The Finance Bill, 2018 ( Bill No. 4 of 2018 ) was presented in Parliament by the Finance Minister on February 01, 2018, to give effect to the financial proposals of the central government for the Financial Year, 2018-19. The main object of the Finance Bill relating to Direct Tax is to amend the Income Tax Act of 1961 so as to provide overall growth in the collection of direct tax by widening the tax base, promoting horizontal equity wherever required, enhancing effectiveness, self-compliance, transparency, and accountability of the tax administration. In order to achieve these objectives, Key Proposals as contained in the Finance Bill, 2018 with regard to Direct Tax are as follow –
l No change in Non-Corporate Income Tax Rates.
l However, the current Rate of Cesses @ 3%, payable by Assessees is proposed to be hiked to 4% to be termed as “Health and Education Cess”.
l Domestic Companies having Turnover up to `250 crore during the FY-16-17 shall be eligible for Concessional Tax Rate of 25%.
l Standard Deduction under Sec 16(ia) is proposed to the tune of `40, 000 or 100% of Salary whichever is lower.
l The Existing Exemptions on account of Medical Re-imbursement (up to `15000) and Transport Allowance ( up to `19200 ) from Taxable Salaries are proposed to be withdrawn.
l Compensation even though termed as Capital Receipt
received by Employee in connection with termination or modification of the terms and conditions of Employment would be taxed under the head “Income from Other Sources” vide proposed insertion of clause (xi) to Sec 56(2) of the Act.
l Tax liability of all the employees will marginally go up due to proposed increase in Cess by 1%.
l Deduction from GTI under Sec 80D for Medical Insurance Premium / Medical Treatment Expenses for Senior Citizens is proposed to be increased from Existing Limit of `30000 to `50000.
l Deduction from GTI under Sec 80DDB for treatment of specified diseases for all Senior Citizens is uniformly proposed to be increased from existing limits of `60000/80000 to `1 lakh.
l Deduction from GTI in respect of Interest Income from Bank Deposits etc under proposed new Sec 80TTB would be allowed upto `50000 as against the existing limit of `10000 under Sec 80TTA.
l No TDS on Interest Income up to `50000 on Interest Income under Sec 194A.
l The benefit of Exemption on account of DDT Paid Dividend Income continues.
l However, the scope of DDT has been enlarged by bringing in the Deemed Dividend referred to in Sec 2(22)(e) of the Act by way of proposed deletion of Explanation to Sec 115Q of the Act.
l The aforesaid dividend is proposed to be taxed @ 30% ( without grossing up ) as against the existing DDT Rate on Dividend Payment of 15% PLUS Grossing Up.
l Further, Dividend to be distributed by Equity Oriented Fund on or after April 1, 2018 would also be subject to DDT at 10% as per the proposed amendment to Sec 115R of the Act.
l Again, to widen the tax base and check tax evasion, it is proposed to insert Explanation 2A in Sec 2(22) of the Act to widen the scope of the term “Accumulated Profits” so as to provide that in the case of Amalgamation, in the hands of the Amalgamated Company, Accumulated Profits, whether capitalized or not, or losses, as the case may be, shall be increased by the Accumulated Profits of the Amalgamating Company, whether capitalised or not, on the date of amalgamation.
l The Existing benefit of Exemption from LTCG Tax available under Sec 10(38) of the Act on transfer of Equity Shares of Listed Company, Units of Equity Oriented Fund & Business Trust is proposed to be withdrawn on and from first day of April, 2018.
l However, the aforesaid LTCG made upto `100000 would not be liable to Income Tax, even if the transfer is made on or after April 1, 2018, as per the provisions of Sec 112A proposed to be inserted by clause 31 of the Finance Bill, 2018.
l The aforesaid LTCG made on or after April 1, 2018 , in excess of `100000 shall be taxable at concessional Rate of 10% under New Sec 112A without any Indexation Benefits ( For Residents ) under 2nd Proviso to Sec 48 or Foreign Exchange Fluctuation benefits ( For Non-Residents ) under 1st Proviso to Sec 48 presently available.
l Further, the deduction from GTI under Chapter-VIA or Tax Rebate under Sec 87A of the Act shall not be available to the aforesaid LTCG.
l Assessees have been given option to substitute the Cost of Acquisition of Listed Equity Shares (acquired prior to February 1, 2018 ) with FMV as on January 31, 2018 for the purpose of computing the aforesaid Capital Gain to be taxed under New Sec 112A proposed in the Finance Bill, 2018.
l The existing benefit of Exemption under Sec 10(38) of the Act would continue in respect of aforesaid LTCG made till March 31, 2018;
l As per the proposed amendment to Sec 54EC of the Act, the Exemption Benefit for Long Term Capital Gains is proposed to be restricted to Sale or Transfer of “Land and/ or Buildings “only . Further, the Lock-in-Period for the said Investment to be made on or after April 1, 2018 is proposed to be increased from existing 3 Years to 5 years.
l As per the existing provisions of Sec 47(iv) & (v) of the Act, any transfer of Capital Assets by Holding Co to its 100% Subsidiary & vice-versa is treated as Exempted Transfer and hence not liable to Cap Gains Tax. However, in case of such transfers for inadequate consideration the tax liability under Sec 56(2) of the Act is triggered. Now, as per the proposed amendment to in clause XI to the 4th Proviso to Sec 56(2), it is proposed to extend the benefit of non-taxability of such transfers for inadequate consideration under the head “Income from Other Sources “too.
l Presently the difference between the Stamp Duty Value of Land & Building & the Transaction Value is charged to income tax under the head Capital Gains [ Sec 50C ] in the hands of the Seller & Other Sources in the hands of the Purchaser [ Sec 56(2)(x) ] of the Act. Now, it is proposed to amend Sec 50C as well as Sec 56(2) of the Act to allow the variation up to 5% between Value for Stamp Duty & Transaction Value.
