Union Budget 2018 ` Flight Towards Better Tomorrow
FOREWORD For the last couple of years, we have mentioned that with the current government, the budget could not be seen as a one day or a one year event, but rather as chapters in a book, written one year at a time. This was the last full budget by the government before the elections next year and this chapter tops up all its efforts with a balanced and understandably populist stance with slight slippage on fiscal management. This has been a budget with a focused eye on what needs to be done pre-election. Towards this mandate, the finance minister also changed a decades old tradition and introduced a mix of Hindi and English in his speech, making the budget more accessible to common people. Last year, post demonetization and GST rollout, India has seen a remarkable increase in tax base. After November 2016, 10.1 million filers were added compared with an average of 6.2 million in the preceding six years. tax sops for senior citizens and a reduction in tax rates for the MSME sector. With equity markets near their all time highs, what has naturally taken the lions share of the discussion is the re-introduction of the Long Term Capital tax while retaining the Securities Transaction Tax. The Finance Minister brought in this much feared tax in a masterful manner with excellent grandfathering provisions provided. This budget is an attempt for the government to show that it will be there for the masses while extracting a little bit more from the rich. If the government manages the fiscal situation without allowing inflation to get out of hand and also gets in the much required growth in the economy and employment, it could aptly have finished its book with a happy ending in the last chapter, in a position to tackle the elections next year and see if it gets the mandate to script another 5 chapter book for the country! Last year, the big reform was the GST. India finally fulfilled years of preparation, negotiation and speculation to make India one market. While the execution could have been much better and the tax structure simpler, it has managed to bring a lot of unorganized businesses in the main stream. Another large reform undertaken was the recapitalization of the public sector banks. Its instructive to see a list of all reforms of the government, complete and incomplete on http://indiareforms.csis.org This year, the government has focused on the electorally sensitive areas, like the rural economy with a big benefit to farmers in the form of higher minimum support prices for agriculture, medical insurance upto INR 5 lakhs for the poor 10 crore families, railway development, CA Dinesh D. Ghalla CA Haresh K. Chheda GBCA & Associates, Chartered Accountants 2
TABLE OF CONTENTS Economic Overview Page: 05 Key Highlights Page: 07-08 Direct Tax Proposals Page: 10-32 Indirect Tax Proposals Page: 34 This document Union Budget 2018-2019 summarizes the Union Budget 2018 2019 and the recent policy changes. It has been prepared for the privileged use of our clients. We recommend you to seek professional advice before taking action on specific issues. GBCA & Associates, Chartered Accountants GBCA & Associates, Chartered Accountants 3
OVERVIEW Economic Overview I n t r o d u c t i o n 0 5 GBCA & Associates, Chartered Accountants
Economic Overview INTRODUCTION Major reforms were undertaken over the past year like the launch of the transformational Goods and Services Tax (GST) and the long-festering Twin Balance Sheet (TBS) problem was decisively addressed. As a result of these measures, the dissipating effects of earlier policy actions, and the export uplift from the global recovery, the economy began to accelerate in the second half of the year which will thereby re-instate India as the world s fastest growing major economy in 2018-19. As per the advance estimates released by the Central Statistics Office, the economy is expected to grow by 6.5 per cent in year 2017-18 in terms of GDP at constant market prices. On a positive note, the IMF has upgraded its forecast for India to grow at 7.4% next year. There are signs of revival of investment activity in the economy and the recent pick up in the growth of fixed investment can be expected to maintain momentum in the coming year. The growth of fixed investment at constant prices increased from 2.4 per cent in 2016 to 4.5 per cent in 2017-18. The headline inflation as measured by Consumer Price Index (CPI) for 2016-17 declined to 4.5 per cent from 4.9 per cent in 2015-16. It averaged 3.3 per cent in April to December 2017 and stood at 5.2 per cent in December 2017. The Current Account Deficit (CAD) increased in the first half (H1) of 2017-18 to 1.8 per cent of GDP from 0.4 per cent in H1 of 2016-17 primarily on account of higher trade deficit. The foreign exchange reserves increased by about US$ 30.3 billion over the last ten months to US$ 409.4 billion. In 2017-18, rupee has appreciated against USD by 2.5% from March 2017 to December 2017. India has two underlying macroeconomic vulnerabilities, its fiscal and current accounts, both of which tend to deteriorate when oil prices rise. Overcoming the fiscal vulnerability requires breaking the inertia of the tax-gdp ratio. It is striking that the center s tax-gdp ratio is no higher than it was in the 1980s, despite average economic growth of 6.5 percent, the most rapid in India s history (Figure 2). The government is counting on the GST to fix this vulnerability. KEY INDICATORS Industry/ Sector 14-15 15-16 16-17 17-18 (E) Agriculture & forestry -0.2 0.7 4.9 2.1 Industry 7.5 8.8 5.6 4.4 Mining & quarrying 11.7 10.5 1.8 2.9 Manufacturing 8.3 10.8 7.9 4.6 Electricity, gas, water 7.1 5.0 7.2 7.5 Construction 4.7 5.0 1.7 3.6 Services 9.7 9.7 7.7 8.3 Trade, Hotel, Transport, Storage, communication Financial, real estate & professional services Public administration, defense GVA at constant basic prices 9.0 10.5 7.8 8.7 11.1 10.8 5.7 7.3 8.1 6.9 11.3 9.4 7.2 7.9 6.6 6.1 GDP at market prices 7.5 8.0 7.1 6.5 GBCA & Associates, Chartered Accountants 5
