Union Budget 2017

16
Union Budget 2017-18 Key proposed substantive amendments to Income Tax Act, 1961

Transcript of Union Budget 2017

Union Budget 2017-18 Key proposed substantive amendments to Income Tax Act, 1961

CORPORATE TAXATION

1. Rate of Taxation In the case of domestic companies, the rate of income tax

has been reduced to 25% (twenty five percent) of the total

taxable income, if the total turnover or gross receipts of the

previous year 2015-16 does not exceed fifty crore rupees.

However, rate of taxation for other companies having

turnover or gross receipts in excess of fifty crore rupees

remains unchanged and any income of such companies shall

be taxable at the rate of 30% (thirty percent).

2. Tax Neutral Conversion of Preference Shares to Equity Shares In terms of the provisions of the Income Tax Act, 1961 (‘Act’)

conversion of Preference Shares to Equity Shares is not a tax

neutral transaction and is liable for capital gains taxes. Vide

Finance Bill, 2017 it is proposed to introduce Sub Section

(xb) to Section 47 of the Act to not to consider the

conversion of Preference Shares into Equity Shares as

‘transfer’, hence the charging provisions of Section 45 of the

Act pertaining to Capital Gains shall not be applicable.

Relevant amendments are also proposed to be made in

Section 2(42A) of the Act for the purposes of including in the

period of holding of equity shares the period of holding of

preference shares prior to conversion. Thus, in other words

for the purpose of adjudging the nature of the equity shares,

being short term capital asset or long term capital asset, the

India Mauritius Tax Treaty

Now, since amendments

are being proposed to

make conversion of

Preference Shares into

Equity Shares as Tax

Neutral and to include in

the period of holding of

Equity Shares the period

of holding of the

preference shares, it is

worthwhile to analyze

whether the

grandfathering provided

under the India

Mauritius Protocol shall

be available to

Preference Shares issued

prior to April 1, 2017 but

converted to Equity

shares post April 1, 2017

and then subsequently

transferred.

period of holding of preference shares prior to conversion into equity shares shall also be

considered.

Also, amendments are proposed in Section 49 of the Act, to take the cost at which the

preference shares were acquired as the cost of acquisition of the converted equity shares.

Thus, no capital gains tax shall be levied at the time of conversion of preference shares into

equity shares and at the time of transfer of equity shares, cost of acquisition and the time of

acquisition of preference share to be considered.

3. Capital Gains Tax Exemption to Rupee Denominated Bonds Vide Finance Act, 2016, inter alia amendments were made in Section 48 of the Act so as to

provide that the gains arising on account of appreciation of rupee against a foreign currency

at the time of redemption of rupee denominated bond of an Indian company (‘Masala Bonds’)

subscribed by the Non-Resident, shall be ignored for the purposes of computation of full

value of consideration.

The benefit of Section 48 as introduced vide Finance Act, 2016 are proposed to be extended

to the subsequent non-resident holders of the bond vide the instant Finance Bill.

It is further proposed to exempt the capital gains arising on transfer of such bonds by a Non-

Resident to a Non-Resident. Amendments are proposed in Section 47 of the Act so as to

provide that any transfer of such bonds by a Non-Resident to another Non-Resident shall not

be regarded as transfer.

4. Lower Withholding Tax Rate on Interest payment in case of borrowings in foreign currency Section 194LC of the Act provides for a lower withholding tax rate of 5% on interest payable

to a non-resident by a specified company on borrowing made by it in foreign currency from

sources outside India under a loan agreement or by way of issued of long term bonds.

Co

rpo

rate

Tax

atio

n

However, the period prescribed for availment of such lower withholding tax rate is on the

payment of interest arising on any such loans availed or bonds issued on or after July 1, 2012

but before July 1, 2017.

In view of the representations received to extend the concessional rate of withholding tax, it

is proposed vide the instant Finance Bill, to extend the benefit of lower withholding taxes on

interest payments arising on borrowing made before July 1, 2020.

Furthermore, the benefit of 5% withholding tax is also provided on interest payments made

on rupee denominated bonds issued outside India before July 1, 2020.

5. Thin Capitalization Rules A company is said to be thinly capitalized when a greater proportion of its ‘capital-structure’

is made up of ‘debt’ than of ‘equity’. The interest payments generated on ‘debt capital’ is

treated as a finance charge, and is allowable as a deduction in the taxable corporate income,

thereby reducing the corporate tax burden. Hence, higher proportion of debt results in tax

avoidance.

