Reform. Perform. Transform. Union Budget 2018 Highlights www.skpgroup.com/budget2018
Coverage Direct Tax Proposals Indirect Tax Proposals 2
Typical Scenario 3
Direct Tax Proposals 4
Individuals No change in income-tax slabs, tax rates and surcharge Education Cess increased from 3% to 4% - renamed as Health and Education Cess Standard deduction of INR 40,000 introduced for the salaried taxpayer Exemption for transport allowance of INR 19,200 will be removed Exemption for reimbursement of medical expenses of INR 15,000 will be removed Increased deductions for medical insurance and expenditure on specified diseases for senior citizens Interest on bank deposits tax free up to INR 50,000 for senior citizens (> 60 years of age) Interest on savings account will be fully taxable for senior citizens Withdrawal from NPS will be tax-exempt for 40% of contribution benefit extended to all taxpayers Key Takeaways Beneficial to provide reimbursement of motor car running and maintenance expenses (?) Tax on interest on savings account for senior citizens needs to be rectified 5
Corporate Entities Corporate tax rate reduced to 25% for companies with turnover up to INR 250 crore in 2016-17 No change in rate of surcharge Education Cess increased from 3% to 4%, renamed as Health and Education Cess Key Takeaways Companies set up from 1 April 2017 not eligible for lower rate of tax Firms, LLPs not eligible for lower rate of tax MAT remains unchanged @ 18.50% - the gap reduces 6
Corporate Entities Deemed dividend to attract Dividend Distribution Tax (DDT) @ 30% Making loan or advance to a shareholder holding 10% or more shares, or Making loan or advance to a concern in which above shareholder holds 20% or more stake, or Incurring expenses for the benefit of the above shareholder DDT not required to be grossed up Effective rate of DDT would be 34.944% Key Takeaways Shift of burden from Tax payer receiving income to the Company Commercial substance needs to be established for financing transactions Repayment of loan does not prevent application of deemed dividend provisions Expenses incurred on behalf of shareholder and subsequently reimbursed could trigger deemed dividend 7
Widening of Tax Base Long-Term Capital Gains on Listed Securities Tax @ 10% levied on long-term capital gains on equity shares and equity-oriented mutual fund units Applicable to all taxpayers Concessional tax rate to apply for gains above INR 1 lac STT should have been paid at the time of purchase and sale Gains below INR 1 lac taxed are not exempt taxed at normal slab rates Applicable on gains earned on or after 1 April 2018 Any gains earned up to 31 March 2018 will continue to remain exempt Gains up to 31 January 2018 grandfathered For sale made from 1 April 2018, cost of acquisition will be higher of A = Actual Cost of Acquisition B = Fair Market Value as on 31 January 2018 or consideration received, whichever is lower FMV will be the highest price quoted on 31 January 2018 Cost indexation benefit not available Equity-oriented mutual fund to pay dividend distribution tax (DDT) at 10% 8
Widening of Tax Base Long-Term Capital Gains on Listed Securities Particulars Situation 1 Situation 2 Situation 3 Situation 4 [A] Cost of Acquisition 100 100 100 100 [B] Price on 31 Jan 2018 120 120 90 90 [B] Sale Consideration 150 110 150 70 Cost of Acquisition 120 110 100 100 Taxable LTCG 30 0 50 (30) Key Takeaways Long term capital gains up to INR 1 lac is intended to be exempt needs to be rectified Promoter shareholding/bonus shares/trust structures may not enjoy concessional rate 9
Widening of Tax Base Prosecution provisions for companies defaulting in filing returns expanded Presently prosecution can be launched only if self-assessment tax exceeds INR 3,000 Prosecution can now be launched irrespective of tax liability Compensation received by a taxpayer on termination/modification in terms of contract to be taxable Business income for a businessman Income from other sources for a salaried person Definition of deemed dividend amended Accumulated reserves of amalgamating company on date of amalgamation to be considered for computing DDT effective from 1 April 2017 onwards Key Takeaways Not filing tax returns would be more risky Compensation received by a professional whether taxable? Expenses incurred on obtaining compensation (e.g. legal expenses) could be deductible for a salaried person 10
