Khimji Kunverji & Co (Registered) Chartered Accountants UNION BUDGET 2018 ANALYSIS OF DIRECT TAX PROPOSALS www.kkc.in
A Step towards a New India - Swachh, Swasth & Samriddha India The Modi Government has successfully implemented a series of fundamental structural reforms aimed towards realising the vision of honest, clean and transparent Government - Minimum Government and Maximum Governance and improving ease of doing business in India. As a result, India now stands out amongst the fastest growing economies of the world. The government is confident of achieving growth @ 8% together with fiscal deficit target of 3.3% of GDP. The journey of economic reforms during the past few years has been challenging but rewarding. The indirect tax system, with introduction of Goods and Services Tax (GST), has been made simpler. Benefits to the poor have been targeted more effectively with use of digital technology. The demonetization of high value currency has reduced the quantum of cash currency and its circulation in India. It has increased the taxation base and spurred greater digitization of the economy. The Insolvency and Bankruptcy Code (IBC) has changed the lender-debtor relationship. The recapitalized banks will now have a greater ability to support growth. All these structural reforms in the medium and long run will help Indian economy achieve stronger growth. With this background in the present Budget, our Government has taken Ease of Doing Business further and stresses on Ease of Living for common men of this country, especially for those belonging to poor and middle class of the society. Thus, this year s Budget particularly focuses on:- Strengthening agriculture and rural economy Provision for good health care to economically less privileged & senior citizens and social security Infrastructure creation, financial sector development, increasing employment, strengthening MSME and working with the States to provide more resources for improving quality of education in the country 2
A Step towards a New India - Swachh, Swasth & Samriddha India The major Tax proposals are highlighted herein below:- Corporate tax rate reduced to 25% for companies having turnover up to Rs.250 crore 100% tax deduction to Farmer Producer Companies having annual turnover up to Rs.100 crore Deduction u/s. 80JJAA for new employment rationalized for footwear & leather industry Standard deduction of Rs.40,000 to salaried taxpayer in lieu of transport allowance & medical reimbursement Benefits to Senior citizens - exemption of interest on fixed deposits / post-offices up to Rs.50,000. Deduction for health insurance premium & general medical expenditure increased to Rs.50,000. Deduction for medical treatment of specified diseases increased to Rs.1 lakh Education Cess has now been renamed to Health & Education Cess and increased to 4% LTCG on transfer of listed equity shares & equity oriented MF units taxable @ 10% without indexation benefit on LTCG > Rs.1 lakh DDT on dividend payouts to unit holders of equity oriented MFs to be taxed @ 10% Proposal to roll out E-assessment across the country Increase in custom duty on import of mobile phones, LED panels, high end cosmetics, luxury vehicles etc. Levy of 3% Education cess replaced by a Social welfare surcharge at the rate of 10% on import of goods We hope that our analysis of the tax proposals will help you to analyse the provisions of the Finance Bill 2018. - Team Khimji Kunverji & Co. 3
TABLE OF CONTENTS Tax Rates Personal Tax Charitable Trusts & Institutions Business & Other Sources Real Estate Sector Income Computation & Disclosure Standards (ICDS) Facilitating Insolvency Resolution Measures to promote International Financial Services Centre (IFSC) Capital Gains Dividend International Tax & Transfer Pricing Return Processing & Assessment Procedures Penalty & Prosecution 4
TAX RATES
TAX RATES SUBSTITUTION OF EDUCATION CESS WITH HEALTH & EDUCATION CESS Education Cess @ 2% & Secondary and Higher Education Cess @ 1% have been discontinued. Health and Education Cess (HEC) introduced: Proposed to be levied @ 4% on income tax including surcharge, wherever applicable No HEC on TDS / TCS in case of domestic company & any other person resident in India HEC applicable on TDS in case of salary payments, non-residents & foreign companies FOR INDIVIDUALS, HUFs, AOPs, BOIs & ARTIFICIAL JURIDICAL PERSONS (AJPs) Tax Rates, Surcharge and Rebate remain unchanged TAX RATES < 60 years of age 60 80 years of age > 80 years of age Slab of Income Tax Rates Slab of Income Tax Rates Slab of Income Tax Rates 2.5L NIL 3L NIL 2.5L 5L 5% 3L 5L 5% 5L NIL 5L 10L 20% 5L 10L 20% 5L - 10L 20% 10L 30% 10L 30% 10L 30% SURCHARGE Total Income Rate of Surcharge Between Rs.50 Lakhs Rs.1 Crore 10% > Rs.1 crore 15% REBATE U/S. 87A (only for Resident Individuals) Total Income Amount of Rebate u/s. 87A < Rs.3.5 Lakhs Rs.2,500 6