Hon’ble Bombay High Court in the case of Director of Income-tax, International Taxation-II,

Mumbai v. Besix Kier Dabhol SA [ITA No. 776 of 2011] held in favour of the assesse and held

that since no thin capitalization rules are in force in India, interest expenditure on debt even

in abnormal debt equity ratio of 248:1 could not be disallowed.

To prevent such abuse, it is proposed to introduce a new Section 94B of the Act in line with

the recommendation provided by Organisation for Economic Co-Operation and Development

in BEPS Action Plan 4.

The provisions of the proposed Section 94B of the Act shall be applicable to an Indian

company or a permanent establishment of a foreign company, who being the borrower pay

interest to the non-resident in respect of debt issued by such non-resident, being an

associated enterprise. Furthermore, debt shall be deemed to be issued by the associated

enterprise if the associated enterprise instead of directly issuing the debt, indirectly provides

an implicit or explicit guarantee to any other lender or deposits corresponding and matching

amount of funds with such lender so as to issue debt to the Indian company.

Interest expenses claimed by the Indian company or permanent establishment of a foreign

company in lieu of the aforesaid debt received from an associated enterprise directly or

indirectly shall be restricted to 30% (thirty percent) of its earnings before interest, taxes,

depreciation and amortization (‘EBIDTA’) or interest actually paid or payable to associated

enterprise whichever is less.

However, if the interest expenses claimed are higher than 30% of EBIDTA, a carry forward of

the disallowed (excess) interest expense shall be allowed to eight assessment years

immediately succeeding the assessment year for which the disallowance was first made. The

carried forward expense shall be eligible for deduction as expense from profits and gains from

business and profession, subject to the cap of interest expense being 30% of EBIDTA.

The amendment is proposed to be effective from April 1, 2018 ie. Assessment Year 2018-19

and shall only be applicable in a scenario where interest payments are more than Rs. 1 Crore.

If the interest expense is below Rs. 1 Crore, no disallowance would be made under the said

Section.

6. Secondary Adjustments in Transfer Pricing Finance Bill, 2017 proposes amendments to the Transfer Pricing Rules to provide for

secondary adjustments. While various countries are already following the concept of

secondary adjustments, the Indian government has taken a leap to align itself with the

recognized guidelines across the world and a step to raise more voluntary adjustments.

Co

rpo

rate

Tax

atio

n

“Secondary adjustment” means an adjustment in the books of accounts of the assesse and

its associated enterprise to reflect that the actual allocation of profits between the assesse

and its associated enterprise are consistent with the transfer price determined as a result of

primary adjustment, thereby removing the imbalance between the books of accounts and

actual profit of the assesse.

A new section 92CE is proposed to be inserted, with effect from April 1, 2018, ie. Assessment

Year 2018-19, wherein, the assessee shall be required to carry out secondary adjustments

when the primary adjustment to transaction price (to compute arm’s length price), has been

made:

1. suo motu by the assessee; or

2. by the Assessing Officer; or

3. is determined by an advance pricing agreement; or

4. is made as per the safe harbour rules; or

5. is arising as a result of resolution of an assessment by way of the mutual agreement

procedure;

And where as a result of primary adjustment to the transaction price the excess money which

is available with its associated enterprise, if not repatriated to India within the time as may

be prescribed shall be deemed to be an advance made by the assesse to such associated

enterprise and the interest on such advance, shall be computed as the income of the

assessee, in the manner as may be prescribed.

The provisions of the proposed Section shall not be applicable in a scenario wherein, the

primary adjustment does not exceed Rs. 1 Crore or the primary adjustment is made in respect

of an assessment year commencing on or before April 1, 2016.

7. Widening scope of Income from Other Sources Provisions of Section 56 of the Act are proposed to be amended to widen the scope of income

from other sources.

The existing provisions of Section 56(2)(vii) of the Act are attracted only to individuals or

Hindu Undivided Family where any sum of money or any property is received by them without

any consideration or for inadequate consideration, in excess of the limit of Rs. 50,000.

Further Section 56(2)(viia) of the Act provides for chargeability of sum as income from other

sources, in a scenario wherein, a firm or a company, not being a company in which the public

are substantially interested, receives in any previous year from any person any property being

shares of company not being a company in which the public are substantially interested,

without consideration or for an inadequate consideration, in excess of specified limit of Rs.

50,000.

Finance Bill, 2017 proposes to restrict the applicability of the aforesaid Sections upto the

Financial year 2016-17 and further proposes to introduce Section 56(x) of the Act with effect

from Assessment Year 2018-19, through which the scope of chargeability of sum as income

from other sources, based on fair market value is widened.

