INDIAN UNION BUDGET
The Indian Union Budget 2018 - Foreword INDIAN FINANCE BUDGET 2018 The Finance Minister had a tough balancing act in the Budget of 2018 ahead of the national elections in May 2019. The Budget of 2018 is a budget which changes some of the fiscal trends of the past few decades. The first trend reversal is that the earlier budgets brought down tariff barriers into the country by systematically reducing Custom Duty across the board. This year the Custom Duty has been significantly increased in 6 to 7 key sectors. This augers well for the domestic manufacturing industry. The second trend reversal is in reducing fiscal deficit. This year, the fiscal deficit has gone up back to 3.5% of the GDP from the Budget plan of 3.2%. The roadmap to reach target of 3% fiscal has been postponed to FY 2021. The third trend reversal is reduction in Tax Rate to put more money in the hands of the consumers / businesses so that a virtuous cycle of higher spending / investing in businesses could lead to a boost in the GDP and also perhaps lead to more job creation. It is estimated that the top 1% companies of the total 7 lakh companies in India contribute almost 90% of the total corporate tax. There is no reduction in their tax rate unlike the trend set by USA and Europe. Similarly, firms and individuals have their tax rate largely unchanged. There is in-fact an increase of cess in form of Health and Education Cess up from 3% to 4% for all taxpayers. The reintroduction of long term capital gains on listed Equity Investments and mutual funds is reversing a trend started in 2005 for creating a robust equity market by channelizing money for business and growth. While it may not be a complete deal breaker, it will certainly act as a dampener to the roaring equity markets. From a long-term investors perspective a 10% LTCG on gains should in no way discourage investors from investing in equities but to the recent participants in the equity markets who had purely came in due to lack of other options or tax reasons (gains were tax free after 1 year) or due to the overall momentum of the markets can certainly cause panic and may lead to uninformed decisions. The grandfathering of gains till Jan 31, 2018 does provide some marginal relief. 1
The Indian Union Budget 2018 - Foreword One trend this Finance Bill continues from the past is that it adds lots of complexity to tax compliance. Lot of fine print changes, some minor, some major, have made the Indian Income Tax Act one of the most complex statutes in the world. India has been at the forefront of the global initiative to tax multinational companies at the source and/or place of their income generating activity thereby avoiding Base Erosion and Profit Shifting (BEPS). In line with this, the Finance Bill contains enabling provisions to implement this plan from India s perspective. Digital economy and its challenges have also been addressed. The government s stance on crypto-currencies not being legal tender and their focus on using block chain technology are also steps in the right direction. There are some beneficial changes in the tax regime for senior citizens. The health insurance scheme for the 100 million poor is one of the largest initiative of its kind in the world. The steps of giving remunerative prices to the farmers, building rural infrastructure, railways, airports, ports, roads will go a long way in building India for the future. The rural programs initiated by the government will aid in increasing farmer productivity, raise agricultural prices and increase farmer income over time, which are the key for inclusive growth for a country like India which is still largely agrarian in nature. The budget being seen as a pre-election manifesto by the ruling party does not give away freebies as was expected. The budget also thankfully does not bring in more unproductive taxes on the taxpaying and compliant population of the country such as a wealth tax, gift tax or an inheritance tax and the people should be grateful to the Finance Ministry for this. We at SRD as usual have tried to decode the fine print and my team has prepared a summary of the proposals contained in the Finance Bill for your consideration. Best Wishes Pradeep Dinodia 2
Budget Highlights 3
Changes in the Tax laws affecting Individuals () Increase in Cess levied on Income The slabs for personal taxation remain same along with the rate of taxation applicable. The present levy of Education Cess @ 3% is discontinued and a new cess by the name of Health and Education Cess @ 4% shall be levied from AY 2018-19. Standard deduction on salary income introduced It is proposed to allow a standard deduction u/s 16 of `40,000/- or the amount of salary income, whichever is less and to withdraw existing exemption in respect of transport allowance of `19,200/- and medical reimbursement of `15,000/-. Thereby net benefit of `5,800/- (40,000-19,200-15,000). Cumbersome paperwork for submitting bills, etc to employer has been done away with. Benefits to Senior Citizens extended A senior citizen is an individual