TAX RATES FOR INDIVIDUALS, HUFs, AOPs, BOIs & AJPs: IMPACT ON TAX LIABILITY Total Income Slabs Total Income Tax Liability (Rs. in Lakh) Before 80C After 80C Current Proposed Decrease / (Increase) in Tax Liability 2.5 L - 3 L 4.5 3 - - - 3.1 L - 3.5 L 4.6 3.1 515 520 (5) 5 3.5 2,575 2,600 (25) 5.5 4 7,725 7,800 (75) 4 L - 5 L 6 4.5 10,300 10,400 (100) 6.5 5 12,875 13,000 (125) 8.5 7 54,075 54,600 (525) 61.5 60 18,26,963 18,44,700 (17,738) 5 L - 100 L 76.5 75 23,36,813 23,59,500 (22,688) 91.5 90 28,46,663 28,74,300 (27,638) 101.5 100 31,86,563 32,17,500 (30,938) > 100 L 601.5 600 2,10,98,906 2,13,03,750 (2,04,844) NCLUDING LLPs) & LOCAL AUTHORITIES ALTERNATE MINIMUM TAX (AMT) Current Proposed If Adjusted Total Income 1 Cr > 1 Cr If Adjusted Total Income 1 Cr > 1 Cr Tax rate 18.5% 18.5% Tax rate 18.5% 18.5% Surcharge - 15% Surcharge - 15% Edu. Cess 3% 3% Health & Edu. Cess 4% 4% Total 19.06% 21.91% Total 19.24% 22.13% 7
TAX RATES FOR CO-OPERATIVE SOCIETIES: Tax Rates remain unchanged. Surcharge @ 12% in case total income > Rs.1 crore Edu. Cess @ 3% substituted with Health & Edu. Cess @ 4% - applicable on (tax + surcharge) Slab of income Tax Rate Rs.10,000 10% Rs.10,000 Rs.20,000 20% > Rs.20,000 30% FIRMS (INCLUDING LLPs) & LOCAL AUTHORITIES Current Proposed Total income Rs.1 Cr. > Rs.1 Cr. Total income Rs.1 Cr. > Rs.1 Cr. Tax rate 30% 30% Tax rate 30% 30% Surcharge 0 12% Surcharge 0 12% Edu. Cess 3% 3% Health & Edu. Cess 4% 4% Total 30.90% 34.61% Total 31.20% 34.94% ALTERNATE MINIMUM TAX (AMT) FOR CO-OPERATIVE SOCIETIES, FIRMS (INCL. LLPs) & LOCAL AUTHORITIES Current Proposed If Adjusted Total Income 1 Cr > 1 Cr If Adjusted Total Income 1 Cr > 1 Cr Tax rate 18.5% 18.5% Tax rate 18.5% 18.5% Surcharge - 12% Surcharge - 12% Edu. Cess 3% 3% Health & Edu. Cess 4% 4% Total 19.06% 21.34% Total 19.24% 21.55% 8
TAX RATES FOR DOMESTIC COMPANIES: If Total Income (Rs.) If Total Turnover / Gross Receipts (Rs.) Current Proposed < 1 Cr. 1 Cr. - 10 Cr. > 10 Cr. < 1 Cr. 1 Cr. - 10 Cr. > 10 Cr. In FY 2015-16 In FY 2016-17 50 Cr. > 50 Cr. 50 Cr. > 50 Cr. 50 Cr. > 50 Cr. 250 Cr > 250 Cr 250 Cr > 250 Cr 250 Cr Tax rate 25% 30% 25% 30% 25% 30% 25% 30% 25% 30% 25% 30% Surcharge 0% 0% 7% 7% 12% 12% 0% 0% 7% 7% 12% 12% EC / HEC (#) 3% 3% 3% 3% 3% 3% 4% 4% 4% 4% 4% 4% Total (in %) 25.75 30.9 27.55 33.06 28.84 34.61 26 31.20 27.82 33.38 29.12 34.94 > 250 Cr TAX ON INCOME OF CERTAIN DOMESTIC COMPANIES [S.115BA] Currently, certain domestic companies have an option of paying tax @ 25% tax rate, if company: is engaged solely in business of manufacture or production of any article or thing and research in relation thereto, or distribution of such article or thing manufactured by it has not claimed any benefit u/s.10aa, additional depreciation, investment allowance, expenditure on scientific research & any deduction under Part-C of Chapter-VI-A other than S.80JJAA; and furnished its option before the due date of filing ROI It is proposed to clarify that: such option of paying tax @ 25% shall be restricted to income from the business of manufacturing, production, research or distribution of any article or thing as referred to above; and income which are at present taxed at a scheduler rate will continue to be so taxed at such rates. [w.r.e.f. AY 2017-18] 9
TAX RATES FOR FOREIGN COMPANIES: Current Proposed If Total Income (Rs.) < 1 Cr 1 Cr - 10 Cr > 10 Cr If Total Income (Rs.) < 1 Cr 1 Cr - 10 Cr > 10 Cr Tax rate 40% 40% 40% Tax rate 40% 40% 40% Surcharge 0 2% 5% Surcharge 0 2% 5% Edu. Cess 3% 3% 3% Health & Edu. Cess 4% 4% 4% Total 41.20 42.02 43.26 Total 41.60 42.43 43.68 MINIMUM ALTERNATE TAX (MAT) FOR DOMESTIC & FOREIGN COMPANIES: Current Proposed BOOK PROFIT < 1 Cr 1 Cr - 10 Cr > 10 Cr BOOK PROFIT < 1 Cr 1 Cr - 10 Cr > 10 Cr Tax rate 18.5% 18.5% 18.5% Tax rate 18.5% 18.5% 18.5% Surcharge - 7% 12% Surcharge - 7% 12% Edu. Cess 3% 3% 3% Health & Edu. Cess 4% 4% 4% Total 19.06 20.39 21.34 Total 19.24 20.59 21.55 TAX ON DIVIDEND DISTRIBUTED (DDT) BY DOMESTIC COMPANIES [S.115-O] Particulars CURRENT PROPOSED DDT 15% 15% Surcharge 12% 12% EC / HEC 3% 4% DDT on grossed-up dividend 17.304% 17.472% Effective DDT 20.92% 21.171% 10
