EXTRACTS FROM THE BUDGET SPEECH The journey of economic reforms during the past few years has been challenging but rewarding. As a result of the reforms undertaken by the Government, foreign direct investment has gone up. Measures taken by the Government have made it much easier to do business in India. Natural resources are now allocated in a transparent and honest manner. There is a premium on honesty. The present top leadership of this country has reached at this level after seeing poverty at close quarters. Our leadership is familiar with the problems being faced by the SC, ST, Backward Classes and economically weaker sections of the society. People belonging to poor and middle class are not case studies for them, on the other hand they themselves are case study. There has been huge increase in the number of returns filed by taxpayers. In financial year 2016-17, 85.51 lakhs new taxpayers filed their returns of income as against 66.26 lakhs in the immediately preceding year. By including all filers as well as persons who did not file returns but paid tax by way of advance tax or TDS, we can derive the figure of Effective Taxpayer Base. This number of effective tax payer base increased from 6.47 crores at the beginning of F.Y.14-15 to 8.27 crores at the end of F.Y.16-17. We are enthused by this success of our measures and we pledge to continue to take all such measures in future by which the black money is contained and the honest taxpayers are rewarded. Demonetization was received well by honest taxpayers as imandari k autsav only for this reason. Swami Vivekanand had also envisioned decades ago in his Memoirs of European Travel, You merge yourselves in the void and disappear, and let new India arise in your place. Let her arise out of the peasants cottage, grasping the plough; out of the huts of the fisherman. Let her spring from the grocer s shop, from beside the oven of the fritterseller. Let her emanate from the factory, from marts, and from markets. Let her emerge from groves and forests, from hills and mountains. 1
Prime Minister Sh. Narender Modi Ravi Associates REACTIONS TO BUDGET Desh ki neev mazboot karne wala budget hai, farmer friendly, common man friendly, business friendly aur development friendly hai (This budget is farmer friendly, Common man friendly, business friendly aur development friendly. It will strengthen foundation of our nation. From food processing to fiber optics, roads to shipping, youth to senior citizen, rural India to Ayushmaan Bharat, Digital India to Start Up India, this budget strengthens hopes and aspirations of crores of Indians. This budget will accelerate economic growth, it is focused on all sectors. I congratulate the Finance Minister for the decision regarding Minimum Support Price. I am sure it will help the farmers tremendously. Former Prime Minister Manmohan Singh I don t think I can blame the budget for being motivated by scoring points in elections, but fiscal arithmetic is at fault. this budget is high on projecting a bright picture but how will that be sustained (by the underlying fiscal arithmetic). Real issue is whether farm crisis is a thing of the past, if not, what is the strategy to deal with the farm crisis, How will farmers income be doubled? How will these promises be fulfilled? Congress President Rahul Gandhi Even after four years at the Centre, the Bharatiya Janata Party was still promising farmers a fair price, still announcing fancy schemes with no matching budgets and had still not created jobs for the youth. He ended his tweet saying, Thankfully, only one more year to go. Former Finance Minister P Chidambaram FM fails fiscal consolidation test, this failure will have serious consequences. the fiscal deficit limit of 3.2% in 2017-18 had been breached and was now estimated at 3.5%. "For 2018-19 also against 3.0%, he has fixed fiscal deficit at 3.3%, this failure will have serious consequences." This is the last full Budget of this government and I should add, "Thank God for that." 2
Bihar CM Nitish Kumar Ravi Associates Announcements regarding education, health and agriculture made. A national health protection scheme to benefit 10 crore poor families announced, it is a huge initiative. I would like to congratulate the government. Arvind Kejriwal, Chief Minister, New Delhi "I had expected some financial assistance to important infrastructure projects for national capital. Am disappointed that Centre continues its step-motherly treatment to Delhi" Akhilesh Yadav, Samajwadi Party president "There is disappointment among the poor, the farmers and labourers. The unemployed youths are despondent. And it is a slap on the face of traders, women, service class and the common people. This is a destructive budget by an egostical government known to neglect the problems of the people. Even in its final budget the BJP showed that it only champions the cause of the rich. The people will give it a fitting reply." FICCI President Rashesh Shah Budget 2018 consolidates financial sector reform measures. There is continuity in widening the social security framework, strengthening the foundation of the financial sector and promoting easier access to finance. 3
