An overview The Union Financial Budget

An overview The Union Financial Budget 2017-18 Contents 1. 2. Fiscal & 3. 4. 5. Customs & 6.

The Hon'ble Finance Minister of India presented the Union Budget 2017 on February 01, 2017 in the Parliament. It was the first time in our country's history that the rail and general budget were presented together. The Union Budget mainly focuses on proposed increased spending on rural areas, infrastructure development, prudent fiscal management to preserve financial stability, fighting poverty and sought to assure honest taxpayers that they would be treated in a fair manner. The budget has also proposed to incorporate various anti-avoidance measures to preserve the tax base. The Budget s proposals for 2017 have brought out few changes to India s taxation framework with a larger intent of simplification and equity. This year s Budget has the following themes: agriculture and farmer s welfare, rural focus, promoting affordable housing and real estate sector, education and job creation, promoting digital economy, transparency in electoral funding, infrastructure focus, ease of business, fiscal discipline, personal income tax and GST. Whilst, the government has announced major investments and schemes in agriculture and farmer s welfare, rural sector development and infrastructure, a lot is driven by and will depend on the quality of execution on the ground. We have discussed some of the key pillars that impact businesses and individuals through the government s tax policy and regulatory changes in this Budget Update 2017. The Ease of Doing Business initiative has seen path breaking simplified dispute resolution and regulatory compliance measures in this Budget. The infrastructure push and the underlying investment commitments is much welcome and solidifies the government s stated position when it came into power in May 2014. The need of the hour was to ensure fiscal discipline and tax reforms by creating a favorable and predictable environment for businesses. This Budget takes a major step in that direction. The Hon ble FM quoted in his Budget speech that impact of demonetization on growth, fiscal deficit and jobs and taxes will not be carried forward to the next fiscal year. Page 2

I. Economic indicators III. Transformational reforms Fiscal deficit for FY 2016-2017 is expected to be retained to the target of 3.5% of GDP. The road map for fiscal deficit are 3.2% and 3.0% in FY 2017-18 & 2018-19 respectively. Revenue deficit estimated at 2.8% for FY 2016-17 was revised to 2.1% for the same period and for next year FY 2017-18 is pegged at 1.9%. Current account deficit declined from 1% of GDP in FY 2015-16 to 0.3% of GDP in the first half of FY 2016-17 GDP growth is expected to be at 6.5% FY 2016-17. GDP growth projected to be between 6.75%-7.5% in FY 2017-18. The wholesale price index (WPI) turned 3.39% in Dec-16. The CPI inflation declined from 6% in July 2016 to 3.4% in December, 2016 Industrial growth (FY 2016-17): 5.2 % Service sector growth: 8.8% in FY 2016-17 Forex reserves: US$ 361 Bn. at its highest ever II. Prudent fiscal management Stepped up allocation for Capital expenditure by 25.4% over the previous year Net market borrowing of Government restricted to INR3,480 bn after buyback in 2017-18, much lower than INR4,250 bn of the previous year Passage of the Constitution Amendment Bill and a 2017 GST roll out being certain Demonetisation of high denomination currency notes & structural first steps in cleansing the parallel economy Enactment of the Insolvency and Bankruptcy Code Enactment of the Aadhar bill for disbursement of financial subsidies and benefits Removal of plan and non-plan classification of expenditure to facilitate a holistic view of allocations for sectors and ministries IV.Roadmap & priorities Agenda for 2017-18 is : Transform, Energise & Clean India Transform the quality of governance and quality of life of our people; Energise various sections of society (youth & the vulnerable) and enable them to unleash their true potential; and Clean the country from the evils of corruption, black money and non-transparent political funding V. Farmers & rural population Target for agricultural credit in FY 2017-18 has been fixed at INR10,000 bn By 2019, aim to bring 10 mn households and 50,000 Gram Panchayats to be poverty free Page 3

(contd...) MGNREGA allocation at INR480 bn (highest ever) in FY 2017-18. Total allocation for Rural, Agriculture and Allied sectors is INR 1872 bn VI.Global challenges Global uncertainty, post major and political developments like Brexit and US elections; and validated by President Trump s first 11 days of executive orders and executive actions The US Federal Reserve's intention to increase policy rates in 2017, may lead to lower capital inflows and higher outflows from the emerging economies Uncertainty around crude oil prices, will affect fiscal situation of emerging economies Signs of retreat from globalisation of goods, services and people, as pressures build up for protectionism VII.Youth Skill Acquisition and Knowledge Awareness for Livelihood Promotion programme (SANKALP) to be launched at a cost of INR 40 bn to provide market relevant training to 350 mn youth Incredible India 2.0 campaign will be launched across the world to promote tourism and employment. VIII.Infrastructure For transportation sector including rail, roads, shipping, provision of INR 2414 bn has been made in 2017-18. By the end of 2017-18, high speed broadband connectivity on optical fibre will be available in more than 150,000 gram panchayats, under BharatNet. Launch second phase of Solar Park development for additional 20,000 MW capacity. Focus to make India a global hub for electronics manufacturing with incentive schemes like M-SIPS and EDF. IX.Financial sector Propose to create an integrated public sector oil major to match the performance of international and domestic private sector oil and gas companies X. Digital economy BHIM app adoption by 12.5 mn people and to promote the app, government to launch schemes like Referral Bonus Scheme for individuals and a Cashback Scheme for merchants A Mission to be set up with a target of 25 billion digital transactions for 2017-18 through UPI, USSD, Aadhar Pay, IMPS and debit cards XI.Public service Web based interactive Pension Disbursement System for Defence Pensioners will be established To rationalise the number of tribunals and merge tribunals wherever appropriate Page 4