Business Connection Definition of Business Connection widened Where an Indian agent (including an Indian subsidiary) plays a principal role in concluding a contract by the non-resident parent, PE exposure could arise If PE is constituted, part of the profit earned by the non-resident could be taxable in India @ 40% base rate Amendments in line with BEPS multilateral instrument to which Indian is a signatory Key Takeaways Tax risk may increase of marketing operations of foreign companies Tax treaty benefit could be available but would need Tax Residency Certificate Risk exposure would vary country to country and their positions on MLI Goods and now Services also covered 11
Taxing Digital Economy Entities having substantial economic footprint but no physical presence in India are out of the tax net A nexus rule to tax digital economy significant economic presence to result in business connection in India Income attributable to nexus with India will be taxable at base rate of 40% Significant economic presence means Case 1 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 for such transactions during the previous year exceeds prescribed amount Case 2 systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means 12
Taxing Digital Economy Rules and conditions to be prescribed by the Government after consultation with stakeholders Express clarification that in absence of amendment in definition of PE under tax treaties, the taxation of profits will continue to be governed as per existing rules Key Takeaways Digital PE may not result in tax liability soon Co-operation from India s treaty partners critical Digital PE may also cover non-digital transactions Enforcement could be a challenge Determining income attributable to Digital PE could be complex Tax on Digital PE different than equalisation levy Thresholds for application of Digital PE will be announced in due course Payer may have withholding tax obligations 13
Incentives Employment Generation Existing Section 80JJAA Benefit available to all businesses where there is an increase in number of employees over earlier year 30% of salary paid to additional employees is allowed as an additional deduction for three (3) years For a salary of INR 100 in first year, deduction allowed is INR 190 over 3 years Certain Conditions Employee should work for a minimum period of 240 days during the year (150 days for manufacture of apparel) Salary of additional employees should not be more than INR 25,000 per month (excluding employer PF) Budget Proposal If an employee works for less than 240 days in year 1 but works for 240 days in year 2, deduction of 30% will start from year 2 Key Takeaways Significant incentive to boost employment generation Period served in year 2 should meet the 240 day criteria (and not aggregate period of year 1 and year 2) 14
Other Incentives Start-ups Requirement of innovation driven by technology or intellectual property removed Improvement of products, processes and systems to qualify for tax holiday Scalable business with high potential for employment generation or wealth creation eligible for tax holiday Turnover of start-up should not exceed INR 25 crore for 7 years from year of incorporation Should file income-tax return within due date Others Benefit under section 54EC restricted to long term capital gains from transfer of land or building Presently, this benefit is available for all long term capital assets 5 year 100% tax holiday introduced for farm producer companies with turnover less than INR 100 crore Key Takeaways While eligibility conditions for start-ups are relaxed, approval from DIPP still necessary to claim tax holiday What constitutes high potential for employment generation or wealth creation? 15
Facilitating Insolvency Resolution MAT provisions rationalised for companies under insolvency proceedings Aggregate of unabsorbed depreciation and loss brought forward can be reduced from book profit Brought forward losses can be carried forward even if shareholding changes by more than 49% Section 79 not to apply in such cases An opportunity of hearing to however be provided to the tax authorities Tax return of companies under insolvency proceedings process to be signed by appointed insolvency professional Key Takeaways MAT benefits would apply only once the insolvency application is admitted by Adjudicating Authority Section 79 relaxation would apply only once the insolvency plan is approved 16
Rationalisation Measures Legislative foundation laid for prescribing extensive procedure for e-assessment proceedings Team based assessments Dynamic jurisdiction Could be functional latest by 31 March 2020 Sale value of immovable property to be accepted if stamp value is within 5% of consideration Sale Value = 100, Stamp Value = 104 Sale Value will be accepted Sale Value = 100, Stamp Value = 107 Stamp Value will be considered as consideration CPC not to be make adjustments based on variance with Form 26AS data Tax holiday for affordable housing projects to be denied if tax return not filed on time Transfer of capital assets between holding company and wholly owned subsidiary to be tax exempt even under gift tax provisions Key Takeaways 5% tolerance band for real estate transactions not like a basic exemption 17
