Union Budget Re-monetizing TEC India

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Basil Barber
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1 Union Budget Re-monetizing TEC India

Preface Every year may not be good, but there is something good in every year. It was only a year back when the Indian economy was sailing smooth with a 7.

2 Preface Every year may not be good, but there is something good in every year. It was only a year back when the Indian economy was sailing smooth with a 7.6% GDP growth rate in the global turbulent times. Given the backdrop of Demonetization, a fall in the GDP growth was an expected phenomenon. Although, a fall may not sound optimistic, such a corrective measure was important to be taken at this stage, where the Indian economy was buoyant enough to take such radical shock. Even with such measures the Indian economy promises to be the fastest growing economy in the world with a corrected growth rate hovering around 6.75%- 7.5%, post demonetization impact. Despite of global slowdown and number of developments on account of Brexit, elections in the developed countries, external monetary policies, India has still remained strong and resisted challenges. Through further fiscal consolidation and reforms, the path to growth would be sustained. As expected by many, the budget has been a carrot against the pressures of demonetization that the country has witnessed over past couple of months. Widening the tax base has been the motto of the budget with inclusion of even low earning groups in the tax compliance bracket. Considering the sops given by the Government, an individual would be keen on fiscal participation and compliance. Further, the budget has taken some bold steps like combining the railway budget in Union budget, phasing out of FIPB, tightening screws and improvement in transparency for the donation made to political parties, which goes a long way in establishing the principle of good governance. A Union budget is often looked from a taxation perspective that could provide us an insight in to the impact that such tax proposals may have on an individual or body corporate. However, such tax proposals are an outcome of the state of economy which needs detailed analysis of past performance and implementation of future strategies for development of sustainable economy. Through this document we have analyzed the economic results and decoded the impact of budget proposals on sectors as well as summarized the direct and indirect tax proposal implications on you and your business. Trust you will find the publication useful. Happy reading!! In case you need any further clarification please feel free to me at akshaykenkre@transprice.in. Thanks a lot. Best Regards, Akshay Kenkre Director TransPrice 2

Table of Content Economic Highlights 4 - Economy Overview Demonetization 6 Roadmap & Priorities 8 Taxation Proposals 10 - Direct Tax Proposals -International Tax

3 Table of Content Economic Highlights 4 - Economy Overview Demonetization 6 Roadmap & Priorities 8 Taxation Proposals 10 - Direct Tax Proposals -International Tax Proposals -Indirect Tax Updates Understanding the Priorities Area 15 - Agriculture - Banking & Financial Sector - Manufacturing & Infrastructure Glossary 18 About TransPrice

4 Economic Highlights 4

5 Economy Overview Financial Year marked two most important policy developments, first being the passage of Constitutional Amendment for implementation of GST and secondly demonetization and remonetisation of two highest denomination currency. While the GST aims to create an efficient indirect tax mechanism, the demonetization may have drawn the short term stick against long term carrots. As a result GDP growth for current year has been pegged at 6.5% down from 7.6% recorded in the last financial year. However, with no signs of slow down, India stands out as a bright spot amid world economic gloom and expects growth to re-bound in the range of 6.75% - 7.5% for FY , maintaining the pole position for fastest growing economy. One of such sign is that the FDI in India increased by 36%, despite of global reduction of 5% in FDI Inflows. Three main challenges identified for emerging economies: 1. Monetary policy stance of US Federal Reserve to increase the policy rates 2. Uncertainty over prices of crude oil 3. Increasing retreat against globalisation and built up of pressures for protectionism Economic Indicators Performance FY Targets FY % % GDP Growth Fiscal Deficit to GDP Inflation CPI terms (Q3) % 12 Interplay - Economic Indicators FY Growth rate Inflation (CPI) Fiscal Deficit 5

6 Demonetization 4

7 Demonetization On 8 th November 2016, the two largest denomination currency notes of Rs. 500 and Rs 1,000 were taken out of system with immediate effect. The aim of the action was fourfold: 1. curb corruption 2. eliminate counterfeiting 3. eradicate terror financing 4. purge black money Unlike other countries experience of demonetization which was a result of hyperinflation, wars, political upheavals or extreme circumstances, India s demonetization move was unique. Macro Impact of Demonetization: Demand shock due to cash crunch Supply shock where economic activity was dependent on cash Uncertainty shock Impact Analysis of Demonetization: Particular Short term impact Long term impact Availability of cash In short supply Recover but settle at lower level Interest Rates Deposit rates declined Lending rates to decline further Black Money Fall in holding Formal checks to be in place Real Estate Decline in prices Further fall in price expected Broader economy Job losses, decline in farm incomes Stabilise gradually GDP Growth slowed, as demonetisation reduced demand, supply liquidity and increased uncertainty Beneficial in long run Tax collection Increased due to voluntary disclosures Efficient tax collection due to reduction in cash economy and formalization Credibility Short term in crease in uncertainty Credibility would be strengthened if complimentary measures follow. Early and full remonetisation essential 7