TAX RATES COMPARATIVE ANALYSIS OF DOMESTIC CO. V/S FOREIGN CO. V/S FIRM (OR LLP) CURRENT PROPOSED Domestic Co. Foreign Co. Firm / LLP Domestic Co. Foreign Co. Firm / LLP Turnover 50 crore 250 crore NA NA in FY 2015-16 in FY 2016-17 NA NA Effective Tax Rate * 28.84% 43.26% 34.61% 29.12% 43.68% 34.94% PBT 100.00 100.00 100.00 100.00 100.00 100.00 Less: Tax 28.84 43.26 34.61 29.12 43.68 34.94 PAT 71.16 56.74 65.39 70.88 56.32 65.06 Less: DDT 14.89 - - 15.01 - - Cash-on-hand 56.27 56.74 65.39 55.87 56.32 65.06 CURRENT PROPOSED Domestic Co. Foreign Co. Firm / LLP Domestic Co. Foreign Co. Firm / LLP Turnover > 50 crore > 250 crore NA NA in FY 2015-16 in FY 2016-17 NA NA Effective Tax Rate * 34.61% 43.26% 34.61% 34.94% 43.68% 34.94% PBT 100.00 100.00 100.00 100.00 100.00 100.00 Less: Tax 34.61 43.26 34.61 34.94 43.68 34.94 PAT 65.39 56.74 65.39 65.06 56.32 65.06 Less: DDT 13.68 - - 13.77 - - Cash-on-hand 51.71 56.74 65.39 51.29 56.32 65.06 (*) Effective Tax Rate is inclusive of Surcharge @ maximum rate and Edu. Cess @ 3% (current) or Health & Edu. Cess @ 4% (proposed) 11
PERSONAL TAX
PERSONAL TAX TAX-EXEMPTION FOR PARTIAL WITHDRAWAL FROM NATIONAL PENSION SYSTEM (NPS) EXTENDED TO ALL SUBSCRIBERS [S.10(12A)] Currently, payment from NPS trust to an employee on closure of his account or opting out is exempt up to 40% of total amount payable to him. This exemption is not available to non-employee subscribers. It is proposed to extend this benefit to all subscribers. DEDUCTION IN RESPECT OF MEDICLAIM / HEALTH CHECKUP [S. 80D] Currently, a deduction up to Rs.30,000/- is allowed to an individual & HUF, in respect of payments towards annual premium on health insurance policy, or preventive health check-up, of a senior citizen, or medical expenditure in respect of very senior citizen. It is proposed to raise this limit to Rs.50,000/- In case of single premium health insurance policies having cover of > 1 year, it is proposed that deduction shall be allowed on proportionate basis for the number of years for which health insurance cover is provided, subject to the specified monetary limit. HEALTH INSURANCE PREMIUM (INCLUDING PREVENTIVE HEALTH CHECKUP) + MEDICAL EXPENDITURE CASE CURRENT PROPOSED Individual & his family (Age<60 Yrs.) 25,000 25,000 Individual & his family (Age>60 Yrs.) 30,000 50,000 Parents (Age <60 yrs., resident) 25,000 25,000 Parents (Age >60 yrs., resident) 30,000 50,000 Agg. deduction if a ee & his parents are not a senior citizen 50,000 50,000 Agg. deduction if a ee is not a senior citizen & his parents are a senior citizen 55,000 75,000 Agg. deduction if a ee & his parents are a senior citizen 60,000 1,00,000 13
PERSONAL TAX DEDUCTION IN RESPECT OF MEDICAL TREATMENT [S.80DDB] Currently, a deduction is available to an individual & HUF in respect of amount paid for medical treatment of specified diseases for senior citizens up to Rs.60,000/- & in case of very senior citizens, up to Rs.80,000/-. It is proposed to raise the limit of deduction to Rs.1,00,000/- for both senior citizens & very senior citizens. DEDUCTION IN RESPECT OF INTEREST INCOME TO SENIOR CITIZEN [New S.80TTB & S.194A] Currently, a deduction up to Rs.10,000/- is allowed to an individual & a HUF in respect of interest income from savings account with a banking company, a co-operative society engaged in carrying on business of banking & a Post Office. It is proposed to increase the limit of this deduction up to Rs.50,000/- in respect of interest income from such deposits held by senior citizens. Consequently, it is proposed to increase the threshold limit for TDS on such interest income paid to senior citizens from Rs.10,000/- to Rs.50,000/-. [w.e.f. 01.04.2018] DEDUCTION FOR SALARIED ASSESSEES [S. 16] Currently, while computing income chargeable under the head Salaries, exemptions of Rs.1,600/- per month & up to Rs.15,000/- per annum are allowed for Transport Allowance & reimbursement of medical expenses by the employer respectively It is proposed to withdraw the aforesaid exemptions (except Transport Allowance in case of differently abled persons) & allow a standard deduction up to Rs.40,000/- or the amount of salary received, whichever is less. 14