OVERVIEW Key Highlights D i r e c t T a x P r o p o s a l s 0 7 GBCA & Associates, Chartered Accountants
Key Highlights DIRECT TAX PROPOSALS No changes in the income tax rates for individuals. Tax rate reduction from 30 to 25% extended to companies with turnover upto INR 250 Crores in FY 2016-17. Education Cess of 3% to be replaced by a new Health and Education Cess of 4%. For Salaried taxpayer - Standard Deduction of INR 40,000 will be provided. Exemption in respect of Transport Allowance of INR 1,600 p.m. i.e 19,200 p.a and reimbursement of medical expenses of INR 15,000 withdrawn. Long Term Capital Gains on sale of equity shares of a listed company or units of Equity oriented mutual funds or units of Business Trust exceeding INR 1 Lakh will be taxed at 10% without indexation. Highest price as on 31.01.2018 can be substituted as cost. Dividend Distribution Tax at 10% on income distributed by Equity oriented Mutual Funds. Tax payable on conversion of stock-in-trade into capital asset in the year of conversion. Fair Market Value of stock on date of conversion will be treated as Sale consideration. Notional tax in case of capital gains, business income and income from other sources based on stamp duty valuation will not be triggered if the difference in the stamp duty value and actual sale consideration is less than 5% of sale consideration. Deduction in respect of mediclaim, preventive health check-up or medical expenditure in respect of senior and very senior citizen increased from INR 30,000 to INR 50,000. Deduction of medical treatment of specified diseases in respect of senior citizens as well as very senior citizens has been increased to INR 1,00,000. Deduction upto INR 50,000 for Interest on deposits with Bank, Post Office & Cooperative Societies for senior citizens. No TDS on such income upto INR 50,000. Deemed dividend is now brought within the purview of DDT @ 30%, without grossing up. 100% deduction in respect of profits for first five years from FY 2018-19 to Farm Producer Companies with turnover upto INR 100 Crores. All non-individual entities entering into a Financial Transaction aggregating to INR 2,50,000 or more in a financial year and their managing director, director, partner, trustee, author, founder, karta, chief executive officer, principal officer, or office bearer shall obtain PAN. Additional Deduction at 30% of emoluments paid shall be available if new employees employed for less than 240 days in the first year are continued to be employed in the subsequent year for minimum 240 days. GBCA & Associates, Chartered Accountants 7
Key Highlights DIRECT TAX PROPOSALS Deduction from capital gains for investment in REC and NHAI bonds will be available only against sale of land or building or both and not for any other capital asset. Further, lock in period for such investments made on or after 01.04.18 shall be 5 years. Payments by charitable and religious trusts to a single person of more than INR 10,000 in cash in a day will not be deductible. Payments by charitable and religious trusts without TDS where applicable - 30% of the payment will be disallowed. Income Tax Act to be amended to incorporate provisions of ICDS. Tax relief for carry forward of losses and MAT for companies covered by Insolvency and Bankruptcy Code, 2016. Benefit of exemption for withdrawals from NPS upto 40% extended to all taxpayer. GBCA & Associates, Chartered Accountants 8
OVERVIEW Direct Tax Proposals R a t e C h a r t s T D S R a t e C h a r t P e r s o n a l T a x a t i o n B u s i n e s s P r o v i s i o n s C a p i t a l G a i n s D i v i d e n d A s s e s s m e n t P r o v i s i o n s P e n a l t y P r o v i s i o n s I n t e r n a t i o n a l T a x a t i o n O t h e r P r o v i s i o n s 1 0 1 3 1 7 1 9 2 5 2 7 2 8 2 9 3 0 3 2 GBCA & Associates, Chartered Accountants
RATE CHARTS All the amendments mentioned below are proposed in the Finance Bill, 2018 and will take effect from AY 2019 20, unless otherwise specifically stated, subject to passing by both the houses of the Parliament and assent by the President. Tax Rates Tax Rates for Individuals, HUF, AOP and BOI Status Individual, HUF, AOP and BOI Senior Citizen (60 years & Above) Very Senior Citizen ( 80 years & above) Notes: Net Taxable Income (INR) Surcharge @ 10.0% if income exceeds INR 50 Lakhs but below INR 1 Crore. Upto 2,50,000 NIL NIL NIL Surcharge @ 15.0% if income exceeds INR 1 2,50,001 3,00,000 5.00% NIL NIL Crore 3,00,001 5,00,000 5.00% 5.00% NIL Health and Education Cess @ 4.0% of Tax + Surcharge 5,00,001 10,00,000 20.00% 20.00% 20.00% Rebate of INR 2,500 available only to individuals with total income upto INR 3.5 Lakhs Above 10,00,000 30.00% 30.00% 30.00% Refer Note 1 Tax Rates for Firms (including LLPs) Particulars Basic Tax Income upto INR 1 Crore 30.00% - 4.00% 31.20% Income exceeding INR 1 Crore 30.00% 12.00% 4.00% 34.94% Surcharge Cess Total Notes: Health and Education Cess @ 4.0% of Tax + Surcharge Refer Note 1 GBCA & Associates, Chartered Accountants 10
RATE CHARTS NOTE: 1. Additional tax @ 10% of gross amount of dividend will be payable by all resident taxpayer receiving dividend exceeding of INR 10 lakhs per annum except following specified taxpayer: Domestic Company A fund or institution or trust or any university or other educational institution or any hospital or other medical institution as per Section 10(23C) A trust or institution registered under section 12AA Tax Rates for Domestic Companies Total Turnover or Gross Receipts of FY 2016-17 Upto INR 250 Crores Exceeding INR 250 Crores Upto INR 250 Crores Exceeding INR 250 Crores Particulars Basic Tax Basic Tax Surcharge Cess Total Total Notes Income upto INR 1 Crore 25.00% 30.00% - 4.00% 26.00% 31.20% Income exceeding INR 1 Crore but less than INR 10 Crores Income exceeding INR 10 Crores 25.00% 30.00% 7.00% 4.00% 27.82% 33.38% 25.00% 30.00% 12.00% 4.00% 29.12% 34.94% Health and Education Cess @ 4.0% of Tax + Surcharge GBCA & Associates, Chartered Accountants 11