8 Roadmap & Priorities 4

9 Roadmap & Priorities With world economies hovering around GDP growth of 3.6% and emerging economies with 4.1% -4.5%, India s growth is way above the average. To continue with such growth path, the budget has been structured around 10 clear priority areas Agenda for is Transform, Energize and Clean India TEC India TEC India seeks to: Transform the quality of governance and quality of life Energize various sections of society, especially the youth and unleash their true potential Clean country from the evils of corruption, black money and non transparent political funding Ten distinct themes to foster this broad agenda: 1. Farmers: committed to double the income in 5 years; (Agriculture) 2. Rural Population: providing employment & basic infrastructure; (Agriculture) 3. Youth: energizing them through education, skills and jobs; (Infrastructure) 4. The Poor and the Underprivileged: strengthening the systems of social security, health care and affordable housing; (Infrastructure) 5. Infrastructure: for efficiency, productivity and quality of life; (Infrastructure) 6. Financial Sector: growth & stability by stronger institutions; (Banking and Finance) 7. Digital Economy: for speed, accountability and transparency; (Infrastructure) 8. Public Service: effective governance and efficient service delivery through people s participation; 9. Prudent Fiscal Management: to ensure optimal deployment of resources and preserve fiscal stability; (Taxation Proposals) 10. Tax Administration: honouring the honest (Taxation proposals) (bracket denotes the section wherein above-mentioned priorities are captured in this document) 9

10 Taxation Proposals

11 Direct Tax proposals Individual taxation: Rates of taxes Income slabs Rate of tax Up to Rs. 250,000 NIL Rs. 250,001 - Rs. 500,000 5% Rs. 500,001 Rs. 1,000,000 20% Above Rs. 1,000,000 30% * Surcharge: 10% if income exceeds Rs. 50 Lakhs but does not exceed Rs. 1 Crore Surcharge : 15% if income exceeds Rs. 1 crore Lower slab of Rs. 300,000 for senior citizens and Rs. 500,000 for super senior citizens SUPER RICH TAX u/s 10% by way of dividend in excess of Rs. 10 Lakh proposed applicable to all persons except company and certain funds, trusts, institutions etc. TDS on Rent by Individuals - Individuals to deduct 5% u/s 194-IB on payment of rent, if exceeding Rs 50,000 per month. No requirement on application of TAN (w.e.f 1 June 2017) Period of holding for being a long term asset with regard to immovable property to be reduced from existing 36 months to 24 months, thereby being attractive to investment in real estate sector Change of base year for computation of FMV for the purpose of capital gain changed from 1981 to 2001 Scope of Section 54EC (infrastructure bond exemption for Capital Gain) widened to include any bond redeemable after 3 years, as notified by CG No 80G deduction on donation of any sum exceeding Rs. 2,000 unless other than cash Real Estate: In order to promote affordable housing, it is proposed to amend S. 80IBA to provide (w.e.f. 1 Apr 2018) Change of term built up area to carpet area provides 30% more floor space Extension of period of completion to 5 years from 3 years In case of joint development agreement between developer and land owner, capital gains to be computed in the previous year of receipt of completion certificate. Stamp duty value as increased by monetary consideration in excess of stamp duty value to be considered as full value of consideration. No benefit if the taxpayer transfers shares before completion of such project. Further, a tax 10% by the developer to be made under S. 194-IC No notional income from house property for taxpayer who treat such property as stock in trade until 1 year from the end of financial year in which completion certificate is received 11

12 Direct Tax proposals Corporate tax proposals: A. Rate of taxes: In case of domestic company rate of tax to be 25% if the total turnover or gross receipts of the previous year does not exceed Rs. 50 crores. In all other case, rate remains unchanged Start ups to choose any 3 consecutive years out of initial 7 years for 100% deductions u/s 80-IAC Carry forward of MAT/ AMT to be allowed for 15 assessment years. FTC allowable against MAT/ AMT only to the extent of credit available against normal provisions of the Act B. Promotion of digital economy No deduction of depreciation u/s 32 or expenditure on specified projects u/s 35AD if purchase of asset or expenditure is made in cash or cash equivalents Limit of cash expenditure in a single day reduced from Rs. 20,000 to Rs. 10,000 per person Presumptive profits u/s 44AD to be reduced from 8% to 6% for income received through banking and digital channels S 269-ST : No person to receive above Rs. 300,000 in cash or cash equivalents from a person in a day, or in respect of single transaction or in respect of transaction relating to one event or occasion from person. w.e.f 1 April 2017 Transparency in electoral funding and restriction of receiving donations in cash C. Tax provisions Enabling of filing self declaration for non deduction of 5% for commission income, declaring that tax on estimated total income of the relevant previous year would be nil Requirement for audit of books of accounts for person carrying on business increased to Rs. 2 crores Special provision of tax deduction u/s 194J for 2% for person engaged in operation of call center Tax neutral conversion of preference share to equity shares U/s 115-BBG income from transfer of carbon credits to be taxable at 10% on gross amount It has been decided by the Government to merge the Authority of Advance Ruling for Income-taxes,. Central Excise, Custom Duty and Service Tax Insertion of Section 50CA to provide for transfer of share of a company (other than quoted share) if at a value less than FMV, then such FMV to be the full value of consideration [Reference drawn to Section 56(2)] 12

