is not a citizen of India and is a non-resident, includes any income received or receivable by way of (i) participation in India in any game (other than a game the winnings wherefrom are taxable under section 115BB) or sport; or (ii) advertisement; or (iii) contribution of articles relating to any game or sport in India in newspapers, magazines or journals; or (b) being a non-resident sports association or institution, includes any amount guaranteed to be paid or payable to such association or institution in relation to any game (other than a game the winnings wherefrom are taxable under section 115BB) or sport played in India ; or (c) being an entertainer, who is not a citizen of India and is a non-resident, includes any income received or receivable from his performance in India, 20% Refer Para A of Part I of First Schedule -10% or 15% if the person is an individual and 2% +1 % Refer clause II of Para E of Part I of First Schedule -2 % or 5% if the person is a Foreign company 20% 20% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

24 Budget 2018 An overview Membership no Chartered Accountant Section 115BBB - Tax on income from units of an open-ended equity oriented fund of the Unit Trust of India or of Mutual Funds. (1) Where the total income of an assessee includes any income from units of an open-ended equity oriented fund of the Unit Trust of India or of a Mutual Fund, the income-tax payable shall be the aggregate of (a) the amount of income-tax calculated on income from units of an open-ended equity oriented fund of the Unit Trust of India or of a Mutual Fund, at the rate of ten per cent 10% Refer clause I of Para E of Part I of First Schedule -7 % or 12% if the person is a Foreign company 2% +1 % SC as provided in Para A of Part I to First Schedule ( 10% or 15% depending on total income) 2% + 1 % Section 115BBC -Anonymous donations to be taxed in certain cases. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any university or other educational institution referred to in sub-clause (iiiad) or subclause (vi) or any hospital or other institution referred to in subclause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be (i) the amount of income-tax calculated at the rate of thirty per cent on the aggregate of anonymous donations received in excess of the higher of the following, namely: (A) five per cent of the total donations received by the assessee; or (B) one lakh rupees 30% of the higher of ( Rs 1 lacs or 5% of total donations) Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

25 Budget 2018 An overview Membership no Chartered Accountant Section 115BBD -Tax on certain dividends received from foreign companies. On the total income of an assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of (a) the amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen per cent 15% SC as provided in clause I of Para E of Part I to First Schedule ( 7% or 12% depending on total income) 2% + 1 % Section 115BBDA -Tax on certain dividends received from domestic companies. On the total income of 42[an assessee, being an individual, a Hindu undivided family or a firm], resident in India, that includes any income in aggregate exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic company or companies, the income-tax payable shall be the aggregate of (a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding ten lakh rupees, at the rate of ten per cent; and 10% SC as per Para A of Part I to First schedule (10 % or 15%) 2% + 1 % Or 12 % as per Para C of Part I to First schedule Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

26 Budget 2018 An overview Membership no Chartered Accountant Section 115BBE amended by FA Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D. [(1) Where the total income of an assessee, (a) includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or (b) determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a), the income-tax payable shall be the aggregate of (i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent th 25% ( refer 7 proviso to section 2(3) of FA 2018) 2% + 1 % 60% Section 115BBF - [Tax on income from patent. On the total income of an eligible assessee that includes any income by way of royalty in respect of a patent developed and registered in India, the income-tax payable shall be (a) the amount of income-tax calculated on the income by way of royalty in respect of the patent at the rate of ten per cent 10% As per Para A or B or C or D or E of Part I to First schedule to FA 2018 depending on who the assessee person is 2% + 1 % Section 115BBG- Tax on income from transfer of carbon credits. On the total income of an assessee that includes any income by way of transfer of carbon credits, the income-tax payable shall As per Para A or B or C or D Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

27 Budget 2018 An overview Membership no Chartered Accountant be (a) the amount of income-tax calculated on the income by way of transfer of carbon credits, at the rate of ten per cent; 10% or E of Part I to First schedule to FA 2018 depending on who the assessee person is 2% + 1 % Chapter XII-A Section 115C - SPECIAL Tax rates will be discussed in other sections as this section addresses the definitions. Section 115D -SPECIAL This section talks about computation and not tax rates PROVISIONS RELATING TO CERTAIN INCOMES OF NON-RESIDENTS Definitions. PROVISIONS RELATING TO CERTAIN INCOMES OF NON-RESIDENTS Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

28 Budget 2018 An overview Membership no Chartered Accountant Section 115E -Tax on investment income and long-term capital gains. On the total income of an assessee, being a non-resident Indian, that includes (a) any income from investment or income from long-term capital gains of an asset other than a specified asset; (b) income by way of long-term capital gains, the tax payable by him shall be the aggregate of (i) the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent; (ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; Section 115F - Capital gains on transfer of foreign exchange assets SC as per Para A of Part I to First Schedule to the FA % +1% 20% 10% or 15 % in the case of an individual depending upon his total income 10% Tax rates not discussed not to be charged in certain cases Section 115G - Return of income not to be filed in certain cases. Tax rates not discussed Section 115H - Benefit under Chapter to be available in certain cases Tax rates not discussed even after the assessee becomes resident. Section 115I - Chapter not to apply if the assessee so chooses. Tax rates not discussed Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

29 Budget 2018 An overview Membership no Chartered Accountant Section 115JB - Special provision for payment of tax by certain companies. ( amended by FA 2018 with ref to companies under IBC resolution and exemption to Foreign companies from the applicability of section 115JB if its income contains only income from Profits & gains of Business or profession u/s 44B, 44BB, 44BBA or 44BBB and income is offered to tax at the rates prescribed under those sections) 115JB -Foreign companies where the income contains only income from Profits & gains of Business or profession u/s 44B, 44BB, 44BBA or 44BBB and income is offered to tax at the rates prescribed under those sections - On Income u/s 44B o in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" which is : (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and (ii) The amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped 18 ½ % of Book profits if the tax computed under normal provisions is lower than 18 ½ % of book profits As per clause I of Para E of Part I to First schedule to the FA % or 12 % depending upon the total income 2% +1% As per clause II of Para E of Part I to First schedule to the FA % or 5 % depending upon the total income 2% +1% 40% or 50% on the 7 ½ % of such aggregate amounts paid or payable as referred to in the sub section(2) Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

30 Budget 2018 An overview Membership no Chartered Accountant at any port outside India. - On income u/s 44BB o in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" which is (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India; and (b) The amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India. - On income u/s 44BBA o In the case of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to five per cent of the aggregate of 40% or 50% on the 10 % of such aggregate amounts paid or payable as referred to in the sub section(2) Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

31 Budget 2018 An overview Membership no Chartered Accountant the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" which is (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods from any place in India; and (b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods from any place outside India. - On Income u/s 44BBB o in the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf, a sum equal to ten per cent of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession 40% or 50% on the 5 % of such aggregate amounts paid or payable as referred to in the sub section(2) Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

32 Budget 2018 An overview Membership no Chartered Accountant 40% or 50% on the said 10 % of such aggregate amounts paid or payable as referred to in the sub section(2) Section 115JC - Special provisions for payment of tax by certain persons other than a company. 18 ½ % of the Adjusted Total Income if the tax computed under normal provisions is lower than 18 ½ % of Adjusted Total income or In the case of units set up in IFSC at 9% of the Adjusted Total Income if the tax As per clause I of Para E of Part I to First schedule to the FA % or 12 % depending upon the total income if it is an LLP and As per Para B or C or D of Part I to First schedule to the 2% +1% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

33 Budget 2018 An overview Membership no Chartered Accountant computed under normal provisions is lower than 9 % of Adjusted Total income FA 2018 at 12 % depending upon the total income if it is a Cooperative society or firm or local authority Chapter XII-FA Section 115UA -Tax on income of unit holder and business trust. The total income of a business trust shall be charged to tax at the maximum marginal rate. 30% As per Para A to E of Part I of First Schedule to FA %+1% Chapter XII-FB Section 115UB Tax on income of investment fund and its unit As per Para A to E of Part I of First Schedule to FA 2018 holders. (4) The total income of the investment fund shall be charged to tax (i) at the rate or rates as specified in the Finance Act of the relevant year, where such fund is a company or a firm; or (ii) at maximum marginal rate in any other case. 2%+1% 25% or 30% if it is a domestic 40 % or 50 % if it is a foreign company; At 30 % if it is a firm; At the rates specified in Para A, B, D of Part I to First Schedule if the unit holder is an individual or HUF or Cooperative society or local authority Sub-section (1A) of section 161 Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

34 Budget 2018 An overview Membership no Chartered Accountant (1A) Notwithstanding anything contained in sub-section (1), where any income in respect of which the person mentioned in clause (iv) of sub-section (1) of section 160 [(iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any Wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees ] is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate : Section 164 Charge of tax where share of beneficiaries unknown. tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate 30% As per para A of Part I to First Schedule 30% As per para A of Part I to First Schedule 30% As per para A of Part I to First Schedule 2%+1% 2%+1% Section 164A -Charge of tax in case of oral trust 2%+1% Tax shall be charged on such income at the maximum marginal rate. Section 167B -Charge of tax where shares of members in association of persons or body of individuals unknown, etc. tax shall be charged on the total income of the association or body at the maximum marginal rate %+1% 30% As per para A of Part I to First Schedule The rates discussed above are for AY For AY , the rates of tax shall be as per Part I to first schedule of FA 2018 shall be relevant which shall be the rates as per Part III to First Schedule of FA 2017 Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

35 Budget 2018 An overview Membership no Chartered Accountant Rates of Tax and SC applicable for the AY shall be as per the rates in the sections in ITA as amended by FA Educational Cess and Secondary Educational Cess on IT and SC Refer 2(13) of Finance Act 2018 Refer Sections 2(4) of FA Refer Section 2(3) of Finance Bill 2018: The rates of tax, SC and Educational Cess will be based on Part I of First Schedule to the Current Finance Act 2018 ( which shall be Part III of First schedule to FA 2017) Also if no rates have been prescribed in the Part I to the First Schedule to FA 2018[ Part III of First Schedule to Finance Act 2017], then refer to any amendments to sections contained in Chapters referred to below. If yes, the rates in such amended sections shall apply. Else the rates in those sections under the existing ITA shall apply. 5. Since the discussion above pertains to tax rates for AY , as provided under section 2(3) of FA 2018, the rates discussed above pertain to AY only. 6. For AY , the discussion is under Section 2(9) of FA 2018 which will be either as per rates prescribed under a. Part III of First Schedule to FA 2018 or b. Rates mentioned under the ITA under specific sections or Chapters mentioned in Section 2(9) of FA 2018 c. These will be for computation of tax under select chapters or sections or advance tax or TCS or deduction of tax under salaries d. There is no SC if the income subject to TDS or advance tax is payable to a resident or Domestic Company e. Health & educational Cess 4% of Tax irrespective of whether it is paid to a resident or non-resident Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

36 Budget 2018 An overview Membership no Chartered Accountant Rates at which tax has to be charged as per the rates provided in the sections and the applicable Sur Charge and the applicable Health & Educational Cess on Income Tax plus SC. Refer Section 2(4) of Finance Bill 2018: In respect of the Tax chargeable on income under following sections : O Tax on distributed profits of domestic companies QA Tax on distributed income to Shareholders R(2) Tax on distributed income to Unit Holders (i) on income distributed to any person being an individual or a Hindu undivided family by a money market mutual fund or a liquid fund; (ii) On income distributed to any other person by a money market mutual fund or a liquid fund; (iii) ten per cent. On income distributed to any person by Tax chargeable as per provisions of Section 2(4) of Finance Bill 2018 Sur Charge on Tax chargeable as per provisions of Section 2(4) of Finance Bill 2018 Educational Cess & Additional Sur Charge Refer Section 2(13) of Finance Bill 2018 AY (Refer Section 2(4) to 2(10) of Finance Bill 2018 if the income subject to tax is payable to Domestic Companies and Residents in India in all cases, Health & Educational Cess on Income Tax plus SC AY (Refer Section 2(4) to 2(10) of Finance Bill 2018 if the income subject to tax is payable to other than Domestic Companies and NonResidents in India in all cases,, Health & Educational Cess on Income Tax plus SC on IT +SC 15% normal dividend and 30% if covered u/s (22)(e) 12% 4% 4% 20% 12% 4% 4% 25% 12% 4% 4% 30% 12% 4% 4% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

37 Budget 2018 An overview Membership no Chartered Accountant an equity oriented fund; (iv On income distributed to any person being an individual or a Hindu undivided family by a fund other than a money market mutual fund or a liquid fund or an equity oriented fund; and (v) On income distributed to any other person by a fund other than a money market mutual fund or a liquid fund or an equity oriented fund TA Tax on distributed income to Investors (i) twenty-five per cent on income distributed to any person being an individual or a Hindu undivided family; (ii) thirty per cent on income distributed to any other person 5. 10% 12% 4% 4% 25% 12% 4% 4% 30% 12% 4% 4% 25% 12% 4% 4% 30% 12% 4% 4% 30% 12% 4% 4% 115TD Tax on accreted income Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

38 Budget 2018 An overview Membership no Chartered Accountant Rates of Tax and SC applicable for the AY shall be as per the rates in the below Chapters and sections in ITA as amended by FA 2018 or as per Part II to First Schedule to FA Educational Cess and Secondary Educational Cess on IT and SC Refer 2(13) of Finance Act 2018 Refer Sections 2(5) of FA TDS, SC and Educational Cess & Additional Sur Charge Refer Section 2(13) of Finance Bill 2018 Refer Section 2(5) of Finance Bill 2018: In cases in which tax has to be deducted under sections of the Income-tax Act, at the rates in force, the deductions shall be made at the rates specified in Part II of the First Schedule In the case of an assessee being a resident or a domestic Company, there is no Surcharge on the TDS AY (Refer Section 2(4) to 2(10) of Finance Bill 2018,No Health and Educational Cess if the income subject to tax is payable to Domestic Companies and Residents in India in all cases Tax deductible under the below Chapters or sections in the FY AY Refer provisions of Section 2(5) of Finance Bill 2018 In the case of a person other than a Company:(a) where the person is resident in India salary Interest on securities - on income by way of interest payable on (A) any debentures or securities for money issued by or on behalf of any local authority or a corporation established by a Central, State or Provincial Act; (B) any debentures issued by a company where such debentures are listed on a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and any rules made thereunder; (C) any security of the Central or State Government; Dividends ( other than dividends referred to u/s 115O) A Interest other than Interest on Securities B Winnings from Lottery or cross word puzzle At the rates in force 10% 10% 10% 10% 10% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

39 Budget 2018 An overview Membership no Chartered Accountant BB Winnings from horse race 194D Insurance Commission 194LBA Income from units of business trust 194LBB Income from Units of Investment Fund 194LBC Income in respect of units in Securitization Trust (i) twenty-five per cent, if the payee is an individual or a Hindu undivided family; (ii) thirty per cent, if the payee is any other person Other sums 30% 30% 5% 10% 10% 25% 30% 10% Rates of Tax and SC applicable for the AY shall be as per the rates in the sections or chapters in ITA as amended by FA 2018 or rates as per Part II to First Schedule to FA Educational Cess and Secondary Educational Cess on IT and SC Refer 2(13) of Finance Act 2018 Refer Sections 2(5) of FA Educational Cess & Additional Sur Charge Refer Section 2(13) of Finance Bill 2018 Refer Section 2(5) of Finance Bill 2018: In cases in which tax has to be deducted under sections of the Income-tax Act, at the rates in force, the deductions shall be made at the rates specified in Part II of the First Schedule In the case of an assessee being a non- resident or a Foreign Company, the tax shall be increased by a Surcharge on the TDS as per indications in the Table at the end of Section 2(5) discussions AY (Refer Section 2(4) to 2(10) of Finance Bill 2018, Health and Educational 4% is payable on IT plus SC if the income subject to tax is payable to foreign Companies and Non -Residents in India in all cases Tax deductible under the below Chapters or sections in the FY AY Refer provisions of Section 2(5) of Finance Bill 2018 In the case of a person other than a Company:(b) where the person is Not resident in India- Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

40 Budget 2018 An overview Membership no Chartered Accountant (i) in the case of a non-resident Indian Refer section 195 (A) on any investment income (B) on income by way of long-term capital gains referred to in section 115E or sub-clause (iii) of clause (c) of sub-section (1) of section 112 ( C) on income by way of long-term capital gains referred to in section 112A (D) on other income by way of long-term capital gains [not being long-term capital gains referred to in clauses (33) and (36) of section 10] (E) on income by way of short-term capital gains referred to in section 111A (F) on income by way of interest payable by Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency (not being income by way of interest referred to in section 194LB or section 194LC) (G ) on income by way of royalty payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern where such royalty is in consideration for the transfer of all or any rights (including the granting of a licence) in respect of copyright in any book on a subject referred to in the first proviso to sub-section (1A) of section115a of the Income-tax Act, to the Indian concern, or in respect of any computer software referred to in the second proviso to sub-section (1A) of section115a of the Income-tax Act, to a person resident in India (H) on income by way of royalty [not being royalty of the nature referred to in sub-item ( b)( i)( G)] payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy I) on income by way of fees for technical services payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy (J) on income by way of winnings from lotteries, crossword puzzles, card games and other games of any sort (K) on income by way of winnings from horse races (L) on the whole of the other income Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph % 10% 10% 20% 15% 20% 10% 10% 10% 40

41 Budget 2018 An overview Membership no Chartered Accountant (ii) where the person is any other Non-resident person: (A) on income by way of interest payable by Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency (not being income by way of interest referred to in section194lb or section 194LC) Section 195 (B) on income by way of royalty payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern where such royalty is in consideration for the transfer of all or any rights (including the granting of a licence) in respect of copyright in any book on a subject referred to in the first proviso to sub-section (1A) of section 115A of the Income-tax Act, to the Indian concern, in respect of any computer software referred to in the second proviso to subsection (1A) of section 115A of the Income-tax Act, to a person resident in India - Section 195 (C) on income by way of royalty [not being royalty of the nature referred to in sub-item ( b)(ii)( B)] payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy Section 195 (D) on income by way of fees for technical services payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy Section 195 (E) on income by way of winnings from lotteries, crossword puzzles, card games and other games of any sort Section 195 (F) on income by way of winnings from horse races - Section 195 (G) on income by way of short-term capital gains referred to in section 111A Section 195 (H) on income by way of long-term capital gains referred to in sub-clause (iii) of clause (c) of sub-section (1) of section 112 ( S 195) (I) on income by way of long-term capital gains referred to in section 112A Section 195 (J) on income by way of other long-term capital gains [not being long-term capital gains referred to in clauses (33) and (36) of section 10] Section 195 Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph % 30% 30% 20% 10% 10% 10% 30% 30% 15% 10% 10% 41

42 Budget 2018 An overview Membership no Chartered Accountant (K) on the whole of the other income Section % 30% SC on TDS payable: where the person is a Non- Resident 1. In the case of a person other than a company: a. In the case of every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, being a non-resident, calculated, I. At the rate of ten per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds fifty lakh rupees but does not exceed one crore rupees; II. At the rate of fifteen per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees; and b. In the case of every co-operative society or firm, being a non-resident, calculated at the rate of twelve per cent., where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees; 2. In the case of a person being a company a. Item 2 of this Part shall be increased by a surcharge, for the purposes of the Union, in the case of every company other than a domestic company, calculated, I. At the rate of two per cent of such income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees but does not exceed ten crore rupees; and II. At the rate of five per cent of such income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds ten crore rupees. Rates of Tax and SC applicable for the AY shall be as per the rates in the sections in ITA as amended by FA 2018 or as per rates in Part II to First Schedule to FA Educational Cess and Secondary Educational Cess on IT and SC Refer 2(13) of Finance Act 2018 Refer Sections 2(5) of FA Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

43 Budget 2018 An overview Membership no Chartered Accountant TDS, SC and Educational Cess & Additional Sur Charge Refer Section 2(13) of Finance Bill 2018 Refer Section 2(5) of Finance Bill 2018: In cases in which tax has to be deducted under sections of the Income-tax Act, at the rates in force, the deductions shall be made at the rates specified in Part II of the First Schedule Tax deductible under the below Chapters or sections in the FY AY Refer provisions of Section 2(5) of Finance Bill 2018 In the case of a company (a) where the company is a domestic company [In the case of an assessee being a Domestic Company, there is no Surcharge on the TDS AY (Refer Section 2(4) to 2(10) of Finance Bill 2018,no Health and Educational Cess is payable on IT plus SC if the income subject to tax is payable to Domestic Companies in India in all cases] A -on income by way of interest other than Interest on securities B-on income by way of winnings from lotteries, crossword puzzles, card games and other games of any sort BB -on income by way of winnings from horse races on any other income 10 % 30 % 30 % 10 % (b) where the company is not a domestic company [In the case of an assessee being a Company other than a Domestic Company, the tax shall be increased by a Surcharge on the TDS as per indications in the Table at the end of the below discussions AY (Refer Section 2(4) to 2(10) of Finance Bill 2018, Health and Educational 4% is payable on IT plus SC if the income subject to tax is payable to a Foreign Companies in all cases] 1. on income by way of winnings from lotteries, crossword puzzles, card games and other games of any sort [Section 194B] 2. on income by way of winnings from horse races [Section 194BB] 3. on income by way of interest payable by Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency (not being income by way of interest referred to in section 194LB or section 194LC) [ section 195] 30 % 30 % 20 % Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

44 Budget 2018 An overview Membership no Chartered Accountant 4. on income by way of royalty payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 31st day of March, 1976 where such royalty is in consideration for the transfer of all or any rights (including the granting of a licence) in respect of copyright in any book on a subject referred to in the first proviso to sub-section (1A) of section 115A of the Income-tax Act, to the Indian concern, or in respect of any computer software referred to in the second proviso to sub-section (1A) of section 115A of the Income-tax Act, to a person resident in India [ section 195] 5. on income by way of royalty [not being royalty of the nature referred to in sub-item (b)(iv)] payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy [ section 195] A. Where the agreement is made after the 31st day of March, 1961 but before the 1st day of April, 1976 B. Where the agreement is made after the 31st day of March, on income by way of fees for technical services payable by the Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy [ section 195] A. Where the agreement is made after the 29th day of February, 1964 but before the 1st day of April, 1976 B. Where the agreement is made after the 31st day of March, on income by way of short-term capital gains referred to in section 111A [section 195] 8. on income by way of long-term capital gains referred to in sub-clause (iii) of clause (c) of sub-section (1) of section 112 [ section 195] 9. on income by way of long-term capital gains referred to in section 112A [ section 195] 10. On income by way of other long-term capital gains [not being long-term capital gains referred to in clauses (33) and (36) of section 10] [Section 195] 11. on any other income [ section 195] 10 % 50 % 10 % 50 % 10 % 15 % 10 % 10 % 20% 40% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

45 Budget 2018 An overview Membership no Chartered Accountant Item 2 of this Part shall be increased by a surcharge, for the purposes of the Union, in the case of every company other than a domestic company, calculated, (a) at the rate of two per cent of such income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees but does not exceed ten crore rupees; and (b) At the rate of five per cent of such income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds ten crore rupees. 2% 5% Rates of Tax and SC applicable for the AY shall be as per the rates in the sections or chapters in ITA as amended by FA 2018 or as per rates in Part II to First Schedule to FA Educational Cess and Secondary Educational Cess on IT and SC Refer 2(13) of Finance Act 2018 Refer Sections 2(6) of FA Tax and SC as per Section 2 (6) of FA 2018 and Educational Cess & Additional Sur Charge as per Section 2(13) of Finance Bill 2018: ( Refer respective sections of ITA or the amendments in Finance Bill 2018 ) A. SC on Income Tax only if the person to whom the income is payable is a Non Resident or a Foreign company as per table below B. No Health and Educational SC if the person receiving the income is a resident or a Domestic Company C. If the person receiving the income is a Non- Resident or a foreign 4 % of Tax plus SC Refer Section 2(6) of Finance Bill 2018: In respect of the income chargeable under sections of the Income-tax Act, the deductions shall be made at the rates specified in those sections : A Payment of accumulated balance due to an employee C Payment to contractors (i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family; (ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, Tax deductible under the below Chapters or sections in the FY AY Refer provisions of Section 2(6) of Finance Bill % 1% 2% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

46 Budget 2018 An overview Membership no Chartered Accountant DA Payment in respect of Life Insurance Policy[ other than those covered u/s 10(10D) 194E Payment to Non-Resident Sports person or Sports association 194EE Payments in respect of deposits under NSC 194F payments on account of repurchase of units by MF or UTI 194G Commission on the sale of lottery tickets 194H Commission on brokerage 194-I Rent a) two per cent for the use of any machinery or plant or equipment; and (b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings IA Payment on transfer of immovable property other than agricultural land IB Payment of rent by individuals and HUF IC Payment under specified agreement J Fees for professional or technical services covering (a) fees for professional services, or (b) fees for technical services, or (ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company, or (c) royalty, or (d) any sum referred to in clause (va) of section 28, LA Payment of compensation on acquisition of immovable property LB Income by way of infrastructure debt fund 1% 20% 10% 20% 5% 5% 2% 10% 1% 5% ( in the last month of FY or lease subject to the amount of rent payable in that month) 10% 10% 10% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

47 Budget 2018 An overview Membership no Chartered Accountant LBA income from units of a business trust a. To a resident ( income referred to u/s 115UA being in the nature referred to u/s 10(23FC)(a) or 10(23FCA) b. To a non-resident or a foreign company ( income referred to u/s 115UA being in the nature referred to u/s 10(23FC)(a)) c. To a non-resident or a foreign company ( income referred to u/s 115UA being in the nature referred to u/s 10(23FCA)) LBB income from units of investment fund 5% 10% 5% At the rates in Force ( refer Part II of First schedule) 30% (i) at the rate of ten per cent, where the payee is a resident; (ii) at the rates in force, where the payee is a non-resident (not being a company) or a foreign company: LBC Income from investments in Securitization trust ( refer Explanation to section 115TCA) 194LC Interest from Indian Company 194LD Interest on bonds and government securities 196B Income from Units 196C - Income from Foreign Currency bonds or shares of Indian companies 196D Income of FII from securities 10% At the rates in Force ( refer Part II of First schedule) 30% At the rates in Force ( refer Part II of First schedule)-30% 5% 5% 10% 10% 20% SC on Income Tax only if the person to whom the income is payable is a Non Resident or a Foreign company (a) In the case of every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, being a non-resident, calculated, I. at the rate of ten per cent. of such tax, where the income or the aggregate of such incomes paid or likely 10% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

48 Budget 2018 An overview Membership no Chartered Accountant to be paid and subject to the deduction exceeds fifty lakh rupees but does not exceed one crore rupees; II. At the rate of fifteen per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees; and (b) in the case of every co-operative society or firm, being a non-resident, calculated at the rate of twelve per cent., where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees; (ii) Item 2( companies other than Domestic Company) of this Part II to First Schedule shall be increased by a surcharge, for the purposes of the Union, in the case of every company other than a domestic company, calculated, (a) at the rate of two per cent of such income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees but does not exceed ten crore rupees; and (b) At the rate of five per cent of such income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds ten crore rupees. 15% 12% 2% 5% Rates of Tax and SC applicable for the AY shall be as per the rates in the sections or chapters in ITA as amended by FA 2018 or as per rates in Part II to First Schedule to FA Educational Cess and Secondary Educational Cess on IT and SC Refer 2(13) of Finance Act 2018 Refer Sections 2(7) of FA Tax and SC as per Section 2 (7) of FA 2018 and Educational Cess & Additional Sur Charge Refer Section 2(13) of Finance Bill 2018 A. SC on Income Tax only if the person to whom the income is payable is a Non Resident or a Foreign company as per table below B. No Health and Educational SC if the person receiving the income is a resident or a Domestic Company C. If the person receiving the income is a Non- Resident or a foreign 4 % of Tax plus SC Tax collectible under the below Chapters or sections in the FY AY Refer provisions of Section 2(7) of Finance Bill 2018 Refer Section 2(7) of Finance Bill 2018: In respect of the income on which Tax has to be collected under sections at the rates specified in Part II to Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

