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tax laws and other measures proposed for companies in the 2018 Budget..

Finance Minister Arun Jaitley quoted Swami Vivekananda’s vision of a New India emerging “from the peasant’s cottage … from markets and from hills and mountains” before commending the budget to the house. The focus on agriculture, health, education and small industries was clearly visible. The Finance Bill, 2018, did not largely deviate from the tone of the previous year that ushered in thin capitalization rules, secondary adjustment and discouraging payment of expenses in cash. Thus, while incentivizing startups, reducing the corporate tax rates for smaller companies, proposing e-assessment and team-based assessment to reduce interface between the taxpayer and the assessing officer, this year, the finance minister also proposed a number of measures to improve tax compliance.

Reduction in corporate tax

In the 2015 budget speech, the finance minister had promised to bring down corporate tax rates to ASEAN levels of 25% gradually while also phasing out many incentives and allowances. The corporate tax rate is now proposed to be reduced from 30% to 25% (exclusive of surcharge and cess) and will be applicable to companies having turnover up to ₹2.5 billion (US$38.5 million) in financial year 2016-17. However, no similar reduction in tax rate has been proposed in respect of foreign companies.

Incentives for startups

Presently startups incorporated on or after 1 April 2016, but before 1 April 2019, can enjoy a 100% deduction of profits and gains for three consecutive years out of seven years if their total turnover does not exceed ₹250 million and are engaged in eligible business involving innovation, commercialization of new products, etc., driven by technology or intellectual property. As per proposed amendments, the benefits will also be extended to startups incorporated between 1 April 2019 and 1 April 2021. The amended definition of eligible business would include a scalable business model with high potential for employment or wealth generation.

Tax on long-term capital gains

Long term capital gains (LTCG) on transfer of listed equity shares, units of equity-oriented funds and units of business trusts, which are presently exempt are proposed to be brought within the tax net. An amendment is proposed to tax capital gains made by the transferor on sale of such securities under LTCG tax if gains exceed ₹100,000 in a year. The rate of taxation is proposed to be at 10% without any benefit of indexation (calculation of cost of acquisition of asset after accounting for inflation). This tax will be applicable only on transfers made on or after 1 April 2018.

Tax benefits to transactions in centres

It is proposed to extend the benefit of exemption from capital gains tax to transfer of bonds or global depositary receipts (GDRs) or rupee denominated bonds made by a non-resident on a recognized stock exchange located in any international financial service centre in India. The consideration for such transaction is paid or payable in foreign currency. Presently, any transfer of bonds, GDRs or rupee denominated bonds of an Indian company (bond issued outside India) made outside India by a non-resident to another non-resident are considered as tax neutral transfers.

Relief for insolvent companies

An amendment is proposed to be made to allow deduction of both brought forward losses and unabsorbed depreciation for calculation of book profits on which the minimum alternate tax rate is applied. This benefit will be available if an application for insolvency resolution has been admitted under the Insolvency and Bankruptcy Code, 2016 (IBC). Also, another amendment is proposed to be made for allowing carry forward and set-off losses even if there is change in shareholding provided such change is in accordance with an approved resolution plan under the IBC.

Taxation on modification of contracts

To tax compensation and other such receipts received on termination or modification of certain contracts, amendments are proposed to sections 28 and 56 of the Income Tax Act, 1961 (ITA). This amendment is very widely worded and businesses will have to factor in the taxation of compensation amounts which hitherto may have not been taxable as capital receipts for impairment to profit making structure or being a causal receipt.

Widening scope of ‘business connection’

The Multilateral Convention to Implement Tax Treaty Related Measures (MLI) has widened the scope of dependent agent permanent establishment to include a person, acting on behalf of an enterprise, who habitually concludes contracts, or who habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise. The Finance Bill, 2018, proposes to incorporate the anti-fragmentation rule so that enterprises cannot abuse the treaty provisions by merely concluding the contract outside India. Accordingly, a new clause will be inserted in section 9 of the ITA stating that if business activity is carried out through a person who plays a principal role leading to conclusion of contracts in the name of the non-resident, or to any transfer of rights or ownership or provision of services by the non-resident, it will amount to a business connection.

There is also a proposal to introduce the concept of “significant economic presence” rather than physical presence to constitute a business connection of a foreign enterprise in India. This is in line with the focus on tax challenges in a digital economy in Base Erosion and Profit Shifting (BEPS) Action Plan 1 where significant economic presence can be created by purposeful and sustained interaction with the economy by aid to technology. Thus, download of data or software can also constitute transaction in respect of goods, services or property as well as systematic and continuous soliciting of business activities through digital means as per the proposed explanation 2A. The transactions or activities will constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India. However, the provisions of treaties will continue to be applicable and a non-resident can benefit from these provisions until the treaty is amended in line with the domestic law.

MAT exemptions for foreign companies

The budget proposes an amendment in the provisions relating to minimum alternate tax (MAT) to clarify that if a foreign company opts for presumptive taxation in respect of income from certain specified businesses, the businesses would not be subject to MAT. The specified businesses include operation of ships, provision of services or facilities in connection with prospecting for or extraction or production of mineral oil, operation of aircraft or civil construction, etc., in turnkey power projects. This amendment is merely clarificatory and will apply retrospectively from assessment year 2001-02.

Taxation of deemed dividend

Deemed dividends in the form of loan or advance by a company to its shareholder to the extent of accumulated profits is taxable in the hands of the recipient. However, it is proposed to charge dividend distribution tax at 30% and this would be payable by the company.

Disclosure standards provisions

The government had notified the Income Computation and Disclosure Standards in 2017, but Delhi High Court struck down many of the provisions since they sought to override judicial precedents and were beyond the powers of the Central Board of Direct Taxes. However, by way of amendments proposed in section 145A of the ITA, some of the standards, such as those pertaining to valuation of inventory, or recognizing export incentives as income in the year of claim, will be incorporated in the ITA.

Tax reporting time limit extended

The due date for furnishing of country-by-country reporting (CbCR) is proposed to be extended to 12 months from the end of the reporting accounting year. This provision will apply to a parent entity or alternative reporting entity, a resident of India, and also to a constituent entity in India having a non-resident parent entity. It also proposes to clarify that a constituent entity in India is required to furnish CbCR if the non-resident parent entity is not furnishing such a report in its jurisdiction. These changes will be effective from 1 April 2017.

Taxpayer-tax officer interactions

The budget also proposes to eliminate the interface between the assessing officer and the assessee during the course of proceedings and to introduce a team-based assessment with a dynamic jurisdiction. The details of this scheme will be prescribed by the central government in the Official Gazette. It remains to be seen how well the scheme will be implemented to achieve the desired objectives of transparency and convenience for the assessee.

Conclusion

With incentives to startups, employment generation, relaxation in MAT and reduction in corporate tax and aligning domestic tax provisions with BEPS and MLI, discouraging cash payment of expenses by charitable institutions and taxation of long-term capital gains on equity shares, Budget 2018 appears to have achieved its objective of being a balancing exercise.

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