Key Highlights - India Budget 2018 Habibullah & Co. Chartered Accountants India hcoca.com
Foreword CA. Vivek Agarwal Managing Partner This Budget is expected to be the last of the Modi Government prior to elections which are expected to happen over the next twelve months, and the focus was around ensuring that the rural economy was adequately benefitted. There was a bit of apprehension on the eve of this budget that the Government may not be able to resist the temptation to come up with a populist budget before the elections looming ahead in 2019. The union budget of FY 2018-19 was presented amid concerns regarding subdued economic growth, challenging fiscal situation, and farm distress. While the world packed its punch growing at the fastest pace in five years, India s economy temporarily decoupled with growth decelerating to a fouryear low to 6.75% in FY 2017-18, according to official estimates. Post the twin radical interventions of demonetization and GST, it is heartening to note that the Indian Economy has slowly but surely found its feet back, with GDP growth pegged at 6.3% in the second quarter of 2017 and expected to rise further between 7 to 7.5% in the second half, thereby setting the path back for 8% growth in 2018-19. It is no surprise that, the thrust of the Budget was on the agricultural sector, rural economy, healthcare, MSMEs and infrastructure. The National Healthcare Scheme introduced promises to bring in a transformational change in the arena of healthcare, covering almost one-third of India s population. Additional measures for strengthening the growth and successful operation of Alternative Investment Funds has been promised though it fell short on providing parity on taxation with listed equity. There is also an assurance that the outbound direct investment guidelines would be reviewed to bring in a coherent and integrated policy 2 Habibullah & Co. Chartered Accountants www. hcoca.com
Although the last 12 months have seen a significant increase in investments from Foreign Portfolio Investors ( FPI ) and Foreign Direct Investment ( FDI ), the Budget largely focused on the domestic audience. On the tax and regulatory front, the Budget proposals have been minimal, especially for the global investor community. The biggest blow has been for the Indian capital markets with introduction of a long term capital gains ( LTCG ) tax at the rate of 10% on listed equities, which were earlier exempt. The domestic tax provisions for non-resident taxation are proposed to be aligned with BEPS Action Plans of OECD. The concept of business connection is proposed to be widened to align the domestic tax laws to BEPS Action Plans and the Multi-Lateral Treaty Instrument, and a concept of Significant Economic Presence has been introduced. The provisions relating to CbCR are proposed to be rationalized. As anticipated, long term capital gains tax @10% has been imposed on listed securities, units of equity oriented fund and units of business trust. The tax rate for companies having turnover of less than INR 2.5 billion has been proposed to be reduced from 30% to 25%. The budget has banked upon the announced allocation outlays to stimulate investment by creating favorable sentiment as a whole, in absence of specific measures through corporate investment. With impending elections, it is critical that while implementing the budgetary proposals, fiscal consolidation is not allowed to be compromised, as in the past. Habibullah & Co. Chartered Accountants hcoca.com 3 Habibullah & Co. Chartered Accountants www. hcoca.com
Tax Proposals 4 Habibullah & Co. Chartered Accountants www. hcoca.com
INDIVIDUALS There is no change in the tax rate slabs or rates for individual taxpayers. Existing Education Cess and Secondary and Higher Education Cess of 3% to be replaced by Health and Education Cess at the rate of 4% of tax and surcharge The Budget proposals also seek to provide relief to salaried tax payers by allowing a Standard Deduction of Rs. 40,000 in place of the present exemption allowed for transport allowance and reimbursement of miscellaneous medical expenses. However, transport allowance at enhanced rate is proposed to be continued for differently abled persons. Further, it is also proposed to continue medical reimbursement benefits in case of hospitalization etc. for all employees. The proposed Standard Deduction will help middle class employees even further in reducing their tax liabilities. It will also significantly benefit pensioners, who normally do not enjoy any allowance for transport and medical expenses currently, reimbursement of medical expenses is not taxable up to INR 15,000 and transport allowance is exempt up to INR 19,200. It has been proposed to increase the deductions available to senior citizens towards interest, health insurance and medical expenses as outlined below 5 Habibullah & Co. Chartered Accountants www. hcoca.com