Disclaimer Budget 2018 proposals presented by the Finance Minister before the parliament are analysed in this document. It should not be relied upon as a substitute for detailed advice or a basis for formulating business decisions. The proposals are subject to amendment as the Finance Bill is yet to be passed by the Parliament. All reasonable care has been taken in preparing this document. Ravi Associates, Advocates & Solicitors, accept no responsibility for any error it may contain, whether caused by negligence, or otherwise or for any loss, however caused or sustained by the person relying on it. This document is not an offer, invitation or solicitation of any kind and is meant for use of clients and firm's personnel only. TEAM MEMBERS Dr. Girish Ahuja 9810015290 Dr. Ravi Gupta 9810060708 CA Arun Ahuja 9811074486 CA Manish Garg 9999999818 CA Rajesh Jain 9811132392 CA Shashank Gupta 9711012424 CA Sanjeev Singhal 9811565606 4
(Budget: 2018-19) 5
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CONTENTS HIGHLIGHTS OF BUDGET 8 DIRECT TAX PROPOSALS 13 CUSTOMS, EXCISE AND SERVICE TAX 51 7
HIGHLIGHTS OF BUDGET 1. Government's health scheme to cover 10 crore poor families is world's largest government-funded health protection scheme. Health and education cess has been increased to 4 per cent. 2. FM proposes a fiscal deficit of 3.3% of GDP for 2018-19. 3. Disinvestment target for 2017-18 has been exceeded and will reach `1 lakh crore. Target for 2018-19 is ` 80,000 crore. 4. 5 lakh WiFi hotspots will be set up in rural areas to provide easy internet access. 5. Govt announces Amrut program to focus on water supply to all households in 500 cities. Water supply contracts for 494 projects worth ` 19,428 core will be awarded. 6. NITI Aayog will establish a national programme to direct our efforts in the area of Artificial Intelligence towards national development. 7. Mumbai transport receives ` 40,000 crore. 8. National Heritage City Development Augmentation Scheme has been undertaken to preserve and protect heritage cities in the country, announces the Finance Minister. 9. Employees PF Act to be amended to reduce contribution of women to 8 pc from 12 pc with no change in employer s contribution. Contribution of 8.33% to EPF for new employees by the govt for three years and 12% govt contribution to EPF in sectors employing large number of people. 10. Target of 3 lakh crore for lending under PM Mudra Yojana. 11. Govt will launch health scheme to cover 10 crore poor families. 12. Government aims to bring 60 crore bank accounts under the Jan DhanYojana. 13. Eklavya schools to be started for Scheduled Tribe populations. 14. ` 600 crore allocated to Tuberculosis patients undergoing treatment. 15. Govt will set up two new Schools of Planning and Architecture. 8
16. To tackle brain drain, FM announces scheme to identify bright students pursuing B Tech in premiere engineering institutes, and providing them higher-education opportunities in the IITs and IISc. These students will receive handsome fellowships, and will be expected to dedicate a few hours to teach in higher education institutions weekly. 17. Proposal of integrated B.Edprogramme for teachers: "training of teachers during service is essential." Technology will be the biggest driver in improving the quality of education. 18. Budget allocates money for social security and protection programme for all widows and orphaned children. 19. Ujjwala scheme to amplify targets, will now provide 8 crore rural women free LPG connections. 20. Air pollution in Delhi-NCR has been a cause of concern, govt has proposed subsidised machinery for in-situ management of crop residue in Punjab, Haryana, Uttar Pradesh and NCT Delhi. 21. Govt of India will take necessary measures to put in place measures for the state government to purchase surplus solar power produced by local farmers at suitable prices. 22. A sum of ` 500 crore for 'Operation Green' on the lines of 'Operation Flood'. 23. Food processing sector is going at an average of 8 per cent per annum. 24. Minimum Support Price of agricultural products: Only increasing the MSP is not enough, the government will fix the MSP of agricultural products at 1.5 times the market rate. 25. Govt to launch flagship National Health Protection scheme to cover 10 crore poor and vulnerable people. Govt to set up 24 new medical colleges and hospitals by upgrading district level ones. 10 cr families will be provided ` 5 lakh cover per family per year for treatment. Government is slowly but steadily progressing towards universal health coverage. 115 aspiration districts identified taking various indices of development into consideration, quality of life to be improved in these districts. Govt s budget for health, education and social security increased to ` 1.38 lakh crore for 2018-19 from ` 1.22 lakh crore in current fiscal. 9
