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Budget 2018: Key Corporate Tax Amendments

February 2, 2018 12348 Views
Sujay Paul
Chartered Accountant
Archana Kumar
Chartered Accountant

The Finance Minister presented the much-awaited last full year Budget of the current Government. While the taxpayer community including India Inc. had high hopes from the Budget, the FM had to balance the expectations while managing the fiscal deficit targets and provide impetus to economic growth and job creation. The Budget is largely focused on bringing reforms and creating wider socio-economic impact, while providing marginal relief to individual taxpayers. For corporate taxpayers, the direct tax proposals were largely directed to achieve rationalization, barring a few major amendments.

Given the current buoyancy in stock markets and to encourage investments in non-financial assets, the current tax exemption available to long terms capital gains on listed shares and equity oriented funds under section 10(38) of the Income Tax Act, 1961 ('the Act') is proposed to be withdrawn. Effective 1 April 2018, long-term capital gain exceeding INR 1 lakh, from transfer of these assets will be subject to tax at 10 percent, without giving the effect of indexation. The gains accrued till 31 January 2018 are proposed to be grandfathered.

The reduction of headline corporate tax rate from 30% to 25% for companies having a turnover upto INR 250 crores in the FY 2016-17 is a welcome move. The benefit would extend to 99% of the corporate tax payers and is directed to provide relief to the MSME sector. However, considering the increase in cess from the current 3% to 4%, the effective rate may still be higher than the effective rates in other major economies, including the US. The FM could have clarified that the reduced rate will also apply to newly incorporated companies.

The definition of 'start-up' has been widened to include 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.

The Finance Act, 2016 broadened the scope of section 80JJAA of the Act to promote employment generation across industries. The benefit under this section has now been extended to employees not meeting the threshold of 240 days in the year of joining, but meet this threshold in the subsequent year.

India has been a frontrunner in adopting the OECD BEPS Action Plans recommendations. While it introduced Equalization Levy in 2016, in 2017 India brought limitation on interest deductibility based on EBIDTA. India also became a signatory to Multilateral Instrument ('MLI') in 2017. In order to align the scope of dependent agent stipulated in 'business connection' under the domestic tax law with the BEPS Action Plan 7 and MLI, an amendment in section 9 of the Act is proposed. A non-resident will have a business connection in India if any of its business activities are carried out 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 the non-resident. In order to align with Action Plan 1 recommendations on digital economy, the scope of business connection has also been expanded to include transactions 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.

Various measures have been introduced to strengthen the level of compliance. Where income tax return is not filed within the prescribed timeline, it is proposed that the benefit of various profit linked deductions under Heading C of Chapter VI-A will not be allowed. To encourage cash less economy, it is proposed that where any charitable or educational institutions registered under the Act incurs any expenditure exceeding INR 10,000 in cash, the same shall be disallowed. Further, where such institution makes any payment without withholding applicable taxes, 30% of such expense will be disallowed. In order to discourage the practice of deferring tax payment by converting stock-in-trade into capital asset, suitable amendments have also been made in the Act.

On the tax administration front, the FM proposes to introduce a new scheme to make e-assessments a norm across the country. This is a welcome move since it will impart greater transparency and accountability by eliminating interface between the tax officers and the taxpayers, while decreasing the tax administration cost.

Following the recent Delhi High Court ruling striking down several ICDS, the industry was expecting that ICDS may be struck-off in their entirety. However, the Budget 2018 has provided a legislative backing to ICDS by bringing in amendments in certain sections and insertion of new sections in the Act itself. The proposed amendments include adjustments and treatment of, inter-alia, marked to market loss / expected loss, gain / loss on foreign exchange rates, construction contracts and inventory valuation. The amendment is likely to have significant implications for the industry.

While the Budget has rationalized the tax laws from a corporate tax perspective, some of the major expectations remain unaddressed. This includes reduction in DDT and MAT rate, exempting SEZ units from MAT , clarity on Ind-AS adjustments, removal of cess and surcharge to bring down the effective corporate tax rate, carry forward of foreign tax credit among others. While the FM had adopted a balanced approach in his proposals for corporate tax payers, the industry hopes that some of these anticipated amendments are brought about in due course of time.


Contributed by:

Sujay Paul, Chartered Accountant

Archana Kumar, Chartered Accountant



Budget 2018: Status quo for corporates

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