CORPORATE TAX Foreign Companies For Foreign Companies tax rates has not been changed and it remains at 40% (plus applicable surcharge and cess). It has also been proposed to replace Education cess of 3% by Health & Education cess of 4%. The effective tax rate for foreign companies is as follows: Particulars Taxable income <= INR 10 million INR 10 million < taxable income <= INR 100 million Taxable income > INR 100 million Tax Rate 40.00% 40.00% 40.00% Surcharge - 2.00% 5.00% Total 40.00% 40.80% 42.00% Health & Education 4.00% 4.00% 4.00% Cess Net Tax Rate 41.60% 42.43% 43.68% Domestic Companies Small and Medium domestic companies have been given relief by lowering Corporate tax to 25% (plus applicable surcharge and cess) for domestic companies having total turnover/ gross receipts not exceeding INR 2.5 billion in the FY 2016-17. In other cases, the tax rates remain unchanged at 30% (plus applicable surcharge and cess). It has been proposed to replace Education cess of 3% by Health & Education cess of 4%. Effective tax rates are as under: 6 Habibullah & Co. Chartered Accountants www. hcoca.com
For a domestic company having total turnover/ gross receipts not exceeding INR 2.5 billion in the FY 2016-17 the effective tax rates shall be as below: Particulars Taxable income INR 10 million < Taxable <= INR 10 million taxable income income > INR <= INR 100 100 million million Tax Rate 25.00% 25.00% 25.00% Surcharge - 7.00% 12.00% Total 25.00% 26.75% 28.00% Health & 4.00% 4.00% 4.00% Education Cess Net Tax Rate 26.00% 27.82% 29.12% For other Domestic Companies Particulars Taxable income INR 10 million < Taxable <= INR 10 million taxable income income > INR <= INR 100 100 million million Tax Rate 30.00% 30.00% 30.00% Surcharge - 7.00% 12.00% Total 30.00% 32.10% 33.60% Health & 4.00% 4.00% 4.00% Education Cess Net Tax Rate 31.20% 33.38% 34.94% 7 Habibullah & Co. Chartered Accountants www. hcoca.com
Partnership Firms/ LLP There is no change in tax rates except for Health and Education cess. Effective tax rate of 31.2% if taxable income is less than INR 10 million and 34.94% if taxable income exceeds INR 10 million. Tax on dividends Rate of Dividend Distribution Tax (DDT) remains unchanged at 15% (plus applicable surcharge of 12% and 4% as Health and Education cess). Further, scope of DDT has been expanded to include deemed dividend under section 2(22)(e) of the Income Tax Act and the rate prescribed thereto is 30% (plus applicable surcharge and cess). Long Term Capital Gain Tax on sale of Listed Equity Shares The existing provisions of Section 10 provides for exemption from tax on the income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust subject to certain conditions specified in the said clause. It is proposed to amend the said clause so as to provide that the provisions of said clause shall not apply to any income arising from the transfer of longterm capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, made on or after the 1st day of April, 2018. It is now proposed to introduce a new Section 112A to provide that long term capital gains (in excess of INR 0.1 million) arising on transfer of equity shares of a listed company, an unit of equity oriented fund or an unit of a business trust shall be taxed at 10% (without indexation). This is applicable for all taxpayers including FII. 8 Habibullah & Co. Chartered Accountants www. hcoca.com
Further, it is provided that cost of acquisition in respect of long term capital asset being equity share of a company, unit of an equity oriented fund or business trust acquired by assessee prior to 01 February 2018, shall be higher of the following Actual cost of acquisition; and Lower of Fair market value; and Full value of consideration received or accruing as result of transfer Measures to promote International Financial Services Centre (IFSC) In its continuous endeavor to build a robust financial services center in the country, the Government has proposed incentives for financial services operating through International Financial Services Centers ( IFSCs ). Importantly, in addition to the tax reforms, the FM in his speech has proposed to establish a unified authority to regulate this space. Section 47 of the Act provides for tax neutrality relating to certain transfer. In order to promote the development of world class financial infrastructure in India, it is proposed to amend the section 47 of the Act so as to provide that transactions in the following assets, by a non-resident on a recognized stock exchange located in any International Financial Services Centre shall not be regarded as transfer, if the consideration is paid or payable in foreign currency: bond or Global Depository Receipt, as referred to in sub-section (1) of section 115AC; or rupee denominated bond of an Indian company; or Derivative Section 115JC of the Act provides for alternate minimum tax at the rate of 18.50% of adjusted total income in the case of a non-corporate person. In order to promote the development of world class financial infrastructure in India, it is further proposed to amend the section 115JC so as to provide that 9 Habibullah & Co. Chartered Accountants www. hcoca.com