CHARITABLE TRUSTS AND INSTITUTIONS
CHARITABLE TRUSTS AND INSTITUTIONS DISALLOWANCE IN CASE OF PAYMENTS MADE WITH NON-DEDUCTION OF TDS & CASH PAYMENTS [S.10(23C), S.11, S.40(a)(ia), S.40A(3), S.40A(3A)] Currently, payments made by charitable trusts & other exempt entities covered u/s. 11 and clauses (iv), (v), (vi) & (via) of S.10(23C) are not subject to any disallowance u/s. 40(a)(ia) or 40A(3) or 40A(3A). It is proposed that payments made without deducting applicable TDS would attract a disallowance of 30% of sum payable by the above mentioned entities. If TDS for the same payment is deducted in the subsequent year, then the 30% previously disallowed will be allowed as a deduction in the subsequent year. Also, if such an entity makes cash payment > Rs.20,000 per person per day, then the whole amount would not be allowed as deduction. 16
BUSINESS & OTHER SOURCES
BUSINESS & OTHER SOURCES TAXABILITY OF COMPENSATION IN CONNECTION TO BUSINESS OR EMPLOYMENT [S.28 & S.56] The scope of compensation taxed so far is proposed to be expanded to include any compensation received/receivable, whether of revenue/capital nature, in connection with termination/modification of terms & conditions of any contract: relating to business to be taxable u/s 28(ii)(e) relating to employment to be taxable u/s 56 PRESUMPTIVE INCOME IN CASE OF GOODS CARRIAGE [S.44AE] Currently, the presumptive income scheme of Rs.7,500 p.m. per goods carriage is applicable uniformly to all classes of goods carriages irrespective of their tonnage capacity For heavy goods vehicle (gross vehicle weight of > 12,000 kg): It is proposed to enhance income to Rs.1,000 per ton of gross vehicle weight/unladen weight, p.m. or part of the month during which vehicle is owned by assessee. INCOME OF FARM PRODUCER COMPANIES [New S.80PA] Currently, S.80P provides for 100% deduction in respect of profit of co-operative society which provides assistance to its members engaged in primary agricultural activities. It is proposed to extend this benefit to Farm Producer Companies, having a total turnover up to Rs.100 Crore, whose gross total income includes any income from: marketing of agricultural produce grown by its members, or purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for purpose of supplying them to its members, or processing of agricultural produce of its members The benefit shall be available for a period of 5 years from FY 2018-19. 18
BUSINESS & OTHER SOURCES MEASURES TO PROMOTE START-UPS [S.80IAC] 100% deduction is available in respect of profits derived by an eligible start-up from an eligible business : At the option of the assessee, benefit can be availed for 3 consecutive years out of 7 years beginning from year of incorporation Eligible start-up is a Co. engaged in eligible business provided that: It is incorporated on or after 01-04-2016 but before 01-04-2019 Total turnover of business Rs. 25 crore in any year from PY 2016-17 to PY 2020-21 It holds a certificate of eligible business from Inter-Ministerial Board of Certification as notified by Govt. ( IMBC ) Eligible business means a business involving innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property To improve the effectiveness of the scheme for promoting start-ups in India, it is proposed as under: The benefit of 100% deduction of profits to be extended to start ups incorporated up to 31-03-2021 The requirement of turnover Rs.25 crore would apply to 7 PYs commencing from the date of incorporation The definition of eligible business has been expanded means an eligible start-up engaged in innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation [w.e.f. AY 2018-19] INCENTIVE FOR EMPLOYMENT GENERATION [S.80-JJAA] Currently, in case of tax payers subject to tax audit, a deduction of 30% is allowed (in addition to normal deduction of 100%) in respect of emoluments paid to new employees employed for a minimum period of 240 days during the year (relaxed to 150 days in case of apparel industry). The minimum period of employment of 150 days is proposed to be extended to footwear & leather industry. Further, it is also proposed to allow deduction of 30% for employee who is employed for less than the minimum period during the 1 st year but continues to remain employed for the minimum period in subsequent years.