Measures to promote International Financial Services Centre (IFSC)
l In order to promote the development of world class financial infrastructure in India, it is proposed to to amend the section 47 of the Act so as to provide that transactions in the following assets, by a non-resident on a recognised stock exchange located in any International Financial Services Centre shall not be regarded as transfer & accordingly would not be subjected to Capital Gains Tax , if the consideration is paid or payable in foreign currency :
(i) Bond or Global Depository Receipt, as referred to in sub-section (1) of section 115AC; or
(ii) Rupee denominated bond of an Indian company; or
l It is further proposed to amend section 115JC so as to
provide that in case of a unit located in an International Financial Service Centre, the Alternate Minimum Tax (AMT) under section 115JC shall be charged at the rate of 9 %, i.e., the provision similar to sec 115JB (7) inserted by the Finance Act,2016.
l To nullify the effect of the Judgement of the Apex Court, it is proposed to amend Sec 28 of the Act to tax Compensation of any nature (Capital or Revenue) in connection with the termination or modification of the terms & conditions of a contract relating to the business of an assessee.
l Again to nullify the effect of the Judgement recently pronounced by the Hon’nble Del High Court it is proposed to make retrospective amendment [ wef Asst Year-2017-18 ] to incorporate the various provisions of ICDS notified to the Act.
l However, the notable proposed amendment in this regard is proposal to amend Sec 36(1) where in under the New Clause ( xviii) , the Marked to Market Loss as computed under ICDS shall be allowed as deduction while computing the taxable income under the head “P&G from Bus & Profession” and that too retrospectively with effect from Asst Year-2017-18.
l To abide by the various Judicial Pronouncements, it is clarified that the provisions of MAT shall not apply to Non Resident Entities (e.g. Non Resident Assessees engaged in Oil & Gas Exploration, Shipping Business, Aircraft Operations etc. ) which are subjected to Special Rates of Income Tax under the Presumptive Taxation basis.
l Further, the aforesaid benefit is proposed to be applied retrospectively wef Asst Year- 2001-02 to reduce litigations.
l As per the existing provisions of 115 JB of the Act, deduction is allowed to the extent of the lower of unabsorbed depreciation and brought forward loss (excluding depreciation) as per books of account. Now, as per the proposed amendment to Sec 115JB of the Act, Companies against whom Insolvency Process has been admitted under Sec 7/9/10 of the IB Code, 2016 shall be entitled for the deduction of the Total Loss ( including Dep., if any ) while computing the Book Profit u/s-115JB of the Act which is in line with the Press Release dated 6-1-18 issued by CBDT.
l Furthermore, the restriction regarding carry forward of losses due to change in Shareholding , contained in Sec 79 of the Act, shall not apply to IBC Companies provided that Departmental Authorities were given opportunity of hearing in Insolvency Process.
l A Return of Income in case an IBC Company shall be verified by the Insolvency Professional appointed under IB Code, 2016 as per the proposed amendment to Sec 140 of the Act.
l In order to align the definition of the term “ business connection” with the “Permanent Establishment Rule “ under the Multilateral Instrument ( MLI ) , & to widen the scope of Total Income of NRIs to be taxed in India, it is proposed to amend the clause (a) in the Explanation-2 to Sec 9(1)(i) of the Act .
l Furthermore, to address the challenge arising out of digital economy, the long-time Rule of Physical Presence to determine the Tax Resident for determining the scope of total income taxable in India, it is proposed to substitute the same with “ significant economic presence” and thereby to widen the base of income taxable in India.
Charitable Trusts & Institutions
l In order to encourage less cash economy & to reduce generation of Black Money thru Exempted Trusts Route it is proposed that –
l Cash Payments exceeding `10000 shall be disallowed while computing the “application of income”.
l 30% of Payments would be disallowed for payments ( Without TDS ) made to Residents in violation of the provisions of sec 40(a)/(ia) while computing the “application of income”.
Mandatory to Obtain PAN
l Permanent Account Number (PAN) mandatory for non-individual entities having financial transactions exceeding `250,000 in a financial year.
l Principal officers and other specified persons of such non-individual entities also required to obtain PAN.
Tax Compliance and Miscellaneous matters
l No deduction available under Chapter VI-A (Heading C) (viz. Sec 80IA, 80IB, 80IC, 80JJA) in case of non-filing or delay in filing of tax return .
l Scheme for e-assessment proposed. Details to be notified.
l No adjustment in summary assessment on account of discrepancy in total income reported vis-à-vis Form 26AS (annual statement of taxes) or Form 16/16A (electronically generated withholding tax certificate) (effective from FY 2017-18 onwards) .
l No expenditure/loss to be allowed against unexplained income/investments determined by the Assessing Officer.
l The additional deduction of 30% of new employee cost is available for footwear and leather industry in respect of employees who have been employed for 150 days. Further, employment cost of a new employee who is employed for less than the minimum period (240 or 150 days as the case may be) for first year, but continues to remain employed for the minimum period in the subsequent year to qualify for deduction.
l Penalty order issued to an accountant, a merchant banker or registered valuer for furnishing incorrect information in any report or certificate furnished under the provisions of the Act by the Commissioner of Income-tax (Appeals) made appealable to the Income-tax Appellate Tribunal. Amendment effective from April 1,2018.
l Prosecution can lie against companies for non-filing of returns even if no tax is due.
To sum up, the Budget contains substantial relief for the senior citizens and companies falling in the MSME Category but very little relief for big corporates and high middle class individuals. Further, the levy of LTCG Tax will dampen stock market in the short run and impact FII capital investment in the long run.
Head - Direct Taxation
Srei Infrastructure Finance Limited