in case of a unit located in an International Financial Service Center, the alternate minimum tax under section 115JC shall be charged at the rate of 9%. Consequential amendment in section 115JF is also proposed to be made. This amendment will take effect, from April 1, 2019. Taxation on conversion of inventory into capital asset It is proposed that any profit or gains arising from conversion of inventory into, or treatment as, a capital asset shall be charged to tax as business income based on the FMV (determined in a prescribed manner) of the inventory on the date of such conversion or treatment. It is further proposed that for computing capital gains arising on the transfer of such converted capital assets, the aforesaid FMV shall be the cost of acquisition thereof and the period of holding shall be reckoned from the date of such conversion or treatment. Currently, the Act does not provide for the tax treatment in case where the inventory is converted into, or treated as, a capital asset. This amendment is proposed in order to provide symmetrical treatment in a reverse transaction and discourage the practice of deferring tax payment by converting the inventory into a capital asset. Rationalization of Laws relating to Carry forward and set of Losses Benefit of carry forward and set off of losses In order to address this problem, it is proposed to relax the rigors of section 79 (which provides that carry forward and set off of losses in a closely held company shall be allowed only if there is a continuity in the beneficial owner of the shares carrying not less than 51% of the voting power, on the last day of the year or years in which the loss was incurred) in case of such companies, whose resolution plan has been approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal 10 Habibullah & Co. Chartered Accountants www. hcoca.com
Commissioner or Commissioner. This amendment will take effect from April 1, 2018 and will, accordingly, apply in relation to assessment year 2018-19 and subsequent assessment years. It is also proposed to amend section 140 of the Act so as to provide that during the resolution process under the Insolvency and Bankruptcy Code, 2016, the return shall be verified by an insolvency professional appointed by the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016. This amendment will take effect from April 1, 2018 and will, accordingly apply to return filed on or after the said date. Rationalization of MAT for Insolvency Resolution Section 115JB of the Act, in computing the book profit, provides, for a deduction in respect of the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Consequently, where the loss brought forward or unabsorbed depreciation is Nil, no deduction is allowed. This non-deduction is a barrier to rehabilitating Companies seeking insolvency resolution. In view of the above, it is proposed to amend section 115JB to provide that the aggregate amount of unabsorbed depreciation and loss brought forward (excluding unabsorbed depreciation) shall be allowed to be reduced from the book profit, if a company s application for corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 has been admitted by the Adjudicating Authority. Consequently, a company whose application has been admitted would henceforth be entitled to reduce the loss brought forward (excluding unabsorbed depreciation) and unabsorbed depreciation for the purposes of computing book profit under section 115JB, in situations where an application for insolvency resolution under the Sections 7, 9, or 10 of the IBC has been admitted against it by the NCLT. By inserting a specific provision in this regard, the Budget also clarifies that the relaxation should be available irrespective of whether the amount of brought forward losses, or unabsorbed depreciation is nil. 11 Habibullah & Co. Chartered Accountants www. hcoca.com
Tax Relief for Agricultural Companies New section 80PA has been proposed to be inserted in the Act to provide for 100% deduction of profits from eligible businesses to Farm Producer Company having a total turnover up to INR 1 billion. Deduction in respect of income of Farm Producer Companies Section 80P provides for 100% deduction in respect of profit of cooperative society which provide assistance to its members engaged in primary agricultural activities. It is proposed to extend similar benefit to Farm Producer Companies (FPC), having a total turnover up to INR 1 billion, whose gross total income includes any income from- the marketing of agricultural produce grown by its members, or the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or the processing of the agricultural produce of its members The benefit shall be available for a period of five years from the financial year 2018-19. Rationalization of provisions with regard to transaction in immovable property Currently income from capital gains (section 50C), business profits (section 43CA) and other sources (section 56) arising out of transactions in an immovable property, is taxed on the basis of the sale consideration or stamp duty value, whichever is higher. Where the consideration is less than the stamp duty, the differential is taxed as income, both in the hands of the purchaser and the seller. It is proposed that no adjustments shall be made in a case where the variation between stamp duty value and the sale consideration is not more than 5% of the sale consideration. 12 Habibullah & Co. Chartered Accountants www. hcoca.com
International Tax 13 Habibullah & Co. Chartered Accountants www. hcoca.com