BUSINESS & OTHER SOURCES CONVERSION OF STOCK-IN-TRADE INTO CAPITAL ASSET [S.2(24), S.2(42A), S.28 & S.49] Currently, conversion of capital asset into stock in trade is taxable. It is now proposed to tax income arising on conversion/ treatment of stock in trade into capital asset. For this purpose: Fair market value of inventory on date of conversion/ treatment as capital asset shall be: Full value of consideration for the purpose of computing business profits Cost of acquisition for computation of capital gains arising on subsequent transfer of such capital asset Period of holding of such capital asset shall be from date of conversion/ treatment as capital asset DEDUCTIONS IN RESPECT OF CERTAIN INCOMES NOT TO BE ALLOWED UNLESS RETURN IS FILED BY DUE DATE [S.80AC] Currently, no deduction is admissible u/s. 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID & 80-IE, unless return is filed on or before due date specified u/s. 139(1) It is proposed to extend condition of mandatory filing of return before due date for claiming any deduction under the head Chapter VI-A: C Deductions in respect of certain incomes (i.e., S.80H to S.80TT) [w.e.f. AY 2018-19] 20
REAL ESTATE SECTOR
REAL ESTATE SECTOR VARIATION BETWEEN STAMP DUTY VALUE & SALE CONSIDERATION [S.50C, S.43CA & S.56] Currently, while taxing income from capital gains (S.50C), business profits (S.43CA) & other sources (S.56) arising out of transactions in immovable property, the higher of sale consideration or stamp duty value is adopted To minimize hardship in case of genuine transactions, it is proposed that consideration so received shall be deemed to be full value of consideration in cases where variation between stamp duty value & sale consideration is 5% of sale consideration 22
INCOME COMPUTATION & DISCLOSURE STANDARDS (ICDS) CA Kamlesh Vikamsey 23
INCOME COMPUTATION & DISCLOSURE STANDARDS (ICDS) The Hon ble Delhi High Court in the case of Chamber of Tax Consultants v. Union of India [2017] (87 taxmann.com 92) struck down various provisions of ICDS notified u/s. 145(2) as ultra-vires the provisions of the Act. In order to bring certainty on the issue of applicability & legitimacy of ICDS, it is proposed to amend the provisions of the Act to legitimize the provisions of ICDS as under: ALLOWABILITY OF MARKED-TO-MARKET (MTM) LOSS OR OTHER EXPECTED LOSS [New S.36(1)(xviii), New S.40A(13)] MTM loss or other expected loss shall be allowed as a deduction, to the extent and in the manner provided in the relevant ICDS TAX ON GAIN/LOSS ARISING ON ACCOUNT OF EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES [NEW. S.43AA] Subject to S.43A, any gain or loss arising on account of effects of changes in foreign exchange rates shall be taxed in the manner provided in the relevant ICDS in respect of all foreign currency transactions including those relating to: i. monetary items and non-monetary items ii. translation of financial statements of foreign operations iii. forward exchange contracts iv. foreign currency translation reserves REVENUE RECOGNITION FOR CONSTRUCTION CONTRACTS & SERVICES [NEW S.43CB] Profits arising from construction contract or provision of services shall be determined on the basis of percentage of completion method (POCM) except in the following cases: For service contracts with duration of 90 days: Follow project completion method Services involving indeterminate number of acts over a specific period of time: Follow straight line method Contract revenue shall include retention money Contract cost shall not be reduced by incidental interest, dividend & capital gains [w.r.e.f. AY 2017-18] 24
INCOME COMPUTATION & DISCLOSURE STANDARDS (ICDS) METHOD OF ACCOUNTING IN CERTAIN CASES [Substituted S.145A, New S.145B] Valuation of various inventory for the purpose of determining Business Income to be: a) At lower of actual cost or net realizable value (NRV) computed in the manner provided in ICDS b) In case of Unlisted securities or listed but not quoted securities: At actual cost initially recognised in the manner provided in ICDS c) In case of Listed securities: At lower of actual cost or NRV, category-wise, in the manner provided in ICDS Interest received by an assessee on compensation or on enhanced compensation shall be deemed to be income of the year in which it is received Claim for escalation of price in a contract or export incentives shall be deemed to be income of the year in which reasonable certainty of its realisation is achieved, irrespective of whether the claims have been accepted by the other party or the Government. Assistance in the form of subsidies or grants or incentives, by whatever name called, shall be deemed to be income of the year in which it is received, if not charged to income tax for any earlier year, irrespective of whether the conditions attached to such grant have been fulfilled or not. [w.r.e.f. AY 2017-18] 25
Variation between stamp duty value & sale consideration [S.50C, S.43CA & S.56] Currently, while taxing income from capital gains (S.50C), business profits (S.43CA) & other sources (S.56) arising out of transactions in immovable property, the higher of sale consideration or stamp duty value is adopted FACILITATING INSOLVENCY RESOLUTION To minimize hardship in case of genuine transactions, it is proposed that consideration so received shall be deemed to be full value of consideration in cases where variation between stamp duty value & sale consideration is 5% of sale consideration 26