The amended Section enhances the scope of income from other sources and includes

taxability in the hands of all the persons, whether resident or non-residents, if they receive

any sum of money, immovable property, or any other property, without consideration or for

inadequate consideration, exceeding the specified limit of Rs. 50,000.

In view of the proposed amendments to Section 56 of the Act, now even immovable property

or sum of money or any other property, received by corporates, firms and other assessee’s,

without any consideration or for inadequate consideration, in excess of the specified limit of

Rs. 50,000 shall be chargeable as income from other sources.

The proposed amendment overrules the decision of the Hon’ble Mumbai Bench of Income

Tax Appellate Tribunal in the case of DCIT v. KDA Enterprises Private Limited (ITA No.

Co

rpo

rate

Tax

atio

n

2662/M/2013), wherein the Hon’ble Bench held that the sum of money received as gift by

the company is a capital receipt not taxable under the provisions of the Income Tax Act, 1961.

8. Fair Market Value to be the Full Value of Consideration on transfer of shares New Section 50CA is proposed to be inserted, wherein, if the consideration received or

accruing as a result of transfer of share of a company other than a quoted share, is less than

the fair market value, then for the purposes of computation of capital gains in terms of

provisions of Section 48 of the Act, fair market value shall be considered to be the Full Value

of Consideration.

9. Clarity regarding indirect transfer provision under Section 9 of the Act

Finance Act, 2012 brought about a change where an asset or capital asset, being any share or

interest in a company or entity registered or incorporated outside India would be deemed to

be situated in India, if the share or interest derives, directly or indirectly, its value substantially

from the assets located in India.

The proposed Explanation 5A to Section 9 of the Act, provides clarification on the scope of

indirect transfer provisions. Proposed amendment suggest that the Explanation 5 shall not

apply to any asset or capital asset mentioned therein being investment held by non-resident,

directly or indirectly, in a Foreign Institutional Investor, as referred to in clause (a) of the

Explanation to section 115AD, and registered as Category-I or Category II Foreign Portfolio

Investor under the Securities and Exchange Board of India (Foreign Portfolio Investors)

Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992.

The proposed amendment is a positive step towards spurring investments in the economy

especially dealing with foreign institutional investors. To assuage the anxious foreign

portfolio investors such amendment exempts the Foreign Investors only in the case of

Category 1 and Category 2 investors from the provisions of indirect transfer which shall

foreign transactions and increase foreign investment.

This amendment will take effect retrospectively from 1st April, 2012 and will, accordingly,

apply in relation to assessment year 2012-13 and subsequent years.

10. Widening of scope of taxability of dividend income over Rs. 10 Lakhs Scope of Section 115BBDA introduced vide Finance Act, 2016 is proposed to be enhanced

wide Finance Bill, 2017. Under the existing provisions taxability of dividends received by an

Individual, Firm or Hindu Undivided Family, resident in India from a domestic company or

companies, in aggregate over Rs. 10 Lakhs shall be taxable at the rate of 10%.

It is now proposed to enhance the scope of the Section 115BBDA to all the persons, whether

resident or non-resident, except to a domestic company or a fund or institution or trust or

university referred under Section 10(23C) or registered under Section 12AA of the Act, with

effect from April 1, 2018, ie. Assessment Year 2018-19.

Hence, in view of the proposed amendment, a non-resident individual, shall now be liable for

taxation, with respect to dividend income from a domestic company or companies in

aggregate greater than Rs. 10 Lakhs.

11. Scope of section 92BA of the Income-tax Act relating to Specified Domestic

Transactions The existing provisions of section 92BA of the Act, inter-alia provides that any expenditure in

respect of which payment has been made by the assessee to certain "specified persons"

under section 40A(2)(b) are covered within the ambit of specified domestic transactions. It is

hereby proposed to provide that such payment by the assessee to a person referred to under

section 40A(2)(b) are to be excluded from the scope of section 92BA of the Act with effect

from 1st April, 2017 i.e. Assessment year 2017- 18 and subsequent years. Accordingly,

proposing a consequential amendment in section 40(A)(2)(b) of the Act.

The proposed amendments might reduce the existing tax compliance burden on the

taxpayers.

Co

rpo

rate

Tax

atio

n

12. Amendments proposed in Section 10(38) of the Act

In the recent past, in innumerable occasions, revenue before the court of law argued, that

the exemption under Section 10(38) of the Act is being misused by certain assessee’s for

declaring their unaccounted income as exempt long term capital gains by entering into sham

transactions. Since, the Hon’ble Courts in plethora of judgments have decided in favour of

the assessee’s, revenue to protect their tax base has proposed an amendment under the

instant Section.