26. Environment for venture capitalists and angel investors to be strengthened. 27. Indian Railways allocation in next fiscal now proposed at over ` 1.48 lakh crore. 36,000-km of rail track renewal targeted in coming year. 4,267 unmanned railway crossings on broad gauge routes to be eliminated in next two years. Wifi, CCTVs to be progressively provided at all trains.4,000 km of new railway track will be laid down by 2019.All railways stations with footfall more than 25,000 to have escalators. Gross budgetary support for Railways hiked to over ` 3 lakh crore in 2018-19 from ` 2.73 lakh crore in 2017-18.Specialised railway university to be set up at Vadodara. The government will undertake redevelopment of 600 major railway stations across the country. 28. Govt to expand capacity of airports by five times to cater to one billion trips a year. Regional air connectivity scheme shall connect 56 unserved airports and 31 unserved helipads. 29. SEBI may consider mandating large corporates to use bond market to finance one-fourth of their fund needs. Govt will monetise select central public sector enterprises using Infrastructure Investment Trusts. 30. 5 lakh WiFi hotspots to provide broadband access to 5 cr rural people. 31. Govt will evolve a scheme to provide a unique ID to every enterprise on lines of Aadhaar. 32. ` 80,000 cr disinvestment target for 2018-19; ` 1 lakh cr receipt expected in current year. Govt has initiated strategic disinvestment in 24 PSUs, including Air India. 33. Govt to formulate a comprehensive gold policy to develop gold as an asset class; gold monetisation scheme to be revamped. Gold monetisation scheme being revamped so that people can open gold deposit accounts in a hassle-free manner. 34. 372 specific business reform actions identified to improve ease of doing business; Evaluation of performance under this programme to be based on user feedback. 10
35. Government will take all steps to eliminate the use of Crypto- Currencies, will encourage Blockchain technology in payment systems. Govt does not consider crypto-currency as legal; will take all measures against its illegal use. 36. Tax payer base has risen from 6.47 crore in 2014-15 to 8.27 crore in 2016-17. Demonetisation was received by honest tax-payers as ImaandarikaUtsav. More payers joining tax net but turnover not encouraging. 37. PAN to be used as Unique Entity Number for non- individuals from April 1. 38. Govt makes PAN mandatory for any entity entering into a financial transaction of ` 2.5 lakh or more. 39. Expenditure for 2017-18 pegged at ` 21.57 lakh crore, as against ` 21.8 lakh cr previously estimated. 12.6 pc growth rate in direct taxes in FY18. ` 90,000 cr additional income tax collection in 2016-17 and 2017-18 due to measures against tax avoidance. Huge increase in tax returns filed; 85.51 lakh people filed returns in 2017-18, as against 66.26 lakh in 2016-17. 40. Defence outlay raised to ` 2.82 lakh crore in 2018-19 from ` 2.67 lakh crore in current year. 41. Government Integrated Financial Management Information System (GIFMIS): (1) A Non Tax Receipt Portal (NTRP) to provide one stop services for depositing fees, fines and other non-tax dues into Government account; (2) e-vidhan to digitize and make the functioning of all State Legislatures paperless. (3) A Central Public Procurement Portal to provide a single point access for all information on procurement. Around 3.5 lakh contractors and vendors are registered on this platform. (4) The Government E-Marketplace (GeM) to facilitate procurement at the right price, in right quality and quantity in a transparent and efficient manner. 11
(5) E-Courts, to bring about universal computerization of all Districts and Subordinate Courts, use of cloud computing and availability of e-services like e-filing and e-payments as well. (6) A National Judicial Data Grid to provide an online platform for information relating to judicial proceedings and decisions from over sixteen thousand computerized Courts and Subordinate Courts in the country. An e-courts Services App has also been launched to provide litigant centric services. (7) e-panchayats platform to provide a suite of core common applications to address various aspects of panchayats functioning from internal core functions of planning, budgeting, implementation, accounting, monitoring and social audit to delivery of services like issue of certificates, licenses etc. 12
DIRECT TAX PROPOSALS 13
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DIRECT TAXES Rates of income-tax for assessment year 2019-20 Rates of Income Tax (A) I. In the case of every Individual (other than those covered in part (II) or (III) below) or Hindu undivided family or AOP/BOI (other than a cooperative society) whether incorporated or not, or every artificial judicial person Upto `2,50,000 Nil `2,50,010 to `5,00,000 5% `5,00,010 to `10,00,000 20% Above `10,00,000 30% II. In the case of every individual, being a resident in India, who is of the age of 60 years or more but less than 80 years at any time during the previous year. Upto `3,00,000 Nil `3,00,010 to `5,00,000 5% `5,00,010 to `10,00,000 20% Above `10,00,000 30% III. In the case of every individual, being a resident in India, who is of the age of 80 years or more at any time during the previous year. Upto `5,00,000 Nil `5,00,010 to `10,00,000 20% Above `10,00,000 30% Surcharge: The amount of income-tax computed in accordance with the above rates shall be increased by a surcharge at the rate of 10% of such income tax in case of a person having a total income exceeding `50 lakhs and upto ` 1 crore and 15% of such income-tax in case of a person having a total income exceeding ` 1 crore. Marginal relief: The total amount payable as income-tax and surcharge on total income exceeding ` 50 lakhs and ` 1 crore shall not exceed the total amount payable as income-tax on a total income of ` 50 lakhs and ` 1 crore by more than the amount of income that exceeds ` 50 lakhs and ` 1 crore respectively. 15