FACILITATING INSOLVENCY RESOLUTION RELIEF FROM LIABILITY OF MINIMUM ALTERNATE TAX (MAT) [S.115JB] Currently, while computing book profit for all classes of companies, S.115JB provides for a deduction in respect of lower of loss brought forward or unabsorbed depreciation except where either of the amounts is Nil. In case a company s application for corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC) has been admitted by the Adjudicating Authority, it is proposed that, for computing book profit, a deduction in respect of aggregate amount of unabsorbed depreciation and loss brought forward shall be allowed. [w.e.f. AY 2018-19] BENEFIT OF CARRY FORWARD & SET OFF OF LOSSES IN CASE OF CHANGE IN OWNERSHIP [S.79] S.79 provides for carry forward & set off of losses in a closely held company only if there is a continuity in the beneficial owner of shares carrying 51% of voting power, on the last day of the years in which loss was incurred Generally, the case of a company seeking insolvency resolution under IBC involves a change in beneficial owners of shares beyond permissible limit u/s. 79 It is proposed to relax the rigors of S.79 in case of companies whose resolution plan has been approved under IBC after affording a reasonable opportunity of being heard to jurisdictional PCIT or CIT [w.e.f. AY 2018-19] VERIFICATION OF RETURN OF INCOME [S.140] It is proposed that in case of a company admitted for resolution process under IBC, the return shall be verified by an insolvency professional appointed by the Adjudicating Authority under IBC [w.e.f. 01.04.2018] 27
MEASURES TO PROMOTE IFSC
MEASURES TO PROMOTE INTERNATIONAL FINANCIAL SERVICES CENTRE (IFSC) TAX NEUTRALITY RELATING TO CERTAIN TRANSFERS[S.47] It is proposed that transactions in following assets by a non-resident on a recognized stock exchange located in any IFSC shall not be treated as transfer if consideration is paid or payable in foreign Currency: Bond or Global Depository Receipt, as referred to in S.115AC(1), or Rupee denominated bond of an Indian company, or Derivative REDUCTION IN RATE OF ALTERNATE MINIMUM TAX (AMT) [S.115JC, S.115JF] Currently, Alternate Minimum Tax (AMT) is levied @ 18.50% of adjusted total income in the case of a non-corporate person. Further, Minimum Alternate Tax (MAT) is levied @ 9% of Book Profit in case of a company, being a unit located in an IFSC, and deriving its income solely in convertible foreign exchange. It is proposed that rate of AMT for a person (other than a company), being a unit located in an IFSC, and deriving its income solely in convertible foreign exchange, shall be @ 9% of adjusted total income. 29
CAPITAL GAINS
CAPITAL GAINS NEW REGIME FOR TAXATION OF LONG-TERM CAPITAL GAINS ON SALE OF EQUITY SHARES ETC. [S.10(38), New S.112A] Currently, long term capital gains (LTCG) arising from transfer of long term capital assets, being equity shares of a company or an unit of equity oriented fund or an unit of business trusts is exempt from income-tax if In case of equity share in a company: Securities Transaction Tax (STT) has been paid on both acquisition & transfer; and In case of Unit of an equity oriented fund or a unit of a business trust: STT has been paid on transfer It is proposed to withdraw this exemption & to tax such LTCG > Rs.1 lakh arising from such transfers @ 10%. Such LTCG will be computed without inflation indexation. The benefit of computation of capital gains in foreign currency in the case of a non-resident will also not be allowed. Cost of acquisition for such capital assets acquired before 1st February 2018, shall be deemed to be the higher of actual cost of acquisition of such asset; and lower of Fair Market Value (FMV) of such asset; and full value of consideration received on transfer of such capital asset. FMV means In case of listed security: Highest quoted price on 31st January 2018 However, where the security is not traded on 31st January 2018, the highest quoted price of such security on a date immediately preceding 31st January 2018 when such security was traded In case of unlisted security: Net asset value of such security as on 31st January 2018 Equity oriented fund means a fund set up under a scheme of a mutual fund specified u/s. 10(23D) and In a case where the fund invests in the units of another fund which is traded on a recognized stock exchange- Minimum of 90% of total proceeds of such funds is invested in units of such other fund; and such other fund also invests a minimum of 90% of its total proceeds in equity shares of domestic companies listed on recognized stock exchange; and In any other case, a minimum of 65% of total proceeds of such fund is invested in equity shares of domestic companies listed on recognized stock exchange. Similar treatment to be extended to Foreign Institutional Investors (FII) (S.115AD) In case of non-residents / foreign companies, TDS to be deducted @ 10% on such LTCG. 31