49 Budget 2018 An overview Membership no Chartered Accountant First Schedule to the Finance Bill 2018 : B - Winnings from lottery or crossword puzzle. At the rates in Force -30% ( for all categories of persons and whether resident or non-resident) SC on Income Tax only if the person to whom the income is payable is a Non Resident or a Foreign company (a) In the case of every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, being a non-resident, calculated, I. at the rate of ten per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds fifty lakh rupees but does not exceed one crore rupees; II. At the rate of fifteen per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees; and (b) in the case of every co-operative society or firm, being a non-resident, calculated at the rate of twelve per cent., where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees; (ii) Item 2( companies other than Domestic Company) of this Part II to First Schedule shall be increased by a surcharge, for the purposes of the Union, in the case of every company other than a domestic company, calculated, (a) at the rate of two per cent of such income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees but does not exceed ten crore rupees; and (b) At the rate of five per cent of such income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds ten crore rupees. 10% 15% 12% 2% 5% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

50 Budget 2018 An overview Membership no Chartered Accountant Rates of Tax and SC applicable for the AY shall be as per the rates in the sections or chapters in ITA as amended by FA 2018 or as per rates in Part II to First Schedule to FA Educational Cess and Secondary Educational Cess on IT and SC Refer 2(13) of Finance Act 2018 Refer Sections 2(8) of FA Tax and SC as per Section 2 (8) of FA 2018 and Educational Cess & Additional Sur Charge Refer Section 2(13) of Finance Bill 2018 A. SC on Income Tax only if the person to whom the income is payable is a Non Resident or a Foreign company as per table below B. No Health and Educational SC if the person receiving the income is a resident or a Domestic Company If the person receiving the income is a Non- Resident or a foreign 4 % of Tax plus SC Rate of tax Refer In cases in which tax has to be collected under the following section of the Income-tax Act, the collection shall be made at the rates specified in that sectionas per Section 2(8) of Finance Bill 2018 Refer Section 2(8) of Finance Bill 2018: C Profits and gains of dealing in alcoholic liquor or forest produce or scrap etc. a. U/s 206 (c) (1) b. U/S 206(C) (1C) As per table 1 below: As per table 2 below: TABLE-1 Sl. No. (1) (i) Nature of goods Percentage (2) (3) Alcoholic Liquor for human consumption One per cent Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

51 Budget 2018 An overview Membership no Chartered Accountant (ii) Tendu leaves Five per cent (iii) Timber obtained under a forest lease Two and one-half per cent (iv) Timber obtained by any mode other than under a forest lease Two and one-half per cent (v) Any other forest produce not being timber or Tendu leaves Two and one-half per cent (vi) Scrap One per cent (vii) Minerals, being coal or lignite or iron ore One per cent: TABLE -2 Sl. No. Nature of contract or licence or lease, etc. Percentage (1) (2) (3) (i) Parking lot Two per cent (ii) Toll plaza Two per cent (iii) Mining and quarrying Two per cent Rates of Tax and SC applicable for the AY shall be as per the rates in the sections or chapters in ITA as amended by FA 2018 or as per rates in Part III to First Schedule to FA Educational Cess and Secondary Educational Cess on IT and SC Refer 2(13) of Finance Act 2018 Refer Sections 2(9) of FA Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

52 Budget 2018 An overview Membership no Chartered Accountant Tax and SC as per Section 2 (9) of FA 2018 and Educational Cess & Additional Sur Charge Refer Section 2(13) of Finance Bill 2018 for the FY relevant to AY C. SC on Income Tax as per rates mentioned in Part III to First schedule to FA 2018 D. Health and Educational 4 % of Tax plus SC irrespective of person is a resident or non- resident or Domestic Company or foreign company as per rates mentioned in Part III to the FA 2018 Refer Section 2(9) of Finance Bill 2018: In cases in which tax has to be charged under the following section of the Income-tax Act, the collection shall be made at the rates specified in that section (4) Shipping business of non-residents a. Non-resident individual b. Cooperative Society or Firm or Local authority c. Foreign Company (2) Assessment of persons leaving India A assessment of AOP, BOI or artificial juridical person formed for a particular event or purpose assessment of persons likely to transfer property to avoid tax (2) Discontinued business Rate of tax to be charged or deducted or charged under Salaries or Advance Tax to be payable as per rates specified under Part III of First Schedule to FA 2018 during the FY relevant to AY as per Section 2(9) of Finance Bill 2018 Refer In cases in which tax has to be deducted or paid, tax in income chargeable under salaries u/s192, or advance tax to be paid under chapter XVII-C of the ITA at the rate or rates specified in Part III of the First Schedule or in respect of sections applicable under chapter under the following section of the Income-tax Act, the collection shall be made at the rates specified in that section At the rates in force refer to Part III of First schedule a. Refer Para A of Part III to I Schedule b. Refer Para B, C or D of Part III to I schedule c. Refer Clause III of Para E of Part III to First Schedule Refer Para A of Part III to I schedule Refer Para A of Part I ( not Part III) to I schedule to FA 2018 if the person is dissolved in AY Refer Para A of Part I ( not Part III) to I schedule to FA 2018 if the AO commences proceedings relating to the person in AY Refer Para A of Part I ( not Part III) to I schedule to FA 2018 if the discontinuance relate to the FY Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

53 Budget 2018 An overview Membership no Chartered Accountant Salary 7. Advance Tax payable under Chapter XVII C Incomes forming part of total income on which no tax is payable At the rates in force refer to Part III of First schedule a. Refer Para A of Part III to I Schedule As per Para A or Para C of Part III of I Schedule to FA 2018 Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

54 Budget 2018 An overview Membership no Chartered Accountant Rates of Tax and SC applicable for the AY shall be as per the rates in the sections or chapters in ITA as amended by FA 2018 or as per rates in Part II to First Schedule to FA Educational Cess and Secondary Educational Cess on IT and SC Refer 2(13) of Finance Act 2018 Refer Sections 2(9) of FA Section 110 Determination of tax when total income includes income on which no tax is payable Section 111 Tax on accrued balance of Recognized PF Chapter XII (tax rates, SC and ED Cess and Addl Cess based on either the chapter or Section or Part I of First Schedule). If the First schedule does not give any rate then refer the section. If the section is amended in the current Finance bill, refer to the Bill else the existing ITA) As per rates of income tax indicated in Part III of First Schedule ( applicability of Para A,B,C, D, E or F depends on the category of the Person) As per Rule 9(1) or Rule 9(2) of Part A to Fourth Schedule to the IT Act 1961 Section 111 A - Tax on short-term capital gains in certain cases. 15% of such STCG Section 112 -Tax on long-term capital gains. 20 % of such STCG Section 112A -Tax on long term capital gains in certain cases. ( amended by FA 2018) LTCG arising from transfer of LTCA being equity shares in a company or units in an Equity oriented fund or a unit in a business trust The STT has been paid both at the time of acquisition and transfer in the case of Equity shares and at the time of transfer in the case of units in an equity oriented fund or business trust 10% of such LTCG Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

55 Budget 2018 An overview Membership no Chartered Accountant Section 113 -Tax in the case of block assessment of search cases. Section 114-Tax on capital gains in cases of assessees other than companies. Section Tax on capital gains in case of companies. The total undisclosed income of the block period, determined under section 158BC, shall be chargeable to tax at the rate of 60 % (sixty per cent) [Omitted by the Finance (No. 2) Act, 1967, w.e.f and reintroduced with material modifications in section 80T.] [Omitted by the Finance Act, 1987, w.e.f ] Section 115A - Tax on dividends, royalty and technical service fees in the case of a non-resident (not being a company) or of a foreign company. Under Section 115A(1)(a) - (i) dividends other than dividends referred to in section 115-O ; or (ii) interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency not being interest of the nature referred to in sub-clause (iia) or sub-clause (iiaa); or (iia) interest received from an infrastructure debt fund referred to in clause (47) of section 10; or (iiaa) interest of the nature and extent referred to in section 194LC; or (iiab) interest of the nature and extent referred to in section 194LD; or (iiac) distributed income being interest referred to in sub-section (2) of section 194LBA; 20% 20% 5% 5% 5% 5% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

56 Budget 2018 An overview Membership no Chartered Accountant (iii) income received in respect of units, purchased in foreign currency, of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India Under section 115A-(1)(b) (A) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, (B) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, 20% 37 10% (at the rate of [ten] per cent ;) 37 10% ( at the rate of [ten] per cent) Section 115AB In respect of the total income of an assessee, being an overseas financial organisation (hereinafter referred to as Offshore Fund) Tax on income from units purchased in foreign currency or capital gains arising from their transfer. Section 115AB(1)- (a) income received in respect of units purchased in foreign currency; or (b) income by way of long-term capital gains arising from the transfer of units purchased in foreign currency, 10% 10% Section 115 AC-Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer, In the case of the total income of an assessee, being a non- resident. 115AC(1)- (i) the amount of income-tax calculated on the income by way of interest or dividends, other than dividends referred to in section 115-O, as the case may be, in respect of bonds referred to in clause (a) or Global Depository Receipts referred to in clause (b), if any, included in the total income, (ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (c), if any, At the rate of ten per cent (10%) At the rate of ten per cent (10%) Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

57 Budget 2018 An overview Membership no Chartered Accountant Section 115ACA Tax on total income of an assessee, being an individual, who is a resident and an employee of an Indian company engaged in specified knowledge based industry or service, or an employee of its subsidiary engaged in specified knowledge based industry or service (hereafter in this section referred to as the resident employee - i) the amount of income-tax calculated on the income by way of dividends, other than dividends referred to in section 115-O, in respect of Global Depository Receipts referred to in clause (a), if any, included in the total income,; (ii) the amount of income-tax calculated on the income by way of longterm capital gains referred to in clause (b), if any, at the rate of ten per cent At the rate of ten per cent (10%) At the rate of ten per cent (10%) Section 115AD (amended by FA 2018) Tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer. (i) the amount of income-tax calculated on the income in respect of securities referred to in clause (a) [(a) income other than income by way of dividends referred to in section 115-O received in respect of securities (other than units referred to in section 115AB)], if any, included in the total income, at the rate of twenty per cent : Provided that the amount of income-tax calculated on the income by way of interest referred to in section 194LD shall be at the rate of five per cent; (ii) the amount of income-tax calculated on the income by way of shortterm capital gains referred to in clause (b) [(b) income by way of short-term or long-term capital gains arising from the transfer of such securities], if any, included in the total income, at the rate of thirty per 20% 5% 30% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

58 Budget 2018 An overview Membership no Chartered Accountant cent Provided that the amount of income-tax calculated on the income by way of short-term capital gains referred to in section 111A shall be at the rate of fifteen per cent; (iii) the amount of income-tax calculated on the income by way of longterm capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent Provided that in case of income arising from the transfer of a long-term capital asset referred to in section 112A, income-tax at the rate of ten per cent. shall be calculated on such income exceeding one lakh rupees 15% 10% 10% on LTCG exceeding Rs 1 lacs Section 115B- Tax on profits and gains of life insurance business. 115B(1) (i) the amount of income-tax calculated on the amount of profits and gains of the life insurance business included in the total income, at the rate of twelve and onehalf per cent Section 115BA -Tax on income of certain domestic companies -( subject to 12 ½ % of such income from Insurance business 25% of the income conditions mentioned under sub-section (2) and subject to other provisions in this chapter) Section 115 BB-Tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever. (i) the amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at the rate of thirty per cent Section 115BBA-Tax on non-resident sportsmen or sports associations. (1) Where the total income of an assessee, (a) being a sportsman (including an athlete), who is not a citizen of India and is a non-resident, includes any income received or receivable by 30% 20% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

59 Budget 2018 An overview Membership no Chartered Accountant way of (i) participation in India in any game (other than a game the winnings wherefrom are taxable under section 115BB) or sport; or (ii) advertisement; or (iii) contribution of articles relating to any game or sport in India in newspapers, magazines or journals; or (b) being a non-resident sports association or institution, includes any amount guaranteed to be paid or payable to such association or institution in relation to any game (other than a game the winnings wherefrom are taxable under section 115BB) or sport played in India ; or (c) being an entertainer, who is not a citizen of India and is a non-resident, includes any income received or receivable from his performance in India, 20% 20% Section 115BBB - Tax on income from units of an open-ended equity oriented fund of the Unit Trust of India or of Mutual Funds. (1) Where the total income of an assessee includes any income from units of an open-ended equity oriented fund of the Unit Trust of India or of a Mutual Fund, the income-tax payable shall be the aggregate of (a) the amount of income-tax calculated on income from units of an openended equity oriented fund of the Unit Trust of India or of a Mutual Fund, at the rate of ten per cent 10% Section 115BBC -Anonymous donations to be taxed in certain cases. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or any hospital or other institution Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

60 Budget 2018 An overview Membership no Chartered Accountant referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in subclause (v) of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be (i) the amount of income-tax calculated at the rate of thirty per cent on the aggregate of anonymous donations received in excess of the higher of the following, namely: (A) five per cent of the total donations received by the assessee; or (B) one lakh rupees 30% of the higher of ( Rs 1 lacs or 5% of total donations) Section 115BBD -Tax on certain dividends received from foreign companies. On the total income of an assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of (a) the amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen per cent 15% Section 115BBDA -Tax on certain dividends received from domestic companies. On the total income of 42[an assessee, being an individual, a Hindu undivided family or a firm], resident in India, that includes any income in aggregate exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic company or companies, the income-tax payable shall be the aggregate of (a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding ten lakh rupees, at the rate of ten per cent; and 10% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

61 Budget 2018 An overview Membership no Chartered Accountant Section 115BBE amended by FA Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D. [(1) Where the total income of an assessee, (a) includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or (b) determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a), the income-tax payable shall be the aggregate of (i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent 60% Section 115BBF - [Tax on income from patent. On the total income of an eligible assessee that includes any income by way of royalty in respect of a patent developed and registered in India, the income-tax payable shall be (a) the amount of income-tax calculated on the income by way of royalty in respect of the patent at the rate of ten per cent 10% Section 115BBG- Tax on income from transfer of carbon credits. On the total income of an assessee that includes any income by way of transfer of carbon credits, the income-tax payable shall be (a) the amount of income-tax calculated on the income by way of transfer of carbon credits, at the rate of ten per cent; 10% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

62 Budget 2018 An overview Membership no Chartered Accountant Chapter XII-A Section 115C - SPECIAL PROVISIONS RELATING TO CERTAIN INCOMES OF NON-RESIDENTS Tax rates will be discussed in other sections as this section addresses the definitions. Definitions. Section 115D -SPECIAL PROVISIONS RELATING TO CERTAIN INCOMES OF NON-RESIDENTS This section talks about computation and not tax rates Section 115E -Tax on investment income and long-term capital gains. On the total income of an assessee, being a non-resident Indian, that includes (a) any income from investment or income from long-term capital gains of an asset other than a specified asset; (b) income by way of long-term capital gains, the tax payable by him shall be the aggregate of (i) the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent; (ii) the amount of income-tax calculated on the income by way of longterm capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; 20% 10% Section 115F - Capital gains on transfer of foreign exchange assets not to be Tax rates not discussed charged in certain cases Section 115G - Return of income not to be filed in certain cases Tax rates not discussed Section 115H - Benefit under Chapter to be available in certain cases even after Tax rates not discussed the assessee becomes resident. Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

63 Budget 2018 An overview Membership no Chartered Accountant Section 115I - Chapter not to apply if the assessee so chooses. Section 115JB - Special provision for payment of tax by certain companies. ( amended by FA 2018 with ref to companies under IBC resolution and exemption to Foreign companies from the applicability of section 115JB if its income contains only income from Profits & gains of Business or profession u/s 44B, 44BB, 44BBA or 44BBB and income is offered to tax at the rates prescribed under those sections) 115JB -Foreign companies where the income contains only income from Profits & gains of Business or profession u/s 44B, 44BB, 44BBA or 44BBB and income is offered to tax at the rates prescribed under those sections - On Income u/s 44B o in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" which is : (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and (ii) The amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India. - Tax rates not discussed 18 ½ % of Book profits if the tax computed under normal provisions is lower than 18 ½ % of book profits 40% or 50% on the 7 ½ % of such aggregate amounts paid or payable as referred to in the sub section(2) On income u/s 44BB o in the case of an assessee, being a non-resident, engaged in the Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

64 Budget 2018 An overview Membership no Chartered Accountant business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" which is 40% or 50% on the 10 % of such aggregate amounts paid or payable as referred to in the sub section(2) (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India; and (b) The amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India. - On income u/s 44BBA o In the case of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to five per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" which is (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods from any place in India; and (b) the amount received or deemed to be received in India by or on 40% or 50% on the 5 % of such aggregate amounts paid or payable as referred to in the sub section(2) Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

65 Budget 2018 An overview Membership no Chartered Accountant behalf of the assessee on account of the carriage of passengers, livestock, mail or goods from any place outside India. - On Income u/s 44BBB o in the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf, a sum equal to ten per cent of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession Section 115JC - Special provisions for payment of tax by certain persons other than a company. 40% or 50% on the said 10 % of such aggregate amounts paid or payable as referred to in the sub section(2) 18 ½ % of the Adjusted Total Income if the tax computed under normal provisions is lower than 18 ½ % of Adjusted Total income or In the case of units set up in IFSC at 9% of the Adjusted Total Income if the tax computed under normal provisions is lower than 9 % of Adjusted Total income Chapter XII-FA Section 115UA -Tax on income of unit holder and business trust. The total income of a business trust shall be charged to tax at the maximum marginal rate. 30% Chapter XII-FB Section 115UB Tax on income of investment fund and its unit holders. Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

66 Budget 2018 An overview Membership no Chartered Accountant (4) The total income of the investment fund shall be charged to tax (i) at the rate or rates as specified in the Finance Act of the relevant year, where such fund is a company or a firm; or (ii) at maximum marginal rate in any other case. 30% in the case of an individual or HUF or Cooperative society or Local authority 25% or 30% if it is a domestic 40 % or 50 % if it is a foreign company; At 30 % if it is a firm; At the rates specified in Para A to E of Part III to First Schedule if the unit holder is an individual or HUF or Cooperative society or local authority or firm or company Sub-section (1A) of section 161 (1A) Notwithstanding anything contained in sub-section (1), where any income in respect of which the person mentioned in clause (iv) of sub-section (1) of section 160 [(iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any Wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees ] is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate : Section 164 Charge of tax where share of beneficiaries unknown. tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate Section 164A -Charge of tax in case of oral trust Tax shall be charged on such income at the maximum marginal rate. 30% 30% Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

67 Budget 2018 An overview Membership no Chartered Accountant 30% Section 167B -Charge of tax where shares of members in association of persons or body of individuals unknown, etc. tax shall be charged on the total income of the association or body at the maximum marginal rate 30% SC will be computed as per Para A to E of Part III to First schedule to the FA 2018 In the case of an individual or HUF or an AOP or BOI or an artificial or juridical person: Surcharge AY (Refer Para A of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 50 Lakhs but not exceeding Rs 1 crore: AY (Refer Para A of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 crore: On Total Income Tax computed under para A Add : 10 % of the Total Income Tax Total = Total IT+SC Add : 15 % of the Total Income Tax Total = Total IT+SC Tax on income of : Difference between Income Tax plus Sur Charge on the total income and Income tax on Rs 1 crores should not be more than Difference between Income Tax plus Sur Charge on the total income and Income tax on Rs 50 lacs should not be more than Difference between Income Tax plus Sur Charge on the total income and Income tax plus Sur Charge on Rs 1 crores should not be more than Total income tax on Rs 50 lacs Total income tax on Rs 1 Crores Difference between Total income and Rs 50 lakhs Difference between Total income and Rs 1 crores Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

68 Budget 2018 An overview Membership no Chartered Accountant In the case of Cooperative Society: Surcharge AY (Refer Para B of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 crores: On Total Income Tax computed under para B Add : 12 % of the Total Income Tax ; Total = Total IT+SC Subject to following limits Tax on income of : Difference between Income Tax plus Sur Charge on the total income and Income tax on Rs 1 crores should not be more than In the case of a Firm: Surcharge Total income tax on Rs 1 crores Difference between Total income and Rs 1 crores AY ( Refer Para C of Part III of I Schedule)Surcharge on Income Tax where the total income exceeds Rs 1 crores: On Total Income Tax computed under para C Add : 12 % of the Total Income Tax ; Total = Total IT+SC Subject to following limits Tax on income of : Total income tax on Rs 1 crores Difference between Income Tax plus Sur Charge on the total income Difference between Total income and Rs 1 crores Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

69 Budget 2018 An overview Membership no Chartered Accountant and Income tax on Rs 1 crores should not be more than In the case of a Local authority: Surcharge AY (Refer Para D of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 crores: On Total Income Tax computed under para D Add : 12 % of the Total Income Tax ; Total = Total IT+SC Subject to following limits Tax on income of : Total income tax on Rs 1 crores Difference between Income Tax plus Sur Charge on the total income and Income tax on Rs 1 Difference between Total income and Rs 1 crores should not be more than crores In the case of a Domestic Company: Surcharge where total income does not exceed Rs 10 crores AY (Refer Para E of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 Crore but not exceeding Rs 10 Crores: Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

70 Budget 2018 An overview Membership no Chartered Accountant On Total Income Tax computed under para E Add : 7 % of the Total Income Tax ; Total = Total IT+SC Subject to following limits Total Income tax on income of Rs 1 crores Difference between Income Tax plus Sur Charge on the total income and Income tax Difference between Total income and Rs 1 crores on Rs 1 crores should not be more than AY (Refer Para E of Part III of I Schedule) Surcharge where total income exceeds Rs 10 Crores Surcharge on Income Tax where the total income exceeds Rs 10 crores: On Total Income Tax computed under para E Add : 12 % of the Total Income Tax ; Total = Total IT+SC Subject to following limits Total Income tax plus Sur Charge on Difference between Income Tax plus Sur Charge on entire Total income and income tax plus SC on Rs 10 crores should not be more than In the case of a company other than a Domestic company: Surcharge where total income does not exceed Rs 10 crores Rs 10 Crores Difference between Total income and Rs 10 crores AY (Refer Para E of Part III of I Schedule) Surcharge on Income Tax where the total income exceeds Rs 1 crores Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

71 Budget 2018 An overview Membership no Chartered Accountant but not exceeding Rs 10 crores: On Total Income Tax computed under para E Add : 2 % of the Total Income Tax ; Total = Total IT+SC Subject to the following limits Total Income tax on income of Rs 1 Crores Difference between Income Tax plus Sur Charge and Income tax on Rs 1 Difference between Total income and Rs 1 crores crores should not be more than AY (Refer Para E of Part III of I Schedule) Surcharge where total income exceeds Rs 10 Crores Surcharge on Income Tax where the total income exceeds Rs 10 crores: On Total Income Tax computed under para E Add : 5 % of the Total Income Tax ; Total = Total IT+SC Subject to the following limits Total Income tax plus Sur Charge on Difference between Income Tax plus Sur Charge on entire Total income and income tax plus SC on Rs 10 Crores should not be more than Rs 10 Crores Difference between Total income and Rs 10 crores Health & Higher Educational 4 % of Tax plus SC. Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

72 Budget 2018 An overview Membership no Chartered Accountant Section 2(10) of the Finance Bill 2018: Grossing up of agricultural income with individual assessee s total income for rate purposes: Assessee is an individual who is taxable as per Para A to Part III to the First schedule to the Finance Bill 2018 Has agricultural income in excess of Rs 5,000 Such agricultural income belongs to any year other than the previous year For the purpose of computation of advance tax during the FY relevant to AY Total income of the assessee will be grossed up with the amount of agricultural income and tax shall be computed under Para A of Part III to I Schedule 6. Tax shall be computed on agricultural income plus Rs 250,000 (or Rs 300,000 or Rs 500,000 depending on whether he is 60 years old or 80 years old) under Para A of Part III to I schedule 7. From tax computed under para 5, the tax computed under para 6 shall be reduced and the balance shall be the tax payable under advance tax 8. The tax computed under para 7 above shall be increased by applicable SC as prescribed under Para A of Part III to First Schedule ( based on whether his total income is within Rs 50 lacs or above) Rules for computation of agricultural income: Refer Section 2(14) (C) to Finance Bill 2018 and not 2 (13) (C) as printed in the bill. Reference is given to Section 2(13)(C) of the Finance Bill 2018 but it should be Section 2(14)(C) of the Finance Bill 2018 [ looks like the introduction of sub section (14) to section 2 in the Finance Bill 2018 for Heath and Higher Education Cess in respect of income chargeable under sections 2(4) to 2(10) of the Finance Bill 2018 has moved the reference to agricultural income, domestic company and insurance commission to sub section (14) to Section 2. This has not been amended in the current Finance Bill Hence the rules as existing currently shall apply which are briefly reproduced: Rule 1 Nature of agricultural income In the nature of income referred to in section 2 (1A)(a) of the IT Act, any rent or revenue derived from land Computational method Like Income from other sources Deductions available a) reasonable sum paid by way of commission or remuneration to a banker or any other person Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

73 Budget 2018 An overview Membership no Chartered Accountant which is situated in India and is used for agricultural purposes Provisions of sections 57 to 59 shall apply without any ref to section 40A (3),(3A) &(4) b) any income recovered from the tenants and credited to their accounts c) land revenue, municipal taxes and insurance d) repairs and maintenance of machinery e) depreciation in respect of the machinery/furniture used for agriculture repairs on machinery/plant/furniture on a pro rata basis used for agriculture purposes g) any other expenditure ( other than Capital expenditure) h) No requirement to make payments in account payee cheque( 40A(3),(3A)&(4)) f) 2 In the nature referred to in sub-clause (b) or sub-clause (c) Like income chargeable to of clause (1A) of section 2 of the Income-tax Act income-tax under that Act under the head Profits and (b) Any income derived from such land by gains of business or profession i. Agriculture ii. the performance by a cultivator or receiver of rentin-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market iii. the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause (c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on Provisions of sections i. ii. iii. iv. v. vi. vii. 30 Rent, rates & taxes and Insurance for the buildings 31 Repairs and maintenance of plant & machinery and furniture 32 - Depreciation 36 other deductions 37 general deductions of any expenditure not being in the nature of capital expenditure 38 Buildings etc. partly used and not exclusively used ( pro rate deductions as attributable to agriculture) 40 deductions not available like certain expenditure like interest, royalty, fees for technical services and other sums paid/payable to a nonresident or a foreign company or payable outside India Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