13 International Tax proposals Transfer Pricing: Reduction of scope of SDT : In order to reduce compliance burden of tax payers, it is proposed to exclude payments made to persons referred to in S.40A(2)(b) from the ambit of transfer pricing Incorporation of Secondary Adjustments : Given the circumstance that the transactions between the AEs is not considered at ALP, then in addition to the primary adjustments that were in place till date, a secondary adjustment is proposed to be levied in case of difference in the adjusted profit and real cash situations. This provision is incorporated to harmonize Indian transfer pricing with global regulations. The adjustment is based on the concept of excess money that would be available with the AE, and would be treated as a deemed advance made by the taxpayer to the AE. Threshold of Rs. 1 crore to apply for primary adjustments, and applicable from assessment year Example: - Total declared income Rs.100 crore - Adjustment of Rs. 10 crore on the international transaction Hence the computation would be as follows: Particulars Declared income Add: Primary adjustment Add: Secondary adjustment (treat 10 crores as advance given to AE and impute an interest, 10%) Total adjusted income Amount (Rs.) 100 crores 10 crores 1 crore 111 crore International taxation: Adoption of BEPS Action plan no 4: Limitation of interest deduction to the extent of claim by the taxpayer as expense to AE shall be restricted to 30% of its profit before interest, taxes, depreciation and amortization. Provision shall allow carry forward of disallowed interest to eight assessment years. Threshold of interest expenditure of one crore rupees for applicability. Clarity relating to Indirect transfer provisions: It is clarified that explanation 5 on indirect transfers shall not apply to asset or capital asset mentioned therein being investment held by non resident, directly or indirectly in FII and registered Category I or Category II FPI. 13

14 Indirect Tax update Goods and Service Tax The GST Council has finalized its recommendation on almost all the issues based on consensus on the basis of 9 meetings held Preparation of IT System for GST is also on schedule The extensive reach-out efforts to trade and industry for GST will start form 1 April 2017 to make them aware of new taxation system Indirect tax rates No change in peak rate of customs duty or median rate of excise duty/ service tax Other changes to boost Make In India or protect domestic industry Certain industries provided correction to inverted duty structure - No categorical change for pharma industry RAPID (Revenue, Accountability, Probity, Information and Digitization) Maximize efforts for e-assessment in the coming years Enforcing greater accountability of officers of tax department for specific act of commission and omission 14

15 Understanding the 10 priority areas

16 Agriculture The Agriculture sector estimates a growth of 4.1% for FY , which is in line with the twelfth five year plan ( ) and up from 1.2% in FY The above growth could be attributed to a normal rainfall during the year Price certainty to be brought by fixation of Minimum Support Price and related policies Credit for agriculture was pegged at Rs. 9 Lakh crore in FY , 6% higher than the earlier year Budget Highlights: Commitment to double the income of farmers in next 5 years Target for agriculture credit in has been fixed at record level of Rs. 10 Lakh crore Support extended to NABARD for computerization and integration of 63,000 Primary Agriculture Credit Societies Agriculture Insurance increased from 30% of cropped area to 40% in and 50% in Establishment of mini labs in all Krishi Vigyan Centers for soil sample testing Dairy processing and Infrastructure Development fund to be set up in NABARD Poverty eradication to be the core and make 50,000 panchayats poverty free by 2019 MGNREGA allocation to be the highest ever at Rs. 48,000 crores in Pace of construction of rural roads accelerated to 133 km per day in % village electrification by 1 May 2018 Sanitation coverage in rural India gone up by 13% The Economic Survey has advocated the concept of Universal Basic Income (UBI) as an alternative to the various social welfare schemes in an effort to reduce poverty Total allocation to Rural, Agriculture and Allied Sectors is Rs. 187,223 crores 16