resident in India who is of the age of 60 years or more at any time during the relevant previous year & a super senior citizen means an individual resident in India who is of the age of 80 years or more at any time during the relevant previous year. Monetary limit for claiming deduction in respect of payments towards annual premium on health insurance policy or preventive health check-up u/s 80D has been proposed to be increased from existing ` 30,000/- to ` 50,000/- for all Senior Citizens from AY 2019-20 (FY 2018-19). Monetary limit for claiming deduction of amount paid for medical treatment of specified diseases u/s 80DDB has been proposed to be increased from existing ` 60,000/- for senior citizens and `80,000/- for very senior citizens to ` 1,00,000/- for both senior and very senior citizens from AY 2019-20. It is proposed to insert a new section 80TTB so as to allow a deduction of upto ` 50,000/- in respect of interest income from deposits held by senior citizens from AY 2019-20. However, no deduction under section 80TTA for `10,000 shall be allowed in case of senior citizens separately. It is also proposed to consequently amend section 194A so as to raise the threshold for deduction of TDS on interest income for senior citizens from ` 10,000/- to `50,000/-. 4
Changes in the Tax laws affecting assessees tax rate reduced for MSMEs to 25% In order to respond to the global trend of reducing the corporate tax rate and to make India competitive, the Govt. has come up with a tax cut for medium and small corporate which according to the Finance Minister would cover 99% of domestic companies. For companies with total turnover or gross receipts not exceeding `250 crores in FY 2016-17, tax rate reduced to 25% + Surcharge + Health and Education cess from F.Y. 2018-19 (i.e. A.Y. 2019-20). Levy of Surcharge remains the same. Existing Education cess and Higher Secondary Education Cess of 3% replaced with 4% now known as Health and Education cess. Consequent effect would be on Advance tax installments for F.Y. 2018-19. No change in tax rate & Surcharge for other than MSMEs No change in tax rates (30%) for rest of the companies in India. Types of companies Domestic with turnover not exceeding `250 crore in FY 2016-17 Income up to ` 1 Crore Surcharge rate + HEC Effective tax rate Above ` 1 Crore up to ` 10 Crore Surcharge Effective rate + HEC tax rate Above ` 10 Crore Surcharge rate + HEC Effective tax rate Nil + 4% 26% 7% + 4% 27.82% 12% + 4% 29.12% Other domestic Cos Nil + 4% 31.20% 7% + 4% 33.384% 12% + 4% 34.944% Foreign Cos Nil + 4% 41.60% 2% + 4% 42.432% 5% + 4% 43.68% 5
Changes in the Tax laws affecting assessees Widening of scope of accumulated profits for the purposes of Dividend In order to address the abusive arrangements resorted to escape the tax liability on distributed profits through amalgamation, the scope of accumulated profits has been widened by insertion of Explanation 2A to section 2(22). Consequently, it is proposed to ignore the losses of amalgamating company while computing the accumulated profits of amalgamated company for the purposes of calculating deemed dividend u/s 2(22)(e). Applicable for F.Y. 2017-18 i.e. A.Y. 2018-19. Application of Dividend Tax (DDT) to Deemed Dividends Currently there is no DDT on deemed dividends and tax is paid by recipient of such dividends, unlike in all other cases, where company pays the DDT. In order to bring uniformity in taxation of dividend, Deemed dividend has been proposed to be brought under the scope of DDT u/s 115O. It is proposed to be taxed @ 30% + Surcharge + Health and Education cess (effective tax rate 34.94%) (without grossing up) as against the normal rate of DDT @15% + Surcharge + Health and Education cess (effective tax rate 20.55%) Applicable on transactions undertaken on or after 1 st April, 2018. Deduction in respect of income of Farm Producer Companies In order to boost the agriculture processing industry, 100% deduction of profits is proposed to be extended to Farm producer Companies having total turnover upto `100 crores on account of following activities:- Marketing of agriculture produce grown by its members Purchase of agriculture implements intended for agriculture for supplying to its members Processing of agriculture produce of its members Benefit shall be available for a period of 5 years from F.Y. 2018-19. 6
Changes in the Tax laws affecting assessees Measures to promote start-ups In order to improve the effectiveness of the start-ups scheme, the definition of eligible business has been expanded to companies engaged in innovation, development or improvements of products and services with a high potential of employment generation. Scope of deduction has been extended to startups incorporated between 1.04.2019 to 01.04.2021. Deduction is allowed for 3 consecutive assessment years out of seven assessment years. The requirement of Turnover not exceeding `25 crores would apply for all the seven years commencing after the date of incorporation. Extended deduction for hiring new employees Sec 80JJAA - amended with a view of rationalize deduction in cases in which new employees employed less than minimum period of 240 days (all industries) or 150 days (special industries) during the first year of employment i.e. FY 2017-18. New employees who employed for less than the minimum period during the first year of employment but continues to remain employed for the minimum period in the subsequent year then the said deduction of 30% of employee cost is available as per section 80JJAA of the Act. Minimum period of employment of 150 days for claiming deduction under section 80JJA of the Act has been extended to footwear and leather industry, earlier this was available only to apparel Industry. Applicable from AY 2019-20 (FY2018-19). 7