74 Budget 2018 An overview Membership no Chartered Accountant viii. ix. x. xi. xii. xiii. 3 In the nature of income derived from any building required Like income chargeable to as a dwelling-house by the receiver of the rent or revenue income-tax under that Act of the cultivator or the receiver of rent-in-kind referred to under the head Income from in the said sub-clause (c) house property 40A expenses and payments not deductible under certain cases ( except 40A(3),(3A)&(4)) 41 loss or expenditure earlier allowed, if subsequently obtained shall be taxed in the hands of the assessee 43 definition of certain terms relevant to computation 43A foreign exchange fluctuations to be added or deducted from cost of capital asset 43B expenditure allowable on actual payment basis and not accrual basis and 43C cost of capital asset computed in the hands of the amalgamated company to be that of amalgamating company plus cost of improvements made by the amalgamated company of the Income tax Act shall, so far as may be, apply accordingly The provisions of sections i. 23 determination of the annual value of the house property ii. 24 deductions from income from house property iii. 25 amounts not deductible from income from house property iv. 25A- deductions for arrears of rent and unrealized rent v. 26 assessment of co-owned Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

75 Budget 2018 An overview Membership no Chartered Accountant properties 27 definition of owner of house property and annual charge etc. of that Act shall, so far as may be, apply accordingly vi. 4 Income in the nature of tea growing business To be computed as per Rule 8 of IT Rules % of such income from tea business to be agricultural income Provisions of Rule 8 of IT Rules 1962 are i. 8(1) to be computed as income from business ii. 40% of such income to be Business income iii. Cost of planting new bushes to be allowed as deduction iv. No deduction available in respect of subsidy received towards cost of bushes and is such subsidy is not includible as income u/s 10(30) of the Act 4 Income from sale of centrifuged latex or cenex or latex To be computed as per Rule 7A based crepes (such as pale latex crepe) or brown crepes of IT Rules 1962 (such as estate brown crepe, re-milled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed by him from rubber plants grown by him in India 65% of such income from latex, rubber business etc. to be agricultural income Provisions of Rule 7A of the IT Rules 1962 are i. ii. iii. 7A(1) to be computed as income from business 35% of such income to be Business income Cost of planting new rubber plants to Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

76 Budget 2018 An overview Membership no Chartered Accountant be allowed as deduction No deduction available in respect of subsidy received towards cost of new rubber plants and is such subsidy is not includible as income u/s 10(31) of the Act 60% or 70% as the case may be of such income from coffee growing business etc. to be agricultural income iv. 4 Income from sale of coffee grown and manufactured by him Income shall be computed in in India accordance with rule 7B of the Income-tax Rules, 1962 Provisions of Rule 7B of the IT Rules 1962 are 7B(1)&(1A) to be computed as income from business ii. 7B(1) Income from coffee grown and cured by the seller in India shall be 25% to be Business income iii. 7b(1A) -Income from coffee grown, cured, roasted and grounded by the seller in India with or without mixing chicory shall be 40% to be Business income iv. Cost of planting new coffee plants to be allowed as deduction v. No deduction available in respect of subsidy received towards cost of new coffee plants and is such subsidy is not includible as income u/s 10(31) of the Act Computation of agricultural income of the AOP or BOI shall be as per preceding Rules and share of assessee computed i. 5 a) Assessee member of an AOP or BoI (other than a HUF, Share of agricultural income or a firm or company) loss of the assessee in the AOP b) Not having any taxable income Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

77 Budget 2018 An overview Membership no Chartered Accountant 6 c) Has income not exceeding the maximum amount or BOI shall be computed in chargeable to tax accordance with the Rule 5 of d) Has agricultural income or loss the Finance Act e) Loss from agricultural income assessee not being a a) Shall be set off against member of an AOP or BOI agricultural income of the assessee from any other source b) agriculture loss in the form of a share of the assessee in an AOP or BOI not to be set off against any other source of agriculture income of the assessee 7 Tax payable by the assessee to State Government 8 (1) (i)to(viii) a) Set off of carried forward agricultural loss from PY To the extent not set off against to relevant to AYs to agricultural income for the b) Agricultural loss for the PY relevant to AY succeeding PYs to relevant to AYs to AY a) Set off of carried forward agricultural loss from PY To the extent not set off against to relevant to AYs to agricultural income for the b) Agricultural loss for the PY relevant to AY succeeding PYs to relevant to AYs to AY Benefit of carry forward and set off available only to a Benefit not available to 8(2) 8(3) Various sources of agricultural income are: a) b) c) d) Rent Revenue Agriculture Performance of a process or no process to sell products e) Farm house f) Tea g) Latex h) Coffee Loss from one source to be set off against another agricultural income source To be deducted in computing the agricultural income To be set off against agricultural income for the PY relevant to AY To be set off against agricultural income for the PY relevant to AY Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

78 Budget 2018 An overview Membership no Chartered Accountant successor in inheritance successor otherwise than by inheritance 8(4) Agricultural loss to be determined by the AO under these rules or rules under Finance Acts 2010 to Net computation of agricultural income is a loss 10 Provisions of IT Act to apply to computation of agricultural income AO to have same powers while computing agricultural income 11 No set off of agricultural loss if not determined by the AO under these rules of Finance Act 2010 to Finance Acts 2017 Such loss to be ignored and agricultural income to be Nil Including provisions of rounding off u/s 288A End of Section 2 of Finance Bill on Taxes Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore Ph

79 Budget 2018 Part B Direct Tax Proposals: Part B Direct Tax Proposals: 1 Page Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

80 Budget 2018 Part B Direct Tax Proposals: Clause 3 of Finance Bill 2018: Amendment to section 2(22) of the Income-tax Act, (a) In clause (22), after Explanation 2, The following Explanation shall be inserted, namely: Explanation 2A. In the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating company on the date of amalgamation. The above should be read along with amendments to Sections 115 BBDA (Tax on distributed profits in the hands of individuals or HUFs in excess of Rs 10 lacs per annum), 115-O (DDT on dividends), and 115-Q penalty for non-compliance of 115-O and Explanation on what is dividend for the purpose of Chapter XIID (115-O, 115-P and 115-Q) Section 115 BBDA remains untouched. Deemed dividends u/s 2(22) (e) remains excluded from the concessional tax rate of 10% if dividend received is in excess of Rs 10 lacs by an individual or HUF Amendment to 115-O: In section 115-O of the Income-tax Act, (a) In sub-section (1), the following proviso shall be inserted, namely: Provided that in respect of dividend referred to in sub-clause (e) of clause (22) of section 2, this subsection shall have effect as if for the words fifteen per cent., the words thirty per cent. had been substituted; ; (b) In sub-section (1B), the following proviso shall be inserted, namely: Provided that this subsection shall not apply in respect of dividend referred to in sub-clause (e) of clause (22) of section 2. Deemed dividends paid in the form of a loan or advance to or for the benefit of a shareholder (which hither to was excluded from the section) is included to be taxed at 30% No grossing up of such dividends while applying the tax rate of 30% In Section 115-Q: After section 115Q of the Income-tax Act, the Explanation shall be omitted, since deemed dividend u/s 2(22) (e) is included for DDT u/s 115-O The section 2(22) as it exists now: This is a new explanation that is added by the Finance Bill The current 2(22) is reproduced below: (22) 6 "dividend"7 includes (a) Any distribution7 by a company of accumulated profits7, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company; 2 Page Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

81 Budget 2018 Part B Direct Tax Proposals: (b) any distribution8 to its shareholders by a company of debentures, debenturestock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits8, whether capitalised or not ; (c) Any distribution8 made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; (d) any distribution8 to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ; (e) any payment9 by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) 10[made after the 31st day of May, 1987, by way of advance or loan9 to a shareholder9, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits11 ; but "dividend" does not include (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; 12 [(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, 13[and before the 1st day of April, 1965] ;] (ii) any advance or loan made to a shareholder 14[or the said concern] by a company in the ordinary course of its business15, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; 16 [(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A17 of the Companies 3 Page Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

82 Budget 2018 Part B Direct Tax Proposals: Act, 1956 (1 of 1956); (v) Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).] Explanation 1. The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, Explanation 2. The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, 18[but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. 19 [Explanation 3. For the purposes of this clause, (a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year20, beneficially entitled to not less than twenty per cent of the income of such concern ;] FM s speech Annexure V to Part B of Budget Speech Other changes in Direct Taxes: 30. It is proposed to provide that in the case of an amalgamated company, accumulated profits for the purpose of determining dividend shall also include the accumulated profits of the amalgamating company on the date of amalgamation. It is proposed to provide that deemed dividend under section 2(22) (e) of the Act shall be subject to dividend distribution tax at the rate of 30% without grossing up. Memorandum to Finance Bill 2018: Widening of scope of Accumulated profits for the purposes of Dividend Section 2 of the Act defines various terms used in the Act. Clause (22) of the said section defines dividend to include distribution of accumulated profits (whether capitalized or not) to its shareholders by a company, whether it is in the nature of, (a) Release of all or any of its assets, 4 Page Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

83 Budget 2018 Part B Direct Tax Proposals: (b) Issue of debentures in any form (with or without interest) or distribution of bonus to its preference shareholders, (c) Distribution of proceeds on liquidation, (d) On the reduction of capital, or (e) in the case of an unlisted company, any loan or advance given to a shareholder having shareholding of 10% or above, or to a concern in which such shareholder holds substantial interest (exceeding 20% of shareholding or interest) or any payment by such company on behalf of or for the individual benefit of such shareholder. Explanation 2 to the said clause provides the definition of the term accumulated profits for the purposes of the said clause, as all profits of the company up to the date of distribution or payment or liquidation, subject to certain conditions. Instances have come to light whereby companies are resorting to abusive arrangements in order to escape liability of paying tax on distributed profits. Under such arrangements, companies with large accumulated profits adopt the amalgamation route to reduce capital and circumvent the provisions of sub-clause (d) of clause (22) of section 2 of the Act. With a view to preventing such abusive arrangements and similar other abusive arrangements, it is proposed to insert a new Explanation 2A in clause (22) of section 2 of the Act to widen the scope of the term accumulated profits so as to provide that in the case of an amalgamated company, accumulated profits, whether capitalised or not, or losses as the case may be, shall be increased by the accumulated profits of the amalgamating company, whether capitalized or not, on the date of amalgamation. This amendment will take effect from 1st April, 2018 and will accordingly apply in relation to assessment year and subsequent assessment years. [Clause 3] Application of Dividend Distribution Tax to Deemed Dividend At present dividend distributed by a domestic company is subject to dividend distribution tax payable by such company. However, deemed dividend under sub-clause (e) of clause (22) of section of 2 the Act is taxed in the hands of the recipient at the applicable marginal rate. The taxability of deemed dividend in the hands of recipient has posed serious problem of the collection of the tax liability and has also been the subject matter of extensive litigation. With a view to bringing clarity and certainty in the taxation of deemed dividends, it is proposed to delete the Explanation to Chapter XII-D occurring after section 115Q of the Act so as to bring deemed dividends also under the scope of dividend distribution tax under section 115-O. Further, such deemed dividend is proposed to be taxed at the rate of 30 per cent. (Without grossing up) in order to prevent camouflaging dividend in various ways such as loans and advances. This amendment relating to imposition of dividend distribution tax on deemed dividend will apply to transactions referred to in sub-clause (e) of clause (22) of section 2 of the Act undertaken on or after 1st April, [Clause 38 & 39] 5 Page Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

84 Budget 2018 Part B Direct Tax Proposals: Notes on Clauses: Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions. Clause (22) of the said section provides the definition of the term dividend. Explanation 2 to the said clause clarifies the expression accumulated profits for the purposes of the said clause. It is proposed to insert a new Explanation to the said clause to provide that in the case of an amalgamated company, accumulated profits or loss in the hands of the amalgamated company shall be increased by the accumulated profits of the amalgamating company, whether capitalised or not, on the date of amalgamation. This amendment will take effect from 1st April, 2018 and will accordingly apply in relation to the assessment year and subsequent years. Clause 38 of the Bill seeks to amend section 115-O of the Income-tax Act relating to tax on distributed profits of domestic companies. It is proposed to insert a proviso to sub-section (1) of the said section so as to provide for levy of tax at the rate of thirty per cent on distributed profits in the nature of dividend under sub-clause (e) of clause (22) of section 2. It is further proposed to insert a proviso to sub-section (1B) of the said section 115-O so as to exclude the amount of dividend under sub-clause (e) of clause (22) of section 2 from the applicability of grossing up provisions of the said sub-section. These amendments will take effect from 1st April, Clause 39 of the Bill seeks to omit the Explanation occurring after section 115Q of the Income-tax Act. The said Explanation clarifies that the expression "dividends" shall have the same meaning as is given in clause (22) of section 2 but shall not include sub-clause (e) thereof. It is proposed to omit the said Explanation consequent to the amendments made to section 115-O. This amendment will take effect from 1st April, Objective behind the amendment: 1. There must have been a position taken by courts that when loans are given by an amalgamated company, after the amalgamation from out of the total accumulated profits ( post amalgamation that includes that of amalgamating and amalgamated companies), that part of the loan as is equal to the accumulated profits of the amalgamated company as it existed prior to amalgamation alone could be treated as Deemed dividend under section 2(22)(e) and shall not include that part of the loan as is paid out of the accumulated profits transferred from the amalgamating company. 2. This way the unlisted companies go through amalgamation and post amalgamation the amalgamated company distributes loans to shareholders and still claim that the transferred accumulated profits from the amalgamating company is not part of accumulated profits of the amalgamated company and hence deemed divided shall not be applicable 6 Page Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

85 Budget 2018 Part B Direct Tax Proposals: 3. Existing Provisions: a. The Dividend Distribution Tax u/s 115-O also will not apply to the portion of deemed dividend u/s 2(22)(e) in the form of loan issued by the amalgamated company out of its accumulated profits (as it existed before amalgamation) Refer Explanation to Chapter XIID given at the end of Section 115Q which reads as - Explanation. For the purposes of this Chapter, the expression "dividends" shall have the same meaning as is given to "dividend" in clause (22) of section 2 but shall not include sub-clause (e) thereof and b. On the balance loan issued equal to the transferred accumulated profits, it is just a loan and not even a deemed dividend. Hence no DDT in the hands of the amalgamated company. ( not a deemed dividend, hence no 115-O) 4. The deemed dividend in the hands of the recipient shareholder used to be treated as a. Income from Other sources Dividend 56(2)(i) b. The dividend received is exempt from tax in the hands of the shareholder recipient u/s 10(34) if it has suffered DDT u/s 115-O c. Since the deemed dividend u/s 2(22) (e) does not get covered under section 115-O, the deemed dividend used to be taxed in the hands of the recipient shareholder at the normal rates applicable to his Total income. d. Also the provisions of Section 115BBDA that provides for taxing dividend in excess of Rs 10 lacs at 10% is not applicable to deemed dividends u/s 2(22)(e). It will be taxed at the normal rates applicable to his Total income. e. But in the hands of the Shareholder, he can avail the benefits of Set off of normal business losses against Other sources income including deemed dividends u/s 2(22)(e) 5. Current proposal : a. Accumulated profits of the amalgamated company shall include accumulated profits of the amalgamating company i. The company is an unlisted company ii. It is a company in which public are not substantially interested iii. It is formed by amalgamation of 2 or more companies iv. Post amalgamation, it has received accumulated profits from the amalgamating companies v. It makes a payment of any sum by way of advance or loan 1. To a shareholder, Who is beneficial holder of shares holding not less than 10% of the voting power n the company or 2. To a concern in which the shareholder is a member or partner and in which he has substantial interest or 3. For the individual benefit of any such shareholder 4. To the extent of accumulated profits of the amalgamated company vi. In such a scenario, the accumulated profits of the amalgamated company shall include the accumulated profits received from the amalgamating company under the amalgamation and vii. The loan or advance or payment shall be treated as Deemed Divided under section 2(22)(e) in the hands of the shareholder 7 Page Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

86 Budget 2018 Part B Direct Tax Proposals: b. Such deemed dividend u/s 2(22) (e) shall suffer Dividend Distribution tax in the hands of the 30% of such Deemed dividend amended proviso to sub section (1) of section 115-O c. Such DDT shall not suffer grossing up provisions of sub section (1A) of section 115O- amended proviso to subsection (1B) of section 115-O d. Since the DDT is paid by the company, the shareholder shall not suffer tax in his hands on the deemed dividend. e. Section 115BBDA that talks of tax on dividends in excess of Rs 10 lacs in the hands of an individual or HUF does not apply to Deemed dividends u/s 2(22) (e) since it is not amended and remains as it is. Case laws: 1. S. 2(22) (e): Deemed dividend- Not shareholder-provision is not applicable. In the present case, the assessee company was engaged in the business of providing computer Services. Its shares were held by a company V and Three individuals by name K R and S to the extent of 64% 32% 2% and 2% respectively. Further the entire shares of company V were held by R & S. During the previous year, the assessee had received a loan from company V. The A.O treated the amount of loan as deemed dividend under section 2(22) (e) of the Act. On appeal C.I.T (A) Held that to invoke the provisions of section 2(22) (e), the assessee must be shareholder in the company which gave loan. Since the assessee was not a shareholder the loan in question could not be treated as deemed dividend in the hands of the assessee under section 2(22) (e) of the Act. The Tribunal upheld the order of the C.I.T. (A) and dismissed the Departments appeal on the ground that since the intention of legislature behind the provisions of section 2(22) (e) is to tax dividend in hands of shareholder and assessee company was not a shareholder in company V deeming provisions of Section 2(22) (e) of the Act were not applicable to the instant case. (AY ) -ACIT v. Source Hub India (P) Ltd. (2014) 61 SOT 111 (Bang) (Tribunal) The current amendment does not change the decision in the above case. 2. Assistant Commissioner Of Income... vs Gautam Sarabhai Trust No. 23 on 20 March, 2001 Equivalent citations: ITD 676 Ahmedabad - According to the learned counsel the expression 'accumulated profits' used in Section 2(22) means profits in the commercial sense and not assessable or taxable profits liable to tax as income under the IT Act. The learned counsel further submitted that the amalgamating companies are separate independent entities and profits including the capital reserves of such companies on merger are taken over by the amalgamated company. However, such capital reserves would not be covered under the expression "accumulated profits" of the amalgamated company as per the provisions of Section 2(22) of the Act. In support of his contentions the learned counsel placed reliance on a number of decisions of Supreme Court as well as various High Courts as under: 1. CIT v. Rasiklal Maneklal (HUF) (1989) 177 ITR 198 (SC); 2. Saraswati Industrial Syndicate Ltd v. CIT (1990) -186 ITR 278 (SC): 3. Marshal Sons & Co. (I) Ltd. v. ITO (1997) 223 ITR 809 (SC); 4. Wood Polymer Ltd. (supra); and 5. CIT vs. Master Raghuveer Trust (1985) 151 ITR 368 (Karnataka) KPPL and BAPL prior to 1st Jan., 1974 cannot be added to the accumulated profits of Alkapuri for the purposes of Section 2(22). Alkapuri as well as SEPL has not issued, any bonus shares to its shareholders. 8 Page Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

87 Budget 2018 Part B Direct Tax Proposals: The crux of the argument of the learned counsel before us is that profits of the erstwhile amalgamating companies, whether capitalised or not could not be treated as accumulated profits of Alkapuri for the purposes of Section 2(22) of the Act. The view by the Hon ble judges is as follows: 1. Section 2(22) introduces legal fiction and would necessarily receive strict interpretation. 2. The expression "accumulated" profits used in the section would be construed as commercial profits computed in accordance with principles of commercial accounting. These profits are not to be treated as equivalent to assessable income. 3. Capital gains chargeable under Section 45 would be includible as part of the accumulated profits. 4. If there is a provision in the constitution of the company against distribution of dividend out of capital profits, such profits would not form part of accumulated profits unless charged to capital gains tax. 5. Surplus arisen on the amalgamation of companies would not result in revenue gain since amalgamation even if treated as an activity of purchase would not result in profit to the amalgamated company. 6. Since amalgamating company is a separate entity, profits in its balance sheet, after amalgamation cannot be treated as accumulated profits of the amalgamated company. The current amendment is to correct the view from the above judgement Clause 3 of Finance Bill 2018: Amendment to section 2(24) of the Income-tax Act, In section 2 in clause (24), Clause (24) of the said section defines the expression income. 1. It is proposed to insert a new sub-clause (xiia) in the said clause (24) so as to include the fair market value of inventory referred to in Clause (via) of section 28, also within the definition of income. - (xiia) the fair market value of inventory referred to in clause (via) of section 28; 2. It is further proposed to insert a new sub-clause (xviib) in the said clause (24) so as to include any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56, also within the definition of income. - (xviib) any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56; 3. Clause (42A) of the said section, inter alia, provides for determination of period for which the capital asset is held by the assessee. It is proposed to insert a new sub-clause (ba) in clause (i) of Explanation 1 of the said clause (42A) so as to provide that in case inventory is converted into or treated as a capital asset under the proposed new clause (via) of section 28, the period shall be reckoned from the date of its conversion or the treatment. - (ba) in the case of a 9 Page Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

88 Budget 2018 Part B Direct Tax Proposals: capital asset referred to in clause (via) of section 28, the period shall be reckoned from the date of its conversion or treatment; These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years These amendments have to be seen in conjunction with amendments proposed in: 1. Section 28(via) - after clause (vi), the following clause shall be inserted, namely: (via) the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner;. Income under Profits & gains of business or profession 2. In section 28 of the Income-tax Act, with effect from the 1stday of April, 2019,in clause (ii), after sub-clause (d), the following sub-clause shall be inserted, namely: (e) any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, of any contract relating to his business; ; - Income under Profits & gains of business or profession [ this is not included in section 2(24) as income while similar such compensation received for termination or modification of employment is included under 2(24) as income] 3. Section 49(9) In section 49 of the Income-tax Act, after sub-section (8), the following subsection shall be inserted with effect from the 1st day of April, 2019, namely: (9) Where the capital gain arises from the transfer of a capital asset referred to in clause (via) of section 28, the cost of acquisition of such asset shall be deemed to be the fair market value which has been taken into account for the purposes of the said clause. Cost of acquisition for Capital gains 4. Section 2(42A) - (ba) in the case of a capital asset referred to in clause (via) of section 28, the period shall be reckoned from the date of its conversion or treatment; - period of holding to see whether the Capital gains is short term or long term and 5. Section 56(2)(xi) - (xi) any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto. - Income under other sources The section 2(24) as it exists now: 1. The section defines income. 2. The amendments proposed are new 3. The amendment includes 2 more categories of income a. (xiia) the fair market value of inventory referred to in clause (via) of section 28; when the FMV of inventory converted into Capital asset is chargeable to income-tax under the head "Profits and gains of business or profession and b. (xviib) any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56; where any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto shall be chargeable to tax under the head Income from Other sources 10 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

89 Budget 2018 Part B Direct Tax Proposals: 4. This should also include compensation by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, of any contract relating to his business; which is not proposed under section 2(24) FM s speech: 22. It is proposed to provide that if stock-in-trade is converted into capital asset, the fair market value of the same on the date of conversion shall be taken into account for computing business income. Memorandum to Finance Bill 2018: Rationalisation of provision relating to conversion of stock-in-trade into Capital Asset Section 45 of the Act, inter alia, provides that capital gains arising from a conversion of capital asset into stock-in-trade shall be chargeable to tax. However, in cases where the stock in trade is converted into, or treated as, capital asset, the existing law does not provide for its taxability. In order to provide symmetrical treatment and discourage the practice of deferring the tax payment by converting the inventory into capital asset, it is proposed to amend the provisions of (i) Section 28 so as to provide that any profit or gains arising from conversion of inventory into capital asset or its treatment as capital asset shall be charged to tax as business income. It is also proposed to provide that the fair market value of the inventory on the date of conversion or treatment determined in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of such conversion or treatment; (ii) Clause (24) of section 2 so as to include such fair market value in the definition of income; (iii) section 49 so as to provide that for the purposes of computation of capital gains arising on transfer of such capital assets, the fair market value on the date of conversion shall be the cost of acquisition; (iv) Clause (42A) of section 2 so as to provide that the period of holding of such capital asset shall be reckoned from the date of conversion or treatment. These amendments will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. [Clause 3, 9 & 18] Taxability of compensation in connection to business or employment Under the existing provisions of the Act, certain types of compensation receipts are taxable as business income under section 28. However, the existing provisions of clause (ii) of section 28 is restrictive in its scope as far as taxation of compensation is concerned and a large segment of compensation receipts in connection with business and employment is out of the purview of taxation leading to base erosion and revenue loss. Therefore, it is proposed to amend section 28 of the Act to provide that any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its business shall be taxable as business income. 11 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

90 Budget 2018 Part B Direct Tax Proposals: It is further proposed that any compensation received or receivable, whether in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its employment shall be taxable under section 56 of the Act. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to assessment year and subsequent assessment years. [Clause 3, 9 & 21] Notes on Clauses: Clause 3 of the Bill: Section 2 Clause (24) of ITA defines the expression income. It is proposed to insert a new sub-clause (xiia) in the said clause (24) so as to include the fair market value of inventory referred to in Clause (via) of section 28, also within the definition of income. It is further proposed to insert a new sub-clause (xviib) in the said clause (24) so as to include any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56, also within the definition of income. Clause (42A) of the section (2), inter alia, provides for determination of period for which the capital asset is held by the assessee. It is proposed to insert a new sub-clause (ba) in clause (i) of Explanation 1 of the said clause (42A) so as to provide that in case inventory is converted into or treated as a capital asset under the proposed new clause (via) of section 28, the period shall be reckoned from the date of its conversion or the treatment. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 9 of the Bill seeks to amend section 28 of the Income-tax Act relating to profits and gains of business or profession. The said section, inter alia, provides that certain types of compensation receipts as set out in subclauses (a) to (d) of clause (ii) of the said section are taxable under the head "Profits and gains of business or profession". It is proposed to insert a new sub-clause (e) in the said clause (ii) so as to provide that any compensation due or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, as the case may be, of any contract relating to his business shall be chargeable to tax under the head "Profits and gains of business or profession". It is further proposed to amend the said section so as to provide that the fair market value determined in the prescribed manner of the inventory as on the date of its conversion or treatment as capital assets shall be chargeable to tax under the head Profit and gains of business and profession. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 18 of the Bill seeks to amend section 49 of the Income-tax Act relating to cost with reference to certain modes of acquisition. It is proposed to amend the said section so as to provide that where the capital gain arises from the transfer of a capital asset, referred to in clause (via) of section 28, the cost of acquisition of such asset 12 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

91 Budget 2018 Part B Direct Tax Proposals: shall be deemed to be the fair market value which has been taken into account for the purposes of the said clause. This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 21 of the Bill seeks to amend section 56 of the Income-tax Act relating to income from other sources. It is also proposed to insert a new clause (xi) in sub-section (2) of the said section so as to provide that any compensation or other payment due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto shall be chargeable to income-tax under the head "Income from other sources". This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Simple understanding: The tax proposals expand 1. When inventory is converted into Capital asset, the FMV of the inventory as on the date of conversion shall be included to be taxed as Profits and gains of business or profession [section 2(24) read with Section 28(via)] 2. When a Capital asset which was originally an inventory but converted into Capital asset at FMV as on date of conversion, the cost of acquisition shall be the FMV as on the date of such conversion ( section 49(9)) 3. The period of holding of such capital asset shall be reckoned from the original date of acquisition of the inventory [ section 2(42A)] 4. Compensation received for termination or change of contract relating to his business shall be taxed as Profits and Gains of business or profession ( section 28(ii)(e) a. But this compensation has to be included under Income u/s 2 ( which is not done) 5. Compensation received for termination or change in terms and conditions of employment shall be taxed as Income from Other sources ( section 56(2)(xi) Clause 4 of Finance Bill 2018: Amendment of section 9 In section 9 of the Income-tax Act, in sub-section (1), in clause (i), with effect from the 1st day of April, 2019, (I) in Explanation 2, for clause (a), The following clause shall be substituted, namely: (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the nonresident or habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by that non-resident and the contracts are (i) In the name of the non-resident; or 13 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