RATE CHARTS Tax Rates for Foreign Companies Particulars Tax Surcharge Cess Total Notes: Income upto INR 1 Crore 40.00% - 4.00% 41.60% Income exceeding INR 1 Crore but less than INR 10 Crores 40.00% 2.00% 4.00% 42.43% Health and Education Cess @ 4.0% of Tax + Surcharge Income exceeding INR 10 Crore 40.00% 5.00% 4.00% 43.68% Dividend Distribution Tax* on amount received by Shareholder Particulars Tax Surcharge Cess Total Notes: Present 17.65% 12.00% 3.00% 20.36% - Proposed 17.65% 12.00% 4.00% 20.56% Health and Education Cess @ 4.0% of Tax + Surcharge *Deemed dividend is now brought within the purview of DDT @ 30%, without grossing up. GBCA & Associates, Chartered Accountants 12
TDS RATE CHARTS Section Nature of Payments made to Resident Rates of Tax Deduction at Source Threshold Limits (INR) Company, Partnership Firm / LLP / Co op Society / Local Authority Payee Individual, HUF, AOP & BOI Rates Rates Rates Notes 192 Salary N.A. N.A. * N.A. 192A Payment of accumulated balance due to an employee by RPF 50,000 N.A. 10.0% 1 193 Interest on Securities 2,500 10.0% 10.0% 2 194 A Other Interest 5,000 10.0% 10.0% 3 194 B Winning from Lotteries 10,000 30.0% 30.0% N.A. 194-BB Winnings from Horse races 10,000 30.0% 30.0% N.A. 194 C Payment to Contractors / Sub Contractors Single Transaction = 30,000 Aggregate= 1,00,000 2.0% 1.0% 4 194 D Insurance Commission 15,000 5.0% 5.0% N.A. 194 DA 194 E Payment in respect of Life Insurance Policy Income arising to a Non Citizen, Non Resident Entertainer or Sportsmen 1,00,000 1.0% 1.0% 5 NIL N.A 20.0% N.A. *At the rates applicable to particular slab of income including applicable surcharge and Health & education cess. GBCA & Associates, Chartered Accountants 13
TDS RATE CHARTS Section 194-EE 194-G Nature of Payments made to Resident Payment in respect of deposits under NSS Commission etc. on the sale of lottery tickets Rates of Tax Deduction at Source Threshold Limits (INR) Company, Partnership Firm / LLP / Co op Society / Local Authority Payee Individual, HUF, AOP & BOI Rates Rates Rates Notes 2,500 10.0% 10.0% N.A 15,000 5.0% 5.0% N.A. 194 H Commission/Brokerage 15,000 5.0% 5.0% N.A. 194 I 194 I 194 IA Rent of machinery, plant or equipment Rent of land, building, or Furniture Payment on transfer of certain immovable property other than agricultural land 1,80,000 2.0% 2.0% N.A. 1,80,000 10.0% 10.0% N.A. 50,00,000 1.0% 1.0% No TAN required 194-IB Payment of Rent by Individuals/HUF (other than covered by Section 44AB) 50,000 p.m. N.A. 5.0% No TAN required 194- IC Payment under Specified Agreement for Joint Development NIL N.A. 10.0% N.A. 194 J Professional Fees 30,000 10.0% / 2.0%* 10.0% 6 *2% in cases as mentioned in the note no.6 below. GBCA & Associates, Chartered Accountants 14
TDS RATE CHARTS Section 194 LA 194 LC Nature of Payments made to Resident Compensation or Consideration for Compulsory Acquisition of Immovable Property(other than agricultural land) Interest Income paid to Non Residents by Specified Companies or Business Trust Rates of Tax Deduction at Source Threshold Limits (INR) Company, Partnership Firm / LLP / Co op Society / Local Authority Payee Individual, HUF, AOP & BOI Rates Rates Rates 2,50,000 1.0% 1.0% 7 NIL 5.0% 5.0% 8 Notes NOTES: 1. In case withdrawal of accumulated balance in RPF is includible in the total income than TDS provisions u/s I92A applies. 2. Threshold limit of interest paid on debentures is INR 5,000. Threshold limit of interest on 7.75% GOI savings (Taxable) bonds is INR 10,000 which has replaced the earlier 8% Savings (Taxable) Bonds, 2003. 3. Threshold limit where the payer is a banking company, cooperative society engaged in the business of banking or interest on any deposit with Post Office under any notified scheme is INR 10,000. The threshold limit for TDS on interest income for Senior Citizens is increased from INR 10,000 to INR 50,000. 4. TDS is to be deducted @ 2.0% if the payee is an AOP or BOI. No TDS is applicable on payment to Contractor during the course of plying, hiring or leasing of goods carriages, where such contractor owns 10 or less goods carriages during the FY and furnishes declaration along with PAN. 5. Applicable only where amount is not exempt u/s. 10(10D). 15G/15H can be given wherever applicable. 6. a. Rate of TDS is 2% instead of 10% if the payee is engaged only in the business of operation of call center. b. TDS on Remuneration to Director which is not in the nature of Salary to be deducted @ 10%. GBCA & Associates, Chartered Accountants 15
TDS RATE CHARTS 7. No tax will be deducted if payment is made in respect of any award or agreement which has been exempted from levy of income-tax under section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. 8. a. The specified company shall be an Indian company engaged in the business of - construction of dam, operation of Aircraft, manufacture or production of fertilizers, construction of port including inland port, construction of road, toll road or bridge; generation, distribution of transmission of power construction of ships in a shipyard; or developing and building an affordable housing project as is presently referred to in section 35AD(8)(c)(vii) b. Also, requirement of section 206AA to furnish PAN shall not apply to this section. c. TDS shall be deducted in respect of interest payment for borrowings in foreign currency from a source outside India under a loan agreement made before 01.07.2020 to boost the economy by way of introduction of foreign capital. d. Further, Borrowings would also include monies borrowed by way of issue of rupee denominated bond outside India. e. The rate of TDS will be 20% in all cases except under section 194LC, if PAN is not quoted by the deductee GBCA & Associates, Chartered Accountants 16 (only on the non compliance of conditions as prescribed in section 206AA). 9. Health and Education Cess @ 4.0% shall be leviable on TDS in respect of all payments to non resident payees. In case of resident payees Health and Education cess @ 4.0% is leviable only in respect of TDS on payment of Salaries. 10. TDS on payments to non resident payees in general will be governed by section 195 or other applicable provisions read with the DTAA with the country of their residence.