17 Manufacturing and infrastructure The manufacturing and the industrial sector showcased a decline The production of capital goods declined steeply and consumer non durable goods suffered a modest contraction To meet the challenge of job creation and opportunities for export, it is proposed to focus on the low skill and high labor intensive manufacturing of clothes and shoes Many new initiatives taken to boost the sector including Make in India, Invest India, Start Up India, e-biz Mission Mode Project Measures to facilitate ease of doing business implemented Budget Highlights: Skill enhancement and education given a priority and expense allocation. Incredible India 2.0 Campaign to be launched across the world to promote tourism and employment Affordable housing to be given infrastructure status Serious health issues taken up for eradication till 2025 Two new All India Institutes of Medical Sciences to be set up in Jharkhand and Gujarat An allocation of Rs. 241,387 crores has been made for transportation sector including rail, roads and shipping First time in history, railway allocations were discussed with the Union budget with a total capital and development expenditure pegged at Rs. 131,000 crores out of which Rs. 55,000 crores would be funded by Government. Second phase of solar park development to be taken up for additional 20,000 MW capacity Proposed to set up strategic crude oil reserve at 2 more locations, namely in Odhisa and Rajasthan Select airports in Tier II cities to be taken up for operations and maintenance in PPP model Digital Economy given a boost with linkages to Aadhar, promotion of digital transactions and cashless economy Focus on leather and shoes manufacturing to generate skilled employment 17

18 Banking & financial sector NPAs has climbed to almost 12 per cent of gross advances for public sector banks at end-september 2016 At this level, India s NPA ratio is higher than any other major emerging market, with the exception of Russia. India taking efforts to solve the twin balance sheet issue i.e. corporate + bank s financial position One of such method was use of decentralized approach where banks were put in charge of restructuring decisions Current position remains that NPA keeps growing, while credit and investment keep falling Time to consider a different approach A centralized Public Sector Asset Rehabilitation Agency, that could take charge of largest, most difficult cases and practically take tough decisions to reduce debt Budget Highlights: FIPB to be abolished in and further liberalization of FDI policy under consideration Bill relating to curtail the menace of illicit deposit schemes to be introduced A time bound listing of identified CPSEs on stock exchanges. Shares of PSEs like IRCTC, IRFC and IRCON will be listed in stock exchanges A new ETF with diversified CPSE stocks and other Government holdings will be launched in Rs. 10,000 crores for recapitalization of banks provided in Lending target under Pradhan Mantri Mudra Yojna to be set at Rs lakh crore Introduction of new law to confiscate Indian asset of a person who is an economic offender and has fled the country to escape the reach of law Increase in deduction limit in respect of provision of bad and doubtful debts from 7.5% to 8.5% 18

19 Glossary Act Income-Tax, 1961 AMT Alternative Minimum Tax BEPS Base Erosion And Profit Shifting CG - Capital Gains CPI - Consumer Price Index CPSE Central Public Sector Enterprise ETF Exchange Traded Funds FDI - Foreign Direct Investment IT- Information Technology IRCTC India Railway Catering And Tourism Corporation IRFC Indian Railway Finance Corporation IRCON - Indian Railway Construction Company Limited MAT Minimum Alternate Tax MGNREGA - Mahatma Gandhi National Rural Employment Guarantee Act, 2005 NABARD - National Bank for Agriculture and Rural Development NPA - Non-Performing Assets FIPB - Foreign Investment Promotion Board PSE Public Sector Enterprise FPI Foreign Portfolio Investor FTC Foreign Tax Credit GDP - Gross Domestic Product GST - Goods and Service Tax HUF Hindu Undivided Family SDT Specified Domestic Transaction TCS Tax Collected At Source TDS Tax Deducted at Source TEC - Transform, Energies and Clean US United State 19

20 About TransPrice: TransPrice is a tax firm focused on Transfer Pricing and international taxation. The firm's vision is 'to provide high quality Transfer Pricing solutions and be an advisor of choice for the Indian businesses'. TransPrice is a member firm of Quantera Global, a leading transfer pricing and valuation specialist firm worldwide. As much as an MNE would like to optimize its tax results, it equally would like to be compliant with laws of the land for a smooth business operation. We understand that tax planning and compliance are one of the key drivers for any Multinational Corporation in India and we provide expert tax solutions to balance the two. We add value with plethora of tax planning and structuring activities that helps you build effective tax structures. We are aware that documentation is the heart of any Transfer Pricing solutions and we believe in elaborate, extensive and contemporaneous documentation for our clients. We advocate specialization and believe that focus is vital for expert advice, especially in the field of Transfer Pricing, where every issue is unique. As Transfer Pricing deals with different and dynamic business scenarios, we tailor make every solution for you. We at TransPrice are strong advocates of research and knowledge base. Our continuous learnings and updates in the field of Transfer Pricing help us and our clients to stay up to date on various key issues in an around Transfer Pricing fraternity. TransPrice releases a weekly dossier 'TransPrice Weekly', which provides weekly updates to our clients, members and associates. 20

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