In terms of the proposed amendment exemption under this Section for income arising on

transfer of equity share acquired on or after October 1, 2004 shall be available only if the

acquisition of share is chargeable to Securities Transaction Tax (‘STT’) under Chapter VII of

the Finance (No.2) Act, 2004. Furthermore, to protect the genuine cases like Initial Public

Offer, Bonus Issue, Right Issue in which STT is not being paid, tax department has proposed

to notify transactions on which the condition of payment of STT shall not be applicable.

It is worthwhile to note that the condition of payment of STT is for acquisition on or after

October 1, 2004 and there is no condition as such for shares acquired prior to such date.

The said provisions are proposed to be applicable from Assessment Year 2018-19.

13. Rationalization of MAT provisions enshrined under Section 115JB of Act

Central Government notified the Indian Accounting Standards (Ind AS) which are converged

with International Financial Reporting Standards(IFRS) and prescribed the Companies (Indian

Accounting Standards) Rules, 2015 which laid down a roadmap for implementation of the Ind

AS. Following the same tangent, MAT calculations are proposed to be aligned with IND-AS by

making amendments to Section 115JB of the Income Tax Act,1961.

Though abolition of MAT was much wanted by Industry in line with the phasing out of tax

holidays, proposal to carry forward Minimum Alternate Tax (MAT) credit for 15 years from

existing 10 years may give some relief to the corporates.

14. Cost of Acquisition in Tax Neutral Demerger of a Foreign Company Under the existing provision of Section 47(vic) of the Act, the transfer of shares of an Indian

company by a demerged foreign company to a resulting foreign company is not regarded as

transfer.

It is proposed to amend Section 49 so as to provide that the cost of acquisition of the shares

of Indian company referred to in Section 47(vic) in the hands of the resulting foreign company

shall be the same as it was in the hands of demerged foreign company.

This amendment will take effect from April 1, 2018 and will, accordingly apply in relation to

Assessment Year 2018-19 and subsequent years.

15. Shifting base year from 1981 to 2001 for computation of Capital Gains The existing provisions of Section 48 provide that for computation of capital gains, an

assessee shall be allowed deduction for cost of acquisition of the asset and also cost of

improvement, if any. However, for computing capital gains in respect of an asset acquired

before 01.04.1981, the assessee has been allowed an option of either to take the fair market

value of the asset as on 01.04.1981 or the actual cost of the asset as cost of acquisition. The

assessee is also allowed to claim deduction for cost of improvement incurred after

01.04.1981, if any.

As the base year for computation of capital gains has become more than three decades old,

assessees are facing genuine difficulties in computing the capital gains in respect of a capital

asset, especially immovable property acquired before 01.04.1981 due to non-availability of

relevant information for computation of fair market value of such asset as on 01.04.1981.

Co

rpo

rate

Tax

atio

n

In order to revise the base year for computation of capital gains, it is proposed to amend

section 55 of the Act so as to provide that the cost of acquisition of an asset acquired before

01.04.2001 shall be allowed to be taken as fair market value as on 1st April, 2001 and the cost

of improvement shall include only those capital expenses which are incurred after

01.04.2001.

Consequential amendment is also proposed in section 48 so as to align the provisions relating

to cost inflation index to the proposed base year.

These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation

to the assessment year 2018-19 and subsequent years.

16. Omission of Section 197(c) of Finance Act, 2016 Vide the Finance Bill, 2017, it is proposed to omit the provisions enshrined under Section

197(c) of the Finance Act, 2016 introduced as part of Income Declaration Scheme.

The much debated provision provide that where any income has accrued, arisen or been

received or any asset has been acquired out of such income prior to commencement of the

Income Declaration Scheme, 2016 (the Scheme), and no declaration in respect of such income

is made under the Scheme, then, such income shall be deemed to have accrued, arisen or

received, as the case may be, in the year in which a notice under sub-section (1) of section

142 or sub-section (2) of section 143 or section 148 or section 153A or section 153C of the

Income-tax Act is issued by the Assessing Officer, and provisions of the said Act shall apply

accordingly.

The said provision is proposed to be omitted retrospectively from June 1, 2016.

17. Restrictions on Cash Transactions: Demonetization Effect No cash transaction over Rs. 3 Lakhs or more An amendment to insert section 269ST is proposed vide Finance Bill, 2017 with effect from

1st April, 2017, wherein no person shall receive an amount of three lakh rupees or more-

(a) in aggregate from a person in a day;

(b) in respect of a single transaction; or

(c) in respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or account payee bank draft or use of electronic

clearing system through a bank account.