PERSONAL TAXATION Standard Deduction Introduced for Salaried Employees Currently, while computing income chargeable under head Salaries following exemptions/deductions are available:- Transport allowance of INR 1,600/- per month. Medical expenses actually incurred and reimbursed by the employer to the extent of INR 15,000/-. The above benefits are proposed to be withdrawn (except transport allowance for differently abled persons). In lieu of both these benefits, it is proposed to allow a standard deduction of INR 40,000/- or amount of salary, whichever is less. Amendment in Section 80D Currently, an individual or HUF is eligible for claiming deduction under Section 80D in respect of payments made towards annual premium on health insurance policy, or preventive health check-up or medical expenditure in the year of payment of premium. In respect of mediclaim policies which are of tenure of more than one year and a lump sum premium is paid in the previous year, it is proposed that deduction shall be allowed on proportionate basis for each relevant previous year covered under the policy. Tax Benefits in case of Senior Citizens It is proposed to grant relief to senior citizens keeping in view their personal state of affairs like health and fixed source of income. Deduction in respect of health insurance premium and medical treatment Currently, an individual or HUF gets a deduction of upto INR 30,000/- in respect of annual premium paid on account of health insurance policy or preventive health check-up for a senior citizen. The above deduction is also available for medical expenditure incurred in case of very senior citizen who does not have any medical insurance. It is proposed, to increase the said limits of INR 30,000/- to INR 50,000/- Benefit of deduction which was earlier available for very senior citizens on account of medical expenditure is now proposed to be extended to senior citizens as well. Enhanced Deduction for medical treatment of specified diseases Currently, an individual or HUF who is resident in India is eligible to claim deduction upto of INR 40,000/- for medical treatment of specified diseases or ailments like dementia, chorea, malignant cancer etc. subject to fulfilment of certain specified conditions. GBCA & Associates, Chartered Accountants 17
PERSONAL TAXATION However, higher deduction limits are available for senior citizens and very senior citizens. Senior citizens and very senior citizens are eligible for deduction upto INR 60,000/- and INR 80,000/- respectively. It is proposed to raise the said monetary limit of deduction uniformly for both senior citizens and very senior citizens to INR 1,00,000/-. Deduction in respect of interest income Currently, deduction upto INR 10,000/- is allowed to an taxpayer being an individual or HUF under Section 80TTA, in respect of interest income earned on savings account with banks or post office. Likewise, it is proposed to insert a new section 80TTB to allow a deduction upto INR 50,000/- in respect of such interest income earned from all deposits held by senior citizens. Such senior citizen shall not be eligible to claim benefit under Section 80TTA. Correspondingly, it is also proposed to raise the threshold of TDS for senior citizens from INR 10,000/- to INR 50,000/- This amendment shall be applicable from AY 2018-19. Tax exemption to non-employee subscribers on withdrawal from NPS Account. NPS is an Investment-cum-Pension Scheme launched by GOI. The deduction with regards to contribution in NPS is availed in the following manner: Contribution by Section *Salary includes Basic and Dearness Allowance Deduction Salaried Self Employed Employee 80CCD (1) 10% of Salary* max 10% of Gross Total upto INR 1,50,000/- Income max upto including INR 1,50,000/- deduction u/s 80C including deduction u/s 80C Employee 80CCD (1B) INR 50,000/- INR 50,000/- Employer 80CCD (2) 10% of Salary (no Not Applicable upper limit in absolute terms) Presently, withdrawal from NPS by an employee on closure of his account or opting out shall be exempt upto 40% of total amount payable to him. This exemption was not available to the subscribers other than an employee. It is proposed to extend this benefit to non-employee subscribers to bring parity. GBCA & Associates, Chartered Accountants 18
BUSINESS PROVISIONS Rationalization of deduction for employment generation under section 80JJAA Deduction for new employment generation is available @ 30% of additional employee cost paid to new persons employed during the year, for first three years. One of the condition being that, the person ought to be employed for minimum 240 days in the first year. If the person was employed for less than 240 days in the first year then the deduction was lost despite the said person being continued to be employed in subsequent year(s). It is proposed that if the person has continued to be in employment for minimum 240 days in the second year, then the taxpayer shall be eligible to claim the deduction for 3 years, beginning from the second year. The minimum threshold applicable to Apparel industry is 150 days (instead of 240 days) and the same is proposed to be extended to footwear and leather industry. Rationalisation of Section 43CA, Section 50C and Section 56 Currently notional tax in case of capital gain, business income and income from other sources is charged if stamp duty value of an immovable property being land or building is higher than actual sale consideration on transfer of such property and accordingly income is calculated on difference between stamp duty value and actual sale consideration. However, in order to reduce the hardship caused in respect of genuine transactions, it is proposed that where the stamp duty value is not higher than 5% of the actual consideration, then no adjustment will be made to the income. Consequently, if stamp duty value is higher than the actual sale consideration by upto 5% of Sale consideration, there shall be no tax liability. Provisions related to conversion of stock in trade in to capital assets Business income It is proposed that any profits or gains arising from conversion of inventory into capital assets shall be taxed as business income in the year of conversion. The FMV of such inventory as on the date of conversion will be deemed to be the total value of consideration. Capital Gain The FMV determined while calculating business income will be deemed to be the Cost of acquisition at the time of sale of such capital asset. The period of holding of such capital asset shall be calculated from the date of conversion. GBCA & Associates, Chartered Accountants 19