Business connection to include Significant Economic presence Taxation of business profits on the basis of economic allegiance has always been the underlying basis of existing international taxation rules. 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. With respect to the digital economy, the Government has introduced the new concept of significant economic presence (SEP). Since traditionally under Tax Treaties, sufficient physical presence was required for a transaction to be taxable in India and the domestic requirements to form a sufficient taxable nexus or business connection mirrored the provisions under the Tax Treaties, many cross border transactions in the digital economy went untaxed The scope of existing provisions of clause (i) of sub-section (1) of section 9 is restrictive as it essentially provides for physical presence based nexus rule for taxation of business income of the non-resident in India. Explanation 2 to the said section which defines business connection is also narrow in its scope since it limits the taxability of certain activities or transactions of non-resident to those carried out through a dependent agent. Therefore, emerging business models such as digitized businesses, which do not require physical presence of itself or any agent in India, is not covered within the scope of clause (i) of sub-section (1) of section 9 of the Act. It is further proposed to insert a new Explanation 2A in clause (i) of subsection (1) of the said section so as to provide that the significant economic presence of a non-resident in India shall constitute business connection of the non-resident in India and the significant economic presence for this purpose, shall mean (a) any transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or 14 Habibullah & Co. Chartered Accountants www. hcoca.com
transactions during the previous year exceeds such amount as may be prescribed; or (b) Systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means. It is further proposed to provide that the transactions or activities shall constitute significant economic presence in India, whether or not the nonresident has a residence or place of business in India or renders services in India. It is also proposed to provide that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India. Transfer Pricing Section 286 of the Act contains provisions relating to specific reporting regime in the form of Country-by-Country Report (CbCR) in respect of an international group. As part of the implementation of the BEPS Action Plan 13 regarding Three Tier TP Documentation, India had introduced Country by Country Report (CbCR) requirements effective from AY 2017-18. This required certain Indian headquartered MNEs, and in some cases Indian affiliates of foreign headquartered MNEs, to file CbCR in India reporting country-wise details of revenue, profits, taxes, number of employees, etc. It is proposed to amend the said sub-section so as to provide that the said report for every reporting accounting year shall be furnished within a period of twelve months from the end of said reporting accounting year. It is further proposed to amend sub-section (3) to give reference therein of the report to be furnished under sub-section (4). It is also proposed to amend sub-section (4) so as to provide in case of a constituent entity, resident in India, whose parent entity is outside India that, 15 Habibullah & Co. Chartered Accountants www. hcoca.com
(a) (b) report of the nature referred to in sub-section (2) shall be furnished within the period specified in sub-section (2); and An additional condition for filing of report by said entity in a case where a country or territory, of which the parent entity is resident, is not obligated to file the report of the nature referred to in sub-section (2). It is also proposed to amend sub-section (5) so as to provide that the due date for furnishing of the report of the nature referred to in sub-section (2) by said entity with the tax authority of the country or territory of which such entity is resident, would be the due date specified by that country or territory. It is also proposed to consequentially substitute clause (b) of subsection (9) so as to provide that the term agreement would mean a combination of, a. an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A; and b. An agreement as may be notified by the Central Government for exchange of the report referred to in sub-section (2) and subsection (4). It is also proposed to consequentially amend clause (j) of sub-section (9) so as to also make reference to the report referred to in subsection (4). These amendments are clarificatory in nature. 16 Habibullah & Co. Chartered Accountants www. hcoca.com
Key Policy Announcements 17 Habibullah & Co. Chartered Accountants www. hcoca.com