Individual, Hindu Undivided Family ( HUF ) and Firm: I. Tax rates a) Relaxation in tax rates The Finance Bill, 2017 ( the Bill ) has proposed some relaxation to the non-corporate assessee (i.e. Individuals, HUF, Association of Persons ( AOP ), Body of Individuals ( BOI ) and Artificial Juridical Person ( AJP )) in the existing tax rates for the income slab between INR 250,001 to INR 500,000 by reducing it from 10% to 5%. The current and the proposed tax rates have been tabulated below in case of each category of noncorporate taxpayers: Taxable Income (Amounts in INR) The slab rates for individuals, being resident in India who are of the age of 60 years or more but less than 80 years: Taxable Income (Amounts in INR) Tax Rates Current Upto INR 300,000 Nil Nil INR 300,001- INR 500,000 10% 5% INR 500,001- INR 1,000,000 20% 20% Above INR 1,000,001 30% 30% Tax Rates Current Upto INR 300,000 Nil Nil INR 300,001- INR 500,000 10% 5% INR 500,001- INR 1,000,000 20% 20% Above INR 1,000,001 30% 30% Proposed Proposed There would be no effect of the proposed reduction in tax rates in case of individuals, being resident in India and who is of the age of 80 years or more and hence their tax rates as per the applicable slab continues to be the same: Taxable income (Amounts in INR) Upto INR 500,000 Tax rates Also, surcharge shall be levied on the amount of income tax, if the taxable income of the person (i.e. Individuals, HUF, AOP, BOI and AJP) is as under Additionally, education cess and higher education cess at the rate of 3% will continue to be levied to the tax amount and the surcharge. Nil INR 500,001- INR 1,000,000 20% Above INR 1,000,001 30% Taxable income (Amounts in INR) Rates 5,000,001 to 10,000,000 10% Above 10,000,001 15% Page 5

(contd...) b) Corporative Societies, firms, local authorities, etc. There has been no change in the income tax rates and the rates continue to be the same as that specified for assessment year 2017-18. Further, there is no change in the rates of surcharge and cess to be levied on the tax amount. It continues to be 12% and 3% respectively. II. Incentive Provisions a) Rebate It is proposed to amend section 87A of the Act in order to provide relief in taxation to the individual taxpayers, whose total income does not exceed INR 350,000. Accordingly, an amount of INR 2,500 shall be reduced from the income tax liability. The current and the proposed limits have been tabulated below: Existing Provision Taxable income INR 500,000 Rebate INR 5,000 Proposed Provision Taxable income INR 350,000 Rebate INR 2,500 This amendment is proposed to come into effect from 1st April, 2018 i.e. AY 2018-19. b) Tax incentive for the development of capital of Andhra Pradesh In order to provide relief to an individual or HUF who was the owner of land as on 2nd June, 2014, and has transferred such land under the land pooling scheme notified under the provisions of Andhra Pradesh Capital Region Development Authority Act, 2014, it is proposed to insert a new clause (37A) in section 10 of the Income tax Act, 1961 ( the Act ) to provide that capital gains arising to said individual or HUF, as the case may be, from the following transfer shall not be chargeable to tax under the Act: i) Transfer of capital asset being land or building or both, under land pooling scheme; ii) Sale of Land Pooling Ownership Certificates by the said persons received in lieu of land transferred under the scheme; iii) Sale of reconstituted plot or land by said persons within two years from the end of the financial year in which the possession of such plot or land was handed over to the said persons. This amendment will take effect retrospectively, from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. Further, it is also proposed to make amendment to section 49 of the Act to provide for cost of acquisition where reconstituted plot or land is transferred after the expiry of 2 years from the end of the financial year in which the possession of such plot or land was received by the assessee. The cost of acquisition of such plot or land shall be deemed to be its stamp value on the last day of the second financial year after the end of financial year in which the possession of such asset was handed over to the assessee. Proposed amendment will take effect from 1st April, 2018 i.e. AY 2018-19. Page 6