92 Budget 2018 Part B Direct Tax Proposals: (ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that non-resident has the right to use; or (iii) For the provision of services by the non-resident; or ; (II) After Explanation 2, the following Explanation shall be inserted, namely: Explanation 2A. For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident in India shall constitute business connection in India and significant economic presence for this purpose, shall mean (a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or (b) Systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means: Provided that the transactions or activities shall constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India: Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.. Section as it exists today: Explanation 2. for the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident, (a) Has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or FM s speech: 24. It is proposed to amend section 9 of the Act to align the scope of "business connection" with the modified dependent agent permanent establishment rule as per Multilateral Instrument signed by the Government. 25. It is proposed to amend section 9 of the Act to provide that significant economic presence of a non-resident shall constitute "business connection" with India. It is also proposed to define the phrase significant economic presence. Memorandum to Finance Bill 2018: Aligning the scope of business connection with modified PE Rule as per Multilateral Instrument (MLI). 14 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

93 Budget 2018 Part B Direct Tax Proposals: Under the existing provisions of Explanation 2 to clause (i) of sub-section (1) of section 9, "business connection" includes business activities carried on by non-resident through dependent agents. The scope of "business connection" under the Act is similar to the provisions relating to Dependent Agent Permanent Establishment (DAPE) in India s Double Taxation Avoidance Agreements (DTAAs). In terms of the DAPE rules in tax treaties, If any person acting on behalf of the non-resident, - Is habitually authorised to conclude contracts for the non-resident, then such agent would constitute a PE in the source country. However, in many cases, with a view to avoid establishing a permanent establishment (hereafter referred to as 'PE') under Article 5(5) of the DTAA, the person acting on the behalf of the non-resident, negotiates the contract but does not conclude the contract. Further, under paragraph 4 of Article 5 of the DTAAs, a PE is deemed not to exist when a place of business is engaged solely in certain activities such as maintenance of stocks of goods for storage, display, delivery or processing, purchasing of goods or merchandise, collection of information. This exclusion applies only when these activities are preparatory or auxiliary in relation to the business as a whole. The OECD under BEPS Action Plan 7 reviewed the definition of 'PE' with a view to preventing avoidance of payment of tax by circumventing the existing PE definition by way of commissionaire arrangements or fragmentation of business activities. In order to tackle such tax avoidance scheme, the BEPS Action plan 7 recommended modifications to paragraph (5) of Article 5 to provide that an agent would include not only a person who habitually concludes contracts on behalf of the non-resident, but also a person who habitually plays a principal role leading to the conclusion of contracts. Similarly Action Plan 7 also recommends the introduction of an anti-fragmentation rule as per paragraph 4.1 of Article 5 of OECD Model tax conventions, 2017 so as to prevent the tax payer from resorting to fragmentation of functions which are otherwise a whole activity in order to avail the benefit of exemption under paragraph 4 of Article 5 of DTAAs. Further, with a view to preventing base erosion and profit shifting, the recommendations under BEPS Action Plan 7 have now been included in Article 12 of Multilateral Convention to Implement Tax Treaty Related Measures (herein referred to as MLI ), to which India is also a signatory. Consequently, these provisions will automatically modify India s bilateral tax treaties covered by MLI, where treaty partner has also opted for Article 12. As a result, the DAPE provisions in Article 5(5) of India s tax treaties, as modified by MLI, shall become wider in scope than the current provisions in Explanation 2 to section 9(1)(i). Similarly, the anti-fragmentation rule introduced as per paragraph 4.1 of Article 5 of the OECD Model Tax Conventions, 2017 has narrowed the scope of the exception under Article 5(4), thereby expanding the scope of PE in DTAA vis-a-vis domestic provisions contained in Explanation 2 to section 9(1)(i). In effect, the relevant provisions in the DTAAs are wider in scope than the domestic law. However, sub-section (2) of section 90 of the Act provides that the provisions of the domestic law would prevail over corresponding provisions in the DTAAs, to the extent they are beneficial. Since, in the instant situations, the provisions of the domestic 15 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

94 Budget 2018 Part B Direct Tax Proposals: law being narrower in scope are more beneficial than the provisions in the DTAAs, as modified by MLI, such wider provisions in the DTAAs are ineffective. In view of the above, it is proposed to amend the provision of section 9 of the Act so as to align them with the provisions in the DTAA as modified by MLI so as to make the provisions in the treaty effective. Accordingly, clause (i) of sub-section (1) of section 9 is being proposed to be amended to provide that business connection shall also include any business activities carried through a person who, acting on behalf of the non-resident, habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by the non-resident. It is further proposed that the contracts should be (i) In the name of the non-resident; or (ii) For the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that the non-resident has the right to use; or (iii) For the provision of services by that non-resident. This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to assessment year and subsequent assessment years. [Clause 4] Business connection to include Significant Economic presence The oranges upon the trees in California are not acquired wealth until they are picked, not even at that stage until they are packed, and not even at that stage until they are transported to the place where demand exists and until they are put where the consumer can use them. These stages, up to the point where wealth reached fruition, may be shared in by different territorial authorities. (Excerpts from a report on double taxation submitted to League of Nations in early 1920s) Accordingly, both the residence and source countries claim the right to taxation. Taxation of business profits on the basis of economic allegiance has always been the underlying basis of existing international taxation rules. Economists gave primacy to the economic allegiance rather than physical location and made it clear that physical presence was important only to the extent it represented the economic location. Ordinarily, as per the allocation of taxing rules under Article 7 of DTAAs, business profit of an enterprise is taxable in the country in which the taxpayer is a resident. If an enterprise carries on its business in another country through a 'Permanent Establishment' situated therein, such other country may also tax the business profits attributable to the 'Permanent Establishment'. For this purpose, Permanent Establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried out provided that the business activities are not of preparatory or auxiliary in nature and such business activities are not carried out by a dependent agent. For a long time, nexus based on physical presence was used as a proxy to regular economic allegiance of a non-resident. However, with the advancement in information and communication technology in the last few decades, new business models operating remotely through digital medium have emerged. Under these new business models, the non-resident 16 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

95 Budget 2018 Part B Direct Tax Proposals: enterprises interact with customers in another country without having any physical presence in that country resulting in avoidance of taxation in the source country. Therefore, the existing nexus rule based on physical presence do not hold good anymore for taxation of business profits in source country. As a result, the rights of the source country to tax business profits that are derived from its economy is unfairly and unreasonably eroded. OECD under its BEPS Action Plan 1 addressed the tax challenges in a digital economy wherein it has discussed several options to tackle the direct tax challenges arising in digital businesses. One such option is a new nexus rule based on significant economic presence. As per the Action Plan 1 Report, a non-resident enterprise would create a taxable presence in a country if it has a significance economic presence in that country on the basis of factors that have a purposeful and sustained interaction with the economy by the aid of technology and other automated tools. It further recommended that revenue factor may be used in combination with the aforesaid factors to determine 'significance economic presence'. The scope of existing provisions of clause (i) of sub-section (1) of section 9 is restrictive as it essentially provides for physical presence based nexus rule for taxation of business income of the non-resident in India. Explanation 2 to the said section which defines business connection is also narrow in its scope since it limits the taxability of certain activities or transactions of non-resident to those carried out through a dependent agent. Therefore, emerging business models such as digitized businesses, which do not require physical presence of itself or any agent in India, is not covered within the scope of clause (i) of subsection (1) of section 9 of the Act. In view of the above, it is proposed to amend clause (i) of sub-section (1) of section 9 of the Act to provide that significant economic presence' in India shall also constitute 'business connection'. Further, significant economic presence for this purpose, shall mean (i) any transaction in respect of any goods, services or property carried out by a nonresident in India including provision of download of data or software in India if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed; or (ii) Systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means. It is further proposed to provide that only so much of income as is attributable to such transactions or activities shall be deemed to accrue or arise in India. It is further proposed to provide that the transactions or activities shall constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India. The proposed amendment in the domestic law will enable India to negotiate for inclusion of the new nexus rule in the form of 'significant economic presence' in the Double Taxation Avoidance Agreements. It may be clarified that the aforesaid conditions stated above are mutually exclusive. The threshold of revenue and the users in India will be decided after consultation with the stakeholders. Further, it is also clarified that unless corresponding modifications to PE rules are made in the DTAAs, the cross border business profits will continue to be taxed as per the existing treaty rules. 17 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

96 Budget 2018 Part B Direct Tax Proposals: This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to assessment year and subsequent assessment years. [Clause 4] Notes on clauses: Clause 4 of the Bill seeks to amend section 9 of the Income-tax Act relating to income deemed to accrue or arise in India. Explanation 2 to clause (i) of sub-section (1) of the said section provides that business connection shall include - any business activity carried out through a person who, acting on behalf of the nonresident, - has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or - has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or habitually secures orders in India, mainly or wholly for the nonresident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident. The proviso to the said Explanation provides that such business connection shall not include any business activity specified therein. It is proposed to substitute clause (a) of the said Explanation 2 so as to provide that business connection shall include - any business activity carried through a person who, acting on behalf of the nonresident, a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident or b) habitually concludes contracts or c) habitually plays the principal role leading to conclusion of contracts by the non-resident and the contracts are (i) in the name of the non-resident; or (ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that non-resident has the right to use; or (iii) For the provision of services by that non-resident. 73 It is further proposed to insert a new Explanation 2A in clause (i) of sub-section (1) of the said section so as to provide that the significant economic presence of a non-resident in India shall constitute business connection of the non-resident in India and - the significant economic presence for this purpose, shall mean 18 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

97 Budget 2018 Part B Direct Tax Proposals: a) any transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or b) Systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means. It is further proposed to provide that the transactions or activities shall constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India. It is also proposed to provide that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Seen with reference to OECD Draft guidelines on PE read with BEPS Action Plan 7 on DAPE : DISCUSSION DRAFT ON ADDITIONAL GUIDANCE ON THE ATTRIBUTION OF PROFITS TO PERMANENT ESTABLISHMENTS- OECD GUIDANCE ON PARTICULAR FACT PATTERNS RELATED TO DEPENDENT AGENT PERMANENT ESTABLISHMENTS ( DAPE ) 17. Paragraphs 5 and 6 of Article 5 of the MTC set out the circumstances in which an enterprise is treated as having a permanent establishment in respect of activities undertaken for that enterprise, even though the enterprise may not have a fixed place of business. Where a DAPE arises from the activities of a dependent agent, the host country may have taxing rights over two different legal entities: the dependent agent, if it is a resident of the PE jurisdiction; and the DAPE, which is a PE of a non-resident enterprise (2010 Attribution of Profits Report, Part I paragraph 230). 18. For purposes of determining the profits attributable to the DAPE, Article 7 of the MTC is applicable together with the guidance in Section D.5 of Part I of the 2010 Attribution of Profits Report. According to paragraph 234 of Part I of the 2010 Attribution of Profits Report, "in calculating the profits attributable to the dependent agent PE, it would be necessary to determine and deduct an arm's length reward to the dependent agent for the services it provides to the non-resident enterprise (taking into account its assets and its risks, if any)." 19. There are cases where the dependent agent that performs activities that give rise to a DAPE under Article 5(5) is also, for transfer pricing purposes, an associated enterprise of the non-resident enterprise acting as the principal and is resident in the PE jurisdiction. In those cases, in addition to the attribution of profits to the DAPE, it will also be necessary to determine the arm's length remuneration of the dependent agent enterprise ("DAE") 19 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

98 Budget 2018 Part B Direct Tax Proposals: In the following examples illustrating these cases, the determination of the profits of the dependent agent enterprise and of the DAPE have been performed independently, without any direction about the order in which they should be performed. However, in determining the profits of the DAPE under the AOA, it would be logical and efficient first to accurately delineate the actual transaction between the non-resident enterprise and the DAE and to determine the resulting arm's length profits. This process would provide the arm's length fee deductible in the DAPE in respect of the functions performed by the DAE, as required by paragraph 234 of Part I of the 2010 Attribution of Profits Report. 20. The examples illustrating the attribution of profits to DAPEs present the following fact patterns and address the following issues: In Example 1, the non-resident enterprise acting as a principal engages an associated enterprise resident in the host jurisdiction to perform activities that give rise to a DAPE under Article 5(5). This example intends to illustrate the attribution of profits to the DAPE under the AOA in a fact pattern in which an analysis under Article 9 is also required. In Example 2, the non-resident enterprise acting as a principal engages an associated enterprise resident in the host jurisdiction to perform activities that give rise to a DAPE under Article 5(5). The difference in this example compared to Example 1 is that the Article 9 analysis results in the allocation of risk not to the party contractually assuming the risk, but to the party that has control over risk and has the financial capacity to assume the risk. This example intends to illustrate the impact that such allocation of risk may have for the analysis under the AOA. In Example 3, the facts are the same as in Example 2, except that the non-resident enterprise acting as a principal sends an employee to the host country to perform activities that give rise to a DAPE under Article 5(5). This example intends to illustrate the attribution of profits to the DAPE under the AOA in a fact-pattern in which an analysis under Article 9 is not required. In Example 4, based on the facts in Example 2, the analysis focuses on the activities related to the provision of credit to customers performed by the dependent agent enterprise and the non-resident enterprise. This example intends to illustrate the consequences for the attribution of profits to the DAPE resulting from the attribution of risk under the AOA and the allocation of risk under Article 9 (and in particular Section D of Chapter I of the Guidelines). In addition to an associated enterprise (under Article 9 of the MTC), an employee or a separate non-associated enterprise (for transfer pricing purposes) may also act as a dependent agent of the principal, meeting the conditions to create a PE for the non-resident enterprise/principal under paragraphs 5 and 6 of Article of the MTC. In these two additional situations, the remuneration paid to the dependent agent for its services (considering the functions performed, assets used and risks assumed) is generally considered to be arm's length (provided the employment relationship is not subject to the transfer pricing rules under specific domestic legislation). Accordingly, the compensation to the dependent agent in these circumstances would not be subject to scrutiny under Article 9 of the MTC and only Article 7 of the MTC would be applicable. EXAMPLE Prima is a company resident in Country A (hereinafter, "Prima", "non-resident enterprise" or "Principal"). It manufactures consumer products in Country A. Prima's products are sold to 20 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

99 Budget 2018 Part B Direct Tax Proposals: unrelated customers worldwide, and in order to do so Prima uses a network of sales agents. Prima has no physical presence in the countries where its products are sold. 22. Sellco is a company resident in Country B (hereinafter, "Sellco" or dependent agent enterprise, "DAE"), and is an associated enterprise of Prima for transfer pricing purposes. Sellco is engaged by Prima to perform selling activities in Country B for Prima. It is assumed for the purposes of this example that Sellco is a dependent agent of Prima, and that the activities performed by Sellco for Prima give rise to a dependent agent permanent establishment ("DAPE") of Prima in Country B. 23. The contract entered into by Prima and Sellco includes the following terms: CONTRACT Prima engages Sellco as its sales agent in country B. Sellco is responsible for identifying customers, soliciting, placing and processing customer orders with Prima. Sellco provides marketing and advertising services by implementing locally the marketing and advertising strategy devised by Prima. Prima holds title to inventory until the product is delivered to the customer. Prima invoices customers and bears the credit risk with respect to customer receivables. Prima agrees to remunerate Sellco with a commission on sales generated. 24. The relevant facts of Example 1 are set out in the following table: FACTS SALES Prima sets the sales strategy and market share targets in Country B. Prima selects the sales agent, monitors its performance and makes decisions on whether to continue, adapt or terminate the relations with the sales agent. Sellco is responsible for identifying customers, soliciting and placing customer orders and processing customer orders with Prima. Prima is responsible for setting the pricing policy for products, as well as for tailoring that policy to Country B's market through setting specific prices for products offered in Country B. MARKETING & ADVERTISING Prima decides the budget, marketing strategy and advertising content globally and for Country B. Sellco implements the marketing strategy in Country B and is reimbursed by Prima for all expenses incurred in placing local advertising for the products. Sellco's activities do not create any local marketing intangibles in Country B. Sales channels are generic and not specialised. Prima is responsible for the legal protection of the Group's marketing intangibles. INVENTO RY Prima retains title to the inventory until it is delivered to customers. 21 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

100 Budget 2018 Part B Direct Tax Proposals: Prima is responsible for warehousing the inventory and determining and monitoring the inventory levels of the products to fulfil customer orders expeditiously while minimising obsolescence risk and costs. CREDIT TO CUSTOMERS Amounts due from customers are for the account and at the risk of Prima, and Prima contractually bears credit risk with respect to customer receivables. Prima sets parameters within which credit can be extended to customers. Prima approves every sale to customers made in Country B through the review of the customer's creditworthiness. Prima handles collection of customer receivables. Analysis of the controlled transaction between Prima and Sellco under Article Given that Prima and Sellco are associated enterprises, an analysis of the controlled transaction between Prima and Sellco is required under Article Under the guidance in Section D of Chapter I of the Guidelines, the accurate delineation of the controlled transaction starts with the examination of the contractual terms of the transaction, taking into account the additional information provided by the other economically relevant characteristics. 27. The analysis of the transaction finds that the contractual arrangement is one under which Prima appoints Sellco as its sales agent to provide stated service levels. Table 1 in the Annex sets out the functional analysis performed under Article Assume that the functional analysis further finds that Prima is the legal owner of inventory, marketing intangibles and receivables, and that Prima, in addition to contractually assuming the risks, it controls the risks associated with these assets, and has the financial capacity to assume these risks. In addition, assume that the functional analysis identifies key risks arising from the arrangements, and that these are controlled by Prima. Sellco controls its own operational risk of performing its sales agency activities competently. In this example, the contractual assumption of risk is aligned with control of risk and the financial capacity to assume such risks. 29. Assume that the outcome of the analysis under Article 9 determines that the profits of Sellco should be 2, taking into account the functions of Sellco including the risks it assumes. For the sake of simplicity only Country B sales have been shown in the summarised financial results of Prima in the table below. PRIMA (Country A) Sales income COGS (40) Gross profit 160 OPEX SELLCO (Country B) 200 Income from sales commission 40 [200 x 0.05] = OPEX (other than advertising expenses reimbursed by 22 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in (8)

101 Budget 2018 Part B Direct Tax Proposals: Prima) Sales commission to Sellco (10) (10) Reimbursement of advertising expenses incurred by Sellco (7) (7) Bad debt losses (4) (4) Inventory losses (3) Warehousing (6) Operating profit 130 Operating profit Under the assumptions made in this example, it can be concluded that Prima assumes the economically significant risks related to sales in Country B, including inventory and credit risks, since Prima - assumes the risk under the contract, - performs in Country A the risk control functions in relation to such risks (e.g. decides sales strategy, projections and market share targets, as well as making the decision to select Sellco as sales agent in Country B; - determines pricing policy in general and in particular for the products to be sold in Country B, - Determines inventory levels, and approves sales to customers) and, has the financial capacity to assume these risks. Sellco - assumes the risks inherent to its sales agency activities under the contract and, since it controls its own operational risk of performing its agency activities competently and - Has the financial capacity to assume such risk, that contractual assumption is recognised in accurately delineating the actual transaction and no further consideration is required under Section D of Chapter I. 31. in summary: Total profits in Country A and in Country B: 132 Total profits in Country A under Article 9: 130 Total profits in Country B under Article 9: Total profits of the non-resident enterprise: P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

102 Budget 2018 Part B Direct Tax Proposals: Attribution of profits to Prima's DAPE in Country B under Article Given the assumption that Prima has a DAPE in Country B, Article 7 applies to determine the amount of profits, if any, attributable to the DAPE of Prima in Country B. Analysis under Article 7 and Step 1 of the AOA 33. Under Step 1 of the AOA, a functional and factual analysis is performed to determine the functions undertaken by Sellco on its own account and the functions undertaken by Sellco on behalf of the non-resident enterprise, Prima. The functions undertaken by Sellco on behalf of Prima are relevant to the attribution of Prima's assets or risks to the DAPE (2010 Attribution of Profits Report, Part I, para 232). Table 1 in the Annex sets out the functional and factual analysis performed under Article Based on the facts and assumptions in this example, the functional and factual analysis determines that the DAPE has not been attributed risks of Prima related to inventory, marketing intangibles or receivables because there are no significant people functions performed by Sellco on behalf of the non-resident enterprise (Prima) in Country B relevant to the assumption of such risks. Furthermore, the DAPE has not been attributed the economic ownership of any assets (inventory, marketing intangibles, or receivables) of Prima because there are no significant people functions performed by Sellco on behalf of the non-resident enterprise (Prima) in Country B relevant to the attribution of economic ownership of such assets. Accordingly, there are no risks or assets attributable to the DAPE and there is no need to attribute capital to the DAPE. Analysis under Article 7 and Step 2 of the AOA 35. The next step is to determine how much profit is attributable to the DAPE from sales made by Prima in Country B. 36. Under Article 7, the sales income obtained in Country B is attributable to the DAPE of Prima in Country B. Based on the functional and factual analysis under Step 1 of the AOA, the DAPE needs to be attributed: Costs of the compensation payable to Sellco (DAE) for the sales-related activities Sellco performs as a sales agent (which according to the Article 9 analysis, amounts to 10); and, Costs of the compensation payable to Prima for the functions Prima performs in relation to the sale of products in Country B (reflected in cost of goods sold). 37. In this example, given that there are no risks or assets attributed to the DAPE, there are no profits attributed to the DAPE. Accordingly, given that: 1) third party sales in Country B are 200; 2) the DAPE has an expense of 10 relating to the sales commission to Sellco; and, 3) the profits attributed to the DAPE should be zero, the amount of cost of goods sold ("COGS", which equals "sales" of the other part of the non-resident enterprise, referred to as the "Head Office") is determined such that the operating profit of the DAPE, after payment of an appropriate fee to the DAE determined under Article 9, is zero. This results in COGS of P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

103 Budget 2018 Part B Direct Tax Proposals: 38. The P&L of the DAPE showing the amounts received and expensed in connection with the sale of products in Country B and the attribution of Prima's profits to the DAPE of Prima can be summarised as follows: PRIMA'S HEAD OFFICE (Country A) DAPE (Country B) Sales income 190 Sales income COGS (40) COGS Gross profit 150 Gross profit 200 (190) 10 OPEX OPEX Reimbursement of (7) advertising expenses incurred by Sellco Bad debt losses (4) Sales commission to Sellco Inventory losses (3) Warehousing (6) Operating profit 130 Operating profit (10) 0 Conclusion under Article There are no profits to be attributed to the DAPE since there are no significant people functions performed by Sellco on behalf of Prima in Country B relevant to the attribution of Prima's assets and risks to the DAPE. Therefore, in this example, none of the profits of Prima (130) are attributed to its DAPE but are all profits of Prima's Head Office. India s MLI Positions -Impact on Availing Treaty Benefits - Nishith Desai Associates 2017 X. Articles 12 Artificial Avoidance of PE Article 12 of the MLI is based on the work of Action 7 of the BEPS Action Plan. It aims to address the artificial avoidance of PE s through commissionaire arrangement and similar strategies by widening the scope of the types of arrangements that may be deemed PE s. The 2014 version of the OECD Model Tax Convention already provides that a PE is deemed to be established in a Contracting Jurisdiction if an independent agent acting on behalf of an enterprise located in another Contracting Jurisdiction habitually exercises an authority to conclude contracts in the name of that enterprise in the first Contracting Jurisdiction. While countries, including India, have adopted various versions of this provision across their multiple treaty partners, the limited scope of these provisions continued to allow companies 25 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

104 Budget 2018 Part B Direct Tax Proposals: to enter into commissionaire agreements. Such agreements make it possible for a company to sell products in another country by having an agent conclude the transaction in his own name for a commission. In such instances, the agent is not taxed on the sale itself as he does not own the goods (he may be taxed to the limited extent of the commission he receives for the services provided to the company), and the company avoids establishing a PE by ensuring that the transactions are not concluded in its name and therefore are not legally binding on it. The first paragraph of Article 12(1) of the MLI attempts to address the issue of commissionaire agreements and other similar arrangements by providing that a PE is deemed to be established where a person, on behalf of an enterprise, conducts certain activities in a Contracting Jurisdiction. These activities include (i) Concluding contracts; or (ii) Habitually playing the principal role leading to the conclusions of contracts that are routinely concluded without material modification by the enterprise; and Such contracts are either (i) In the name of the enterprise; (ii) For the transfer of ownership or the right to use property belonging to the enterprise; or (iii) for providing services by the enterprise. The second paragraph of Article 12(1) clarifies that paragraph 1 shall not apply if the person acting on behalf of the enterprise does so in an independent capacity and in the ordinary course of business. However, where such person acts exclusively or almost exclusively on behalf one or more enterprises to which is it closely related, that persons shall not be considered as acting as an independent agent. (Please refer to section dealing with Article 15 of the MLI for a definition of the term closely related. ) Pursuant to the MLI, both paragraphs apply in place of existing provisions; however as Article 12 is not a minimum standard, Parties are permitted to reserve the right of this Article do not apply to their tax treaties. Impact and Analysis India s MLI Position Keeping in mind that several of India s treaties already provide for some of the recommended provisions under Article 12 (or a similar version), it is no surprise that India has not chosen to exercise its right of 32. BEPS Action Plan 7 Final Report page 9. BEPS Action Plan 7 Final Report page 9. Provided upon request only reservation and has accordingly notified all its treaties with respect to both paragraphs 1 and 2 of Article 12. By making this choice India has effectively sought to bring all its treaties in line with the MLI. However, it should be noted that these provisions will only apply to a particular tax treaty to the extent that India s relevant treaty partner has similarly not exercised its right of reservation, and notified India with respect to Article 12. Therefore, where both Treaty Partners have notified Article 12 as being applicable, instances where commissionaire arrangements exist would now constitute a PE. In addition to the formation of Agency PE before, business now have to ensure that the legal arrangements with persons located in India and the actual activities carried on by such person, whether employees or consultants or other individuals, do not fall foul of the expanded PE provisions. 26 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