Changes in the Tax laws affecting assessees Relief under MAT and carry forward and set off of losses for rehabilitating companies seeking insolvency resolution Sec 115JB in case of rehabilitating companies seeking insolvency resolution, aggregate amount of unabsorbed depreciation and loss brought forward shall be allowed to be reduced in clause (iii) while calculating the book profit u/s 115JB of Act, while in case of other companies the same was lower of unabsorbed depreciation and brought forward loss. Sec 79 - Rehabilitating companies seeking insolvency resolution are exempt from the condition of 51% voting power to be held by the same beneficiaries on the last day the loss was incurred and on the last day of setting off of or carrying forward of loss as per Section 79 of the Act. Applicable from AY 2018-19. Transaction of conversion of stock-in-trade into capital assets covered under tax regime Sec 28 In order to bring within the tax ambit the transaction of conversion of stock-in-trade into capital assets, section 28 of the Act has been amended and profit and gain arising from such conversion is taxable as business income and the fair market value of inventory calculated in the prescribed manner on the date of conversion. Sec 49& 2(42A) - Consequent amendment has been proposed in Section 49 and 2(42A) to provide that the fair market value on the date of conversion shall be the cost of acquisition for computing capital gain on subsequent sale of such capital asset, and the period of holding of such transferred capital assets shall be reckoned from the date of conversion. Applicable from AY 2018-19. 8
Changes in the Tax laws affecting all Assessees Tax Rate for co-operative societies, local authorities, firms & LLPs remains the same in AY 2019-20. Education cess of 3% replaced by Health & Education Cess of 4%, making the effective tax rate of 34.944% Non-individual Entities to apply for PAN in certain cases (Sec 139A) Non-individual entities entering into financial transaction of amount aggregating to `2,50,000/- or more in a F.Y. are required to obtain PAN. Also managing director, director, partner, trustee, author, founder, karta, chief executive officer, principal officer or office bearer or any person competent to act on behalf of such non- individual entities shall be required to obtain PAN. Tax on income in the nature of Cash credits, Unexplained Investments, Unexplained Money, Amount of investments etc. not fully disclosed in books of accounts, unexplained expenditure, amount borrowed or repaid on Hundi It has been proposed that no deduction in respect of any expenditure or allowance or set off in respect of income determined by AO under section 68, 69, 69A, 69B, 69C and 69D would be permitted. Presently this provision is applicable only on such income declared by assessee in return of income. (Effective from A.Y. 2017-18). Deduction not to be allowed unless return furnished before due date Sec 80AC Scope of Section 80AC has been extended to provide that the benefit of deduction under the entire class of deduction in heading C - Deduction in respect of certain income in chapter VIA shall not be allowed unless the return of income is filed before due date specified u/s 139(1) of the Act, earlier the same was restricted only to sec 80IA, 80IAB, 80IB, 80IC, 80ID and 80IC deductions. (Effective from A.Y. 2018-19). 9
Changes in the Tax laws affecting all Assessees Encourage trading in Agriculture Commodity Derivatives (Sec 43(5)) Trading in Agriculture Commodity Derivatives, not chargeable to Commodity Transaction Tax (CTT) proposed not to be treated as speculative transaction. E-Assessment The New Approach (Sec 143(3A)) Roll out E-assessment across the country to almost eliminate person to person contact leading to greater efficiency and transparency and accountability in direct tax assessments. Rationalization of processing of return of income (Sec 143(1)(vi)) No adjustment in respect of addition of income appearing in Form 26AS or Form 16A or 16 which has not been included in return of income furnished for A.Y. 2018-19 and subsequent years in the online processing of ITRs u/s 143(1). Benefit of tax free withdrawal form NPS to non- employee Benefit of tax free withdrawal @40% from NPS will also available to non-employee subscribers. Amendment u/s 28 and 56 to tax the compensation receipts In order to expand the restrictive scope of taxation of compensation received, it is proposed to amend Section 28(ii)(e) to include any compensation (revenue or capital) received or receivable on termination or modification of any contracts relating to business or employment, and tax the same as business income or other source income under section 28 and 56(2)(xi) respectively. 10