(contd...) c) Benefit to employees and self-employed individuals in relation to National Pension Scheme trusts Section Existing provision Amendment proposed Applicable from 10(12A) Tax exemption on withdrawal from National Pension System ( NPS ) trust Payment from NPS trust to an employee on closer of his account or opting out shall be exempt up to 40% of total amount payable to him. Addition of a new sub-section (12B) so as to provide exemption to partial withdrawal not exceeding 25% of the contribution made by an employee in accordance with the terms and conditions specified under Pension Fund Regulatory and Development Authority Act, 2013. 1st April, 2018 i.e. AY 2018-19 80CCD Deduction for amount deposited in NPS For employees: 10% of salary + contribution made by employer upto 10% of salary to the extent of 20% of salary shall be allowed as a deduction. For employees: No change in provision 1st April, 2018 i.e. AY 2018-19 For other individuals: 10% of gross total income only For other individuals: 20% of gross total income III. Efforts to reduce compliance a) Increasing the threshold limit for maintenance of books of account in case of Individuals and Hindu Undivided Family It is proposed to amend the provisions of section 44AA of the Act, thereby increasing the monetary threshold of income from INR 120,000 to INR 250,000 and the threshold for total sales or turn over or gross receipts from INR 1,000,000 to INR 2,500,000 in case of individuals and HUF carrying on business or profession. This amendment will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. IV. Miscellaneous a) Enabling of filing of Form 15G/15H for commission payments specified under section 194D The existing provision of section 194D provides for tax deduction at source at a rate of 5% for payments in Page 7

(contd...) in the nature of insurance commission which is beyond a limit of INR 15,000 per financial year. It is proposed to amend section 197A so as to include non-deduction of tax at source in respect of insurance commission referred to in section 194D by filing selfdeclaration in Form No. 15G/15H, declaring that the tax on his estimated total income of the relevant previous year would be nil, and hence reducing the compliance burden in case of Individuals and HUFs. This amendment will take effect from 1st June, 2017. b) Special provisions for computation of capital gains in case of joint development agreement It is proposed to insert a new sub-section (5A) in section 45 of the Act to provide that in case of an assessee being an individual or HUF, who enters a specified agreement for development of a project, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority. It is further proposed to provide that the stamp value of his share for land or building or both in the project on the date of issuing of said certificate of completion as increased by any monetary consideration received, if any, shall be deemed to be the full value of the consideration received or accruing because of the transfer of the capital asset. It is also proposed to provide that benefit of this proposed regime shall not apply to an assessee who transfers his share in the project to any other person on or before the date of issue of said certificate of completion It is also proposed to provide that in such a situation, the capital gains as determined under general provisions of the Act shall be deemed to be the income of the previous year in which such transfer took place and shall be computed as per provisions of the Act without considering this proposed provisions. It is also proposed to make consequential amendment in section 49 of the Act so as to provide that the cost of acquisition of the share in the project being land or building or both, in the hands of the land owner shall be the amount which is deemed as full value of consideration under the said proposed provision. These amendments will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. It is also proposed to insert a new section 194-IC in the Act so as to provide that in case any monetary consideration is payable under the specified agreement, tax at the rate of ten per cent shall be deductible from such payment. This amendment will take effect from 1st April, 2017. Page 8

(contd...) KNAV Comments The proposal to reduce holding period from 3 years to 2 years for long-term gain on transfer of immoveable property is a welcome move and this will certainly boost investment in the real estate sector. In case of a Joint Development Agreement, the liability to capital gains tax will arise in the year when the project is completed will provide a much desired and logical relief to JDA projects. c) Deduction of tax at source on payment of rent in the case of certain individuals and HUF Under the existing provisions of section 194-I of the Act, an individual and HUF, being a payer (other than those liable for tax audit) are out of the scope of the said section and are thus, not liable to deduct tax on payment of rent to the account of the resident payee. In order to widen the scope of tax deduction at source, it has been proposed to insert a new section 194-IB in the Act to provide that individual or a HUF (other than those covered under 44AB of the Act), responsible for paying to a resident any income by way of rent exceeding INR 50,000 for a month or part of month during the previous year, shall deduct tax equal to 5% of such rent paid. In relation to the above, the following points have also been proposed: Tax shall be deducted on such income at the time of credit of rent, for the last month of the previous year or the last month of tenancy if the property is vacated during the year, as the case may be; The deductor shall not be required to obtain tax deduction account number (TAN) as per section 203A of the Act; Where the tax is required to be deducted as per the provisions of section 206AA of the Act, such deduction shall not exceed the amount of rent payable for the last month of the previous year or the last month of the tenancy, as the case may be. Further, it has been proposed in the Explanatory Memorandum that the deductor shall be liable to deduct tax only once in a previous year. This amendment is proposed to take effect from 1st June, 2017. Corporates I.Tax rate It is proposed to provide relief in the corporate tax rate to the small and medium domestic enterprises having a turnover of less than INR 50 crores. Existing provisions Proposed provisions Turnover less than INR 5 crores Turnover more than INR 5 crores Turnover less than INR 50 crores Turnover more than INR 50 crores 29 % 30 % 25 % 30 % The above rates will increase by surcharge and cess. In the case of a company other than a domestic company, the rates of tax are the same as those specified for the assessment year 2017-18. There has been no change in the rates of surcharge on income tax in case of companies. Page 9

