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Budget 2017 - the Tax Impact

A few days back the Indian Union Government presented its Budget for the upcoming year. The Budget announced on 1st Feb, 2017 by the Hon'ble Finance Minister include several policy, tax and regulatory amendment proposals - just like the Budget(s) presented in the past, but this time Budget was presented on 1st Feb, instead of 28th Feb and also, a consolidated budget including Railway Budget was presented.

So, Budget 2017 is the new Buzzword everywhere around. It obviously has its share of positive and negative impacts that it has start showing / will show shortly - few sectors in economy such as Affordable Housing already on upward swing. Naturally, everyone wants to know the real impact of Budget 2017, the changes it propose to bring in, which items become cheaper and vice versa, which ones are welcome moves and which are the onea that did not meet 'Expectations' etc. Therefore, in any Budget analysis 'Expectations' becomes a very vital factor .

Before i could pen down my analysis of Budget and tax proposals particularly, I would like to go back to the run-up to the Budget. The time when we all expected the present Government to present a 'Populist' Budget in last few years of its term; also expected certain changes on cash transactions and income disclosures amid the Euphoria of 'Demonitisation'; some of us could sense the changes in International tax provisions in view of OECD BEPS initiative and also if there could be certain really bold and revolutionary changes (as much as getting a new Income tax Act itself) from the present Government. 

So, what has been the outcome of Budget? On the personal tax side, existing tax rate reduced for income between INR 0.25 million to INR 0.50 million is reduced to 5%. It also propose a surcharge at 10% for Individuals having income between INR 5 million to INR 10 million. These coupled with increase in rate of deduction for contributions to National Pension Scheme by self employed individuals and also tax exemption on partial withdrawal from National Pension Scheme. Also, businessmen having gross receipts up to INR 20 million in a year into the eligible business (except plying and leasing trucks) will be subject to tax at 6% (from 8% presently) if amounts are received through Banking channels. Also, it is proposed that set-off of lossses from House Property against any other income restricted to INR 0.2 million in a year. Basis the above, it would be possible to form a view that this is not a 'Populist Budget' for common man and there was much more expected from the Budget. However in my opinion the above changes depict objectivity of Budget and an attempt somewhere to hold high the economic interests instead of merely having a Budget with attractive tax schemes. 

On the Corporate tax side, there were reduced tax rates / regime introduced in the last year. Following the same premise, the corporate tax rate for companies with turnover up to INR  500 million and also for new domestic manufacuring is reduced to 25%. The time limit to claim MAT credit is also enhanced from 10 to 15 years. Also, in line with Ind-AS introduction (new accounting regime), mechanism for computation and applicability of MAT  is also prescribed. Income from transfer of Carbon credits will be taxed at 10% (no expenditure against such income shall be allowed). Except for domestic companies, trusts etc, income by way of dividends exceeding INR 1 million shall be taxable at 10% on gross basis for all taxpayers. 100% deduction provided for profits derived from housing / affordable housing projects and also by proposing certain relaxations in size of units of such projects and time limits for completion of such projects. Also, the domestic transfer pricing measures / compliances applicable till now have been removed / reduced to cut short compliance burden on Companies. For real estate developers, proposed that taxable value of house property held as stock in trade will be NIL in case property is not let out during previous year. Also, conversion of preference shares to Equity will not be regarded as taxable transaction - this proposal brings in more clarity on structuring / funds movement perspective.

Further to the changes made in the earlier year(s) to promote Start-ups, it is proposed that in case of change in shareholding of a start-up by more than 49%, losses would be allowed to transferee based on specified conditions and within time limits. Also, 100 % of profits derived from eligible start up business shall be tax exempt for a period of 3 years out of (newly proposed) 7 years. 

The above developments can make us believe that the attempt of legislators is towards doing away with exemptions / deductions available in current regime and also to move towards a low tax cost regime. Thus, we see that there is no extensions to the several tax exemption measures such as 80 IB or even accelarated depreciation beyond March 2017. I would like to believe that there would be more changes on these lines in future.