CAPITAL GAINS TAX NEUTRAL TRANSFERS [S.56] Currently, S.56 taxes receipts without adequate consideration subject to certain exclusions. Such exclusions include certain transactions not regarded as transfer u/s. 47 for the purpose of capital gains tax. Transfers between a wholly owned subsidiary company & its holding company were earlier not considered in such exclusions. It is now proposed to exclude such transfers between a wholly owned subsidiary company & its holding company from the scope of S.56. RESTRICTING SCOPE OF EXEMPTIONS FROM LTCG [S.54EC] Currently, capital gains arising from transfer of any long-term capital asset are exempt from tax if the same are invested within a period of 6 months of such transfer in the long-term specified asset, being any bond, redeemable after 3 years and issued by the National Highways Authority of India (NHAI) or by the Rural Electrification Corporation Limited (RECL); or any other bond notified by the Central Government in this behalf. It is proposed to: restrict this exemption only to capital gains arising from long-term capital assets, being land or building or both and increase tenure of the bonds from 3 years to 5 years. MEASURES TO PROMOTE INTERNATIONAL FINANCIAL SERVICES CENTER (IFSC) [S.47, S.115JC, S.115JF] It is proposed that transactions in following assets by a non-resident on a recognized stock exchange located in any IFSC shall not be treated as transfer if consideration is paid or payable in foreign Currency: Bond or Global Depository Receipt, as referred to in S.115AC(1), or Rupee denominated bond of an Indian company, or Derivative Currently, Alternate Minimum Tax (AMT) is levied @ 18.50% of adjusted total income in the case of a non-corporate person. It is proposed that rate of AMT for a unit located in IFSC shall be @ 9%. 32
CAPITAL GAINS TAX TREATMENT OF TRANSACTIONS IN RESPECT OF TRADING IN AGRICULTURAL COMMODITY DERIVATIVES [S.43(5)] It is proposed that trading in agricultural commodity derivatives on a recognized stock exchange shall not be treated as a speculative transaction even if no Commodities Transaction Tax (CTT) has been paid in respect of those derivative transactions. PROVISIONS RELATING TO COMMODITY TRANSACTION TAX [S.116, S. 117, S.118 of Finance Act, 2013] Currently, CTT is levied @ 0.01% of price at which the commodity derivative is traded (in respect of commodities, other than agricultural commodities, traded in recognised association) which is payable by the seller. It is proposed to levy CTT on sale of an option on commodity derivatives as under: SR. NO. TAXABLE COMMODITIES TRANSACTION RATE VALUE PAYABLE BY 1. Sale of an option on commodity derivative 0.05% the option premium Seller 2. Sale of an option on commodity derivative, where option is exercised 0.0001% the settlement price Purchaser [w.e.f. AY 2018-19] 33
DIVIDEND
DIVIDEND DEEMED DIVIDEND & DDT THEREON [S.2(22), Chapter XII-D of Income Tax Act,1961, S.115-O] Currently, distribution of accumulated profits (whether capitalized or not) to its shareholders by a company is Deemed Dividend for purpose of income tax whether it is in the nature of a) release of all or any of its assets, b) issue of debentures in any form (with or without interest) or distribution of bonus to its preference shareholders, c) distribution of proceeds on liquidation, d) on the reduction of capital, or e) in the case of an unlisted company, any loan or advance given to a shareholder having shareholding of 10% or above, or to a concern in which such shareholder holds substantial interest (> 20% of shareholding or interest) or any payment by such company on behalf of or for the individual benefit of such shareholder. Currently, accumulated profits for this purpose, is defined as all profits of the company up to the date of distribution or payment or liquidation, subject to certain conditions With a view to prevent the abusive arrangement by companies with large accumulated profits of adopting the amalgamation route to reduce capital and circumvent deemed dividend, it is proposed that in the case of an amalgamated company, accumulated profits, whether capitalised or not, or losses, as the case may be, shall be increased by the accumulated profits of the amalgamating company, whether capitalized or not, on the date of amalgamation. [w.e.f. AY 2018-19] Currently, deemed dividend u/s. 2(22)(e) [mentioned in point (e) above] is taxed in the hands of the recipient at the applicable marginal rate. It is proposed to bring such deemed dividend at par with the taxation of other dividend/ deemed dividends, whereby such deemed dividend would be exempt in the hands of recipient and would be subject to dividend distribution tax (DDT) u/s. 115-O @ 30% (without grossing up) [w.e.f. 01.04.2018] 35
DIVIDEND DDT ON DIVIDEND PAYOUTS TO UNIT HOLDERS IN AN EQUITY ORIENTED FUND [S.115R] Currently, any income distributed to a unit holder by Mutual Fund being, an equity oriented fund, is not subject to DDT. DDT Rates Payable (by MF) Current Type of Mutual Fund Individual / HUF Any Other Person Non Resident Individual Company Equity Oriented Schemes (*) Nil Nil Nil Nil Money Market Mutual Fund or Liquid fund 25% 30% 25% 30% Other Funds 25% 30% 25% 30% Infrastructure Debt Fund 25% 30% 5% 5% (*) It is proposed that any income distributed by a Mutual Fund being, an equity oriented fund, the mutual fund will be subject to DDT @ 10% on income so distributed. For this purpose, equity oriented fund will have the same meaning assigned to it in the new S.112A as discussed above. [w.e.f. 01.04.2018] 36
INTERNATIONAL TAX & TRANSFER PRICING
