This is the first post in the our new blog series on the Budget 2018. This is a two-part piece on the amendments proposed under this Budget to the Income Tax Act; published here is Part I. We hope you enjoy reading this as much as we have enjoyed putting this together.
On 1st February, 2018, the Finance Minister Mr. Arun Jaitley presented the last full-year Union Budget before the 2019 Lok Sabha elections. It was delivered against a backdrop of economic slowdown caused by demonetisation in November, 2016 and the implementation of Goods and Services Tax (GST) legislations. The Budget focuses on strengthening agriculture and the rural economy, providing social security benefits and infrastructure creation.
The Finance Minister stated that the Indian economy is reviving and predicted that its Gross Domestic Product will rise to 7-7.5% in 2018-19, and that India is expected to become one of the world’s fastest and largest economies.
In the paragraphs below, we present a snapshot of some of the proposed amendments to the Income Tax Act, 1961 (IT Act) presented in this Budget:
- Rates of Income tax: It has been proposed that the concessional corporate income tax rate of 25% should be extended to companies having a turnover of less than INR 2.5 billion in the financial year 2016-17. The tax rate for other companies will continue to be 30%. While no change has been proposed in the income tax rate for individuals, it has been proposed to replace the existing 3% educational cess on personal and corporate income tax with a 4% ‘Health and Education Cess’.
- Withdrawal of Long-Term Capital Gain (LTCG) Exemption: It has been proposed that the LTCG exemption that was being provided in relation to stock market transactions should be withdrawn. Currently, capital gains arising on alienation of equity shares, units of an equity-oriented fund and units of a business trust, which have been held for more than 12 months, are exempt, subject to payment of a special tax called the Securities Transaction Tax (STT). The Budget now proposes to withdraw this exemption and to levy capital gains tax on LTCG exceeding INR 0.1 million arising from such transactions at the rate of 10% (without any indexation and foreign exchange fluctuation benefits). Even this concessional rate of 10% would be available only if STT is paid at the time of transfer of the equity share, unless such a transaction has been specifically exempted by the Government. The Budget proposes that all gains arising up to January 31, 2018 would be grandfathered. Further, the exemption available to FIIs on LTCG arising from such transfer is also no longer available.
- Incentives for Real Estate: In transactions immoveable property, IT Act provides for the adoption of stamp duty value against the sale consideration if the sale consideration is less than the stamp duty value. The Budget now proposes such adoption is not required if stamp duty value does not exceed 105% of sale consideration.
- Applicability of Dividend Distribution Tax (DDT): In a major change, the Budget seems to suggest that any loans or advances being paid by a company to its major shareholder shall now be liable to be taxed in the hands of the company at the rate of 30% (without grossing up). It may also be noted that income distributed to a unit holder by an equity-oriented mutual fund shall also be liable to pay DDT on dividend payouts at the rate of 10% (exclusive of applicable surcharge and cess).
- ‘Accumulated Profits’ in Case of Amalgamation: To prevent abusive arrangements, it has been proposed that a new Explanation 2A should be inserted in section 2(22) of the IT Act to clarify that ‘accumulated profits’ of the amalgamated company, if any, whether capitalised or not, shall be added to the accumulated profits of the amalgamating company, whether capitalised or not, on the date of amalgamation.
- Enlargement of the Scope ‘Business Connection’ (BC): The scope of the term Business Connection (BC) under section 9(1)(i) of the IT Act has been expanded in line with the modified Permanent Establishment (PE) rule under Article 12 of the Multilateral Convention to Implement Tax Treaty Related Measures (MLI) and the OECD Model Tax Conventions, 2017. It has been proposed that persons who play a principal role in concluding those contracts will constitute a BC for that non-resident in India irrespective of whether such person/s concludes the contracts on behalf of that non-resident or not. The exception provided to preparatory and auxiliary services from constituting a BC in India has been proposed to be withdrawn in view of the anti-fragmentation rule introduced as per Article 5 of the OECD Model Tax Conventions, 2017. It has been proposed that the significant economic presence of a non-resident would also constitute a BC for a non-resident in India irrespective of whether the non-resident has a residence or place of business in India. This is being proposed to bring the digital economy within the ambit of BC.
In Part II of this blog piece, we will examine some of the other key amendments proposed in this Budget to the Income Tax Act. Do watch this space.
* The author was assisted by Associates Jyoti Anumolu and Bipluv Jhingan.