(contd...) Domestic Companies Taxable income more than INR 1 Crore less than INR 10 Crores Taxable income more than INR 10 Crores II. Ease of doing business Foreign Companies Taxable income more than INR 1 Crore less than INR 10 Crores 7 % 12 % 2 % 5 % Taxable income more than INR 10 Crores a) Clarity related to indirect transfers It is proposed to amend section 9(1)(i) of the Act so as to clarify that the Explanation 5 shall not apply to any asset or capital asset mentioned thereunder being investment held by non-resident, directly or indirectly, in a Foreign Institutional Investor, as referred to in clause (a) of the Explanation to section 115AD, and registered as Category-I or Category II Foreign Portfolio Investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992, as these entities are regulated and broad based. This amendment will take effect retrospectively from 1st April, 2012 and will, accordingly, apply in relation to assessment year 2012-13 and subsequent years KNAV Comments Proposal to exempt certain categories of Foreign Portfolio Investors from indirect transfer provisions reiterates government commitment to provide non-adversarial tax regime. Indirect transfer provisions shall not apply in case of overseas redemption of shares or interest outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India. III. Anti-avoidance measures a) Secondary adjustments in certain cases Background "Secondary adjustment" means an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assesse. Amendment In order to align the Indian transfer pricing provisions in line with Organisation for Economic Cooperation and Development s ( OECD ) transfer pricing guidelines and international best practices, the Bill proposes to insert a new section 92CE to provide that the assessee shall be required to carry out secondary adjustment Page 10

(contd...) where a primary adjustment in excess of INR 10,000,000 has been made to the transfer price of the assessee for assessment year 2018-19 and onwards, either - (i) made suo motu by the assessee in his return of income; or (ii) made by Assessing Officer and accepted by assessee; or (iii) is determined in APA/MAP; or (iv) made as per safe harbour rules. The Bill clarifies that where, as a result of primary adjustment, there is an increase in the total income or reduction in the loss of the assessee, the excess money which is available with its associated enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assessee to such AE and the interest on such advance, shall be computed as the income of the assesse. Detailed guidance with respect to the prescribed timelimit and the interest chargeable thereon, shall be notified in due course. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years. KNAV Comments The secondary adjustments in certain cases proposed by government is to align itself with the OECD Guidelines. Secondary adjustments shall ensure that a robust system is adopted by the assesses and their associated enterprises, to ensure that all transactions meet the arm s length test. The threshold of INR 10,000,000 may be reconsidered and a higher limit can be finalized at the time of passing the Bill. b) Limitation of interest deduction in certain cases Background The debt to equity ratio of each company typically impacts the amount of profit that a company offers to tax, since tax legislations of various countries allow a deduction for the interest paid / payable by the company, on loans availed, for arriving at the profit to be taxed. Consequently, the dividend paid by the company on equity contribution / stake is not allowed as a deduction. In order to gain a leverage / benefit of the interest deduction, debt is often considered as a more taxefficient method of finance, as compared to equity, and Multinational Enterprises ( MNEs ) often home country s tax base and counter cross-border shifting of profits, tax legislations of various countries structure their debt to equity ratio keeping the interest leverage in mind. In order to avoid the erosion of the place a limit on the amount of interest that can be deducted in computing a company's profit to be taxed. Insertion of new section In order to align the Indian Income-tax provisions with the recommendations of the OECD BEPS Action Plan 4, the Bill has proposed to introduce section 94B, with a view to place a limit on the amount of interest that can be deducted in computing an entity s profit to be taxed. Applicability The Bill states that the provisions of the proposed section 94B shall be applicable to an Indian company, or a permanent establishment of a foreign company, being the borrower, where the borrower pays interest in respect of any form of debt issued by a non-resident Page 11