INTERNATIONAL TAX & TRANSFER PRICING ALIGNING SCOPE OF BUSINESS CONNECTION WITH MODIFIED PE RULE AS PER MULTILATERAL INSTRUMENT (MLI) [Explanation 2(a) to S. 9(1)(i)] Income of a non-resident through or from a Business Connection in India is deemed to accrue or arise in India. A Business Connection is defined to include any business activity carried out through a person who, acting on behalf of a nonresident, has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident To align the scope of business connection with the provisions of DTAAs, as modified by MLI, it is proposed that Business Connection shall, in addition to the above, include any business activity carried through a person who, acting on behalf of the non-resident: habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by that non-resident and the contracts are in the name of the non-resident; or for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that the nonresident has the right to use; or for the provision of services by that non-resident Scope of Business connection expanded to include Significant Economic presence [New Explanation 2A to S.9(1)(i)] Currently, S.9(1)(i) provides for physical presence based nexus or existence of a Dependent Agent for taxation of business income of a non-resident in India resulting in exclusion of emerging business models such as digitized businesses which do not require physical presence of itself or any agent in India In line with the OECD BEPS Action Plan 1, to address tax challenges in a digital economy, it is proposed: To expand the scope of business connection to include significant economic presence in the form of: 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 transactions during the year exceeds a prescribed amount; or systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means whether or not the non-resident has a residence or place of business in India or renders services in India that only so much of income as is attributable to such transactions or activities shall be deemed to accrue or arise in India 38
INTERNATIONAL TAX & TRANSFER PRICING PROVISIONS OF MAT NOT APPLICABLE FOR FOREIGN COMPANIES HAVING CERTAIN INCOMES [Explanation 4A to S.115JB] It is proposed to clarify that provisions of MAT shall be deemed never to have been applicable to foreign companies whose total income comprises solely of profits & gains from business referred to in: S.44B Shipping business S.44BB Exploration etc. of mineral oils S.44BBA Operation of aircrafts S.44BBB Civil Construction etc. in certain turnkey power projects and such income has been offered to tax at specified rates [w.r.e.f. AY 2001-02] RATIONALISATION OF PROVISIONS RELATING TO COUNTRY-BY-COUNTRY REPORT (CbCR) [S.286] To improve effectiveness & reduce compliance burden, due date of furnishing CbCR for obligated entities is proposed to be extended to 12 months from end of reporting accounting year It is proposed that a constituent entity resident in India, having a non-resident parent, shall also furnish CbCR in case its parent entity outside India has no obligation to file CbCR in the latter s country or territory It is proposed that due date for furnishing of CbCR by Alternate Reporting Entity (ARE) of an international group, the parent entity of which is outside India, with tax authority of country or territory of which it is resident, will be the due date specified by that country or territory [w.r.e.f. AY 2017-18] 39
RETURNS PROCESSING & ASSESSMENT PROCEDURES
RETURNS PROCESSING & ASSESSMENT PROCEDURES ADJUSTMENTS DURING PROCESSING RETURN OF INCOME [S.143(1)(a)] Currently, at the time of processing of returns, the total income or loss is computed after adjusting, inter alia, addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return. It is proposed to remove the aforesaid adjustment in respect of returns furnished for AY 2018-19 and onwards. [w.e.f. AY 2018-19] NEW SCHEME FOR SCRUTINY ASSESSMENT [New S.143 (3A) / (3B) / (3C)] To impart greater transparency & accountability, eliminate interface between Assessing Officer & assessee, for optimal utilization of resources & introduction of team-based assessment, it is proposed to notify: a new scheme for electronic scrutiny assessments any provisions of the Act relating to assessment that shall not apply, or shall apply with exceptions, modifications and adaptations, in this regard (provided that no direction shall be issued for this purpose after 31-03-2020) Every notification in this regard shall be placed before each House of Parliament, as soon as may be. [w.e.f. 01.04.2018] 41
PENALTY & PROSECUTION
PENALTY & PROSECUTION PENALTY FOR FAILURE TO FURNISH STATEMENT OF FINANCIAL TRANSACTION OR REPORTABLE ACCOUNT [S.271FA] Failure to furnish statement u/s. 285BA(1) within prescribed time Failure to furnish statement within time specified in notice issued u/s. 285BA(5) Current Rs.100 for every day of default Rs.500 for every day of default Proposed Rs.500 for every day of default Rs.1,000 for every day of default [w.e.f. 01.04.2018] PROSECUTION FOR FAILURE TO FURNISH RETURN [S.276CC] S.276CC provides for prosecution of any person in case of willful delay in furnishing return of income except in cases where tax payable by him, as reduced by advance tax & TDS is < Rs.3,000/-. It is proposed to withdraw this exception in case of a company. [w.e.f. 01.04.2018] 43
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