105 Budget 2018 Part B Direct Tax Proposals: To that extent care needs to be taken and records may have to be maintained to prove that the individual in India was only undertaking activities independently and that substantial review or need based modification of the contract was undertaken by the parent entity. Other Countries MLI Positions Significantly, countries like the Netherlands and France have also notified India with respect to both paragraphs under Article 12, thereby modifying India s tax treaties with these countries to replace existing Article 5(5)(a) with paragraph 1 and Article 5(6) with paragraph 2 outlined above. That being said, Singapore, Sweden, and the UK have chosen to reserve the right for the entirety of Article 12 not to apply. This may be in part due to the fact that the existing treaties of these countries already contain a provision whereby persons habitually securing orders in one Contracting Jurisdiction wholly or almost wholly for an enterprise or other closely related enterprises located in another Contracting Jurisdiction are deemed to have established a PE. With respect to the tax treaties between these countries and India, such reservation. This may be due to the fact that these countries already have a provision in their tax treaties. Accordingly, the tax treaties between India and these countries shall remain unchanged with respect to provisions covered under Articles 12. Proposed under the amendment to Section 9(1)(i) Under OECD guidelines under BEPS Action Plan 7 read with MLI signed by India ( amended para 5 & 6 of Article 5 of Model Treaty Convention that now defines the DAPE arrangement as PE of NRE) Explanation 2 to section 9(1)(i) business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident, (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident or habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by that non-resident and the contracts Notwithstanding the provisions of paragraphs 1 and 2 but subject to the provisions of paragraph 6, where a person is acting in a Contracting State on behalf of an enterprise and in doing so, 1. habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these My understanding of the amendment proposal compared against the BEPS Action Plan 7 amending Para (%) of Article 5 and introducing Para 4.1 to Article 5 of Model Tax Convention - The wordings of Para 5 of Article 5 of MTC, have more or less been repeated in the ITA through the amendments. - Principal role has been replaced by authority to conclude the contract. - Whether the activities are in the nature of Dependent 27 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

106 Budget 2018 Part B Direct Tax Proposals: are (i) in the name of the non-resident; or (ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that non-resident has the right to use; or (iii) for the provision of services by the nonresident contracts are a) in the name of the enterprise, or b) for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or c) for the provision of services by that enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, Unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. Agency or Independent Agency as referred to in Para 6 to Article 5 to MTC, is addressed in the amendment through the new Explanation to clause (a) of Section 9(1) (i) that where the activities indicated in the amendment proposal are performed, they will be taken as DAPE only and PE shall be presumed. Para 6 of Article 5 of MTC a) Paragraph 5 shall not apply where the person acting in a Contracting State on behalf of an enterprise of the other Contracting State carries on business in the first-mentioned State as an independent agent and acts for the enterprise in the ordinary course of that business. Where, however, a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related, that person shall not be considered to be an 28 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

107 Budget 2018 Part B Direct Tax Proposals: independent agent within the meaning of this paragraph with respect to any such enterprise. b) For the purposes of this Article, a person is closely related to an enterprise if, based on all the relevant facts and circumstances, one has control of the other or both are under the control of the same persons or enterprises. In any case, a person shall be considered to be closely related to an enterprise if one possesses directly or indirectly more than 50 per cent of the beneficial interest in the other (or, in the case of a company, more than 50 per cent of Commentaries in Para 5 of Article 5: Commentary 32.1 For paragraph 5 to apply, all the following conditions must be met: a person acts in a Contracting State on behalf of an enterprise; in doing so, that person habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are either in the name of the enterprise or for the transfer of the ownership of, or for the granting of 29 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

108 Budget 2018 Part B Direct Tax Proposals: the right to use, property owned by that enterprise or that the enterprise has the right to use, or for the provision of services by that enterprise. Commentaries in Para 6 of Article 5: Paragraph 6 Commentary 36. Where an enterprise of a Contracting State carries on business dealings an independent agent carrying on business as such, it cannot be taxed in the other Contracting State in respect of those dealings if the agent is acting in the ordinary course of that business (see paragraph 32 above). The activities of such an agent, who representing a separate and independent enterprise, should not result in the finding of a permanent establishment of the foreign enterprise B. Artificial avoidance of PE status through the specific activity exemptions 10. Art. 5(4) of the OECD Model Tax Convention includes a list of exceptions (the specific activity exemptions ) according to which a permanent establishment is deemed not to exist where a place of business is used solely for activities that are listed in that paragraph. Para 4. Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include: 30 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

109 Budget 2018 Part B Direct Tax Proposals: a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any activity not listed in subparagraphs a) to d), provided that this activity has a preparatory or auxiliary character, or f) The maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. New Para 4.1 Paragraph, 4 shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise 31 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

110 Budget 2018 Part B Direct Tax Proposals: carries on business activities at the same place or at another place in the same Contracting State and a) that place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of this Article, or b) the overall activity resulting from the combination of the activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, is not of a preparatory or auxiliary character, Provided that the business activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, constitute complementary functions that are part of a cohesive business operation. Proposed Explanation 2A under the amendment to Section 9(1)(i) Explanation 2A. For the removal of doubts, it is hereby clarified that the significant economic presence of a nonresident in India shall Under OECD guidelines under BEPS Action Plan 1 Report read with MLI signed by India, on Significant Economic Presence A new nexus based on the concept of significant economic presence 277. This option would create a taxable presence in a country when a non-resident enterprise My understanding of the amendment proposal compared against the BEPS Action Plan 1 1. The amendments are in line with BEPS Action Plan 1 2. The factors to decide Significant economic presence as per BEPA AP 32 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

111 Budget 2018 Part B Direct Tax Proposals: constitute business connection in India and significant economic presence for this purpose, shall mean (a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or (b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means: Provided that the transactions or activities shall constitute significant economic presence in India, whether or not the nonresident has a residence or place of business in India or renders services in India: Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.. has a significant economic 1 shall include presence in a country on the basis a. Revenue generated of factors that evidence a through Business purposeful and sustained connection in interaction with the economy of India that country via technology and b. Revenue generated other automated tools. through Digital Revenue-based factor transactions 278. As a general matter, c. Ability to measure revenue that is generated on a digital transaction sustained basis from a volume country could be considered d. Local domain to be one of the clearest name potential indicators of the existence of a significant e. Local digital economic presence platform a. Transactions covered. f. Local payment One approach that option could be considered in g. user base and the defining a basic associated data revenue factor is to input include only revenues h. Online contract generated from digital conclusion transactions concluded with ini. volume of digital country customers content collected through an through a digital enterprise s digital platform from platform. users b. Level of the threshold. j.. Possible The core element of combinations of the revenue factor the revenue factor could be the gross with the other revenues generated factors from remote 3. Determining the income transactions attributable to the concluded with significant economic customers in the presence country concerned. a. method based on c. Administration of the fractional threshold. An accurate apportionment application of the b. Modified deemed revenue threshold profit methods would depend on the c. A withholding tax ability of the country 33 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

112 Budget 2018 Part B Direct Tax Proposals: to identify and measure remote sales activities of the nonresident enterprise. One possible approach to address this challenge could be to introduce a mandatory registration system for enterprises that meet the factors giving rise to a significant economic presence Digital factors - In the digital economy, the ability to establish and maintain a purposeful and sustained interaction with users or customers in a specific country via an online presence depends on analogous factors. A range of digital factors based on the current development of the digital economy could be used as part of a test for significant economic presence, including the following: a. A local domain name. A non-resident enterprise targeting customers or users in a country will generally obtain the digital equivalent of a local address where the non-resident enterprise establishes its store front, typically taking the form of a localised or specialised domain name. on digital transactions d. Collection of the tax e. Negative impact of gross-basis taxation and relationship with trade and other obligations f. Introducing an equalisation levy While the manner of computation of income accruing through the Business Connection due to Significant Economic presence is not defined in the proposed amendment, it is expected that it will be in line with the BEPS Action Plan 1 including: 1. Revenue 2. Volume 3. Split between revenues from digital and other transactions 4. And attributable to source country through the digital means Equalization levy at 6% of the Revenue from e-commerce transactions have already been introduced effective 1st April 2017 by Chapter VIII of FA Section 165(2) of the said Chapter excludes levy of Equalization levy if the Nonresident has a PE in India. Thus Equalization levy and 34 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

113 Budget 2018 Part B Direct Tax Proposals: b. A local digital platform. Nonresident enterprises frequently establish local websites or other digital platforms in order to present the goods or services being offered in the light that most appeals to the local users or customers, taking into account language and cultural norms in particular c. Local payment options. A nonresident enterprise that maintains a purposeful and sustained interaction with the economy of a country will frequently ensure that local customers have a seamless purchasing experience with prices reflected in local currency, taxes, duties and fees already calculated, with the option of using a local form of payment to complete the purchase User-based factors280. Given the importance of network effects in the digital economy, the user base and the associated data input may also be important indicators of a purposeful and sustained interaction with the economy of that another country. A range of factors based on normal taxation under PE route are mutually exclusive. The current Finance Bill 2018 does not say anything about Equalization levy. If the Non Resident enterprise gets taxed through the Business connection route due to Significant Economic presence in India based on the new amendment, then will this be in addition to Equalization levy or the said exception provided under section 165(2) of Chapter VIII of Finance Act 2016 will continue needs to be verified. 35 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

114 Budget 2018 Part B Direct Tax Proposals: users could be used to reflect the level of participation in the economic life of a country, namely: a. Monthly active users (MAU). One factor reflecting the level of penetration in a country s economy is the number of monthly active users (MAU) on the digital platform that are habitually resident in a given country in a taxable year b. Online contract conclusion. Another factor indicating the level of participation of an enterprise in the economic life of a country is the regular conclusion of contracts. This is the focus of the existing dependent agent PE test contained in Article 5 of the OECD Model which, in broad terms, requires that this contract conclusion be carried out in the country by a person acting on behalf of the nonresident enterprise. In the digital economy, contracts can frequently be concluded with customers via a digital platform without the need for the intervention of local 36 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

115 Budget 2018 Part B Direct Tax Proposals: personnel or dependent agents c. Data collected. Another factor which could be considered to reflect an enterprise s level of participation in the economic life of a country is the volume of digital content collected through a digital platform from users and customers habitually resident in that country in a taxable year Possible combinations of the revenue factor with the other factors 281. For purposes of this potential option, total revenue in excess of the revenue threshold would be an indicator of the existence of a significant economic presence Total revenue, however, may not by itself suffice to evidence a non-resident enterprise s regular and sustained participation in the economic life of a country. To be an appropriate measure of participation in the economic life of a country, the revenue factor could be combined with other factors, such as the digital and/or user-based factors that indicate a purposeful and sustained interaction with the economy of the country concerned. In other words, a link would have to be created 37 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

116 Budget 2018 Part B Direct Tax Proposals: between the revenuegenerating activity of the non-resident enterprise and its significant economic presence in the country Determining the income attributable to the significant economic presence 284. Attribution of profits is a key consideration in developing a nexus based on significant economic presence Methods based on fractional apportionment2. In the context of a significant economic presence, the implementation of a method based on fractional apportionment would require the performance of three successive steps: a. (1) The definition of the tax base to be divided, b. (2) The determination of the allocation keys to divide that tax base, and c. (3) The weighting of these allocation keys Modified deemed profit methods A withholding tax on digital transactions Collection of the tax Negative impact of gross-basis taxation and relationship with trade and other obligations Introducing an equalisation levy P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

117 Budget 2018 Part B Direct Tax Proposals: To avoid some of the difficulties arising from creating new profit attribution rules for purposes of a nexus based on significant economic presence, an equalisation levy could be considered as an alternative way to address the broader direct tax challenges of the digital economy. This approach has been used by some countries in order to ensure equal treatment of foreign and domestic suppliers If the policy priority is to tax remote sales transactions with customers in a market jurisdiction, one possibility is to apply the levy to all transactions concluded remotely with incountry customers. To target the scope of the levy more closely to the situation in which a business establishes and maintains a purposeful and sustained interaction with users or customers in a specific country via an online presence, the levy would be applied only where the business maintains a significant economic presence as described above Clause 5 of the Finance Bill 2018 In section 10 of the Income-tax Act, (a) After clause (6C), the following clause shall be inserted, namely: (6D) any income arising to a non-resident, not being a company, or a foreign company, by way of royalty from, or fees for technical services rendered in or outside India to, the National Technical Research Organisation; ; 39 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

118 Budget 2018 Part B Direct Tax Proposals: (b) With effect from the 1st day of April, 2019, (i) In clause (12A), for the word employee, the word assessee shall be substituted; (ii) In clause (23C), after the twelfth proviso [as inserted by section 6 of the Finance Act, 2017], the following proviso shall be inserted, namely: Provided also that for the purposes of determining the amount of application under item (a) of the third proviso, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head Profits and gains of business or profession : ; (iii) in clause (38), after the third proviso, the following proviso shall be inserted, namely: Provided also that nothing contained in this clause shall apply to any income arising from the transfer of long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, made on or after the 1st day of April, ; (c) In clause (46), after the brackets and words (by whatever name called) at both the places where they occur, the words, or a class thereof shall be inserted; (d) in clause (48B) [as inserted by section 6 of the Finance Act, 2017], after the word, brackets, figures and letter clause (48A), the words or on termination of the said agreement or the arrangement, in accordance with the terms mentioned therein, as the case may be, shall be inserted with effect from the 1st day of April, Proposed amendment in section 10(23C) has to be seen with reference to the amendment proposed in section 11 which is as below: Clause 6. In section 11 of the Income-tax Act, in sub-section (1), after Explanation 2 [as inserted by section 11 of the Finance Act, 2017], the following Explanation shall be inserted with effect from the 1st day of April, 2019, namely: Explanation 3. For the purposes of determining the amount of application under clause (a) or clause (b), the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head Profits and gains of business or profession.. Proposed amendment to Section 10(38) has to be seen with proposed amendment to section 112A and 115AD (applicable to FIIs) which is Clause 31. After section 112 of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2019, namely: 112A. (1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if (i) The total income includes any income chargeable under the head Capital gains ; (ii) The capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust; (iii) Securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004 has, 40 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

119 Budget 2018 Part B Direct Tax Proposals: (a) In a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or (b) In a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset. (2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of (i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent.; and (ii) The amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee: Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax (3) The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency. (4) The Central Government may, by notification in the Official Gazette, specify the nature of acquisition in respect of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall not apply. (5) The capital gains under sub-section (1) shall be computed without giving effect to the provisions of the first and second provisos to section 48. (6) The cost of acquisition for the purposes of computing capital gains referred to in sub-section (1) in respect of the long-term capital asset acquired by the assessee before the 1st day of February, 2018, shall be deemed to be the higher of (i) The actual cost of acquisition of such asset; and (ii) The lower of (a) The fair market value of such asset; and (b) The full value of consideration received or accruing as a result of the transfer of the capital asset. (7)Where the gross total income of an assessee includes any long-term capital gains referred to in subsection (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains. (8) Where the total income of an assessee includes any long-term capital gains referred to in subsection (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains. 41 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

120 Budget 2018 Part B Direct Tax Proposals: Explanation. for the purposes of this section, (a) equity oriented fund means a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10 and, (i) In a case where the fund invests in the units of another fund which is traded on a recognised stock exchange, (A) A minimum of ninety per cent of the total proceeds of such fund is invested in the units of such other fund; and (B) Such other fund also invests a minimum of ninety per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and (ii) In any other case, a minimum of sixty-five per cent of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange: Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures; (b) Fair market value means, (i) In a case where the capital asset is listed on any recognised stock exchange, the highest price of the capital asset quoted on such exchange on the 31st day of January, 2018: Provided that where there is no trading in such asset on such exchange on 31st day of January, 2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value; (ii) In a case where the capital asset is a unit and is not listed on a recognised stock exchange, the net asset value of such asset as on the 31st day of January, 2018; (c) International Financial Services Centre shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005; (d) Recognised stock exchange shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43. Clause 32 Capital gain arising out of transfer of LTCA by FIIs In section 115AD of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2019, (a) in clause (iii), the word and occurring at the end shall be omitted; (b) after clause (iii), the following proviso shall be inserted, namely: Provided that in case of income arising from the transfer of a long-term capital asset referred to in section 112A, income-tax at the rate of ten per cent shall be calculated on such income exceeding one lakh rupees; and Clause 33 of the Finance Bill 2018: 42 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

121 Budget 2018 Part B Direct Tax Proposals: 33. In section 115BA of the Income-tax Act, in sub-section (1), for the words, figures and letter provisions of section 111A and section 112, the words other provisions of this Chapter shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, This is to ensure that the lower or higher tax rates under other sections of Chapter XII are also referred to while considering the profits and gains of business that is taxed under section 115BA. This will cover newly inserted section 112A. Clause 40: Amendment of section 115R. 40. In section 115R of the Income-tax Act, in sub-section (2), (A) For clause (i) to clause (iii), the following clauses shall be substituted, namely: (i) twenty-five per cent on income distributed to any person being an individual or a Hindu undivided family by a money market mutual fund or a liquid fund; (ii) thirty per cent on income distributed to any other person by a money market mutual fund or a liquid fund; (iii) ten per cent on income distributed to any person by an equity oriented fund; [this is the new proposal; rest are existing] (iv) twenty-five per cent on income distributed to any person being an individual or a Hindu undivided family by a fund other than a money market mutual fund or a liquid fund or an equity oriented fund; and (v) thirty per cent. on income distributed to any other person by a fund other than a money market mutual fund or a liquid fund or an equity oriented fund: ; (B) In the second proviso, clause (b) shall be omitted. Clause 41 of the Finance Bill 2018 which is a continuation reference to clause 40 of the Bill. Amendment of section 115T. 41. In the Explanation occurring after section 115T of the Income-tax Act, for clause (b), the following clause shall be substituted, namely: (b) equity oriented fund means a fund referred to in clause (a) of the Explanation to section 112A and the Unit Scheme, 1964 made by the Unit Trust of India;. Existing sections of ITA 1. Section 10(6D) is in line with existing 10(6C) where the royalty or fees received based an agreement entered into with GoI. In the proposed amendment the payer is National Technical Research Organisation which is a Central Government Organization 2. Withdrawal from National Pension Scheme is currently available tax free to an employee member subject to the condition that it does not exceed 40% of the payments due and payable at the time of withdrawal. Such benefit is extended to any other assessee who may be a non-employee member of the NPS 3. The benefit of application 3rd proviso to Section 10(23C) refers to o Non accumulation of more than 15% of its income for more than 5 years 43 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

122 Budget 2018 Part B Direct Tax Proposals: Non-investment or deposits in any other assets other than clauses (i),(ia),(ii),(iii) & (iv) And not in any form otherwise than those specified u/s 11(5) A new proviso after 12th proviso is added referring to the manner in which the investments under 3rd proviso should be made to claim the exemption u/s10(23c) which is 40(a)(ia) Amount not deductible 30% of the amount payable to a resident on which tax is deductible and no such tax has been deducted 40A (3) payments in excess of Rs 10,000 in a day by way of cash [Expenses or payments not deductible in certain circumstances.] 40A(3A) Expenses allowed under provision basis in any AY which in a subsequent year was paid in cash if the payment is in excess of Rs 10,000/The above amendment has to be seen with reference to amendment in section 11 The powers of the Central Government to notify authorities u/s 10(46) has been expanded to include any class of them A new proviso after the 3rd proviso to Section 10(38) of ITA is proposed to be introduced. o This shall ensure that LTCG arising out of A LTCA being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall get taxed at 10% ( as per new section 112A) o This amendment has to be seen with reference to amendment to section 112A which provides for taxation of LTCG arising out of transfer of equity shares in an Indian Co, or a unit in an equity oriented fund or a unit of a business trust Income from sale of left over crude oil where the sale is in consequence of termination of agreement between the foreign company and GoI. Currently this exemption is only when the agreement expires. New clauses (i) to (iv) shall replace the existing clauses (i) to (iii) to sub section (2) to section 115-R where the income in the form of dividend from an Equity Oriented Fund shall get taxed at 10% and the tax has to be paid as tax on distributed income in the hands of the specified company or MF. o The tax on dividends u/s 2(22)(e) gets taxed in the hands of the distributing company at 30% but the provisions of sub section (1A) to 115-O does not apply and hence there is no grossing up of such dividend o But the tax on distributed income u/s 115-R which provides for taxing income from EOF at 10% still have to go through the provisions of sub section (2A) that provides for grossing up. Definition of an EOF under Explanation (b) to sub section (2) to section 115T has been changed to cover o EOF as defined under section 112A ( which includes a und which invests 90% of its funds in another fund and such other fund also invests 90% of its funds in equity shares of domestic listed companies and o Any other fund that invests 65% of its funds in equity shares of domestic listed companies o The % of investment to be decided at annual average of monthly averages of opening and closing monthly balances of funds o And o Unit 64 of UTI. o o o P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

123 Budget 2018 Part B Direct Tax Proposals: 10. Pre fixed tax rate applicable to domestic 25% of profits of business under section 115BA shall now be subject to all other sections under Chapter XII ( instead of just referring to only sections 111 and 112 earlier)- 115BA(1). FM s speech: 10. Considering the strategic nature of the transactions, it is proposed to provide that income arising to a non-resident from royalty or fees for technical services received from National Technical Research Organisation shall be exempt from tax. 5. It is proposed to extend the benefit of exemption for withdrawal up to 40% from National Pension System Trust (NPS) to all subscribers and not only to employees. Further Measures to control cash economy: 154. Currently, the income of trusts and institutions is exempt if they utilise their income towards their objects in accordance with the relevant provisions of the Income-tax Act. However, there is no restriction on these entities for incurring expenditure in cash. In order to have audit trail of the expenses incurred by these entities, it is proposed that payments exceeding 10,000/- in cash made by such entities shall be disallowed and the same shall be subject to tax. Further, in order to improve TDS compliance by these entities, I propose to provide that in case of non-deduction of tax, 30% of the amount shall be disallowed and the same shall be taxed. Rationalisation of Long Term Capital Gains (LTCG) 155. Madam Speaker, currently, long term capital gains arising from transfer of listed equity shares, units of equity oriented fund and unit of a business trust are exempt from tax. With the reforms introduced by the Government and incentives given so far, the equity market has become buoyant. The total amount of exempted capital gains from listed shares and units is around 3, 67,000 crores as per returns filed for A.Y Major part of this gain has accrued to corporates and LLPs. This has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets. The return on investment in equity is already quite attractive even without tax exemption. There is therefore a strong case for bringing long term capital gains from listed equities in the tax net. However, recognising the fact that vibrant equity market is essential for economic growth, I propose only a modest change in the present regime. I propose to tax such long term capital gains exceeding `1 lakh at the rate of 10% without allowing the benefit of any indexation. However, all gains up to 31st January, 2018 will be grandfathered. For example, if an equity share is purchased six months before 31st January, 2018 at 100/- and the highest price quoted on 31st January, 2018 in respect of this share is 120/-, there will be no tax on the gain of 20/- if this share is sold after one year from the date of purchase. However, any gain in excess of 20 earned after 31st January, 2018 will be taxed at 10% if this share is sold after 31st July, The gains from equity share held up to one year will remain short term capital gain and will continue to be taxed at the rate of 15% R Further, I also propose to introduce a tax on distributed income by equity oriented mutual fund at the rate of 10%. - To add this under clause 40. This is tax on dividends from Units from an EOF in line with the 115-O for equity shares. Since the subject matter discussed is about Units in an EOF, 45 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

124 Budget 2018 Part B Direct Tax Proposals: looks like though it is dividends, it is grouped along with LTCG from transfer of units in an EOF and FM has spoken. This will provide level playing field across 30 growth oriented funds and dividend distributing funds. In view of grandfathering, this change in capital gain tax will bring marginal revenue gain of about 20,000 crores in the first year. The revenues in subsequent years may be more. 12. It is proposed to provide that in addition to notifying any authority, Board, Trust or Commission under section 10(46) of the Act, the Government can also notify any class of such persons. Memorandum to Finance Bill 2018: New regime for taxation of long-term capital gains on sale of equity shares etc. Under the existing regime, long term capital gains arising from transfer of long term capital assets, being equity shares of a company or an unit of equity oriented fund or an unit of business trusts, is exempt from income-tax under clause (38) of section 10 of the Act. However, transactions in such long term capital assets carried out on a recognized stock exchange are liable to securities transaction tax (STT). Consequently, this regime is inherently biased against manufacturing and has encouraged diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these exemptions. In order to minimize economic distortions and curb erosion of tax base, it is proposed to withdraw the exemption under clause (38) of section 10 and to introduce a new section 112A in the Act to provide that long term capital gains arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at 10 per cent of such capital gains exceeding one lakh rupees. This concessional rate of 10 per cent will be applicable to such long term capital gains, if i) in a case where long term capital asset is in the nature of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and ii) In a case where long term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, securities transaction tax has been paid on transfer of such capital asset. Further, sub-section (4) of the new section 112A empowers the Central Government to specify by notification the nature of acquisitions in respect of which the requirement of payment of securities transaction tax shall not apply in the case of equity share in a company. Similarly, the requirement of payment of STT at the time of transfer of long term capital asset, being a unit of equity oriented fund or a unit of business trust, shall not apply if the transfer is undertaken on recognized stock exchange located in any International Financial Services Centre (IFSC) and the consideration of such transfer is received or receivable in foreign currency. Further, the new provision of section 112A also proposes to provide the following: i) The long term capital gains will be computed without giving effect to the first and second provisos to section 48, i.e. inflation indexation in respect of cost of acquisitions and cost of 46 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

125 Budget 2018 Part B Direct Tax Proposals: improvement, if any, and the benefit of computation of capital gains in foreign currency in the case of a non-resident, will not be allowed. ii) The cost of acquisitions in respect of the long term capital asset acquired by the assessee before the 1st day of February, 2018, shall be deemed to be the higher of a) The actual cost of acquisition of such asset; and b) The lower of (I) the fair market value of such asset; and (II) The full value of consideration received or accruing as a result of the transfer of the capital asset. iii) equity oriented fund has been defined to mean a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10 and, a) In a case where the fund invests in the units of another fund which is traded on a recognized stock exchange,(i) A minimum of 90 per cent of the total proceeds of such funds is invested in the units of such other fund; and (II) such other fund also invests a minimum of 90 per cent of its total proceeds in the equity shares of domestic companies listed on recognized stock exchange; and b) in any other case, a minimum of 65 per cent of the total proceeds of such fund is invested in the equity shares of domestic companies listed on recognized stock exchange. iv) Fair market value has been defined to mean a) In a case where the capital asset is listed on any recognized stock exchange, the highest price of the capital asset quoted on such exchange on the 31st day of January, However, where there is no trading in such asset on such exchange on the 31st day of January, 2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value; and b) In a case where the capital asset is a unit and is not listed on recognized stock exchange, the net asset value of such asset as on the 31st day of January, v) The benefit of deduction under chapter VIA shall be allowed from the gross total income as reduced by such capital gains. Similarly, the rebate under section 87A shall be allowed from the income tax on the total income as reduced by tax payable on such capital gains. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. [Clause 5 & 31] Tax deduction at source and manner of payment in respect of certain exempt entities The third proviso to clause (23C) of section 10 of the Act provides for exemption in respect of income of the entities referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of 47 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