(contd...) or to a permanent establishment of a non-resident and who is an 'associated enterprise' of the borrower. It states that the provisions of the proposed section 94B shall be applicable, where the interest paid / payable exceeds INR 10,000,000, and where the interest paid / payable is deductible while computing the income under the head profits and gains of business or profession. The Bill clarifies that the debt shall be deemed to be treated as issued by an associated enterprise where an implicit or explicit guarantee is provided to the lender by the associated enterprise of the borrower, or where such the associated enterprise deposits a corresponding and matching amount of funds with the lender. The Bill proposes to exclude an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance. The Bill states that the interest expenses claimed by an entity with respect to payment made to its associated enterprise on loans availed, shall be restricted to 30% of its earnings before interest, taxes, depreciation and amortization ( EBITDA ) or the actual amount of the interest paid or payable to the associated enterprise; whichever is less. The Bill states that the provisions shall allow for a carry forward of disallowed interest expense to eight assessment years immediately succeeding the assessment year for which the disallowance was first made and the deduction against the income computed under the head "profits and gains of business or profession to the extent of maximum allowable interest expenditure. This amendment will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. KNAV Comments Proposing Limitation of interest deduction is the move by the Indian Government towards aligning itself with BEPS initiatives undertaken by the OECD and the Action Plan 4 - Interest Deductions and Other Financial Payments thereunder. Limitation of interest deduction shall ensure that there is a cap on the maximum interest deduction that could be sought by a company, and it will ensure that the country s tax base is not eroded, along with countering cross-border shifting of profits. This is a welcome measure since it will help curb tax avoidance measures put in place by global MNCs and which result in loss of revenue to the Indian revenue authorities. IV. Rationalisation of provisions of section 115JB in line with Indian Accounting Standard ( IndAS ) It is proposed to amend section 115JB of the Act so as to provide the framework for computation of book profit for Ind AS compliant companies in the year of adoption and thereafter. The main features of this proposed framework are as under: a) Minimum Alternate Tax ( MAT ) on Ind AS compliant financial statement i) The other comprehensive income includes certain items that will permanently be recorded in reserves and hence never be reclassified to the statement of Page 12

(contd...) profit and loss included in the computation of book profits. These items shall be included in book profits other than those already specified u/s 115JB of the Act for MAT purposes at the point of time as specified below. Items Changes in revaluation surplus of Property, Plant or Equipment (PPE) and Intangible assets (Ind AS 16 and Ind AS 38) Gains and losses from investments in equity instruments designated at fair value through other comprehensive income (Ind AS 109) Remeasurements of defined benefit plans (Ind AS 19) Any other item Point of time To be included in book profits at the time of realisation / disposal / retirement or otherwise transferred To be included in book profits at the time of realisation / disposal / retirement or otherwise transferred To be included in book profits every year as the remeasurements gains and losses arise To be included in book profits every year as the gains and losses arise ii) The difference between the carrying value of the assets and the fair value recorded in the profit and loss account on account of demerger shall be excluded from the book profits. However, in the case of a resulting company, where the property and the liabilities of the undertaking or undertakings being received by it are recorded at values different from values appearing in the books of account of the demerged company immediately before the demerger, any change in such value shall be ignored for the purpose of computing of book profit of the resulting company. b) MAT on first time adoption i) The adjustments arising on account of transition to Ind AS from existing Indian GAAP is required to be recorded directly in other equity at the date of transition to Ind AS. Several of these items would subsequently never be reclassified to the statement of profit and loss or included in the computation of book profits. Accordingly, the following treatment is proposed for purpose of computing book profit under section 115JB of the Act: Those adjustments recorded in other comprehensive income and which would subsequently be reclassified to the profit and loss, shall be included in book profits in the year in which these are reclassified to the profit and loss; Those adjustments recorded in other comprehensive income and which would never be subsequently reclassified to the profit and loss shall be included in book profits as specified at point (i) on MAT on Ind AS compliant financial statement All other adjustments recorded in Reserves and Surplus (excluding Capital Reserve and Securities Premium Reserve) and which would otherwise never subsequently be reclassified to the profit and loss account, shall be included in the book profits, equally over a period of five years starting from the year of first time adoption of Ind AS subject to the following Page 13