Cess: 'Health and Education Cess on Income Tax' @ 4% on income tax (inclusive of surcharge, wherever applicable) shall be levied. (B) In the case of every co-operative society (1) where the total income does not exceed `10,000 (2) where the total income exceeds `10,000 but does not exceed `20,000 (3) where the total income exceeds `20,000 16 10% of the total income; `1,000 plus 20% of the amount by which the total income exceeds `10,000; `3,000 plus 30% of the amount by which the total income exceeds `20,000. Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 12% of such income-tax in case of a co-operative society having a total income exceeding ` 1 crore. Marginal relief: The total amount payable as income-tax and surcharge on total income exceeding ` 1 crore shall not exceed the total amount payable as income-tax on a total income of ` 1 crore by more than the amount of income that exceeds ` 1 crore. Cess: 'Health and Education Cess on Income Tax' @ 4% on income tax (inclusive of surcharge, wherever applicable) shall be levied. (C) In case of any firm (including limited liability partnership) 30%. Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 12% of such income-tax in case of a firm having a total income exceeding ` 1 crore. Marginal relief: The total amount payable as income-tax and surcharge on total income exceeding ` 1 crore shall not exceed the total amount payable as income-tax on a total income of `1 crore by more than the amount of income that exceeds ` 1 crore. Cess: 'Health and Education Cess on Income Tax' @ 4% on income tax (inclusive of surcharge, wherever applicable) shall be levied. (D) In the case of a company (i) For domestic companies: (a) If the total turnover or gross receipts of the 25% previous year 2016-17 does not exceed ` 250 crore (b) In all other cases 30%
Surcharge: The surcharge of 7% in case of a domestic company shall be levied if the total income of the domestic company exceeds ` 1 crore but does not exceed `10 crore. The surcharge at the rate of 12% shall be levied if the total income of the domestic company exceeds `10 crore. Marginal relief: However, the total amount payable as income-tax and surcharge on total income exceeding `1 crore but not exceeding `10 crore, shall not exceed the total amount payable as income-tax on a total income of ` 1 crore, by more than the amount of income that exceeds `1 crore. The total amount payable as income-tax and surcharge on total income exceeding `10 crore, shall not exceed the total amount payable as income-tax and surcharge on a total income of `10 crore, by more than the amount of income that exceeds `10 crore. Cess: 'Health and Education Cess on Income Tax' @ 4% on income tax (inclusive of surcharge, wherever applicable) shall be levied. (ii) For foreign company: 40%. Surcharge: In case of companies other than domestic companies, the surcharge of 2% shall be levied if the total income exceeds ` 1 crore but does not exceed `10 crore. The surcharge at the rate of 5% shall be levied if the total income of the company other than domestic company exceeds `10 crore. Marginal relief: However, the total amount payable as income-tax and surcharge on total income exceeding `1 crore but not exceeding `10 crore, shall not exceed the total amount payable as income-tax on a total income of ` 1 crore, by more than the amount of income that exceeds `1 crore. The total amount payable as income-tax and surcharge on total income exceeding `10 crore, shall not exceed the total amount payable as income-tax and surcharge on a total income of `10 crore, by more than the amount of income that exceeds `10 crore. Cess: 'Health and Education Cess on Income Tax' @ 4% on income tax (inclusive of surcharge, wherever applicable) shall be levied. Amendments relating to Definitions 1. Explanation 2A inserted in definition of dividend [Section 2(22)] [W.r.e.f. A.Y. 2018-19] See para 25. 17
2. Definition of 'income' amended [Section 2(24)] [W.e.f. A.Y. 2019-20] See para 22. 3. Definition of short-term capital asset amended [Section 2(42A)] [W.r.e.f. A.Y. 2018-19] See para 22. Amendments relating to income deemed to accrue or arise in India 4. Aligning the scope of "business connection" with modified PE Rule as per Multilateral Instrument (MLI) [Section 9(1)] [W.e.f. A.Y. 2019-20] 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 18
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 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 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. 19