Changes in the Tax laws affecting all Assessees The Income Computation and Disclosures Standards (ICDS) notified u/s 145(2). Delhi HC decision nullified (w.e.f. 01 st April, 2017 i.e. A.Y. 2017-18) The Delhi HC in case of The Chamber of tax consultants & others [299 CTR 137 (Delhi)], examined several ICDS which were contrary to the binding judicial precedents. Delhi HC held that such provisions are to be struck down as the same are contrary to the law settled by the various decisions of the Supreme Court and High Court and the same are ultra vires the Incometax Act. Nullifying the aforesaid decision of the Delhi HC, the Govt. has introduced the relevant provisions of ICDS in the legislative framework itself, as below: Market to market (MTM) loss or other expected loss as per ICDS-I shall be allowed as deduction under section 36 (1)(xviii) of the Act. Any gain or loss arising on account of any change in foreign exchange rates as per ICDS-VI shall be treated as income or loss under new section 43AA. Recognize ICDS-III as valid by inserting section 43CB which prescribes that the profits and gains arising from construction contracts or a contract for providing services is to be determined in accordance with the relevant ICDS notified under section 145(2). Valuation of inventory shall be in accordance with ICDS notified under section 145(2). Interest on compensation, enhanced compensation, subsidy and incentives to be taxed in the year of receipt only as per new section 145B. Claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realization is achieved as per new section 145B 11
Changes in the Tax laws affecting all Assessees Amendment in Capital gain, business profits and other sources arising out of transaction in Immovable Property - Sec 50C, 43CA and 56 : In order to cover up the cases of variation in prices that can occur for similar properties due to shape of the plot or location, it is proposed to amend Section 50C, 43CA and 56 so as to allow the variation upto five percent between the stamp duty value and sales consideration. (Effective from A.Y. 2019-20). Equity oriented Mutual Fund tax @10% With a view of providing a level playing field between growth oriented funds and dividend paying funds, it is proposed to introduce the dividend distribution tax at the rate of 10 percent on any income distributed by a Mutual Fund being an equity oriented mutual funds, earlier the DDT was paid only on specified mutual funds. Withdrawal of Exemption under Clause 10(38) and introduction of Sec 112A: In order to minimize economic distortion and curb erosion of tax base, it is proposed to insert new section 112A which provide that Long term capital gain arising on transfer of equity shares in a company, unit of equity oriented fund or unit of a business trust shall be taxed at 10 percent (without the benefit of indexation and conversion method). Cost of acquisition in respect of long term capital assets acquired before 1st Feb, 2018 shall be deemed to be higher of- actual cost of acquisition, and lower of (i) fair market value calculated in prescribed manner and (ii) Full value of consideration received as a result of transfer. This amendment will be effective from A.Y. 2019-20. 12
Changes in the Tax laws affecting all Assessees Rationalization of the provisions of Section 54EC Only capital gains arising from long-term capital assets being land or building or both as compared to existing phrase long-term capital asset", invested in long-term specified assets shall not be charged to tax. It is also proposed to consequently increase the lock in period of long-term specified assets from 3 years to 5 years for the purpose of section 54EC. Discourage Cash transactions and disallowance of expense on non- deduction of tax by Charitable and Religious Trust Provisions of section 40(a)(ia) are being made applicable to Charitable & Religious Trusts. Hence expenditure incurred without deduction of tax at source will not be eligible as application of income under section 10(23C) and section 11((1)(a). Provisions of 40A(3) and 40A(3A) are being made applicable to Charitable & Religious Trusts. Hence expenditure incurred in cash exceeding ` 10,000 will be disallowed. Prosecution for failure to furnish return- no relaxation for companies (Sec 276CC) The exemption from prosecution for non-furnishing of returns where tax liability is less than of ` 3000 is proposed to be withdrawn in respect of companies. ` 13