Agriculture and Rural Economy A new Scheme Operation Greens was announced with an outlay of INR 5 Billion to address the challenge of price volatility of perishable commodities like tomato, onion and potato with the satisfaction of both the farmers and consumers. To develop and upgrade existing 22,000 rural haats into Gramin Agricultural Markets (GrAMs) to take care of the interests of more than 86% small and marginal farmers. Set up an Agri-Market Infrastructure Fund with a corpus of INR 20 Billion will be setup for developing and upgrading agricultural marketing infrastructure in the 22000 Grameen Agricultural Markets (GrAMs) and 585APMCs. Set up state-of-the-art testing facilities in all the forty two Mega Food Parks Education, Health and Social Protection To step up investments in research and related infrastructure in premier educational institutions, including health institutions, a major initiative named Revitalizing Infrastructure and Systems in Education (RISE) by 2022 with a total investment of INR 1000 billion crore in next four years World s largest government funded health care programme titled National Health Protection Scheme to cover over 0.10 billion poor and vulnerable families (approximately 0.50 billion beneficiaries) providing coverage up to INR 0.5 million per family per year for secondary and tertiary care hospitalization Government will be setting up 24 new Government Medical Colleges and Hospitals by upgrading existing district hospitals in the country. 18 Habibullah & Co. Chartered Accountants www. hcoca.com
Infrastructure and Financial Sector Development The Government has made an all-time high allocation to rail and road sectors and is committed to further enhance public investment. To develop 10 prominent tourist sites into Iconic Tourism destinations by following a holistic approach involving infrastructure and skill development, development of technology, attracting private investment, branding and marketing. Under the Bharatmala Pariyojana, about 35000 kms road construction in Phase-I at an estimated cost of INR 5350 Billion has been approved. Redevelopment of 600 major railway stations is being taken up. A suburban network of approximately 160 kilometers at an estimated cost of INR 170 Billion is being planned to cater to the growth of the Bengaluru metropolis. To expand the airport capacity more than five times to handle a billion trips a year under a new initiative - NABH Nirman. Under the Regional connectivity scheme of UDAN (Ude Desh ka Aam Nagrik) initiated by the Government last year, 56 unserved airports and 31 unserved helipads would be connected. Government will establish a unified authority for regulating all financial services in International Finance Service Centre (IFSCs) in India. Government proposes to set up 0.5 million wi-fi hotspots to provide net connectivity to 50 million rural citizens Disinvestment & Fiscal Management Three Public Sector Insurance companies- National Insurance Co. Ltd., United India Assurance Co. Ltd., and Oriental India insurance Co. Ltd., will be merged into a single insurance entity. 19 Habibullah & Co. Chartered Accountants www. hcoca.com
The Government will also establish a system of consumer friendly and trade efficient system of regulated gold exchanges in the country. Continuing Government s path of fiscal reduction and consolidation, the Finance Minister projected a Fiscal Deficit of 3.3% of GDP for the year 2018-19. 20 Habibullah & Co. Chartered Accountants www. hcoca.com
About Us Habibullah & Co. (HCO) is a professional services firm providing audit, assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies, guided by core values including competence, honesty and integrity, professionalism, dedication, responsibility and accountability. At HCO, the interests of our clients are paramount. Our focus on the mid-market means we have a real understanding of the environment in which our clients operate and are ideally placed to help them grow and prosper. Let s talk For a deeper discussion of how this issue might affect your business, please contact, Managing Partner for International Relations: CA. Vivek Agarwal E: vivek@hcoca.com T: +91-98391-19370 Offices in India New Delhi Lucknow Gorakhpur Patna Varanasi Mau Hajipur Associates at Who we are and what we stand for Established 1962 Kolkata Allahabad Mumbai Agra 9 Partners 70 + staff 7 offices across India International Representation through Antea- Alliance of Independent Firms Member Firm of The Institute of Chartered Accountants of India since 1962 Registered with all major Government Regulators in India Our Services Accounting and Auditing Business Setups in India Tax Compliance, Planning and Management Transfer Pricing Advisory Business Advisory Email info@hcoca.com Follow Us Web www.hcoca.com Unsubscribe Reply to this mail with subject unsubscribe Disclaimer This presentation is exclusively designed and prepared by Habibullah & Co. Chartered Accountants and no part of this can be reproduced without consent. This document summarizes the important provisions of the Budget 2018 proposals as placed before the Parliament. Unless otherwise stated, Direct Tax Proposals will be applicable from AY 2019-2020.The proposals are subject to amendment as the Finance Bill passes through the Parliament. While all reasonable care has been taken in preparing this document, we don t accept any responsibility for any errors, if it may contain, whether caused by negligence or otherwise or for any loss, howsoever caused or sustained by the person who relies 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.