Income Computation and Disclosure Standards (ICDS) ICDS required certain adjustments to taxable income irrespective of accounting treatment provided in books ICDS were challenged before the Delhi High Court Constitutional validity of ICDS was upheld But most provisions struck down as outside the scope of the law as laid down by several Supreme Court rulings Budget 2018 effectively nullifies Delhi High Court ruling Various provisions struck down by the Delhi High Court are now incorporated in the law ICDS kept applicable from 1 April 2017 itself compliance to be undertaken if not done already 18
Transfer Pricing Country-by-Country Report (CbCR) provisions rationalised Timeline for furnishing CbCR extended from 9 months to 12 months No change in due date for furnishing Master File If parent entity is not required to file CbCR due to home country laws, Indian entity will have to prepare and furnish CbCR in India CbCR exemption provided only where India has an automatic information exchange agreement, and Agreement provides for exchange of CbCR new clarification 19
Others Provisions clarified for taxation of stock-in-trade converted to capital asset FMV on conversion less cost of acquisition taxed as business income Sale consideration less above FMV taxed as capital gains Holding period for capital gains considered from date of conversion Penalty levied on professionals for inaccurate reports/certificates can be appealed before ITAT 20
Indirect Tax Proposals 21
Overview First Budget post introduction of GST Excise and Service Tax already subsumed under GST Proposals in the Union Budget 2018 limited to Customs duty as GST Council empowered with making changes in the GST legislation Central Board of Excise and Customs (CBEC) to be renamed as Central Board of Indirect Taxes and Customs (CBIC) 22
Customs 23
Customs Measures to Incentivize Domestic Value Addition and Strengthen Make-in-India Initiative Increase in custom duty in certain sectors like electronics, auto components, footwear, furniture and food processing Key Products Old BCD Rate New BCD Rate Cellular Mobile Phones 15 20 Specified Parts and Accessories of Cellular Mobile Phones 7.5/10 15 Printed Circuit Board Assembly and Moulded Plastics of Charger/Adapter of Cellular Mobile Phones Nil 10 LCD/LED/OLED Panels and Others Parts of LCD/LED/OLED TVs 7.5/10 15 Truck and Bus Radial Tyres 10 15 Specified Parts/Accessories of Motor Vehicles, Motor Cars, Motor Cycles 7.5/10 15 Preform of Silica for Manufacture of Optical Fibre/Cables for Telecommunication Nil 5 24
Customs Introduction of Social Welfare Surcharge (SWS) (effective from 2 February 2018) Social Welfare Surcharge introduced to finance education, health and social security Tariff Heading Goods Rate Any Chapter All imported goods (Except certain Exemptions) 2710, 7106, 7108 Motor Spirit, Silver and Gold Any Chapter Specified Goods which were exempted from Customs Education and Secondary and Higher Education Cess 10% of aggregate duties of customs* 3% of aggregate duties of customs Exempted *exemption provided from levy of SWS on IGST and GST Compensation Cess 25
Customs Ease of Doing Business and Digitalisation (effective from enactment of Finance Bill, 2018) Advance Rulings Scope to apply for Advance Ruling has been broadened by omitting definition for activity and amending definition for advance ruling to include the questions raised by the applicant in respect of any goods prior to its importation or exportation Extended to all person either holding a Importer Exporter code Number or exporting any goods to India or with a justifiable cause to the satisfaction of the Authority Time limit to pronounce the Advance Ruling in writing reduced to three months (from six months) from the receipt of application Introducing the Electronic Credit Ledger to ease the payments for importer and exporters through the ledger instead of transaction wise payment as being done at present Notices and Orders may be issued electronically for clearances and removal of goods for importation, exportation, deposit in warehouse, home consumption, etc. 26