126 Budget 2018 Part B Direct Tax Proposals: said clause in a case where such income is applied or accumulated during the previous year for certain purposes in accordance with the relevant provisions. Section 11 of the Act also contains provisions relating to income from property held for charitable or religious purposes. At present, there are no restrictions on payments made in cash by charitable or religious trusts or institutions. There are also no checks on whether such trusts or institutions follow the provisions of deduction of tax at source under Chapter XVII-B of the Act. This has led to lack of an audit trail for verification of application of income. In order to encourage a less cash economy and to reduce the generation and circulation of black money, it is proposed to insert a new Explanation to the section 11 to provide that for the purposes of determining the application of income under the provisions of sub-section (1) of the said section, the provisions of sub-clause (ia) of clause (a) of section 40, and of sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head Profits and gains of business or profession. It is also proposed to insert a similar proviso in clause (23C) of section 10 so as to provide similar restriction as above on the entities exempt under sub-clauses (iv), (v), (vi) or (via) of said clause in respect of application of income. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. [Clause 5 & 6] Taxation of long-term capital gains in the case of Foreign Institutional Investor The existing provisions of section 115AD of the Act inter alia, provide that where the total income of a Foreign Institutional Investor (FII) includes income by way of long-term capital gains arising from the transfer of certain securities, such capital gains shall be chargeable to tax at the rate of ten per cent. However, long term capital gains arising from transfer of long term capital asset being equity shares of a company or a unit of equity oriented fund or a unit of business trusts, is exempt from income-tax under clause (38) of section 10 of the Act. Consequent to the proposal for withdrawal of exemption under clause (38) of section 10 of the Act, such long term capital gain will become taxable in the hands of FIIs also. As in the case of domestic investors, the FIIs will also be liable to tax on such long term capital gains only in respect of amount of such gains exceeding one lakh rupees. The provisions of section 115AD are proposed to be amended accordingly. This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. [Clause 32] Rationalisation of provision of section 115BA relating to certain domestic companies Section 115BA of the Act provides that the total income of a newly set up domestic company engaged in business of manufacture or production of any article or thing and research in relation thereto, or distribution of such article or thing manufactured or produced by it, shall, at its option, be taxed at the 48 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

127 Budget 2018 Part B Direct Tax Proposals: rate of 25 per cent subject to conditions specified therein. This benefit is available from assessment year However, there are certain incomes which are subject to a scheduler tax at a rate which is lower or higher than 25 per cent. Consequently tax payers have been subjected to unintended hardship or unwarranted relief. Accordingly it is proposed to amend section 115BA so as to clarify that the provisions of section 115BA is restricted to the income from the business of manufacturing, production, research or distribution referred to therein; and income which are at present taxed at a scheduler rate will continue to be so taxed. The amendment will take effect retrospectively from the 1st April, 2017 and will, accordingly, apply in relation to the assessment year and subsequent years. [Clause 33] Dividend distribution tax on dividend pay outs to unit holders in an equity oriented fund The existing provisions of section 115R, inter alia, provide any amount of income distributed by the specified company or a Mutual Fund to its unit holders shall be chargeable to tax and such specified company or Mutual Fund shall be liable to pay additional income-tax on such distributed income at the rate specified in the section. However, in respect of any income distributed to a unit holder of equity oriented funds is not chargeable to tax under the said section. With a view to providing a level playing field between growth oriented funds and dividend paying funds, in the wake of new capital gains tax regime for unit holders of equity oriented funds, it is proposed to amend the said section to provide that where any income is distributed by a Mutual Fund being, an equity oriented fund, the mutual fund shall be liable to pay additional income tax at the rate of ten per cent on income so distributed. For this purpose, equity oriented fund will have the same meaning assigned to it in the new section 112A of the Act. This amendment will take effect from 1st April, [Clause 40, 41 & 214] Exemption of income of Foreign Company from sale of leftover stock of crude oil on termination of agreement or arrangement Clause (48A) of section 10 provides that any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India shall be exempt, if (i) Storage and sale is pursuant to an agreement or an arrangement entered into or approved, by the Central Government; and (ii) Having regard to the national interest, the foreign company and the agreement or arrangement are notified by the Central Government. Further clause (48B) of section 10 provides that any income accruing or arising to a foreign company on account of sale of leftover stock of crude oil after the expiry of the agreement or arrangement shall be exempt subject to such conditions as may be notified by the Central Government. The benefit of exemption is presently not available on sale out of the leftover stock of crude in case of termination of the said agreement or the arrangement. 49 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

128 Budget 2018 Part B Direct Tax Proposals: Given the strategic nature of the project benefitting India to augment its strategic petroleum reserves, it is proposed to amend clause (48B) of section 10 to provide that the benefit of tax exemption in respect of income from left over stock will be available even if the agreement or the arrangement is terminated in accordance with the terms mentioned therein. This amendment will take effect from 1st of April, 2019 and will, accordingly, apply in relation to assessment year and subsequent years. [Clause 5] Royalty and FTS payment by NTRO to a non-resident to be tax-exempt Section 195 requires a person to deduct tax at the time of payment or credit to a non-resident. Given the business exigencies of the National Technical Research Organisation (NTRO), it is proposed to amend section 10 so as to provide that the income arising to non-resident, not being a company, or a foreign company, by way of royalty from, or fees for technical services rendered in or outside India to, the NTRO will be exempt from income tax. Consequently, NTRO will not be required to deduct tax at source on such payments. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to assessment year and subsequent assessment years. [Clause 5] Extending the benefit of tax-free withdrawal from NPS to non-employee subscribers Under the existing provisions of the clause (12A) of section 10 of the Act, an employee contributing to the NPS is allowed an exemption in respect of 40% of the total amount payable to him on closure of his account or on his opting out. This exemption is 17 not available to non-employee subscribers. In order to provide a level playing field, it is proposed to amend clause (12A) of section 10 of the Act to extend the said benefit to all subscribers. This amendment will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. [Clause 5] Exemption to specified income of class of body, authority, Board, Trust or Commission in certain cases Clause 46 of section 10 of the Act empowers the Central Government to exempt, by notification, specified income arising to a body or authority or Board or Trust or Commission, if (a) They are not engaged in any commercial activity; (b) they are established or constituted by or under a Central, State or Provincial Act or constituted by the Central Government or a State Government, with the object of regulating or administering any activity for the benefit of the general public. Under the existing provisions, the Central Government is required to notify each case separately even if they belong to the same class of cases. Consequently, the whole process of approval is considerably delayed. Accordingly, it is proposed to amend the said clause so as to enable the Central Government to also exempt, by notification, a class of such body or authority or Board or Trust or Commission (by whatever name called). 50 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

129 Budget 2018 Part B Direct Tax Proposals: This amendment will take effect from 1st April, [Clause 5] Notes on Clauses: Clause 5 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income. The said section provides that in computing the total income of a previous year of any person, certain categories of income shall not be included in total income. It is proposed to insert a new clause (6D) in the said section so as to exempt that any income arising to a non-resident, not being a company, or a foreign company, by way of royalty from or fees for technical services rendered in or outside India to the National Technical Research Organisation. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause (12A) of the said section provides that any payment from the National Pension System Trust to an employee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed forty per cent of the total amount payable to him at the time of such closure or his opting out of the scheme shall not be included in his total income. It is proposed to amend the said clause so as to extend the aforesaid exemption to all the assessees who have subscribed to the National Pension System Trust. Third proviso to clause (23C) of the said section provides for exemption in respect of income of the entities referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of said clause in a case where such income is applied or accumulated during the previous year for certain purposes in accordance with the relevant provisions. It is proposed to insert a proviso after the twelfth proviso to the said clause so as to provide that for the purposes of determining the amount of application under item (a) of the said third proviso, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head "Profits and gains of business or profession". Clause (38) of section 10, inter alia, provides for exemption from tax on the income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust subject to certain conditions specified in the said clause. It is proposed to amend the said clause so as to provide that the provisions of said clause shall not apply to any income arising from the transfer of long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, made on or after the 1st day of April, These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause (46) of said section, inter alia, provides for notification in respect of exemption to specified income arising to a body or authority or Board or Trust or Commission (by whatever name called), not engaged in any commercial activity, established or constituted by or under a Central, State or Provincial Act, or constituted by the Central Government or a State Government, with the object of regulating or administering any activity for the benefit of the general public. It is proposed to amend the said clause so as to provide such exemption to specified income arising to a class of body or authority or Board or Trust or Commission also. This amendment will take effect from 1st April, P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

130 Budget 2018 Part B Direct Tax Proposals: Clause (48B) of the said section provides that any income accruing or arising to a foreign company on account of sale of leftover stock of crude oil, if any, from a facility in India after the expiry of the agreement or arrangement as referred to under clause (48A) shall be exempt subject to such conditions as may be notified by the Central Government in this behalf. It is proposed to amend the said clause (48B) so as to provide that any income accruing or arising to such foreign company on account of sale of leftover stock of crude oil, if any, from such facility in India on the termination of the agreement or the arrangement referred to in clause (48A) of the said section in accordance with the terms mentioned therein, shall also be exempt, subject to the conditions as may be notified by the Central Government in this behalf. This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to assessment year and subsequent years. Clause 6 of the Bill seeks to amend section 11of the Income-tax Act relating to income from property held for charitable or religious purposes. The said section provides for exemption in respect of income derived from property held under trust for charitable or religious purposes to the extent to which such income is applied or accumulated during the previous year for certain purposes in accordance with the relevant provisions. It is proposed to insert a new Explanation to the said section so as to provide that for the purposes of determining the amount of application under clause (a) or clause (b) of sub-section (1) thereof, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head "Profits and gains of business or profession". This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 31 of the Bill seeks to insert a new section 112A of the Income-tax Act relating to tax on longterm capital gains in certain cases. The proposed new section 112A provides that where the total income of an assessee, includes any income chargeable under the head "Capital gains", arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, Subject to the conditions specified under the section, the tax payable by the assessee on the capital gains exceeding one lakh rupees shall be calculated at the rate of ten per cent. It is further proposed to provide that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax. It is also proposed to provide that capital gains arising from a transaction undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is received or receivable in foreign currency, shall be eligible under this section without payment of securities transaction tax. 52 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

131 Budget 2018 Part B Direct Tax Proposals: It is also proposed to provide that the provisions of this section shall not apply to any income arising from the transfer of a long term capital asset, being an equity share in a company, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, It is also proposed to provide that capital gains under the said section shall be computed without giving effect to the first and second proviso to section 48. It is also proposed to provide that the cost of acquisition for the purposes of computing capital gains under the section in respect of capital asset acquired by the assessee before the 1st day of February, 2018, shall be as provided in the said section. It is also proposed to provide that where the gross total income of an assessee includes any long-term capital gains, deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains. It is also proposed to provide that where the total income of an assessee includes any long-term capital gains referred to in the said section, the rebate under section 87A shall be allowed from the incometax on the total income as reduced by tax payable on such capital gains. It is also proposed to define the expressions "equity oriented fund", "fair market value", "International Financial Services Centre" and "recognised stock exchange". This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years Clause 32 of the Bill seeks to amend section 115AD of the Income-tax Act relating to tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer which is consequential in nature. This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years Clause 33 of the Bill seeks to amend section 115BA of the Income-tax Act relating to tax on income of certain domestic companies. The said section provides that subject to the fulfilment of conditions specified therein and the provisions of sections 111A and 112 of Chapter XII, from assessment year , the total income of certain a newly set up domestic companies shall, at their option, be taxed at the rate of twenty-five per cent. It is proposed to amend the said section so as to provide that the provisions of this section shall be subject to the other provisions of the said Chapter instead of only sections 111A and 112. This amendment will take effect retrospectively from 1st April, 2017 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 40 of the Bill seeks to amend section 115R of the Income-tax Act relating to tax on distributed income to unit holders. The said section, inter alia, provides that any amount of income distributed by the specified company or a Mutual Fund to its unit holders shall be chargeable to tax and such specified company or Mutual 53 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

132 Budget 2018 Part B Direct Tax Proposals: Fund shall be liable to pay additional income-tax on such distributed income at the rate specified in the said section. However, in respect of any income distributed to a unit holder of equity oriented funds in respect of any distribution made from such funds is not chargeable to tax under the said section. It is proposed to amend the said section so as to provide that where any income is distributed to any person by an equity oriented fund, the fund shall be liable to pay additional income-tax at the rate of ten per cent on income so distributed. It is further proposed to omit clause (b) of the second proviso to sub-section (2) which is consequential in nature. These amendments will take effect from 1st April, Clause 41 of the Bill seeks to amend section 115T of the Income-tax Act relating to Unit Trust of India or Mutual Fund to be an assessee in default. The said section, inter alia, provides the definition of equity oriented fund" to mean the Unit Scheme, 1964 made by the Unit Trust of India; and such fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than sixty-five per cent of the total proceeds of such fund. It is proposed to amend the said clause so as to define equity oriented fund as a fund referred to in clause (a) of Explanation to section 112A and the Unit Scheme, 1964 made by the Unit Trust of India. This amendment will take effect from 1st April, 2018 Simple understanding of clauses 5, 6, 31, 32, 33 and 40 & 41 of the Finance Bill 2018: 1. On Long Term capital Gains we should discuss based on amended sections 10(38), 112A and existing section In line with the taxation of LTCG arising out of transfer of units in an EOF, the income from units in an EOF shall be 10 % and u/s (2A) of 115-R, the income shall be grossed up so the net after taxation shall be the net income distributed. 3. Definition of an Equity Oriented Fund under section 115T [Explanation (b) to sub section (2)] shall be changed to the definition as given to EOF under section 112A. 4. Provisions of lower tax 25 % under section 115BA was originally subject to only sections 111 and 112A. Now it is referred to all sections under Chapter XII. 5. On application of income towards the objects of the Trust, 10(23C), section 11 and sections 40(a)(ia), 40A(3) and 40A(3A) have to be analysed 6. Section 10(6D) is a new addition 7. Section 10(12A) a new wording assessee in place of employee 8. Section 10(46) it is an insertion of words class of persons and 9. Section 10(48B) addition of sentence termination of agreement to avail the exemption currently available to expiry of agreement Section 10(38)1. Long term Capital gains arising out of transfer of a Long term Capital Asset being a. A share in an Indian Company b. A unit of an Equity Oriented Mutual Fund or 54 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

133 Budget 2018 Part B Direct Tax Proposals: c. A unit of a business trust made after the 1st April Ideally the section should have been omitted because it only used to talk about the LTCG arising out of transfer of a LTCA being a share or a unit from EOF or a business trust If the clause will not apply because there is a new proviso added looks awkward. The clause 5 of Finance Bill 2018 has removed the exemption to the afore said LTCG from section 10(38) Now we need to check at what rate it shall get taxed and what are the other pre-conditions Section 112-A newly inserted through clause 31 to Finance Bill 2018 provides the answer.- Section 112-A (newly inserted: 1. The capital asset is a Long Term Capital asset being a a. share in an Indian Company b. or a unit in an Equity Oriented Mutual Fund or c. a unit of a Business Trust 2. There is a Capital gains arising out of transfer of such a LTCA 3. The LTCG is in excess of Rs 1 lacs 4. On such LTCG in excess of Rs 1 lacs, 10% shall be charged u/s 112 A(2) 5. The above is notwithstanding anything contained u/s 112 (where the LTCG is 20%) The difference between LTCG tax under Section 112 and Section 112A is the nature of assets that are being transferred which are the 3 kinds of LTCA listed above. To enjoy the lower LTCG tax of 10% under section 112-A, the following conditions are to be satisfied in addition to the assets transferred being as indicated above: 1. The Securities Transaction Tax under Chapter VII of Finance Act 2004 has been paid a. If it is an equity share in an Indian Company both at the time of acquisition and now at the time of transfer b. If it is a unit in a EOF or a Business Trust, the STT has been paid now at the time of transfer 2. The EOF is one a. Set up u/s 10(23D) of ITA i. If in case it invests in the units of another fund 1. 90% of the funds of EOF should have been invested in such other fund and 2. Such other fund should also be investing 90% of its funds in equity shares of Indian Companies listed on recognized stock exchanges 3. In any other case, it must be investing 65% of its funds in equity shares of Indian Companies listed on recognized stock exchanges b. The % of investments shall be annual average of monthly averages of its investments based on opening and closing balance of its fund balances. 3. Exception from the condition of payment of STT: 55 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

134 Budget 2018 Part B Direct Tax Proposals: a. Where the transfer takes place in an International Financial Services Centre where the payment for the transfer is received in convertible Foreign exchange b. Where the Central Govt. has notified the category of equity shares the acquisition of which is exempt from the payment of STT ( exempt from applicability of 112A(1)(a)(iii) c. This means the transfer of units in an EOF or a business trust if made outside of IFSC, they should suffer STT at the time of transfer. 4. How to compute the LTCG: a. Sale proceeds to be the consideration received b. Less Cost of acquisition which is i. Higher of 1. The actual cost of acquisition of the equity share or unit in a EOF or a unit in a Business Trust and a. Lower of i. The FMV of the LTCA or ii. The actual consideration received for the asset transfer Example: Cost of acquisition under section 112-A Higher of (a) or lower of (b)& [c] (a) Actual Cost of acquisition or (b) FMV as on 31st January [c] Actual consideration received Lower of [b] or [c] Cost of acquisition [higher of [a] or lower of [b] &[c] In computing the LTCG, no indexation benefit is available (as provided in second proviso to section 48) How to arrive at the Fair Market value of the LTCA: 1. If the LTCA are listed in a recognized stock exchange: a. Highest traded value as on 31st January 2018 or any immediate earlier date if there was no trading on 31st January If the LTCA is a unit and not listed in any recognised stock exchange, the NAV of the unit as on 31st January P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

135 Budget 2018 Part B Direct Tax Proposals: Thus the following points emerge: Section 112A shall not apply if: 1. If the assets are LTCA but not an equity share in a domestic company or a unit in a EOF or a unit in a business trust or 2. The STT is not paid in the case of the equity share either at the time of acquisition or transfer a. And where there is no notification by GoI exempting such payment) or b. The transfer does not take place in an IFSC 3. Where the LTCA is a unit and STT is not paid at the time of transfer 4. The EOF does not fulfil the required investment criteria a. 65% or through a Fund of 90% and b. such Fund of Funds again does not invest 90% of its funds in equity shares of Indian Companies In the above case where the transfer does not fit into section 112A, then the LTCG shall suffer not the lower rate of 10% as provided u/s 112A 20% as provided under section 112 of ITA. This is a welcome proposal as the beneficiaries of the earlier no LTCG were not Aam Admis but HIG representing corporate assessees. This will fetch a revenue to the GoI of around Rs 20K Crores in this fiscal and will tap the Rs 132,000 crores revenue pool hitherto untapped. When domestic investors have to pay LTCG 10 % on transfer of a LTCA being a share in an Indian company or a unit in an EOF or a unit in a business trust, the same shall be applicable to FIII when they transfer such securities. This is an amendment to section 115AD. Consequent to the proposal for withdrawal of exemption under clause (38) of section 10 of the Act, such long term capital gain will become taxable in the hands of FIIs also XXXXX Section 115BA that provides for fixed lower rate of 25 % shall now be subject to all sections under chapter XII and not just sections 111 and 112 Section 115R- Income from units in an EOF: The income from units from an Equity Oriented Fund which hitherto enjoyed exemption from tax u/s 10(38) shall be 10 % and the provisions of grossing up shall apply. This is to keep the taxation in line with LTCG on transfer of such units under section 112A But unlike 115-O where the dividends u/s 2(22) shall get 30 % but shall not go through the provisions of (1A) of 115-O for grossing up, in section 115R the distributed income shall get taxed in the hands of the 10 % and the provisions of grossing up under sub section (2A) shall continue to apply. 57 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

136 Budget 2018 Part B Direct Tax Proposals: Section 115-T- The definition of an Equity Oriented Funds under Explanation (b) to sub section (2) has been changed to include: o EOF as defined under section 112A ( which includes a und which invests 90% of its funds in another fund and such other fund also invests 90% of its funds in equity shares of domestic listed companies and o Any other fund that invests 65% of its funds in equity shares of domestic listed companies o The % of investment to be decided at annual average of monthly averages of opening and closing monthly balances of funds o And o Unit 64 of UTI XXXXXXXXXXXXXXXXXXXX Applicability of the provisions of sections 40(a) (ia), 40A (3) and 40A (3A) to Section 10(23C), section 11 The benefit of the income being completely exempt under section 10(23C) depends upon the application of the funds of the various Institutions referred to in that sub section which is referred to under 3rd proviso to that sub section read with Section 11(5) which is listed below: 1. under sub clause (a) a. 85% of the income must be applied for the objects of the Institution b. If more than 15% is accumulated ( meaning 85% is not applied), it cannot be accumulated for more than 5 years 2. Under sub clause (b) a. And such accumulation shall not be deposited or invested other than those specified under sub clauses (i),(ia),(ii),(iii) & (iv) of that sub section and b. Such investments are not done in any form or manner other than the list of investments provided u/s 11(5) If the above conditions are not complied with, then the exemption contemplated u/s 10(23C) shall not apply While making the application under 10(23C) (a) the same should be by banking means (a/c payee cheque or draft or through Electronic banking system) If they are applied in 1. cash in excess of Rs10, 000 per day the disallowance u/s 40(a) (ia) 2. expenses incurred in excess of Rs 10,000 ( disallowance u/s 40A(3) 3. liability allowed in one AY and paid in another AY by cash in excess of Rs 10,000 (disallowance u/s 40A(3A)) Shall apply. To the above extent the applied funds shall be subject to tax under profits & Gains of business or profession in the hands of the Institution. Similar treatment under section 11(5)- 58 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

137 Budget 2018 Part B Direct Tax Proposals: -any amount set apart or accumulated shall be invested u/s 11(2) (b) as per list of investments u/s 11(5). If not done as per the above, the said investments not done as per the form or manner as provide u/s 11(5) shall be taxed in the hands of the Trust under profits & Gains of business or profession. This is the current position. To the above is added that the investments shall be made digitally through banking system and if cash is used as a mode of investment or payment then the disallowances under 1. section 40(a)(ia) payment in excess of Rs 10,000 in cash per day 2. section 40A(3) expenditure in excess of Rs 10,000 in cash 3. section 40A(3A) payment of an earlier year allowed liability in cash in another AY in excess of Rs 10,000 shall apply and the disallowed amounts shall be added to the total income to be taxed under Income from business or profession XXXXX Section 10(6D) is a new addition Royalty or Technical know-how fees paid by National Technical research Organisation is exempt from tax. 2. Section 10(12A) a new wording assessee in place of employee withdrawal from National pension scheme is exempt subject to the condition that it does not exceed 40% of amount payable to the member is exempt in the hands of any assessee member and not necessarily an employee member 3. Section 10(46) it is an insertion of words class of persons Central Govt. shall appoint an authority or Board etc. applicable to any class of persons instead of just one category of persons 4. Section 10(48B) addition of sentence termination of agreement to avail the exemption currently available to expiry of agreement that exempts income from sale of left over crude oil even in the case of termination of agreement by the foreign company which hitherto was available only in the case of expiry of agreement. So requirement by the foreign company to go through the complete period of the agreement to enjoy the exemption. Clause 7 to the Finance Bill 2018: In section 16 of the Income-tax Act, after clause (i) [as omitted by section 6 of the Finance Act, 2005], the following clause shall be inserted with effect from the 1st day of April, 2019, namely: (ia) a deduction of forty thousand rupees or the amount of the salary, whichever is less; Currently clause (i) had been omitted by FA Clause (ia) is a new clause. 8. In section 17 of the Income-tax Act, in clause (2), in the proviso occurring after sub-clause (viii), clause (v) shall be omitted with effect from the 1st day of April, FM s speech: Relief to salaried taxpayers 59 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

138 Budget 2018 Part B Direct Tax Proposals: 151. The Government had made many positive changes in the personal income-tax rate applicable to individuals in the last three years. Therefore, I do not propose to make any further change in the structure of the income tax rates for individuals. There is a general perception in the society that individual business persons have better income as compared to salaried class. However, income tax data analysis suggests that major portion of personal income-tax collection comes from the salaried class. For assessment year , 1.89 crore salaried individuals have filed their returns and have paid total tax of 1.44 lakh crores which works out to average tax payment of 76,306/- per individual salaried taxpayer. As against this, 1.88 crores individual business taxpayers including professionals, who filed their returns for the same assessment year paid total tax of 48,000 crores which works out to an average tax payment of 25,753/- per individual business taxpayer. In order to provide relief to salaried taxpayers, I propose to allow a standard deduction of 40,000/- in lieu of the present exemption in respect of transport allowance and reimbursement of miscellaneous medical expenses. However, the transport allowance at enhanced rate shall continue to be available to differently abled persons. Also other medical reimbursement benefits in case of hospitalization etc., for all employees shall continue. Apart from reducing paper work and compliance, this will help middle class employees even more in terms of reduction in their tax liability. This decision to allow standard deduction shall significantly benefit the pensioners also, who normally do not enjoy any allowance on account of transport and medical expenses. The revenue cost of this decision is approximately 8,000 crores. The total number of salaried employees and pensioners who will benefit from this decision is around 2.5 crores. Memorandum to Finance Bill: Standard deduction on salary income Section 16, inter-alia, provides for certain deduction in computing income chargeable under the head Salaries. It is proposed to allow a standard deduction up to Rs 40,000/- or the amount of salary received, whichever is less. Consequently the present exemption in respect of Transport Allowance (except in case of differently abled persons) and reimbursement of medical expenses is proposed to be withdrawn. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. [Clause 7 & 8] Notes on Clauses: Clause 7 of the Bill seeks to amend section 16 of the Income-tax Act relating to deductions from salaries. The existing provisions of the said section, inter alia, provide that the income chargeable under the head "Salaries" shall be computed after making certain deductions specified therein. It is proposed to insert a new clause (ia) in the said section so as to provide for deduction of forty thousand rupees or the amount of the salary, whichever is less, for the purpose of computing the income chargeable under the said head. 60 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

139 Budget 2018 Part B Direct Tax Proposals: This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 8 of the Bill seeks to amend section 17 of the Income-tax Act relating to "Salary", "perquisite" and "profits in lieu of salary" defined. Clause (v) of the proviso occurring after sub-clause (viii) of clause (2) of the said section provides that any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family not exceeding fifteen thousand rupees in the previous year shall not be treated as perquisite in the hands of the employee. It is proposed to omit the said clause (v). This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. My understanding: Under Section 16, there used to be a Standard deduction which was omitted by FA Now through another clause (ia), a maximum of Rs 40,000 shall be available to salaried employees to compensate for Transport allowance and medical reimbursements. Under section 17, subsection (2), there is a proviso after sub clause (viii) which excludes the following from being treated as Perquisite. Any actual medical expenses incurred by employee for his or his family members treatment to the extent of Rs 15,000 per year The above reimbursement of actual medical expenses was not taxed on the hands of the employee to the extent of Rs 15,000 per year. Now the above clause has been omitted from section 17. This would mean that there will no longer be any actual medical expenses reimbursement claims by employees. Earlier the transport allowance was around Rs 1500 per month annualized to Rs 18,000 and Medical reimbursement Rs 15,000 totalling to Rs 33,000/-. Now it is increased to Rs 40,000/- this is just available without any proof for transportation expenses and medical reimbursements. But the earlier standard deduction of 1/6th of the Gross salary was available in addition to transport allowance and Medical reimbursements XXXXXXXXXXXXX Clause 10 to the Finance Bill 2018 to be seen in conjunction with clause 11, which have reference to section 145(2) that speak about the ICDS notified by the Central Government to be followed by any class of assessees or in terms of any class of incomes & 45 that inserts new sections 145A and 145B that define valuation of inventory, recognition of certain income and when. The amendment brings to life the ICDS that was notified by CBDT but quashed by the Delhi HC in terms of the authority of delegated legislation to notify those that are the domain of the Parliament. The below clauses talk about the 1. Method of accounting 61 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