(contd...) PPE and intangible assets at fair value as deemed cost An entity may use fair value in its opening Ind AS Balance Sheet as deemed cost for an item of PPE or an intangible asset per Ind AS 101. In such cases the treatment shall be as under - o Revaluation of assets shall be ignored for the purposes of computation of book profits Further, the adjustments in retained earnings on first time adoption with respect to items of PPE and Intangible assets shall be ignored for the purposes of computation of book profits. o Depreciation shall be computed ignoring the amount of aforesaid retained earnings adjustment. o Similarly, gain/loss on realisation/ disposal/ retirement of such assets shall be computed ignoring the aforesaid retained earnings adjustment. Retained earnings adjustment shall be included in the book profit at the time of realisation of investment in for in a subsidiary, joint venture or associate. Cumulative translation differences on the date of transition which have been transferred to retained earnings shall be included in the book profits at the time of disposal of foreign operations. ii) All other adjustments to retained earnings at the time of transition (including for example, Decommissioning liability, Asset retirement obligations, Foreign exchange capitalisation/ decapitalization, Borrowing costs adjustments etc.) shall be included in book profits, equally over a period of 5 years starting from the year of first time adoption of Ind AS. iii) Any deferred tax adjustments recorded in Reserves and Surplus on account of transition to Ind AS shall also be ignored. c) Reference year for first time adoption adjustments Companies which adopt Ind AS with effect from 1st April, 2016 are required to prepare their financial statements for the financial year 2016-17 as per requirements of Ind AS. Such companies are also required to prepare an opening balance sheet as at 1st April, 2015 and restate the financial statements for the comparative period 2015-16. In such a case, it is proposed that the first-time adoption adjustments as of 31st March, 2016 shall be considered for computation of MAT liability for previous year 2016-17 (assessment year 2017-18) and thereafter. As the Ind-AS is required to be adopted by certain companies for financial year 2016-17 mandatorily, these amendments will take effect from 1st April, 2017 assessment year 2017-18 and subsequent assessment years. V. Efforts to reduce litigation / compliance a) Specified Domestic Transactions Background The existing provisions of section 92BA of the Act, state that any expenditure in respect of which payment has been made by the assessee to certain "specified persons" u/s 40A(2)(b) of the Act are covered within the ambit of specified domestic transactions. Page 14

(contd...) Accordingly, under the existing provisions, where the aggregate value of the transactions covered under the ambit of section 92BA are in excess of INR 200,000,000 in order to be compliant with the Indian transfer pricing regulations, the taxpayers need to obtain the Accountants Report in Form 3CEB, which will capture details of related parties to whom payments have been made, nature and value of such payments, method used to determine the arm's length price, etc. This has considerably increased the compliance burden of the taxpayers. Amendment In order to reduce the compliance burden of taxpayers, the Bill proposes to omit payments made by the assessee to a person referred to in under section 40A(2)(b) from the ambit of section 92BA. The amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years. KNAV Comments The move to eliminate domestic transfer pricing between related entities having similar taxation levels and those not enjoying any special incentives, is very welcome, as the underlying tax impact was neutral for the Government. The underlying compliance burden was unnecessary. Pursuant to the proposed amendment, the provisions of section 92BA would get restricted to cases where: one of the entities involved in related party transaction enjoys specified profit-linked deductions; and the aggregate value of the transaction is more than INR 200,000,000 during the relevant financial year. b) Rationalization of time limits for completion assessment / reassessment With a view to minimize human interface and move towards technology, massive computerization has been carried out within the department, which has translated into overall enhanced efficiency in the functioning of the department. In view of the same, it has been proposed to make the following amendments to section 153 of the Act: Particulars Current Proposed Sub-section (1): Time limit for assessment order u/s 143 or 144 Sub-section (2): Time limit for making order u/s 147 in respect of notices served u/s 148 of the Act on or after April 1, 2019 21 months from the end of AY 9 months from the end of the FY in which notice u/s 148 of the Act is served For AY 2018-19: 18 months from the end of AY For AY 2019-20: 12 months from the end of AY 12 months from the end of the FY in which notice u/s 148 of the Act is served Page 15

(contd ) Sub-section (3): Time limit for making an order u/s 254, 263 or 264 of the Act in pursuance of an order passed or received in the FY 2019-20 and onwards u/s 254, 263 or 264 9 months from the end of the FY in which order These abovementioned amendments are proposed to take effect from 1st April, 2017. VI. Promotion of digital economy 12 months from the end of the FY in which order a) Curbing cash donations It is proposed to amend section 80G of the Act with a view to restrict cash donations and promote a cashless economy. The Bill proposes to limit deduction in respect of cash donations to INR 2,000 from the existing INR 10,000. This amendment will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. b) Disallowance of depreciation under section 32 and capital expenditure under section 35AD on cash payment It is proposed that any expenditure for the acquisition of an asset for which payment or aggregate of payments exceeding INR 10,000 to a person in a day is made, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account, shall be ignored for the purpose of determination of actual cost of such asset. Similarly, it is further proposed to amend section 35AD of the Act so as to provide that no deduction shall be allowed in respect of any expenditure incurred for which payment or aggregate of payments exceeding INR 10,000 to a person in a day is made, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account. These amendments will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. c) Disincentivising cash transactions In order to discourage cash transactions, it is proposed to amend the provisions of section 40A of the Act, whereby: The threshold for making tax deductible cash payments to a person in a day has been reduced from INR 20,000 to INR 10,000; Deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the cash payment is made in any subsequent year of a sum exceeding INR 10,000 instead of the existing INR 20,000 a person in a single day; Page 16