5. "Business connection" to include "Significant Economic presence" [Section 9(1)] [W.e.f. A.Y. 2019-20] "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, upto 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 therin, such other country may also tax the business profits attributable to the 'Permant 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 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 20
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 nonresident 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 sub-section (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 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 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 nonresident 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 21
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. Amendments relating to income exempt from tax 6. Royalty and FTS payment by NTRO to a non-resident to be tax-exempt [Section 10(6D) inserted] [W.r.e.f. A.Y. 2018-19] 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. 7. Extending the benefit of tax-free withdrawal from NPS to nonemployee subscribers [Section 10(12A)] [W.e.f. A.Y. 2019-20] 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 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 2019-20 and subsequent assessment years. 8. Provisions of section 40(a)(ia) and section 40A(3)/(3A) to apply to certain exempt entities [Section 10(23C)] [W.e.f. A.Y. 2019-20] See para 12. 9. Exemption of long-term capital gain on transfer of long-term capital asset being an equity share in a company withdrawn [Section 10(38)] [W.e.f. A.Y. 2019-20] See para 19. 22
10. Exemption to specified income of class of body, authority, Board, Trust or Commission in certain cases [Section 10(46)] [W.r.e.f. A.Y. 2018-19] 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). 11. Exemption of income of Foreign Company from sale of leftover stock of crude oil on termination of agreement or arrangement [Section 10(48B)] [W.e.f. A.Y. 2019-20] 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. 23
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. Amendments relating to Charitable Trusts 12. Provisions of section 40(a)(ia) and section 40A(3)/(3A) to apply to certain exempt entities [Section 10(23C) and section 11] [W.e.f. A.Y. 2019-20] 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 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 subclauses (iv), (v), (vi) or (via) of said clause in respect of application of income. 24
Amendments relating to income under the head "salary" 13. Standard deduction on salary income [Section 16(ia)] [W.e.f. A.Y. 2019-20] Section 16, inter-alia, provides for certain deduction in computing income chargeable under the head "Salaries". It is proposed to allow a standard deduction upto ` 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. Amendments relating to income under the head "Profits and Gains of Business or Profession" 14. Taxability of compensation in connection to business or employment [Section 28] [W.e.f. A.Y. 2019-20] 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; 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. 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. 15. Tax treatment of transactions in respect of trading in agricultural commodity derivatives [Section 43(5)] [W.e.f. A.Y. 2019-20] 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 25
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. 16. Rationalization of section 43CA, section 50C and section 56 [Section 50C] [W.e.f. A.Y. 2019-20] See para 23. 17. Presumptive income under section 44AE in case of goods carriage [Section 44AE] [W.e.f. A.Y. 2019-20] Section 44AE, inter alia provides that, the profits and gains shall be deemed to be an amount equal to `7,500 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 ` 1,000 per ton of gross vehicle weight or unladen weight, as the case may be, per 26
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. 18. Amendments in relation to notified Income Computation and Disclosure Standards. [Section 145] [W.r.e.f. A.Y. 2017-18] 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 2017-18.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 subsection(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 subsection (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. 27
(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 2017-18. 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, 28
accordingly, apply in relation to assessment year 2017-18 and subsequent assessment years. Amendments relating to income under the head "Capital Gains" 19. New regime for taxation of long-term capital gains on sale of equity shares etc. [Section 10(23D), 10(38) and section 112A] [W.e.f. A.Y. 2019-20] 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 ` 1,00,000. 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 29
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 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, 2018. 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 30