Customs Anti-Evasion (effective from enactment of Finance Bill, 2018) Applicability of Customs Act extended also to any offence or contravention thereunder committed outside India by any person Erstwhile judgement Shafeek P.K (2015 (325) E.L.T 199 Tri Bangalore) now ineffective Recovery of tax provisions streamlined Pre- notice consultation to be conducted before issuance of SCN Grant of facility to issue a supplementary notice which will be akin to SCN Time-limit for determination of duty under recovery proceedings curtail to a fixed period of 6 months in normal cases and 1 year in case of fraud or willful suppression (extendable to further 6 months and 1 year) Special provision of premise audit introduced Power to Central Government to enter into a agreement with any country outside India for reciprocal exchange of information for facilitation of trade Scope of verification by officer broadened to include declarations made in bill of entry or shipping bill in addition to self-assessment. However, the selection of cases for verification to be primarily on risk evaluation. 27
Customs Other Proposals (effective from enactment of Finance Bill, 2018, unless otherwise) Levy of IGST/GST Compensation Cess on Warehoused Goods Valuation prescribed in for levy of IGST and GST Compensation Cess for warehoused goods sold before clearance for home consumptions Extension of Limit for Indian Customs Water Limit of Indian Customs Water into the sea from the existing Contiguous Zone of India to Exclusive Economic Zone under section 7 of Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 Introduction of Road and Infrastructure Cess (RIC) (effective 2 February 2018) Introduced as an Additional Duty of Customs on imported motor spirits To be computed at a rate of INR 8 per litre Other amendments in lieu of RIC Imported motor spirits have been exempted from the Additional Duty of Customs (CVD) Additional Duty of Customs (Road Cess) applicable at a rate of INR 6 per litre abolished 28
Erstwhile Legislation 29
Overview Retrospective exemptions under Service tax legislation provided to Services provided by GSTN to Government (from 28 March 2013 to 30 June 2017) Life insurance services to coast guards by Naval Group Insurance Fund (from 10 September 2004 to 30 June 2017) Government s share of profit petroleum for services by the Government by way of grant of license/lease to explore or mine petroleum crude or natural gas or both (from 1 April 2016 to 30 June 2017) Refund for such excess service tax can be claimed within 6 months from date of finance bill receiving assent Clarity awaited on powers to issue notices and audit under erstwhile legislation (Guwahati High Court in case of Mascot Entrade) 30
Goods and Services Tax (GST) 31
Legislative Updates Tax Rate Changes Rates reduced on number of goods and services w.e.f. 25 Jan 2018 Goods Sale of old and used motor cars Specified goods of agricultural sector Household items such as LPG cylinders Services Construction of metro and monorail projects Common effluent treatment plant services Rates increased on cigarette filter rods and rice bran Royalty/IPR on which customs is applicable exempted from GST 32
Legislative Updates Other Changes Changes effective 25 January 2018 Deferment of GST on Transferrable Development Rights (TDR) until possession or right in the property is transferred to the land owner Exempt supplies to not include exempt interest or discount earned on value of deposits, loans or advances (except in case of banking company and financial institution including NBFCs) Clarity on Taxability of Certain Goods/Services Supplies to Indian Railways shall be at applicable GST rates of the products Services by doctors/consultants/technicians hired by hospitals to be treated as not liable to tax (tribunal decision in case of Apollo Hospitals) 33
Procedural and Administrative Updates Changes effective 23 Jan 2018 Relaxation in registration provisions by removing 1 year time limit for cancellation Penalties on delayed returns reduced Extension of due date to file ISD returns Clarity awaited on requirement to file mismatch returns 34
Update on E- Way Bills Mandatory implementation of E-way bills from 1 Feb 2018 for all inter-state transactions States have time to implement e-way bill for intra-state transactions up to 31 May 2017 W.e.f. 1 June 2018 mandatory implementation of e-way bills for all intra-state transaction Common e-way bill portal notified - www.ewaybill.gst.gov.in E-way bills generated on common portal will be valid in all states for transportation GSTN to capture data for returns from e-way bill portal Provisions to carry out implementation and regulation of e-way bills in place However, clarity on various practical aspects such as extension of validity of e-ways still emerging 35
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