BUSINESS PROVISIONS Income Computation and Disclosure Standards Amendments in relation to ICDS: Ten ICDS were notified and made effective from AY 2017-18. ICDS is applicable to all taxpayers (except individual and HUF not liable to tax audit) following accrual basis of accounting for computation of income under head Profits and gains of business or profession or Income from Other Sources. A PIL was filed before the Delhi High Court and certain provisions in the ICDS were struck down. Broadly, the following amendments are proposed to overcome the same: Mark-to-market losses/ other expected losses shall be allowed as a deduction while computing income from business or profession only if allowed by provisions of any specific ICDS. Any escalation claim in relation to contract/ export incentive shall be treated as income of the year in which there is reasonable certainty of its realisation. Any subsidy/grant/cash incentive etc. receivable from Govt. or any authority thereof shall be part of income in the year of receipt of same if not charged to tax in any earlier years. Inventories shall be valued at Cost or NRV whichever is lower, computed in manner provided in ICDS. Value of purchase and sale of goods or services and inventory shall include amount of tax, duty, cess, fee etc. incurred to bring the goods or services to the place of its location and condition as on date of valuation. This is applicable to service sector also. Inventories held in form of unlisted securities and unquoted listed securities shall be valued at actual cost initially recognised. Other securities to be valued at Cost or NRV whichever is lower, in accordance with provisions of ICDS. Category wise approach is to be followed for valuation purpose (i.e. cost or NRV is to be determined for category of securities as a whole like shares, debt securities, etc. and not individually for each item of security). Gain or loss arising on changes in foreign exchange rates shall be treated as income or loss, as computed in accordance with provisions of ICDS. In relation to construction contracts, contracts for providing services, profits to be determined by applying percentage of completion method. Profits to be determined by project completion method for contracts for providing services having duration of ninety days or less. Profits to be determined by straight line method for contracts for providing services having indeterminate number of acts over a specified period of time. Contract Revenue shall include retention money. Contract costs shall not be reduced by interest, dividend or capital gains earned. They will have to be offered independently. The proposed amendments shall be effective retrospectively from AY 2017-18 onwards. GBCA & Associates, Chartered Accountants 20
BUSINESS PROVISIONS Taxation Regime for Start-ups Eligible business for Start ups: Currently, only a Start Up engaged in the eligible business involving innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property can claim 100% deduction of profit and gains from such business for three consecutive year out of seven years in which the Start up is incorporated. In order to provide benefit of deduction to larger number of Start ups, the scope of eligible business has been substituted with any business involved in innovation, development or improvement of products, processes or services, or a scalable business model with a high potential of employment generation or wealth creation. The benefit of deduction would now be available also to Start ups incorporated on or after 01.04.2019 but before 01.04.2021. Also the requirement of turnover not exceeding INR 25 crore will apply to seven previous years commencing from the date of incorporation. The above mentioned amendment will be applicable from AY 2018-19. Presumptive Income under section 44AE in case of Goods Carriage Currently, presumptive income scheme applies uniformly to all type of goods carriage vehicles irrespective of the tonnage capacity of the vehicles, the only condition being that the taxpayer should not own more than 10 goods carriage vehicles at any time during the previous year. The basic idea behind the scheme was to give benefit to small transporters in order to reduce their compliance burden. However, due to no specification about tonnage capacity even the large transporters having 10 or less goods carriage vehicles were eligible to offer income @ 7,500/- per month or part of the month for which vehicle was owned by them. It is now proposed that: In case of heavy goods vehicle with more than 12MT gross vehicle weight or unladen weight, the income would be an amount equal to INR 1,000/- per MT of gross vehicle weight or unladen weight per month or part of the month Or Actual amount claimed to be earned by the taxpayer, whichever is higher. Income from Goods carriage vehicles other than heavy goods vehicle, will continue to be taxed as per the existing provisions. GBCA & Associates, Chartered Accountants 21
BUSINESS PROVISIONS Taxability of any compensation received in connection to Business or Employment Presently, compensation received for termination or modification in the terms and conditions of the agreement entered into for providing managerial or agency services, are taxable under the head Income from Business Profession. However, the said provision is restrictive in its scope as far as taxability of certain compensations are concerned. Various compensation incomes escaped from the purview of taxability and thus it is proposed that: Compensation received / receivable for termination or modification in the terms and conditions of any contract relating to the Business, whether revenue or capital, will be taxable under the head Income from Business Profession. The proposed amendment does not contain any reference to Profession. Similarly, compensation received / receivable from termination or modification in the terms and conditions in respect of employment, whether revenue or capital, will be taxable under the head Income from other sources. Consequently, where either the unabsorbed depreciation or loss brought forward is Nil, no deduction is allowed. Such non-deduction causes hardships to the rehabilitating companies seeking insolvency resolution. Therefore, it is proposed to provide deduction of aggregate amount of unabsorbed depreciation and loss brought forward from book profits, if a company s application for corporate insolvency resolution process under the IBC, 2016 has been admitted by the Adjudicating Authority. The above provision shall be applicable from AY 2018-19. For foreign companies It is proposed to clarify that the MAT provisions shall not be applicable and shall be deemed never to have been applicable to a foreign company, if its total income comprises solely of profits and gains from business of Shipping / Mineral Oil Exploration / Operating Aircraft / Civil construction turnkey power projects referred to in section 44B/ 44BB/ 44BBA/ 44BBB and such income has been offered to tax at the rates specified in the said sections. The above provisions shall be applicable retrospectively from AY 2001-02. Rationalisation of MAT provision For companies seeking insolvency resolution Currently, for computing MAT liability, lower of unabsorbed depreciation or brought forward loss as per books is allowed as a deduction from book profits. GBCA & Associates, Chartered Accountants 22