Changes in the Tax laws affecting Transactions & Transfer BEPS recommendations further found place in Domestic legislation- Scope of Business Connection under domestic law enlarged in line with BEPS Actions Adoption of BEPS Action - Permanent Establishment (PE) India is committed to implement BEPS standards in so far as they are beneficial to India. In order to align the concept of business connection /Permanent establishment (PE) with the international consensus / Multilateral Instrument (MLI), following amendments have been proposed in section 9 of the Act: Currently dependent agency PE is triggered on habitual conclusion of the contracts by dependent agent on behalf of the non-resident. The scope of dependent agency PE is widened to further include the activity of habitual performance of principal role by the agent leading to conclusion of contract even though it may not have the authority to conclude the contract. In age of e-commerce and to address the challenges of taxation of Digital Economy, it is proposed to further expand the scope of PE/Business connection by shifting emphasis from physical presence to significant economic presence (digital presence). This is in line with the BEPS Action 1 on Digital Economy. To attribute income to digital PE, significant economic presence shall be determined based on the aggregate of payments from digital transactions or number of users in India, the threshold of which would be prescribed by the Rules. Impact on Taxpayers: By expanding the scope of business connection / PE under Domestic Law, the Foreign taxpayers could face higher PE exposure in respect of commissionaire arrangements or having significant economic /digital presence without having any physical presence in India. This may result in additional tax burden on account of income attributable to such newly visualized PEs in India (applying the Source Country Rule) 14
Changes in the Tax laws affecting Transactions & Transfer Clarification in Country-bycountry reporting(cbcr) Rules Rationalization of CbCR provisions [Sec. 286]: In order to ease the compliance burden, time limit of furnishing CbCR is proposed to be extended to twelve (12) months from the end of relevant accounting year. However, at the same time, Finance Bill proposes to add compliance burden of filing CbCR in India, on those Indian constituent entities, whose foreign parent entity is not obliged to file CbCR in its respective jurisdiction. Promotion of International Financial Services Centre: In order to promote the development of financial infrastructure in India, tax incentive is being proposed by way granting exemption of capital gains on transfer of certain financial assets by non-resident. It is further proposed to reduce the Alternate Minimum Tax (AMT) for unit located in IFSC to 9% from 18.5%. 15
Changes in the Tax laws for Central Board of Excise & Customs to be renamed as the Central Board of and Customs. Goods & Service Tax Act No announcements with respect to Goods & Services Tax (GST) as recommendations on GST Rates and changes will come from GST Council Service Tax Retrospective exemptions have been granted: Life Insurance services provided to Coastal Guard personnel by Naval group Insurance Fund Services by GSTN to central Government, State Government or Union Territories Consideration to Govt in form of share of profit petroleum on services by way of grant of license or lease to explore/mine petroleum crude or natural gas. Customs Definition of Indian Custom waters extended to include Exclusive Economic Zone of India Education cess, Secondary and higher education cess abolished. A new levy of Social Welfare Surcharge @10% of aggregate custom duties introduced (except on IGST and compensation cess) Basic Custom Duty increased w.e.f. 02.02.2018 on following: Mobile Phones and Accessories (20%) Perfumes and Toiletry Preparations (20%) Watches and Clocks (20%) Toys and Games (20%) Imitation Jewellery (20%) Furniture (20%) Juices (50%) Automobile Parts (15%) Footwear (20%) 16
Conclusion In line with the growth in previous years, India after improving its world rankings of Ease of Doing Business is now moving to Ease of Living. The government is taking strong measures to invite investments and create seamless boundaries of trade across the ASEAN and the world for promoting industry and Make in India. Sources Speech of Hon ble Finance Minister Shri Arun Jaitley Finance Bill, 2018 Memorandum to Finance Bill, 2018 Economic Survey of India 2018 S.R. Dinodia & Co. LLP Your Intelligent Connect For more information on how S.R. Dinodia & Co. LLP can provide business solutions that work for you Contact us at srdinodia@srdinodia.com or visit us at www.srdinodia.com This information contained herein is in summary form and is therefore intended for general guidance only. This publication is not intended to address the circumstances of any particular individual or entity. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. This publication is not a substitute for detailed research and opinion. Before acting on any matters contained herein, reference should be made to subject matter experts and professional judgment needs to be exercised. S.R. Dinodia & CO. LLP cannot accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. 17
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