140 Budget 2018 Part B Direct Tax Proposals: 2. Computation of certain income and 3. The year in which the income should be recognized as per the ICDS provisions as notified by the Central Government u/s 145(2) Clause 10. In section 36 of the Income-tax Act, in sub-section (1), after clause (xvii), the following clause shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2017, namely: (xviii) Marked to market loss or other expected loss as computed in accordance with the Income Computation and Disclosure Standards notified under sub-section (2) of section 145. Clause In section 40A of the Income-tax Act, after sub-section (12) [as omitted by section 17 of the Finance Act, 1992], the following sub-section shall be inserted and shall be deemed to have been inserted with effect from the 1stday of April, 2017, namely: (13) No deduction or allowance shall be allowed in respect of any marked to market loss or other expected loss, except as allowable under clause (xviii) of sub-section (1) of section 36. Clause After section 43A of the Income-tax Act, the following section shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2017, namely: 43AA.(1) Subject to the provisions of section 43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145. (2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign exchange rates shall be in respect of all foreign currency transactions, including those relating to (i) Monetary items and non-monetary items; (ii) Translation of financial statements of foreign operations; (iii) Forward exchange contracts; (iv) Foreign currency translation reserves. Clause 15: 15. After section 43CA of the Income-tax Act, the following section shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2017, namely: 43CB. (1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145: Provided that profits and gains arising from a contract for providing services, 62 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

141 Budget 2018 Part B Direct Tax Proposals: (i) With duration of not more than ninety days shall be determined on the basis of project completion method; (ii) Involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1) (i) The contract revenue shall include retention money; (ii) The contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains. Clause For section 145A of the Income-tax Act, the following sections shall be substituted and shall be deemed to have been substituted with effect from the 1stday of April, 2017, namely: 145A. For the purpose of determining the income chargeable under the head Profits and gains of business or profession, (i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation; (iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145: Provided that the comparison of actual cost and net realisable value of securities shall be made category-wise. Explanation 1. For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment. Explanation 2. for the purposes of this section, recognised stock exchange shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

142 Budget 2018 Part B Direct Tax Proposals: 145B. (1) Not withstanding anything to the contrary contained in section 145, the interest received by an assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the previous year in which it is received. (2) Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved. (3) The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.. FM s speech: 28. In order to provide statutory backing and certainty to Income Computation and Disclosure Standards (ICDS), it is proposed to amend the provisions of Chapter IV-D of the Act relating to computation of business income and Chapter XIV of the Act. Memorandum to Finance Bill 2018: Amendments in relation to notified Income Computation and Disclosure Standards. At present, section 145 of the Act empowers the Central government to notify Income Computation and Disclosure Standards (ICDS). In pursuance the central government has notified ten such standards effective from 1st April 2017 relating to Assessment year These are applicable to all assesses (other than an individual or a Hindu undivided family who are not subject to tax audit under section 44AB of the said Act) for the purposes of computation of income chargeable to income-tax under the head Profits and gains of business or profession or Income from other sources. In order to bring certainty in the wake of recent judicial pronouncements on the issue of applicability of ICDS, it is proposed to (i) Amend section 36 of the Act to provide that marked to market loss or other expected loss as computed in the manner provided in income computation and disclosure standards notified under sub-section (2) of section 145, shall be allowed deduction. (ii) amend 40A of the Act to provide that no deduction or allowance in respect of marked to market loss or other expected loss shall be allowed except as allowable under newly inserted clause (xviii) of sub-section(1) of section 36. (iii) insert a new section 43AA in the Act to provide that, subject to the provisions of section 43A, any gain or loss arising on account of effects of changes in foreign exchange rates in respect of specified foreign currency transactions shall be treated as income or loss, which shall be computed in the manner provided in ICDS as notified under sub-section (2) of section 145. (iv) insert a new section 43CB in the Act to provide that profits arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method except for certain service contracts, and that the contract revenue shall include retention money, and contract cost shall not be reduced by incidental interest, dividend and capital gains. 64 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

143 Budget 2018 Part B Direct Tax Proposals: (v) Amend section 145A of the Act to provide that, for the purpose of determining the income chargeable under the head Profits and gains of business or profession, (a) The valuation of inventory shall be made at lower of actual cost or net realizable value computed in the manner provided in income computation and disclosure standards notified under (2) of section 145. (b) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation. (c) inventory being securities not listed, or listed but not quoted, on a recognised stock exchange, shall be valued at actual cost initially recognised in the manner provided in income computation and disclosure standards notified under (2) of section 145. (d) inventory being listed securities, shall be valued at lower of actual cost or net realisable value in the manner provided in income computation and disclosure standards notified under (2) of section 145 and for this purpose the comparison of actual cost and net realisable value shall be done category-wise. (vi) Insert a new section 145B in the Act to provide that (a) Interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received. (b) The claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved. (c) Income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year. Recent judicial pronouncements have raised doubts on the legitimacy of the notified ICDS. However, a large number of taxpayers have already complied with the provisions of ICDS for computing income for assessment year In order to regularise the compliance with the notified ICDS by a large number taxpayers so as to prevent any further inconvenience to them, it is proposed to bring the amendments retrospectively with effect from 1st April, 2017 i.e. the date on which the ICDS was made effective and will, accordingly, apply in relation to assessment year and subsequent assessment years [Clause 10, 11, 13, 15 & 45] Notes on Clauses: Clause 10 of the Bill seeks to amend section 36 of the Income-tax Act relating to other deductions. Sub-section (1) of the said section provides for allowing certain deductions in computing income under the head Profits and gains of business or profession. 65 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

144 Budget 2018 Part B Direct Tax Proposals: It is proposed to insert a new clause (xviii) in the said sub-section so as to provide that deduction in respect of any marked to market loss or other expected loss shall be allowed, if computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145. This amendment will take effect retrospectively from 1st April, 2017 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 11 of the Bill seeks to amend section 40A of the Income-tax Act relating to expenses or payments not deductible in certain circumstances. The aforesaid section provides for disallowance of certain expenses or payments while computing income under the head Profits and gains of business or profession. It is proposed to insert a new sub-section (13) in the said section so as to provide that no deduction or allowance shall be allowed in respect of any marked to market loss or other expected loss except as allowable under the new clause (xviii) of sub-section (1) of section 36. This amendment will take effect retrospectively from 1st April, 2017 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 13 of the Bill seeks to insert a new section 43AA in the Income-tax Act relating to taxation of foreign exchange fluctuation. The proposed new section provides that, subject to the provisions of section 43A, any gain or loss arising on account of 75 any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145. It is further proposed to provide that gain or loss arising on account of the change in foreign exchange rates shall be in respect of all foreign currency transactions including those relating to monetary items and non-monetary items or translation of financial statements of foreign operations or forward exchange contracts or foreign currency translation reserves. This amendment will take effect retrospectively from 1st April, 2017 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 15 of the Bill seeks to insert a new section 43CB in the Income-tax Act relating to computation of income from construction and service contracts. The proposed new section provides that profits and gains of a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145. It is further proposed to provide that in the case of a contract for providing services with duration less than ninety days, the profits and gains shall be determined on the basis of project completion method. It is also proposed to provide that in the case of a contract for provision of services involving indeterminate number of acts over a specific period of time, the profits and gains arising from such contract shall be determined on the basis of a straight line method. 66 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

145 Budget 2018 Part B Direct Tax Proposals: It is also proposed to provide that for this purpose the contract revenue shall include retention money and the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains. This amendment will take effect retrospectively from 1st April, 2017 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 45 of the Bill seeks to substitute new sections 145A and 145B for section 145A of the Income-tax Act relating to method of accounting in certain cases and taxability of certain income. The proposed new section 145A provides that for the purpose of determining the income chargeable under the head "Profits and gains of business or profession", (i) the valuation of inventory shall be made at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation; (iii) the valuation of inventory being securities not listed on a recognised stock exchange; or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (iv) inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 and for this purpose the comparison of actual cost and net realisable value shall be done category-wise. It is also proposed to provide for an Explanation in the said section so as to provide that any tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment for the purposes of the said section. The proposed new section 145B provides that notwithstanding anything to the contrary contained in section 145, the interest received by an assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. It is further proposed to provide that the claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved. It is also proposed to provide that income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year. These amendments will take effect retrospectively from 1st April, 2017 and will, accordingly, apply in relation to the assessment year and subsequent years 67 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

146 Budget 2018 Part B Direct Tax Proposals: My understanding: The amendments proposed in the following sections are as below: Clause Ref 10 In section 11 40A(13) 13 43AA(1) 15 43CB 36(1)(xviii) Proposal indicated Reference to section 145(2) with respect to ICDS for computation of marked to market losses Deduction or allowance for any marked to market loss or any anticipated loss shall be as allowed only if computed under section 36(1)(xviii) which refers again to section 145(2) ICDS Gain or loss in respect of Foreign exchange translations shall be computed as per section 145(2) that refers to ICDS. These refer to gain or loss due to effect of change in rates in respect of all foreign exchange transactions and would include more specifically on the following transactions: 1. Monetary items & non- monetary items 2. Translation of financial statements of foreign operations 3. Forward exchange contracts and 4. Foreign currency translation reserves 1. Computation of profits and gains of construction contracts or contract for provision of services shall be using Percentage of completion method as provided under section 145(2) which refers to the ICDS guidelines notified by the central government 2. In the case of contracts for provision of services a. over a period of not more than 90 days shall be using Project completion method ( completed contracts method) and b. that involves indeterminate number of acts, the contract shall be valued using Straight line method 3. for each of the above methods of computation of revenues and costs the a. revenue shall include retention money & b. the costs shall not be reduced by interest income or dividends or capital gains [ both the revenue & costs shall be reckoned at gross level only] 68 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

147 Budget 2018 Part B Direct Tax Proposals: A valuation of inventory under ICDS 1. Cost or net realizable value whichever is lower (as defined under ICDS- refer 145(2)) 2. Purchases, sales and inventory to include taxes, duties, cess paid or incurred to bring the goods or services to the current stage, location and condition as on date of valuation ( all manufacturing OH, rent, transportation charges shall be included) 3. If the inventory refers to securities not listed on a recognised stock exchange or listed but not quoted in any recognized stock exchange, it shall be valued at actual cost initially recognized in accordance with the ICDS referred to u/s 145(2) 4. If the inventory refers to securities other than those covered under point (3) above, it shall be valued at cost or net realizable value whichever is lower as per ICDS referred to u/s 145(2) Provided the comparison of actual cost and NRV shall be made category of securities wise ( and not individual line item of securities wise) 5. Taxes, duty, cess shall refer to any payment whether or not the assessee has a right in consequence BIncome to be assessed in which year 1. Interest received or compensation or enhanced compensation received shall be income of the PY in which it is received 2. Claim for enhanced compensation or export incentive shall be income of the PY in which it is ascertained with reasonable certainty ( not received but ascertained) 3. Income referred to u/s 2(24(xviii)-[assistance in the form of subsidy, grant, cash incentive or duty drawback, waiver or concession or reimbursement by the Central or State or any local authority or body or agency in cash or kind] shall be income in the PY in which it is received if not already taxed in any earlier PYs] While all the above are already contained in section 145(2) which refer to ICDS notified by the Central Government, the current inclusion in the Finance Act 2018 indicates that they are legislated through Parliament and not through subordinate legislation. Let us get into a comparison of the various points in the Delhi HC judgement that got quashed through the judgement and the current amendment proposals that propose to grant legitimacy to each of those effective AY P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

148 Budget 2018 Part B Direct Tax Proposals: Sl.No Clauses of ICDS annulled by the Delhi HC judgement/or the points included in the summary of observations concluded by the Hon ble Delhi HC 1 (i) Section 145 (2), as amended, has to be read down to restrict power of the Central Government to notify ICDS that do not seek to override binding judicial precedents or provisions of the Act. The power to enact a validation law is an essential legislative power that can be exercised, in the context of the Act, only by the Parliament and not by the executive. If Section 145 (2) of the Act as amended is not so read down it would be ultra vires the Act and Article 141 read with Article 144 and 265 of the Constitution. (ii) The ICDS is not meant to overrule the provisions of the Act, the Rules thereunder and the judicial precedents applicable thereto as they stand. 2 (iv) ICDS I which does away with the concept of 'prudence' is contrary to the Act and binding judicial precedents and is therefore unsustainable in law. Restoration of clauses of ICDS by the current Finance Bill 2018 My comments The ICDS clearly states in the Preamble to ICDS I that in the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. So there is no need for the HC to step in and quash some of the clauses of ICDS. Reference to section 145(2) with respect to ICDS for computation of marked to market losses. In order to claim deductions u/s 36(1)(xviii), the marked to market losses or accumulated losses should be computed as per section 145(2) with reference to ICDS notified by the Central Government 70 P a g e In Considerations in the Selection and Change of Accounting Policies in ICDS I in para 4. Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. For this purpose, (i) the treatment and presentation of transactions and events shall be governed by their substance and Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

149 Budget 2018 Part B Direct Tax Proposals: 3 (v) ICDS II pertaining to valuation of inventories and eliminates the distinction between a continuing partnership business after dissolution from one which is discontinued upon dissolution is contrary to the decision of the Supreme Court in Shakti Trading Co. (supra). It fails to acknowledge that the valuation of inventory at market value upon settlement of accounts of the outgoing partner is distinct from valuation 71 P a g e The current amendment has suggested that the inventory valuation shall be at Cost or NRV whichever is lower. ICDS IV para 24 states- In case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the net not merely by the legal form; and (ii) Marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard. Thus if the accounting policies chosen by the assessee should be such as to represent a True and Fair view of the State of affairs and income of business or profession or vocation of the assessee, it cannot be contrary to the Act or judicial precedents. Marked to market losses can be recognised only after the loss is ascertained. Forward forex contract difference can be recognised only on settlement and not in the FY at the end of BS date. Income will be recognised in the year of Forex rate change unlike in AS 11 where it can be credited to a reserve account and amortized over the period of the contract. 1. I am not sure if para 24 still remains considering that the newly inserted section 145A talks about cost or NRV whichever is less. The methods approved are: 2. Cost of services shall consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

150 Budget 2018 Part B Direct Tax Proposals: of the inventory in the books of the business which is continuing. ICDS II is held to be ultra vires the Act and struck down as such. In that judgement SC had held that 1. In the case where a firm s business is discontinued, then the closing stock shall be valued at Market value 2. In a case of succession of business there was no cessation of business and therefore the closing stock had to be valued at cost or market price, whichever is lower. It is in this case that the Supreme Court has declared the relevant law that "it is an established rule of commercial practice and accountancy that where there is no discontinuance of business the closing stock is to be valued at cost or market price, whichever is lower" where there is no discontinuance of business since the firm s business is taken over by the successor. 4 (vi) The treatment to retention money under Paragraph 10 (a) in ICDS-III will have to be determined on a case to case basis by applying settled principles of accrual of 72 P a g e realisable value. Since the section 145 A provides that valuation of inventory shall be in accordance with ICDS notified under section 145(2), this para also shall be valid and remain. Hence the differentiation sought to be established between dissolution without succession or dissolution with business succession as established in Shakti Trading Co case continues to be ignored. Section 43CB is introduced to define the way Profits & gains of business or profession under construction contracts. It provides that it shall be according to attributable overheads. 3. Uncertainty to collect cannot be a basis to recognise revenue. It should be based on accrual basis of accounting. If the principle propounded by the Delhi HC judgement has to be followed, then revenue can be Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

151 Budget 2018 Part B Direct Tax Proposals: income. By deploying ICDS-III in a manner that seeks to bring to tax the retention money, the receipt of which is uncertain/conditional, at the earliest possible stage, irrespective of the facts, the Respondents would be acting contrary to the settled position in law as explained in the decisions referred to in para 68 and to that extent para 10 (a) of ICDS III would be rendered ultra vires. 5 (vii) Para 12 of ICDS III read with para 5 of ICDS IX, dealing with borrowing costs, makes it clear that no incidental income can be reduced from borrowing cost. This is contrary to the decision of the Supreme Court in CIT v. Bokaro Steel Limited (supra) and is therefore struck down. In Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Incometax ([1997] 227 ITR 172) the respondentassessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that 73 P a g e Percentage of completion method in accordance with ICDS notified u/s section 145(2). Under special circumstances like 90 days service contract it shall be by completed contracts method and in the case of indeterminable acts to be performed under the services contract it shall be under straight line method. For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1) (i) the contract revenue shall include retention money; 43CB -(2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1) (i) the contract revenue shall include retention money; (ii) The contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains. recognised only on receipt which is not the intention. The position under ICDS appears to be a diametrical departure from the position under the general principles of accountancy where interest on borrowed capital before commencement of business is capital in nature and so should be capitalized and interest earned on advances to contractors before setting up of plant is inexplicably capital receipts and should be set off against cost of plant & machinery. The position under ICDS does not make distinction of interest received during preconstruction period and post construction period. Require CBDT clarifications further Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

152 Budget 2018 Part B Direct Tax Proposals: the receipt of interest amounts to income of the assessee from other sources. 6 However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. (viii) Para 5 of ICDS-IV requires an Assessee to recognize income from export incentive in the year of making of the claim if there is 'reasonable certainty' of its ultimate collection. This is contrary to the decision of the Supreme Court in Excel Industries (supra), and is, therefore, ultra vires the Act and struck down as such. (i) Three tests have been laid down by various decisions of the Supreme Court to determine when income can be said to have accrued: 74 P a g e 145B (2) -Claim for enhanced compensation or export incentive shall be income of the PY in which it is ascertained with reasonable certainty ( not received but ascertained) Thus the income on DDB or export incentives or any Govt grants shall be income in the year in which application is made. ICDS IV Revenue recognition :- 13. Following disclosures shall be made in respect of revenue recognition, namely: (a) in a transaction involving sale of good, total amount not recognised as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty That the application for export incentives need not result in receipt of such incentives in the year of application, cannot be an uncertainty that can be Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

153 Budget 2018 Part B Direct Tax Proposals: (a) whether the income is real or hypothetical; (b) whether there is a corresponding liability of the other party to pay the amount to the assessee & (c) The probability or improbability of realisation of the income by the assessee has to be considered from a realistic and practical point of view. Revenue to be recognised only if there is reasonable certainty of its ultimate collection from sale of goods and rendering of services. If there is reasonable certainty, revenue should be recognized. (Not on receipt basis but on ascertainment with reasonable certainty. disclosed under ICDS. The moral is that the incentives should be applied for only in the year of imports. This will amount to not following the AS 9 for revenue recognition and will call for qualification by the Statutory auditor in his audit report u/s 139 of the Companies Act 2013 Applying these tests, on facts, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee. Also, from a realistic and practical point of view (the assessee may not have made imports), no real income accrued to the assessee in the year of exports and s. 28(iv) would be inapplicable. 75 P a g e Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

154 Budget 2018 Part B Direct Tax Proposals: Essentially, the AO is required to be pragmatic and not pedantic (Shoorji Vallabhdas 46 ITR 144 (SC), Morvi Industries 82 ITR 835 (SC) & Godhra Electricity Co 225 ITR 746 (SC) followed); 7 (ix) As far as para 6 of ICDS IV is concerned, the proportionate completion method as well as the contract completion method have been recognized as valid method of accounting under the mercantile system of accounting by WP (C) 5595/2017 Page 52 of 53 the Supreme Court in CIT v. Bilhari Investment Pvt. Ltd. (supra) and this Court in CIT v. Manish Buildwell Pvt. Ltd and Paras Buildtech India Pvt. Ltd. v. CIT (supra). Therefore, to the extent that para 6 of ICDS-IV permits only one of the methods, i.e., proportionate completion method, it is contrary to the above decisions, held to be ultra vires the Act and struck down as such. Section 43CB(1)- Computation of profits and gains of construction contracts or contract for provision of services shall be using Percentage of completion method as provided under section 145(2) which refers to the ICDS guidelines notified by the central government. The ICDS IV para 6 speaks of recognising long term contracts (which are not within 90 days [where revenue could be recognised as per completed contract method] and not consisting of indeterminate number of acts over a specific period of time [where revenue shall be recognised by Straight line method] only by Percentage of completion method. Para 6 of ICDS IV-Rendering of Services 6. Subject to Para 7, revenue from service transactions shall be recognised by the percentage completion method. ICDS in its preamble says that This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of accounts. Under this method, revenue from service transactions is matched with the service transaction costs incurred in reaching the stage of completion, resulting in the determination of revenue, expenses and profit which can be attributed to the proportion of work completed. Thus this is purely for IT purposes to determine the income under Business and other sources. ICAI guidance note on construction contracts whether AS 7 or AS9 should be applicable depending on whether risks and rewards have passed on to buyer or retained by the contractor are irrelevant here. Income Computation and Disclosure 76 P a g e Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

155 Budget 2018 Part B Direct Tax Proposals: Standard on construction contract also requires the recognition of revenue on this basis. The requirements of that Standard shall mutatis mutandis apply to the recognition of revenue and the associated expenses for a service transaction. However, when services are provided by an indeterminate number of acts over a specific period of time, revenue may be recognised on a straight line basis over the specific period. 8 (x) Para 8 (1) of ICDS IV is not been shown to be contrary to any judicial precedent. There is also no challenge to Section 36(1) (vii) of the Act. Accordingly, para 8 (1) of ICDS-IV is held to be not ultra vires the Act. Its validity is upheld. The Use of Resources by Others Yielding Interest, Royalties or Dividends 43CB - the costs shall not be reduced by interest income or dividends or capital gains [ both the revenue & costs shall be reckoned at gross level only] In line with 43CB except that the legislation does not make any distinction between pre construction and post construction interest receipt. Without any distinction between preconstruction interest and post setting up interest receipt. 8. (1) Subject to sub paragraph (2), interest shall accrue on the time basis determined by the amount outstanding and the rate 77 P a g e Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

156 Budget 2018 Part B Direct Tax Proposals: applicable. To the extent the assessee s resources are used by others interest shall accrue. But if it is during pre-construction period, the same SC has held in CIT vs Bokaro Steel, that it is inexplicably capital receipt and should be netted off against capital expenditure. 78 P a g e Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

157 Budget 2018 Part B Direct Tax Proposals: 9 (xi) ICDS-VI which states that marked to market loss/gain in case of foreign currency derivatives held for trading or speculation purposes are not to be allowed, is not in consonance with the ratio laid down by the Supreme Court in Sutlej Cotton Mills Limited v. CIT (supra), insofar as it relates to marked to market loss arising out of forward exchange contracts held for trading or speculation purposes. It is, therefore, held to be ultra vires the Act and struck down as such. 43AA(1)- gain or loss on account of change in rates of foreign exchange transactions shall be recognized as income or loss as per ICDS u/s 145(2) (2) the gain or loss due to changes in rates of foreign exchange shall relate to: i. ii. iii. iv. Monetary and non-monetary items Translation of Financial statement s of foreign operations Forward exchange contracts & Foreign currency translation reserves. ICDS VI relates to Foreign currency translations: Transactions are split into as below: Transactions that are not intended for trading or speculative purposes and are entered into arrive at the requirement of reporting currency at the time of settlement or conversion: i. ii. iii. 79 P a g e Initial Recognition at the average rate in the month or actual rate of conversion into the reporting currency At the close of the FY at the rate at the end of the FY Inventory shall be valued at the 1. I am surprised to see the Delhi HC judgement quoting Sutlej Cotton Mills case. The case has followed the judgement of CIT, Mysore vs Canara Bank Ltd where Forex gains from transfer of PK Rupees to India are of Capital in nature since the funds in Pakistan were kept as blocked and sterilized till the date of repatriation and hence capital in nature 2. SC had directed the case to be remanded to the Tribunal to find out if the Sutlej Mills in West Pakistan had kept the funds before their transfer as Fixed Capital or Circulating Capital and thereafter the AO to decide the character of the receipt to decide if the forex loss is revenue loss deductible or Capital loss not deductible. 3. My take is that the ICDS talks about when the exchange difference shall be treated as income ( whether at the time of conversion or settlement ) while the Delhi HC judgement talks about whether the exchange difference is Revenue receipt and so income or Capital receipt and so not to be treated as income depending upon whether the funds subject to difference is held as Fixed Capital or Circulating Capital Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

158 Budget 2018 Part B Direct Tax Proposals: iv. v. vi. NRV as on the closing date Exchange differences as on settlement date or conversion date shall be income or expenditure for the FY Exchange differences of Nonmonetary items shall be recognised only at the date of settlement and not in the FY Provisions of section 43A and Rule 115 of IT Rules shall apply. Transactions that are intended for trading or speculative purposes or are in the nature of a contract that is entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction: 1. Premium, discount or exchange difference on contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be recognised at the time of settlement 2. Premium or discount is the exchange rate at the time of inception of the contract and the forward rate during the period of 80 P a g e Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

159 Budget 2018 Part B Direct Tax Proposals: the contract 3. Exchange difference is the difference between the closing rate or settlement rate and the opening rate or the rate at the end of previous FY. 81 P a g e Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

160 Budget 2018 Part B Direct Tax Proposals: 10 (xii) ICDS VII which provides that recognition of government grants cannot be postponed beyond the date of accrual receipt, is in conflict with the accrual system of accounting. To that extent it is held to be ultra vires the Act and struck down as such. Insertion of new section 145B (3)(3) The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.. Section 2(24) (xviii) refers to: Treatment of Government grants. The Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc. Recognition of Government Grants 4(1) Government grants should not be recognised until there is reasonable assurance that The only bone of contention between AS12 on accounting of Government grants and ICDS VII relating to treatment of Government grants is that 1. Under AS12 - Mere receipt of grant is not sufficient to recognise income or reduction of cost of capital asset 2. Under ICDS VII - Recognition cannot be postponed beyond date of actual receipt As preamble to ICDS says that this Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of account, the question of this ICDS VII being in conflict with accrual system of accounting does not hold water. (i) the person shall comply with the conditions attached to them, and (ii) The grants shall be received. 4(2) Recognition of Government grant shall not be postponed beyond the date of actual receipt. Treatment of Government Grants : 82 P a g e Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

161 Budget 2018 Part B Direct Tax Proposals: 5. Where the Government grant relates to a depreciable fixed asset or assets of a person, the grant shall be deducted from the actual cost of the asset or assets concerned or from the written down value of block of assets to which concerned asset or assets belonged to. 6. Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfilment of certain obligations, the grant shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income. 7. Where the Government grant is of such a nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total Government grant, the same proportion as such asset bears to all the assets in respect of or with reference to which the Government grant is so received, shall be deducted from the actual cost of the asset or shall be reduced from the written down value of block of assets to which the asset or assets belonged to. 8. The Government grant that is receivable as compensation for expenses or losses incurred in a previous financial year or for the purpose of giving immediate financial 83 P a g e Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

162 Budget 2018 Part B Direct Tax Proposals: support to the person with no further related costs, shall be recognised as income of the period in which it is receivable. 9. The Government grants other than covered by paragraph 5, 6, 7, and 8 shall be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate. 10. The Government grants in the form of non-monetary assets, given at a concessional rate, shall be accounted for on the basis of their acquisition cost. Refund of Government Grants 11. The amount refundable in respect of a Government grant referred to in paragraphs 6, 8 and 9 shall be applied first against any unamortised deferred credit remaining in respect of the Government grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount shall be charged to profit and loss statement. 12. The amount refundable in respect of a Government grant related to a depreciable fixed asset or assets shall be recorded by increasing the actual cost or written down value of block of assets by the amount 84 P a g e Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