BUSINESS PROVISIONS Benefit of carry forward and set-off of losses to companies seeking insolvency resolution Currently, carry forward and set off of losses in a private limited company is allowed only if there is a continuity in the beneficial owner of the shares carrying atleast 51% of the voting power on the last day of the year in which the loss was incurred. In case of a company seeking insolvency resolution under IBC, 2016, change of the beneficial owners of shares beyond 51% acts as a hurdle for rehabilitation. Therefore, it is proposed to relax the above condition in case of such companies whose resolution plan has been approved under IBC, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner. The above provision shall be applicable from AY 2018-19. Clarification regarding the provisions of section 115BA As per section 115BA introduced in The Finance Act, 2017, a newly set up Domestic company engaged in the business of manufacturing, production, research or distribution of any article or thing has the option to be taxed @ 25% subject to the fulfilment of the conditions. It is now clarified that income specified of the company that is chargeable to tax at special rates under Chapter XII shall be taxed at those special rates and the balance of the total income shall be taxed @ 25%. The Amendment will take effect retrospectively from AY 2017-18 (FY 2016-17). Deductions in respect of certain incomes not to be allowed unless return is filed by the due date Currently taxpayer can claim deduction under section 80-IA or 80-IAB or 80-IB or 80-ID or 80-IE only if return of income is furnished on or before the due date specified under section 139(1) of Income Tax Act, 1961. Now it is proposed to extend the scope of Section 80AC, by bringing within the ambit all the deductions falling under the heading C- Deduction in Respect of Certain Incomes of Chapter VI-A. Thus, any claim of deduction In respect of incomes falling under Part C of Chapter VI-A, shall be allowed only if the Return of Income is filed before applicable due date. The proposed amendment will be effective from AY 2018-19 (FY 2017-18). GBCA & Associates, Chartered Accountants 23
BUSINESS PROVISIONS Tax Incentives for Farm Producer Companies 100% deduction in respect of profits to Farm Producer Companies (FPC) The government has proposed to provide 100% deduction in respect of profits of FPC which provides assistance to its members engaged in primary agricultural activities, having a gross total turnover upto INR 100 Crores and whose 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. Note: Producer Company and member of farm producer is defined under Section 581A of Companies Act, 1956. GBCA & Associates, Chartered Accountants 24
INCOME FROM CAPITAL GAINS Taxation of LTCG on sale of Listed Equity Shares etc. At present, LTCG on sale of listed equity shares, unit of equity oriented Mutual Fund and business trust is exempt subject to fulfilment of prescribed conditions. In order to curb erosion of tax base and abusive use of tax arbitrage, it is proposed to tax such LTCG exceeding INR 1 Lakh at concessional rate of 10%. For grandfathering all the gains upto 31.01.2018, it is proposed that the cost of acquisition shall be higher of: A. Actual cost of acquisition or, B. Lower of: I. Highest Quoted Price (Note 1 & 2) of such share / unit as on 31.01.2018 on recognised stock exchange or, II. Sale Consideration Following benefits shall not be available in respect of such LTCG: A. Indexation B. Computation of capital gains in foreign currency (for non-resident). C. Chapter VIA (e.g. Section 80C) deductions D. Rebate u/s 87A The above tax regime is applicable subject to following conditions: A. In case of equity shares STT is paid on acquisition (Note 3) as well as on sale. B. In case of units, STT is paid on sale. GBCA & Associates, Chartered Accountants 25 The above conditions shall not be applicable on sale on recognized stock exchange located in IFSC, if consideration is in foreign currency. Since, under the proposed regime, such LTCG will no longer be an exempt income, the LTCL from sale of such listed equity shares, etc., will be eligible for set off against any LTCG. Notes: 1. In case of no trading on 31.01.2018, highest price on a date immediately preceding 31.01.2018 when such share / unit was traded shall be considered. 2. In case of a unit, not listed as on 31.01.2018, NAV of such unit is to be considered. No such provision for unlisted equity shares. 3. Central Government shall notify acquisitions where the condition of STT will not be applicable. This could be similar to notification issued in respect of section 10(38) wherein cases like bonus shares, shares issued on merger, ESOPs, etc., were covered to avoid hardships. Taxation of LTCG in case of Foreign Institutional Investors (FIIs) Currently, in case of FIIs, LTCG on equity shares of a company or unit of equity oriented fund or unit of business trust is exempt from tax. In order to bring parity of LTCG taxation with domestic investors, it is proposed that, FIIs would be liable to pay tax on LTCG arising from transfer of such equity shares of a company or units of equity oriented fund or units of business trust, @ 10% on such gains exceeding INR 1,00,000/-
INCOME FROM CAPITAL GAINS Amendment in section 54EC Currently, if gains from sale of any long term capital asset is invested within 6 months from the date of transfer in specified bonds (which includes NHAI and REC Bonds), then such gain will not be taxable under the head Capital Gain. The tenure of investment in such bonds was 3 years. It is proposed that: This benefit will be available only in respect of sale of long term capital asset being land or building or both and not on any other long term capital asset. The tenure of investment in such bonds is proposed to be increased to 5 years instead of 3 years. GBCA & Associates, Chartered Accountants 26
