Budget 2018: Cheers some, upsets some! NRI’s too have to shell out more tax

Budget 2018 has widened the scope of the taxable presence of non-residents by moving from a ‘physical presence’ dominated nexus approach to a ‘significant economic presence’ nexus approach.

By Ritu Shaktawat, Associate Partner & Raghav Bajaj Khaitan & Co.

Riding on a spree of structural reforms like the goods & services tax (GST) implementation, demonetisation, IBC ecosystem, massive bank recapitalisation programme and an on-track growth rate, the Finance Minister presented the Union Budget 2018 –last full budget before next general elections.

MSME Sector:

Budget 2018 brings cheer to the MSME sector in the form of a reduced corporate tax rate of 25 percent for companies with turnover up to Rs 250 crore in FY 2016-17.

Start-ups:

Further, to make the 100 percent tax holiday for start-ups more effective, the budget proposes to expand the scope of ‘eligible business’ to include a scalable business model having a high potential of employment generation and wealth creation as against the present restriction in relation to the business being driven by technology or intellectual property.

Companies under distress, relieved:

Budget 2018 has brought a smile to rehabilitating companies under IBC by proposing that unlike other companies which can set off only lower of past losses and unabsorbed depreciation for computation of book profits subject to MAT.

The companies under IBC can set off both, the unabsorbed depreciation as well as past losses. Further, for such companies, change in shareholding would not result in a lapse of past tax losses which is otherwise the case where there is a change in their shareholding beyond 49 percent.

Complete tax neutrality to transfers inter parent and wholly owned subsidiary:

Currently, tax neutrality for such transfers is only available to the transfer or company and not the transferee (recipient) company which is required to pay tax based on fair value of assets received.

This adversely impacts internal group restructurings. In a welcome move, Budget 2018 proposes to exempt the recipient as well from any tax.

LTCG:

One of the biggest talking points in relation to budget 2018 is the introduction of 10 percent long-term capital gains tax for on-market transfers of listed securities (for gains in excess of Rs 1 lakh).

Given the buoyant stock markets, this move seems fair from the perspective of the government which will bring significant gains made by investors within the tax net. Needless to say, this may upset the domestic as well as foreign investors in the short run.

Non-residents: Scope of taxable presence widened:

When it comes to taxing digital economy, India has been the front-runner by introducing equalisation levy. Taking one step further in this direction, Budget 2018 has widened the scope of the taxable presence of non-residents by moving from a ‘physical presence’ dominated nexus approach to a ‘significant economic presence’ nexus approach.

This approach will be more effective only if the tax treaties also gear up for such business models, else the taxpayer will take shelter under a more favourable tax treaty compared to domestic law.

What the budget missed!

Given that India has a massive appetite for quality infrastructure, budget 2018 has not extended any rationalisation for the infrastructure sector such as relaxation from the newly introduced thin capitalisation norms which restrict deduction of interest expense to the borrowers in certain cases.

There is also no relief for the fund's industry which was expecting some rationalisation.

Similarly, the dividend distribution tax (DDT) regime should have also been replaced with a dividend withholding tax (DWHT) regime to ensure seamless credit of such tax to the investor, which is not available in the current regime.

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