163 Budget 2018 Part B Direct Tax Proposals: refundable. Where the actual cost of the asset is increased, depreciation on the revised actual cost or written down value shall be provided 11 (xiii) ICDS VIII pertains to valuation of securities. For those entities not governed by the RBI to whom Part A of ICDS VIII is applicable, the accounting prescribed by the AS has to be followed which is different from the ICDS. In effect, such entities will be required to maintain separate records for income tax purposes for every year since the closing value of the Securities would be valued separately for income tax purposes and for accounting purposes. To this extent Part A of ICDS VIII is held to be ultra vires the Act and is struck down as such. 145A. For the purpose of determining the income chargeable under the head Profits and gains of business or profession, (i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under subsection (2) of section 145; (iv) the inventory being securities other than those referred to in clause (iii), shall be 85 P a g e 1. AS 13 applies to both Securities held as Investments and Stock in trade 2. ICDS VIII apples only to Securities held as Stock in Trade 3. So in the case of securities held as Investments, the provisions of AS13 shall apply 4. To the extent there is an additional burden in book keeping so far as entities that are governed by Part A of ICDS VIII to which RBI does not have oversight responsibility 5. So far as valuation of securities are concerned if it is in exchange for another security: a. Under AS 13, it should be at FMV of security/asset acquired or given up whichever is more evident b. Under ICDS VIII at FMV of security acquired 6. Current investments to be valued at lower of a. Under AS Cost or NRV at individual or category level but not global level Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

164 Budget 2018 Part B Direct Tax Proposals: valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145: b. Under ICDS VIII at category wise cost or NRV basis as per categories indicated 7. Initial cost of acquisition under a. AS13 as per AS2 FIFI, Weighted average cost etc. b. Under ICDS VIII - the cost of such security shall be determined on the basis of first-in-first-out method or weighted average cost formula. 8. Unlisted securities to be valued a. Under AS13 no specific provision b. Under ICDS VIII - at actual cost initially recognised Though there may be a requirement to maintain one more set of books, they are not different from AS13 that will be the guiding spirit for normal book keeping. 86 P a g e Flat # 301, Topaz Block, Esteem Heritage Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

165 Budget 2018 Part B Direct Tax Proposals: Clause 12 of Finance Bill 2018: In section 43 of the Income-tax Act, in clause (5), after the proviso and before Explanation 1, the following proviso shall be inserted with effect from the 1st day of April, 2019, namely: Provided further that for the purposes of clause (e) of the first proviso, in respect of trading in agricultural commodity derivatives, the requirement of chargeability of commodity transaction tax under Chapter VII of the Finance Act, 2013 shall not apply. FM s speech: 9. It is proposed to provide that trading in agricultural commodity derivatives on a recognized stock exchange shall not be treated as a speculative transaction even if no Commodities Transaction Tax (CTT) has been paid in respect of those derivative transactions. 34. It is proposed to amend Finance Act, 2013 to rationalise levy of Commodities Transaction Tax (CTT) on options in commodity futures. Memorandum to Finance Bill 2018: Tax treatment of transactions in respect of trading in agricultural commodity derivatives Clause (5) of section 43 defines speculative transaction. The proviso to the said clause, however, stipulates certain transactions to be non-speculative nature even though the contracts are settled otherwise than by the actual delivery or transfer of the commodity or scraps. The clause (e) to the said proviso provides that trading in commodity derivatives carried out in a recognised stock exchange, which is chargeable to commodity transaction tax is a non-speculative transaction. Commodity transaction tax (CTT) was introduced vide Finance Act 2013 to bring transactions relating to non-agricultural commodity derivatives under the tax net while keeping the agricultural commodity derivatives exempt from CTT. Since no CTT is paid, the benefit of clause (e) of the proviso to clause (5) of the section 43 is not available to transaction in respect of trading of agricultural commodity derivatives and accordingly, such transactions are held to be speculative transactions. In order to encourage participation in trading of agricultural commodity derivatives, it is proposed to amend the provisions of clause (5) of section 43 to provide that a transaction in respect of trading of agricultural commodity derivatives, which is not chargeable to CTT, in a registered stock exchange or registered association, will be treated as non-speculative transaction. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to assessment year and subsequent assessment years. [Clause 12] Notes on Clauses: 87 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

166 Budget 2018 Part B Direct Tax Proposals: Clause 12 of the Bill seeks to amend section 43 of the Income-tax Act relating to definitions of certain terms relevant to income from profits and gains of business or profession. Clause (5) of the said section provides for the definition of speculative transaction. Clause (e) of the proviso to the said clause (5) provides that trading in commodity derivatives carried out in a recognised stock exchange, which is chargeable to commodity transaction tax is a nonspeculative transaction. It is proposed to insert a new proviso for the purposes of clause (e) of the first proviso so as to provide that for transaction in respect of trading in agricultural commodity derivatives, the requirement of chargeability to commodity transactions tax under Chapter VII of the Finance Act, 2013 shall not apply. This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. My take: 1. Proviso to Section 43(5)(e) provides that though the transactions are speculative in nature based on manner of settlement of the transaction which is otherwise than by way of actual delivery or transfer of commodity or scrips, if they are with respect to commodity derivatives and subject to CTT, then they are treated as non-speculative 2. Chapter VII to FA 2013 had provided for payment of CTT but has exempted agricultural commodity derivatives from CTT 3. Now trading in agricultural commodity derivatives shall enjoy non-speculative status even though no CTT is paid ( new second proviso to section 43(5) XXXXXXXXXXXXXXXXXXX Clause 14 to Finance Bill 2018: 14. In section 43CA of the Income-tax Act, with effect from the 1st day of April, 2019, (a) In sub-section (1), the following proviso shall be inserted, namely: Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration. ; (b) In sub-section (4), for the words by any mode other than cash, the words by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account shall be substituted. Clause 19 to the Finance Bill 2018: 19. In section 50C of the Income-tax Act, in sub-section (1), after the second proviso, the following proviso shall be inserted with effect from the 1st day of April, 2019, namely: Provided also that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the 88 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

167 Budget 2018 Part B Direct Tax Proposals: consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration.. Clause 21 of Finance Bill 2018: 21. In section 56 of the Income-tax Act, in sub-section (2), (A) In clause (x), (I) in sub-clause (b), for item (B), the following item shall be substituted with effect from the 1st day of April, 2019, namely: (B) For a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely: (i) The amount of fifty thousand rupees; and (ii) the amount equal to five per cent of the consideration: (II) In the fourth proviso, in clause (IX), after the words, brackets and figure clause (i) or, the words, brackets and figures clause (iv) or clause (v) or shall be inserted; (B) After clause (x), the following clause shall be inserted with effect from the 1stday of April, 2019, namely: (xi) any compensation or other payment, due to or received by any person, by whatever name (this is discussed along with amendment to section 2(24). FM s speech: Incentive for real estate 149. Currently, while taxing income from capital gains, business profits and other sources in respect of transactions in immovable property, the consideration or circle rate value, whichever is higher, is adopted and the difference is counted as income both in the hands of the purchaser and seller. Sometimes, this variation can occur in respect of different properties in the same area because of a variety of factors including shape of the plot and location. In order to minimize hardship in real estate transaction, I propose to provide that no adjustment shall be made in a case where the circle rate value does not exceed 5% of the consideration. Memorandum to Finance Bill 2018: Rationalization of section 43CA, section 50C and section 56. At present, while taxing income from capital gains (section 50C), business profits (section 43CA) and other sources (section 56) arising out of transactions in immovable property, the sale consideration or stamp duty value, whichever is higher is adopted. The difference is taxed as income both in the hands of the purchaser and the seller. It has been pointed out that this variation can occur in respect of similar properties in the same area because of a variety of factors, including shape of the plot or location. In order to minimize hardship in case of genuine transactions in the real estate sector, it is proposed to provide that no adjustments 89 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

168 Budget 2018 Part B Direct Tax Proposals: shall be made in a case where the variation between stamp duty value and the sale consideration is not more than five percent of the sale consideration. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. [Clause 14, 19 & 21] Notes on clauses: Clause 14 of the Bill seeks to amend section 43CA of the Income-tax Act relating to special provision for full value of consideration for transfer of assets other than capital assets in certain cases. The said section, inter alia, provides that in case of transfer of an asset (other than a capital asset) being land or building or both the value adopted or assessed or assessable by the stamp valuation authority for the purpose of payment of stamp duty in respect of such transfer shall be taken as the full value of consideration for the purposes of computing profits and gains from transfer of such asset, if it is more than the consideration. The said section also provides that where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of such transfer of asset are not the same, the value assessable by the authority for the purpose of payment of stamp duty in respect of such transfer on the date of the agreement shall be taken if the amount of consideration or a part thereof has been received by any mode other than cash on or before the date of agreement for transfer of the asset. It is proposed to insert a proviso to sub-section (1) of the said section so as to provide that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration. It is further proposed to amend sub-section (4) of the said section so as to provide that where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of such transfer of asset are not the same, the value referred to in sub-section (1) may be taken as the value assessable by the authority for the purpose of payment of stamp duty in respect of such transfer on the date of the agreement where the amount of consideration or a part thereof has been received by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account on or before the date of agreement for transfer of the asset. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. Clause 19 of the Bill seeks to amend section 50C of the Income-tax Act relating to special provision for full value of consideration in certain cases. The said section provides that in case of transfer of a capital asset being land or building or both, the value adopted or assessed or assessable by the stamp valuation authority for the purpose of payment of stamp duty in respect of such transfer shall be taken as the full value of consideration for the purposes of computation of Capital gains if the same is more than the full value of consideration. It is proposed to insert a proviso to sub-section (1) of the said section so as to provide that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the consideration 90 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

169 Budget 2018 Part B Direct Tax Proposals: so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration. This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years Clause 21 of the Bill seeks to amend section 56 of the Income-tax Act relating to income from other sources. Clause (x) of sub-section (2) of the said section, inter alia, provides that where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017, any immovable property, for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration shall be charged to tax under the head Income from other sources. It is proposed to amend the said clause of sub-section (2) of the said section so as to provide that where any person receives any immovable property for a consideration, the stamp duty value of the property as exceeds such consideration, if the amount of such excess is more than fifty thousand rupees or the amount equal to five per cent of the consideration, whichever is higher, shall be charged to tax under the head Income from other sources. This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. It is further proposed to amend the fourth proviso to clause (x) of the said sub-section so as to exclude the transfer of capital asset between holding company and its wholly owned Indian subsidiary company and between subsidiary company and its Indian holding company, which are not regarded as transfer under clause (iv) or clause (v) of section 47, from the scope of clause (x) of the said sub-section. This amendment will take effect from 1st April, It is also proposed to insert a new clause (xi) in sub-section (2) of the said section so as to provide that any compensation or other payment due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto shall be chargeable to income-tax under the head "Income from other sources". This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Current position of sections 43CA, 50C and 56: Special provision for full value of consideration for transfer of assets other than capital assets in certain cases. 43CA. (1) Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer. 91 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

170 Budget 2018 Part B Direct Tax Proposals: Special provision for full value of consideration in certain cases. 50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer Income from other sources. 56. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely: x) Where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017, (a) Any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum; (b) Any immovable property, (A) Without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property; (B) For a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration: In all the above 3 sections the sentence that is Bold and underlined shall be subject to the following new insertions: Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration. ; Provided also that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration.. (B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely: 92 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

171 Budget 2018 Part B Direct Tax Proposals: o (i) the amount of fifty thousand rupees; and o (ii) The amount equal to five per cent. of the consideration: ; Simple understanding: Stamp duty value of the consideration Actual consideration Rs Rs Rs Rs 10,50,000 25,00,000 25,00,000 24,50,000 26,00,000 10,00,000 10,00,000 15,00,000 24,00,000 25,00,000 50,000 15,00,000 10,00,000 50,000 1,00,000 50,000 50,000 75,000 1,20,000 1,25,000 50,000 50,000 50,000 50,000 50,000 50,000 No 50,000 Yes 75,000 Yes 1,20,000 No 1,25,000 No 10,00,000 25,00,000 25,00,000 24,00,000 25,00,000 10,00,000 25,00,000 25,00,000 24,00,000 25,00,000 Difference Whether Difference is in excess of the higher of the two line items below: Higher of the 2 lines below: or 5% of actual consideration If yes ( see below) Considera tion to compute Profits & Gains of Business o profession Considera tion to compute Capital Gains U/s 43CA U/s 50 [c] The value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer. the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer 93 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

172 Budget 2018 Part B Direct Tax Proposals: Difference to be treated as Income from other sources U/s 56(2)(x) the amount of such excess shall be Income from Other Sources - 15,00,000 10,00, Clause 16 of Finance Bill In section 44AE of the Income-tax Act, with effect from the 1st day of April, 2019, (a) For sub-section (2), the following sub-section shall be substituted, namely: (2) for the purposes of sub-section (1), the profits and gains from each goods carriage, (i) being a heavy goods vehicle, shall be an amount equal to one thousand rupees per ton of gross vehicle weight or unladen weight, as the case may be, for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher; (ii) other than heavy goods vehicle, shall be an amount equal to seven thousand five hundred rupees for every month or part of a month during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from such goods carriage, whichever is higher. ; (b) In the Explanation, for clause (a), the following clauses shall be substituted, namely: (a) the expressions goods carriage, gross vehicle weight and unladen weight shall have the respective meanings assigned to them in section 2 of the Motor Vehicles Act, 1988; (aa) the expression heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds kilograms; FM s speech: 27. It is proposed to provide that in respect of heavy goods vehicles (more than 12 tonnes), the presumptive income under section 44AE of the Act shall be computed at the rate of `1000 per tonne per month. Memorandum to Finance Bill 2018: 94 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

173 Budget 2018 Part B Direct Tax Proposals: Presumptive income under section 44AE in case of goods carriage Section 44AE, inter alia provides that, the profits and gains shall be deemed to be an amount equal to seven thousand five hundred rupees per month or part of a month for each goods carriage or the amount claimed to be actually earned by the assessee, whichever is higher. The current presumptive income scheme is applicable uniformly to all classes of goods carriages irrespective of their tonnage capacity. The only condition which needs to be fulfilled is that the assessee should not have owned more than 10 goods carriages at any time during the previous year. Accordingly, the transporters who owns (less than 10) large capacity/ size goods carriages are also availing the benefit of section 44AE. It is necessary to mention here that the legislative intent of introducing this provision was to give benefit to small transporters in order to reduce their compliance burden. Even though the profit margins of large capacity goods carriages are higher than small capacity goods carriages, the tax consequences are similar which is against the principle of tax equity. In view of the above, it is proposed to amend the section 44AE of the Act to provide that, in the case of heavy goods vehicle (more than 12MT gross vehicle weight), the income would deemed to be an amount equal to one thousand rupees per ton of gross vehicle weight or unladen weight, as the case may be, per month or part of a month for each goods vehicle or the amount claimed to be actually earned by the assessee, whichever is higher. The vehicles other than heavy goods vehicle will continue to be taxed as per the existing rates. These amendments will take effect 1st April, 2019 and will, accordingly, apply in relation to assessment year and subsequent assessment years. [Clause 16] Notes on clauses: Clause 16 of the Bill seeks to amend section 44AE of the Income-tax Act relating to special provision for computing profits and gains of business of plying, hiring or leasing goods carriages. Sub-section (2) of the said section, inter alia, provides that for the purpose of computing profits and gains of business of plying, hiring or leasing goods carriages an amount equal to seven thousand five hundred rupees for every month or part of a month or an amount claimed to be actually earned by the assessee, whichever is higher, shall be deemed to be the aggregate income. It is proposed to substitute the said sub-section so as to provide that for a heavy goods vehicle, the profits and gains shall be an amount equal to one thousand rupees per ton of gross vehicle weight or unladen weight, as the case may be, for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous 95 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

174 Budget 2018 Part B Direct Tax Proposals: year or an amount claimed to have been actually earned from such vehicle, whichever is higher. It is further proposed to provide that in the case of a goods carriage other than heavy vehicle, the profits and gains shall be an amount equal to seven thousand five hundred rupees for every month or part of a month during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from such goods carriage, whichever is higher. It is also proposed to define the expressions goods carriage, "gross vehicle weight", "heavy goods vehicle" and" unladen weight" in the said section. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Existing Section 44AE of ITA: Assessee is engaged in the business of plying, hiring or leasing goods carriages Does not own more than 10 such goods carriages Computation of Income from business under Presumptive basis shall be Rs 7,500 per goods carriage per month or part thereof The anomaly of assessees owning large carriers but not more than 10 in number also enjoying this low income benefit is now corrected. A large carrier with 12 tonne capacity shall be assessed at the minimum of Rs 12,000 per month per carrier. Clause 17 of Finance Bill 2018: 17. In section 47 of the Income-tax Act, after clause (viiaa) [as inserted by section 23 of the Finance Act, 2017], the following clause shall be inserted with effect from the 1st day of April, 2019, namely: (viiab) any transfer of a capital asset, being (a) Bond or Global Depository Receipt referred to in sub-section (1) of section 115AC; or (b) Rupee denominated bond of an Indian company; or (c) Derivative, made by a non-resident on a recognised stock exchange located in any International Financial Services Insertion of new section 43CB. Amendment of section 44AE. Computation of income from construction and service contracts. Amendment of section 47. Centre and where the consideration for such transaction is paid or payable in foreign currency. Explanation. For the purposes of this clause, 96 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

175 Budget 2018 Part B Direct Tax Proposals: (a) International Financial Services Centre shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005; (b) Recognised stock exchange shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43; (c) Derivative shall have the meaning assigned to it in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, FM s speech: Tax incentive for International Financial Services Centre (IFSC) 153. The Government had endeavoured to develop a world class international financial services centre in India. In recent years, various measures including tax incentives have been provided in order to fulfil this objective. To further this objective, I propose to provide two more concessions for IFSC. In order to promote trade in stock exchanges located in IFSC, I propose to exempt transfer of derivatives and certain securities by nonresidents from capital gains tax. Further, non-corporate taxpayers operating in IFSC shall be charged Alternate Minimum Tax (AMT) at concessional rate of 9% at par with Minimum Alternate Tax (MAT) applicable for corporates. Memorandum to Finance Bill 2018: Measures to promote International Financial Services Centre (IFSC) Section 47 of the Act provides for tax neutrality relating to certain transfer. In order to promote the development of world class financial infrastructure in India, it is proposed to amend the section 47 of the Act so as to provide that transactions in the following assets, by a non-resident on a recognized stock exchange located in any International Financial Services Centre shall not be regarded as transfer, if the consideration is paid or payable in foreign currency: (i) Bond or Global Depository Receipt, as referred to in sub-section (1) of section 115AC; or 12 (ii) Rupee denominated bond of an Indian company; or (iii) Derivative This amendment will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. Section 115JC of the Act provides for alternate minimum tax at the rate of percent of adjusted total income in the case of a non-corporate person. In order to promote the development of world class financial infrastructure in India, it is further proposed to amend the section 115JC so as to provide that in case of a unit located in an International Financial Service Center, the alternate minimum tax under section 115JC shall be charged at the rate of 9 percent. 97 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

176 Budget 2018 Part B Direct Tax Proposals: Consequential amendment in section 115JF is also proposed to be made. This amendment will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. [Clause 17, 36 & 37] Current Section 47 Transactions not regarded as transfer: This is a new sub clause inserted after sub clause (viiaa) Transfer by a Non resident In a recognised stock exchange Located in GIFT City Gujarat International Financial Services Centre Where Consideration is paid in convertible Foreign Currency In respect of: a. A Bond or GDR referred to u/s 115AC(2) or 12 b. Rupee denominated bond of an Indian Company or c. A derivative Notes on Clauses: Clause 17 of the Bill seeks to amend section 47 of the Income-tax Act relating to transactions not regarded as transfer. The said section provides that certain transfers of capital assets are not to be regarded as transfer for the purposes of section 45 of the Income-tax Act. It is proposed to insert a new clause (viiab) in the said section so as to provide that any transfer of a capital asset, being bond or Global Depository Receipt referred to in sub-section (1) of section 115AC or rupee denominated bond of an Indian company or derivative, made by a non-resident on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency, shall not be regarded as transfer. It is further proposed to define certain expressions used therein. This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. Clause 20 of Finance Bill 2018: 20. In section 54EC of the Income-tax Act, with effect from the 1st day of April, 2019, (a) In sub-section (1), after the words long-term capital asset, the words, being land or building or both, shall be inserted; (b) In the Explanation occurring after sub-section (3), for clause (ba), the following clause shall be substituted, namely: (ba) long-term specified asset for making any investment under this section, 98 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

177 Budget 2018 Part B Direct Tax Proposals: (i) on or after the 1st day of April, 2007 but before the 1st day of April, 2018, means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 but before the 1st day of April, 2018; (ii) on or after the 1st day of April, 2018, means any bond, redeemable after five years and issued on or after the 1st day of April, 2018, by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 or any other bond notified in the Official Gazette by the Central Government in this behalf.. FM s speech: 23. It is proposed to rationalise the existing provision relating to investment in capital gain bonds by providing that the exemption shall be available only in respect of long-term capital gains arising out of sale of immoveable property and investment in the bond shall be for a minimum period of 5 year from the existing 3 years. Memorandum to Finance Bill 2018: Rationalization of the provisions of section 54EC Section 54EC of the Act provides that capital gain, arising from the transfer of a long-term capital asset, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, shall not be charged to tax subject to certain conditions specified in the said section. The section also provides that long-term specified asset for making any investment under the section on or after the 1st day of April, 2007 means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India or by the Rural Electrification Corporation Limited; or any other bond notified by the Central Government in this behalf. In order to rationalise the provisions of section 54EC of the Act and to restrict the scope of the section only to capital gains arising from long-term capital assets, being land or building or both and to make available funds at the disposal of eligible bond issuing company for more than three years, it is proposed to amend the section 54EC so as to provide that capital gain arising from the transfer of a long-term capital asset, being land or building or both, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, the capital gain shall not be charged to tax subject to certain conditions specified in this section. It is also proposed to provide that long-term specified asset, for making any investment under the section on or after the 1st day of April, 2018, shall mean any bond, redeemable after five years and issued on or after 1st day of April, 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf. 99 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

178 Budget 2018 Part B Direct Tax Proposals: This amendment will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. [Clause 20] Notes on clauses to Finance Bill 2018: Clause 20 of the Bill seeks to amend section 54EC of the Income-tax Act relating to capital gain not to be charged on investment in certain bonds. The said section, inter alia, provides that capital gain arising from the transfer of a long-term capital asset, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, and shall not be charged to tax subject to certain conditions specified in the said section. It is proposed to amend the said section so as to provide that capital gain arising from the transfer of a long-term capital asset, being land or building or both, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, the capital gain shall not be charged to tax subject to certain conditions specified in the said section. Clause (ba) of the Explanation to the said section clarifies expression "long-term specified asset" for making any investment under the said section on or after the 1st day of April, 2007, to mean any bond, redeemable after three years and issued on or after the1st day of April, 2007 by the National Highways Authority of India or by the Rural Electrification Corporation Limited; or any other bond notified by the Central Government in this behalf It is proposed to substitute the said clause so as to provide that long-term specified asset for making any investment under the said section on or after the 1st day of April, 2007 but before the 1st day of April, 2018 shall mean any bond, redeemable after three years and issued on or after the 1st day of April, 2007 but before the 1st day of April, 2018 and for making any investment under the section on or after the 1st day of April, 2018 shall mean any bond, redeemable after five years and issued on or after the 1st day of April, 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf. These amendments will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. My take: Transfer of long term capital asset Asset being land or building Investment within 6 months from the date of transfer Of the whole or a part of the LTCG In a specified capital asset Issued by NHAI, REC or any Bond notified by GoI For a term not less than 5 years if issued after 1st April 2018 and 3 years if issued before 100 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

179 Budget 2018 Part B Direct Tax Proposals: 8. To the extent invested shall not be charged to Capital gains u/s 54EC Clause 22. In section 79 of the Income-tax Act [as substituted by section 32 of the Finance Act, 2017], after the second proviso, the following proviso shall be inserted, namely: Provided also that nothing contained in this section shall apply to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner. Current position u/s 79 of ITA: 1. Carry forward and set off of losses a. Of a company b. Where there is a change in the shareholders of the company c. Where public are not substantially interested d. In the previous year. e. Pertaining to any year prior to the PY in which such change in shareholding has happened f. Shall not be allowed 2. Conditions to be fulfilled to claim Carry forward and set off benefit in spite of the above [ benefit of carry forward loss and set of not being available] a. 51% of the shares on the last day of PY being beneficially held by persons who were holders of shares holding 51% of voting power in each of the years when the loss was incurred 3. Exceptions to point 1- i.e., though change has happened that will not affect the carry forward benefita. Change due to death of shareholder or due to gift of shares to a new shareholder b. The Indian company being a subsidiary of a foreign holding company and the change is due to amalgamation or demerger of the foreign company and that 51% of the shareholding in the amalgamating or demerged foreign company remain shareholders of the amalgamated or resultant foreign company 4. Under any of the above 2 cases, even though there is a change in shareholding in an unlisted Indian company, it shall still get the benefit of carry forward and set off of losses for any year or years prior to the PY in which such change in shareholding takes place 5. To the above cases of 2 exceptions, a 3rd one is also introduced by Finance Bill 2018 a. A change in the shareholding pattern happens in any PY b. Consequent upon a resolution plan approved under IBC Code c. And reasonable opportunity of being heard is provided to Judicial Principal Commissioner or Commissioner. FM s speech: 101 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

180 Budget 2018 Part B Direct Tax Proposals: 1. It is proposed that the provision of section 79 of the Income-tax Act (the Act) regarding restriction on shareholding for the purpose of carry forward loss shall not apply in case of change of shareholding pursuant to an approved resolution plan under IBC, 2016 where an opportunity of being heard has been given to the Principal Commissioner or Commissioner. Memorandum to Finance Bill 2018: Benefit of carry forward and set off of losses Section 79 of Act provides that carry forward and set off of losses in a closely held company shall be allowed only if there is a continuity in the beneficial owner of the shares carrying not less than 51 percent of the voting power, on the last day of the year or years in which the loss was incurred. In general, the case of a company seeking insolvency resolution under Insolvency and Bankruptcy Code, 2016, involves change in the beneficial owners of shares beyond the permissible limit under section 79. This acts as a hurdle for restructuring and rehabilitation of such companies. In order to address this problem, it is proposed to relax the rigors of section 79 in case of such companies, whose resolution plan has been approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to assessment year and subsequent assessment years. It is also proposed to amend section 140 of the Act so as to provide that during the resolution process under the Insolvency and Bankruptcy Code, 2016, the return shall be verified by an insolvency professional appointed by the Adjudicating Authority under the Insolvency and Bankruptcy Code, This amendment will take effect from 1st April, 2018 and will, accordingly apply to return filed on or after the said date. [Clause 22 & 43] Notes on clauses: Clause 22 of the Bill seeks to amend section 79 [as substituted by section 32 of the Finance Act, 2017] of the Income-tax Act relating to carry forward and set off of losses in case of certain companies. The said section, inter alia, provides that where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company 102 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in

181 Budget 2018 Part B Direct Tax Proposals: carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred. It is proposed to amend the aforesaid section to provide that nothing contained in the said section shall apply to a company where a change in the shareholding takes place in a previous year pursuant to approved resolution plan under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year and subsequent years. End of Part B 103 P a g e F l a t # 3 0 1, T o p a z B l o c k, E s t e e m H e r i t a g e Apartments, Rose Garden Road, JP Nagar 5th Phase, Bangalore M Crd27220@icai.org; 20779ramadurai@icmaim.in