DIVIDENDS Application of Dividend Distribution Tax to Deemed Dividend Tax on income distributed by equity oriented mutual fund Currently, deemed dividend is taxable in the hands of the Shareholder at the applicable slab rates. It is now proposed to bring deemed dividend under the scope of Dividend Distribution Tax (DDT) @ 30%, without grossing up and shall be payable by the company. The above provisions will take effect from FY 2017-18. Currently, there is no tax on income distributed by equity oriented mutual funds to its unit holders. In order to bring parity between equity oriented and debt oriented mutual funds, it is proposed that such equity oriented mutual funds shall also be liable to pay an additional income tax @ 10% on income so distributed. Scope of accumulated profits for the purpose of dividend widened Currently, distribution of accumulated profits by way of reduction of capital is taxable as dividend. To escape from the liability of paying DDT on such distribution, certain companies with large accumulated profits adopted the amalgamation route to re-characterise the accumulated profits into share capital in the amalgamated entity. To curb such abusive arrangements, It is proposed that the accumulated profits for an amalgamated company shall also include the accumulated profits of amalgamating company, whether capitalised or not, on the date of amalgamation. GBCA & Associates, Chartered Accountants 27
ASSESSMENT PROVISIONS New Scheme to be introduced for Scrutiny Assessment Proposed to amend existing provisions and insert provisions for conducting faceless assessments w.e.f 01.04.2018 Currently, the AO is empowered to make an assessment of total income or loss by an order in writing. In order to impart transparency, accountability & reduce face to face interactions between officers and taxpayers, it is proposed that the Central Govt. will introduce a new scheme for conducting scrutiny assessments by way of notification in the official gazette. Rationalisation of prima-facie adjustments during processing of return of income No addition of income appearing in Form 26AS/16A/16 : Currently, any difference in income appearing in Form 26AS or Form 16A or Form 16 as compared to the income in the return of income was proposed to be added while processing the return of income. It is proposed that no such adjustment shall be made in any return furnished on or after AY 2018-19. No deduction or allowance or set-off of any loss can be claimed if amount is charged to tax by the AO under the head cash credits/ unexplained investments/unexplained money /unexplained expenditure No expenditure or deduction or set off of any loss will be allowed if any sum is found credited in the books and the AO brings the same to charge as unexplained cash credits, unexplained investments, unexplained money, unexplained expenditure. This amendment is curative in nature and will apply retrospectively from AY 2017-18. Penalty Order passed by Commissioner (Appeals) u/s 271J is now appealable before the Appellate Tribunal The AO or Commissioner (Appeals) is empowered to levy penalty of INR 10,000 per report/certificate if he finds that incorrect information is furnished by an accountant or a merchant banker or a registered valuer in their report/certificate. Currently, this penalty order in writing is not appealable. It is now proposed to make the above penalty order appealable before the Appellate Tribunal from 01.04.2018. GBCA & Associates, Chartered Accountants 28
PENALTY PROVISIONS Prosecution Proceedings for non furnishing of return of income are applicable to Certain Companies Penalty for failure to submit of Statement of Financial Transactions or Reportable Accounts Currently, a person shall not be prosecuted if the taxes payable by him on regular assessment after deduction of advance tax & TDS does not exceed three thousand rupees. In order to prevent shell companies or companies having benami properties from being excluded from prosecution proceedings, this immunity is proposed to be restricted to taxpayers other than companies. The above provision will take effect from AY 2018-19 (FY 2017-18). Obligation is cast on various persons and entities to submit details of prescribed financial transactions in Form 61A, if the value of these transactions exceed a specified limit. The penalty for non submission of this statement which is INR 100 per day is proposed to be enhanced to INR 500 per day. If the failure to furnish is after receipt of a notice from department, the penalty is further enhanced from INR 500 to INR 1,000 per day. GBCA & Associates, Chartered Accountants 29
INTERNATIONAL TAXATION Aligning scope of Business Connection with modified PE Rule as per Multi Lateral Instrument (MLI) OECD/G20 countries along with developing countries have developed BEPS package for establishing modern international framework to tap gaps and mismatches in existing tax rules. Since there are more than 3000 bilateral tax treaties, MLI has been introduced under this package to be a single instrument for modifying bilateral treaties at one go instead of negotiating each treaty separately. Non residents can be taxed to the extent income is attributable to business connection in India. Presently, person habitually authorised to conclude contract for non residents while acting on their behalf are amongst one of the factors resulting in business connection. Scope of business connection under domestic laws is now expanded to also include person who habitually play important role leading to conclusion of contracts by non resident in certain cases. This provisions are similar to those under MLI. Business Connection to include Significant Economic Presence Presently, physical presence is used as a measure for determining allocation of tax between source and resident countries. However, with digitalisation, business model no longer require physical presence in source country. This unfairly deprives source country of its right to tax. Significant economic presence has been introduced as one of the factors leading to business connection and creation of taxable presence for non resident participating in economic life of India. Thresholds leading to significant economic presence shall be prescribed subsequently. Despite provisions have been made applicable, they shall not be effective unless provisions of DTAA are amended. Till that time, cross border business profits shall continue to be taxed based on existing treaty rules. Measures to promote International Financial Services Centre (IFSC) Currently, certain transactions are not considered as transfer and are out of ambit of chargeability of tax under head Capital Gains. It is proposed that in case, non-residents transfers bonds, Global Depository Receipts, derivatives or Rupee Denominated bonds of Indian Company on a recognised stock exchange located in any International Financial Service Centre, then such transfer shall not be regarded as transfer. Furthermore, in respect of unit located in IFSC and deriving its income solely in convertible foreign exchange, Alternate Minimum Tax u/s 115JC shall be charged at 9% instead of 18.5% on the adjusted total income. GBCA & Associates, Chartered Accountants 30