(contd...) The specified mode of payment mentioned in the sub-section is now proposed to include use of electronic clearing system through a bank account. These amendments will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. d) Promotion of digital payments in case of small unorganised business In furtherance of promoting digital transactions and encouraging small unorganized business to accept digital payments, it is proposed to amend section 44AD of the Act to reduce the existing rate of deemed total income of 8% to 6% in respect of the amount of such total turnover or gross receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section(1) of section 139 in respect of that previous year. This amendment will take effect from 1st April, 2017 assessment year 2017-18 and subsequent years. e) Restrictions on cash transactions In order to address the issues of domestic black money, the Bill proposes to insert a new section 269ST which states that no person shall receive an amount of INR 300,000 or more in in aggregate from a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account. The following section shall not apply to: Any receipt by Government, any banking company, post office savings bank or co-operative bank; Transactions of the nature referred to in section 269SS; Such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify The Bill further proposes to: provide for levy of penalty on a person who receives a sum in contravention of the provisions of the proposed section 269ST; consequentially amend the provisions of section 206C to omit the provision relating to tax collection at source at the rate of 1% of sale consideration on cash sale of jewellery exceeding INR 500,000. These amendments will take effect from 1st April, 2017. VII.Tax incentive provisions a) Rationalisation of provisions of section 80-IBA to promote affordable housing It is proposed to amend section 80-IBA of the Act Page 17

(contd...) (provide 100% deduction of profit) so as to provide below relaxation of conditions contained in the existing provision to promote the development of affordable housing sector. The current and the proposed changes have been tabulated below: Conditions Base for measurement of size of residential unit Restriction of 30 sq. m. on the size of residential units for within the distance of 25 K.M. from the municipal limits of metro cities Period of completion of project Existing provision Built-up area Existed in 2016 Proposed amendment Carpet area Omitted in 2017 3 years 5 years These amendments will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. b) Reduction in holding period of immovable property With a view to promote the real estate sector and to make it more attractive for investments, it is proposed to reduce the period of holding of immovable properties i.e. land or building to 24 months instead of the existing 36 months to qualify as long term capital asset. This amendment is proposed to take effect from 1st April, 2018. c) Expanding the scope of long term bonds under 54EC To widen the incentives extended by section 54EC of the Act for the sectors which may raise funds by issue of bonds eligible for exemption, it is proposed to amend section 54EC of the Act so as to provide that in addition to the existing NHAI and RECL bonds, investment in any bond redeemable after three years as may be notified by the Central Government shall also be eligible for such exemption. This amendment will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. d) Tax neutral conversion of preference shares to equity shares It is proposed to amend the provisions of section 47 of the Act to provide that the conversion of preference share of a company into its equity share shall not be regarded as transfer. Consequential amendments have also been proposed in section 49 and section 2(42A) in respect of cost of acquisition and period of holding. These amendments will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. Page 18

(contd...) e) Cost of acquisition in tax neutral demerger of a foreign company It is proposed to amend section 49 so as to provide that cost of acquisition of the shares of an Indian company referred to in section 47(vic) in the hands of the resulting foreign company shall be the same as it was in the hands of demerged foreign company. This amendment will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. f) Income from transfer of carbon credits In order to clearly spell out the tax implications on account of transfer of carbon credits, the Bill has proposed to insert section 115BBG to provide that where the total income of the assessee includes any income from transfer of carbon credit, such income shall be taxable at the concessional rate of ten per cent (plus applicable surcharge and cess) on the gross amount of such income. Further, no expenditure or allowance in respect of such income shall be allowed under the Act. This amendment will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. VIII. Withholding tax a) Change in rate of tax deducted at source u/s 194J of the Act In order to promote ease of doing business, it is proposed to amend section 194J of the Act to reduce the rate of deduction of tax at source to 2% from existing 10% in case of payments are made to a person engaged only in the business of operation of call center. This amendment is proposed to take effect from 1st June, 2017. b) Non-deduction of tax in case of exempt compensation under RFTCTLAAR Act, 2013 Section 96 of the RFTCTLAAR Act, 2013 provides that income tax shall not be levied on award or compensation or consideration received on account of compulsory acquisition of land under this Act. Therefore, in order to rationalise the provisions of the Act, it is proposed to amend the existing provisions of section 194LA to provide that no deduction of tax at source shall be made on such consideration received on compulsory acquisition of land under RFTCTLAAR Act, 2013. This amendment is proposed to take effect from 1st April, 2017. Page 19