Such restriction shall not apply to Government, any banking company, post office savings

bank or co-operative bank and such other persons or class of persons or receipts which shall

be notified by the Central Government. Transactions of the nature referred in section 269SS

of the Act are also proposed to be excluded from the scope of the said section.

Other proposals include amending the provision relating to tax collection at source at the rate

of one per cent. of sale consideration on cash sale of jewellery exceeding five lakh rupees in

section 206C of the Act. And inserting section 271DA in the Act to provide for levy of penalty

on a person who receives a sum in contravention of the provisions of the proposed section

269ST. The penalty is proposed to be a sum equal to the amount of such receipt. The said

penalty which shall be levied by the Joint Commissioner of income tax shall however, will not

be levied if the person proves that there were good and sufficient reasons for such

contravention.

Inadmissibility of Expenditure on payments in excess of Rs. 10,000 by way of cash or bearer cheque. Finance Bill, 2017 proposes to amend Section 40A of the Act, to provide for inadmissibility of

the expenditure in a scenario where the expense is made in cash or bearer cheque in excess

of Rs. 10,000 instead of the limit of Rs. 20,000 provided in the current provisions.

Co

rpo

rate

Tax

atio

n

Furthermore, amendment is also proposed to be made in Section 43 of the Act, which

provides that where the assesse incurs any expenditure for acquisition of any asset in cash or

bearer cheque in excess of Rs. 10,000, then such expenditure in cash or bearer cheque shall

be ignored for the purposes of computation of actual cost of the asset purchased.

Tax Collected at Source

It is also proposed to consequentially amend the provisions of section 206C to omit the

provision relating to tax collection at source at the rate of one per cent. of sale consideration

on cash sale of jewellery exceeding Rs. Five Lakhs. Thus, now TCS shall be applicable at the

rate of one percent of sale consideration on cash sale of jewellery exceeding Rs. Two Lakhs.

18. No notional income for house property held as stock-in-trade

Relief to real estate developers in the garb of amendment under Section 23 of the Act

providing for the manner of determination of annual value of house property. The proposed

amended Section which shall apply from April 1, 2018 i.e. Assessment Year 2018-19, provides

that where the house property consisting of any property which is held as stock-in-trade and

such property or any part of the property is not let out during the whole or any part of the

previous year, the annual value of such property or part of the property, for the period up to

one year from the end of the financial year in which the certificate of completion of

construction of the property is obtained from the competent authority, shall be taken to be

Nil.

Thus, in terms of the proposed amendment no tax liability shall accrue in the hands of the

developers on account of the deeming fiction that treated the house property held as stock

in trade to be let out. The said window is only available for one year from the date of receiving

of the completion order from the competent authority so as to provide a breathing time and

time for selling their stock. If any house property is continued to be held post one year of

receipt of completion, as stock in trade, the same shall be deemed to be let out and hence

the taxability shall arise on the annual value of such property.

19. Restriction on set-off of loss from House property

While addressing the anomaly of interest deduction in respect of self-occupied vis-à-vis let

out property in the Finance Bill, 2017, it is proposed to insert sub-section (3A) in Section 71

of the Act which relates to set-off of loss from one head against income from another. The

proposed amendment restricts set-off of loss under the head "Income from house property"

against any other head of income to two lakh rupees for any assessment year. However, the

unabsorbed loss shall be allowed to be carried forward for set-off in subsequent years with

Income under the head House Property. Such amendment shall take effect from April 1, 2018

i.e. assessment year 2018-19 and subsequent years.

Such amendment has been proposed in view of the fact, that substantial losses under the

head Income from House Property (on account of payment of interest on loan taken for such

property) is being set off against the Income from business or profession thereby lowering

the total taxable income and tax liability.

Co

rpo

rate

Tax

atio

n

FOR FURTHER INFORMATION PLEASE CONTACT: Pranshu Goel A-29, Swasthya Vihar, New Delhi – 110 092 +91 11 45511664 • +91 9811311668 [email protected]

*Private Circulation Only

Disclaimer: The contents of this news update are for Information purposes and general guidance only and do not constitute professional advice. You should not act upon the Information contained in this news update without obtaining specific professional advice. No representation or warranty (express or Implied) is given as to the accuracy or completeness of the information contained in this news update and Pranshu Goel disclaims all responsibility for any damage caused by error/ omissions whether arising from negligence, accident or any other cause to any person acting or refraining from action as a result of this professional update.