INTERNATIONAL TAXATION Rationalisation of provisions relating to Country-by-Country Report CbCR is now to be filed within 12 months from the end of reporting accounting year as against the due date for filing return of income. Indian entity is also required to file CbCR, if applicable as per Indian regulations, even if its parent entity is not required to file the report in its country or territory. The due date for filing of CbCR by Alternative Reporting Entity having parent entity outside India shall be the due date specified by the country/territory of its residence instead of the due date as per Indian regulations. GBCA & Associates, Chartered Accountants 31
OTHER PROVISIONS Entities to apply for Permanent Account Number (PAN) in certain cases Currently, every person is required to apply to an Assessing Officer for the allotment of PAN if on satisfaction of any of the prescribed conditions. In order to facilitate use of PAN as an Unique Entity Number for non-individual entities, it is proposed that every such entity shall obtain PAN, if it enters into a financial transaction of an amount aggregating to INR 2,50,000 or more in a FY. It is proposed that the managing director, partner, author, founder, karta, chief executive officer, principal officer or office bearer or any person competent to act on behalf of such entities shall also obtain a PAN. This would result into linking of the financial transactions of such entities with the natural persons associated with it. Commodity Transaction Tax attracted on Options in Commodity futures w.e.f. 01.04.2018 Currently, Commodity Transaction Tax (CTT) is chargeable on sale of commodities derivatives other than agriculture commodities derivatives that are traded in recognised associations. It is proposed to include Options in commodity futures within the transactions chargeable to CTT. Further, it is also proposed that the tax rate and the value to be considered in respect of sale of commodity derivatives or exercise of option for CTT will be separately prescribed. Tax neutral transfers Certain transfers of capital assets are not regarded as transfers and therefore no Capital gains tax is payable on such transfers. Transfer of capital assets by a Parent company to it s wholly owned subsidiary company or transfer of capital asset by a wholly owned subsidiary company to it s Parent company (transferee being an Indian company) are not regarded as transfer. However, there was no clarity as to applicability of section 56 to the transfers referred to above and subsequent taxation thereof. In order to further facilitate the transaction of property between a wholly owned subsidiary company and its holding company, it is proposed to amend section 56(2)(x) so as to exclude such transfers from its scope. Above provisions shall apply from AY 2018-19 (FY 2017-18). GBCA & Associates, Chartered Accountants 32
OVERVIEW Indirect Tax Proposals C u s t o m D u t y G S T 3 4 3 4 GBCA & Associates, Chartered Accountants
INDIRECT TAXATION CUSTOMS GST Social Welfare Surcharge Finance Bill proposes the abolition of Education Cess and Secondary and Higher Education Cess on imported goods and in its place levy of Social Welfare Surcharge @ 10% calculated on the aggregate of duties or taxes or cesses, in order to finance education, housing and social security. However the goods which were hitherto exempt from Education Cesses on imported goods will also be exempt from this Surcharge. But in case of following goods surcharge will be attracted only @ 3% of the aggregate duties of customs : Motor spirit commonly known as petrol and high speed diesel oil. Silver (including silver plated with gold or platinum), unwrought or in semi-manufactured form, or in powder form. Gold (including gold plated with platinum), unwrought or in semi-manufactured form, or in powder form. As this is the first budget after the roll out of GST, there are no changes announced in GST provisions. Road and Infrastructure Cess: Finance Bill proposes to levy of Road and Infrastructure Cess, as an Additional Duty of Customs, on imported motor spirit commonly known as petrol and high speed diesel @ INR 8 per litre. At the same time Additional Duty of Customs (Road Cess) which is @ INR 6 per litre will be abolished. GBCA & Associates, Chartered Accountants 34
GLOSSARY Abbreviations Abbreviations AO Assessing Officer GOI Government of India AY Assessment Year GDP Gross Domestic Product AOP BEPS BCD BOI Association of Persons Base Erosion and Profit Shifting Basic Customs Duty Body of Individual HUF IBC ICDS Hindu Undivided Family Insolvency and Bankruptcy Code Income Computation and Disclosure Standards CbCR Country by Country Reporting IFSC International Financial Service Centre CVD Countervailing Duty ITAT Income-Tax Appellate Tribunal DDT DTAA Dividend Distribution Tax Double Taxation Avoidance Agreement INR InvITs Indian Rupees Infrastructure Investment Trust EC Education Cess LLP Limited Liability Partnership FMV Fair Market Value LTCG Long Term Capital Gains FY Financial Year LTCL Long Term Capital Loss FII Foreign Institutional Investors MAT Minimum Alternate Tax GST Goods and Services Tax MT Metric Tonnes GTA Goods Transport Agency NPS National Pension Scheme GBCA & Associates, Chartered Accountants 35
GLOSSARY Abbreviations NSS OECD PAN PE PY RPF R&D SHEC STT STCG SAD SFT TDS TAN USD National Saving Scheme Organisation for Economic Cooperation and Development Permanent Account Number Permanent Establishment Previous Year Recognized Provident Fund Research and Development Secondary and higher Education Cess Securities Transaction Tax Short-Term Capital Gains Special Additional Duty Statement of Financial Transactions Tax Deducted At Source Tax Deduction Account Number US Dollars GBCA & Associates, Chartered Accountants 36
न च र ह य न च र ज ह य न भ भ न च भ रक र य क त वधत एव न व धन सवधनध नम Knowledge is the Wealth that: The Thief cannot Steal, The King cannot Acquire, The Brothers cannot Share, Does not Weigh on You, Grows Forever as you share, Truly, Knowledge is the Greatest Wealth. Benefice Business House, 3rd Level, 126, Mathuradas Mills Compound, N. M. Joshi Marg, Lower Parel (W), Mumbai 400013, India. GBCA & Associates, Chartered Accountants T: +91 22 3321 3737 F: +91 22 3321 3838 E: reachus@gbcaindia.com www.gbcaindia.com