(contd...) IX. Miscellaneous a) Exclusion of certain specified person from requirement of audit of accounts u/s 44AB of the Act It is proposed to amend section 44AB of the Act thereby excluding certain specified person who declare profits for the previous year in accordance with the provisions of sub-section (1) of section 44AD (i.e. presumptive taxation) and whose total sales, turnover or gross receipts from the business does not exceed INR 20,000,000 in such previous year, from requirement of audit of books of account u/s 44AB of the Act. This amendment will take effect from 1st April, 2018 and will, accordingly apply in relation to assessment year 2018-19 and subsequent years. c) Shifting base year from 1981 to 2001 for computation of capital gains As the base year for computation of capital gains has become more than three decades old assessees are facing genuine difficulties in computing the capital gains in respect of a capital asset, especially immovable property acquired before 1st April, 1981 due to non-availability of the relevant information for computation of fair market value of such asset as on 1st April, 1981. This amendment will take effect from 1st April, 2017 assessment year 2017-18 and subsequent years. b) No notional income for house property held as stock-in-trade It is proposed to amend section 23 of the Act to provide that where the house property consisting of any building and land appurtenant thereto is held as stockin-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period upto 1 year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil. To revise the base year for computation of capital gains, it is proposed to amend section 55 of the Act to provide that the cost of acquisition of an asset acquired before 1st April, 2001 shall be allowed to be taken as fair market value as on 1st April, 2001 and the cost of improvement shall include only those capital expenses which are incurred after 1st April, 2001. Consequential amendment have been proposed in section 48 of the Act to align the provisions relating to cost inflation index to the proposed base year. These amendments will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. Page 20

(contd ) d) Transparency in Electoral Funding It is proposed to amend the provisions of section 13A of the Act, thereby providing additional conditions for availing the benefit of section 13A of the Act in order to discourage the cash transactions as under; i) Political parties registered with the Election Commission of India cannot receive donations amounting to INR 2,000 or more other than by an account payee cheque, account payee bank draft, or use of electronic clearing system or through electoral bonds. ii) Such parties are required to furnish a return of income for the previous year in accordance with the provisions of section 139(4B) of the Act on or before the due date. Also, in order to maintain anonymity of the donors, it is proposed to amend section 13A of the Act to provide that the political parties shall not be required to furnish the name and address of the donors. These amendments are proposed to take effect from 1st April, 2018. e) Amendment to section 139 of the Act It has been proposed to amend the provisions of section 139(5) of the Act to provide that the time for furnishing of revised return shall be reduced by one year as compared to the previous provision. Therefore, the time limit available shall be only upto the end of the relevant assessment year or before the completion of assessment, whichever is earlier. These amendments will take effect from 1st April, 2018 and will, accordingly apply in relation to AY 2018-19 and subsequent years. f) Extension of capital gain exemption to Rupee Denominated Bonds In order to provide relief in respect of gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company to secondary holders, it is proposed to amend section 48 providing that the said appreciation of rupee shall be ignored for the purposes of computation of full value of consideration. Further, with a view to facilitate transfer of Rupee Denominated Bonds from non-resident to non-resident, it is proposed to amend section 47 so as to provide that any transfer of capital asset, being rupee denominated bond of Indian company issued outside India, by a nonresident to another non- resident shall not be regarded as transfer. These amendments will take effect from 1st April, 2018 assessment year 2018-19 and subsequent years. g) Enabling claim of credit for foreign tax paid in cases of dispute It is proposed to insert sub-section (14A) in section 155 to provide that where credit for foreign taxes paid is not Page 21

(contd...) given for the relevant assessment year on the grounds that the payment of such foreign tax was in dispute, the Assessing Officer shall rectify the assessment order or an intimation under sub-section (1) of section 143, if the assessee, within six months from the end of the month in which the dispute is settled, furnishes proof of settlement of such dispute, submits evidence before the Assessing Officer that the foreign tax liability has been discharged and furnishes an undertaking that credit of such amount of foreign tax paid has not been directly or indirectly claimed or shall not be claimed for any other assessment year. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to assessment year 2018-19 and subsequent years. h) Amendments to the structure of Authority for Advance Ruling In order to promote the ease of doing business, it has been decided by the Government to merge the Authority for Advance Ruling (AAR) for income-tax,, customs and service tax. In furtherance of the above, it is proposed to amend the following: Definition of applicant under section 245N; Section 245Q which relates to application for advance ruling; Qualifications for appointment as revenue Member of the AAR; Qualifications for appointment as Chairman as provided in section 245-O. These amendments will take effect from 1st April, 2017. i) Processing of return within the prescribed time and enable withholding of refund in certain cases In order to address the grievance of delay in issuance of refund in genuine cases which are routinely selected for scrutiny assessment, it is proposed that provisions of section 143(1D) shall cease to apply in respect of returns furnished for assessment year 2017-18 and onwards. Further, it is proposed to insert a new section 241A to provide that, where refund of any amount becomes due to the assessee u/s 143(1) and where the Assessing Officer is of the opinion that grant of refund may adversely affect the recovery of revenue, the Assessing Officer may, for the reasons recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, withhold the refund up to the date on which the assessment is made. These amendments will take effect from 1st April, 2017 and will, accordingly, apply to returns furnished for assessment year 2017-18 and subsequent years. Page 22