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Budget Highlights
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Budget – carrot on the stick!

February 1, 2018 3786 Views
Tarini Nijhara
Associate Director, Nangia & Co LLP
Nitin Narang
Partner Nangia & Co LLP

Union Budget 2018-19 seems to be a mixed bag with something for everyone barring the salaried class. This being the last budget of the NDA government in the current five-year tenure, the budget oscillates from giving some relief and taking it back from the other hand. It carries the flavour of election and provides many pre-cursors for the election speeches. The Government has thrown a bait to the people to give them another term and expect some reforms in future.

The budget places a lot of emphasis on the rural economy, health, education, farmers, senior citizens, employment generation, infrastructure development and digital economy. The spending by the Government has been majorly earmarked for improvement of roads, railway facilities, hygiene, healthcare, rural development, water supply, etc. To fund its spending, the Government has taken some onus on itself by keeping a disinvestment target for FY 2018-19 at INR 80,000 crore.

Continuing with its tradition, the NDA Government has announced many changes in the direct tax provisions which include introduction of long term capital gains tax, reduction in corporate income tax rates for small and medium sized companies, reintroduction of standard deductions, e-assessments provisions, increase in Cess, removal of medical and conveyance allowance reimbursements, no change in slab rates or tax rates, etc.

Relief to a common salaried person comes by introduction of standard deduction of INR 40,000 and is immediately taken away by removal of transport allowance and medical reimbursement. With increase in Cess from 3% to 4%, the salaried class may have less take home net salary. In addition to this, the introduction of long term capital gains tax seems to have taxed the alternate source of income of common man, while securities transaction tax ('STT') still continues. However, the grandfathering provisions should minimize immediate volatility in this transition and it appears that the capital gains arising on the increase in value between now and 31 March 2018, would not be taxable if the stocks are sold by that date. Long term capital gains tax on listed stocks at 10% without indexation and a levy of 10% tax on income distributed by Equity Oriented Mutual funds, could possibly be done to channelize the investment of people in different directions than only stock markets.

As expected, the corporate income tax rate has been reduced to 25% but the benefit of this is only available to the small and medium sized companies having turnover less than INR 250 crore. As per the Finance Minister, this segment of small and medium sized companies represents about 99% of corporate taxpayers, however the reasons for leaving the others requires an explanation since many companies in the left-out segment are the ones which are global companies who were also promised business friendly environment. With larger economies recently rationalising their corporate income tax rates for all corporates (like US reducing from 35% to 21%, UK reducing to 17% from year 2020, Japan reduced from 30% to 20%), India, with an overall effective tax rate in excess of 46% (including dividend distribution tax) would not remain an attractive investment jurisdiction for Global players. No announcements regarding minimum alternate tax ('MAT') and dividend distribution tax ('DDT'), and reintroduction of Income Computation and Disclosure Standards ('ICDS') have also dampened the spirits of corporates.

From a transfer pricing perspective, some of the expectations from the budget were modification on secondary adjustment, efforts to reduce litigation, adoption of international best practices on comparable analysis, etc. However, focus of the Government seems to be on Country by Country Report ('CbCR') provisions. The amendments in the budget are more to do with drafting correction in the current provisions in Section 286 of the Act, extension of timeline for filing the CbCR to twelve months from the end of the year for future years and filing of CbCR by a resident constituent entity (that is not the ultimate parent entity of its group or the alternate reporting entity) has been aligned with OECD BEPS AP 13 minimal standards. However, some open issues still remain which require clarifications in CbCR and Master File provisions.

Keeping in line with the global trends, the Government also continues the focus on implementation of other anti-BEPS measures in the Indian tax law. The concept of "business connection" in the domestic tax law which constitutes the threshold for creating a taxable presence is proposed to be amended to align with the modified Permanent Establishment ('PE') rules of BEPS AP 7. This is expected to be implemented in a number of India's tax treaties through the Multi-lateral Instrument ('MLI'). The budget also seeks to tax the digital economy by clarifying that a "business connection" would include "significant economic presence" in line with one the options discussed in the BEPS AP 1 report. However, the Government has clarified that existing treaty benefits will continue until corresponding amendement is also made in the relevant tax treaty. The Controlled foreign corporation ('CFC') regulations though did not find its way in the budget.

Other significant highlights of the budget are:

  •  Amendment to regularize e-assessment, procedural changes to improve the effectiveness of the tax administration

  •  PAN made mandatory for all non-individual taxpayers who engage in any financial transaction aggregating to INR 250,000 in a financial year. The requirement has been extended to any person who is authorised to act on behalf of such entity.

  •  100% deduction to the farmer producer companies having a total turnover upto INR 100 Cr.

  •  Deemed dividends brought under the tax net of dividend distribution tax

  •  Ability to carry forward business losses irrespective of change in shareholding in case of companies undergoing insolvency proceedings under Insolvency and Bankruptcy Code Regime('IBC')

  •  Senior citizens get 80TTB deduction of upto INR 50,000 with relaxation in withholding tax provisions on interest from banks and post offices, 80D deduction of upto INR 50,000 and 80DDB deduction of upto INR 100,000 for their medical expenditure

  •  Women's contribution reduced to 8.33% towards PF in the first 3 years for new EPF accounts. Government will contribute 12% of EPF contribution for new employees in all sectors for the next three years

  •  Tax holiday to start-ups incorporated till 31 March 2019, has been extended by another two years

Overall, the budget tries to contain benefits for everyone with an eye on the elections, the Government seems to be in a mode to play safe rather than attempting any significant reforms like in the past. It's a balanced and fiscally prudent budget, which attempts at taking baby steps towards various key reforms for future, if given the second term.

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