On International tax side, 5% TDS shall be applied to interest paid on Masala / Re denominated bonds for issuance upto 2020 year, also for External Commercial Borrowings (ECB). Also, upon transfer of Re denominated bonds from a non-resident to another will not attract capital gains tax. There is also some clarity brought on non-applicabilty of Indirect transfer provisions qua FIIs registerewith SEBI. 

Also, in line with Legislators attempt to promote investment into India, the Foreign Investment Promotion Board has been abolished. The exact FDI guidelines in lieu of the same are yet to be seen / notified. Also, there has been merger of Authority of Advance Rulings for all Direct and Indirect Tax matters - to see if cases could be speedened up. In this line of changes, not to forget the Indirect tax measure of removal of Research and Development Cess of 5% - but if the underlying transaction remain subject to Service tax, then there would be no effective impact of this change.

As part of BEPS initiative, the introduction of Thin Capitalisation in India tax regime for first time has, honestly, been quite bold. This restricts deduction of interest cost to the payer at 30% of EBITDA if loans taken from associate foreign entity over INR 10 million. Also, there is introduction of 'Secondary Adjustment' to be made by taxpayer in case a primary adjustment to transfer price has been made by taxpayer suo moto or purauant to Advance Pricing Agreement or other prescribed conditions - this will not apply if primary adjustment does not exceed INR 10 million and transactions relating prior to FY 2015-16. Separately, it is proposed that cost of acquisition of shares of Indian Company in hands of resultant foreign company in case of demerger shall be same as it was in hands of transferor. 

On restricting the cash / alternative economy, increasing usage of banking and online transactions and developments concerning this, it is proposed that any payment for asset acquisition which is in cash exceeding INR 10,000 to a person in a day shall not be considered as a part of asset acquisition cost. Also, payment for revenue expenditure made in cash exceeding INR 10,000 to a person in a day shall be disallowed - this limit is INR 20,000 per day currently. If a person receive any sum in excess of INR 0.3 million in cash, then there could be 100% penalty levied on the same. Donations made in cash shall be allowed as deduction only up to INR 2,000 - this limit is INR 10,000 currently. If Individuals pay a rent of more than INR 50,000 per month to a resident, it will attract 5% TDS or withholding tax. Also, some measures to bring transparency in electoral funding and contributions made to exempt trusts and bodies. 

The deduction limit for banks to claim expense on account of provision for bad and doubtful debts enhanced from 7.5% to 8.5% of total income. 

With GAAR round the corner, on anti abuse, the provisions to tax receipt of money or property exceeding INR 50,000 without consideration has been extended to all taxpayers - this earlier covered only Individuals and HUFs, but covers all kinds of taxpayers. In another move, exemption from long term capital gains on listed equity shares is made available only if on such acquisition securities transaction tax was chargeable. Also, where consideration for transfer of shares (other than quotes share) is less than its Fair Market Value, its Fair Market Value shall be considered as its value. 

On procedures side, there is an attempt to reduce the time-limits for completing assessments and re-assessments by tax authorities further by 3 months - a move similar to last year's amendment brought in. Time limit for revision of return by taxpayer also reduced to end of relevant assessment year. The base year for computing long term capital gains shifted from 1981 figure to 2001 figure. Holding period in case of immoveable property reduced from 36 months to 24 months for computing long term capital gains. Also, proposed that TDS 2% will apply to payments made to persons engaged in business of operation of call centre. Further, if a taxpayer does not file tax return in time, there could be additional levy / fee on such delay. 

On the Indirect tax side, as GST expected shortly, thus no major changes brought in through this budget. 

Customs duty reduced on Liquified Natural Gas, Solar tempered glass, LED light parts and others. Basic Customs Duty (BCD) increased on Cashew nuts, RO membrane element and certain other items. Countervailing Custom Duty (CVD) reduced on Micro ATMs, Iris scanner, parts of LED lights, parts used in manufacture of solar tempered glass and others. CVD enhanced on few items. Similarly, Special Customs Duty (SAD) decreased and enhanced on few items. Also, Export Duty levied on other Aluminium ores including laterite. Also, goods imported through postal parcels, packets etc exempt from Customs if value does not exceed INR 1,000. Bill of Entry to be presented by end of next working day of import. Concept of 'beneficial owner' introduced to cover any person on whoae behalf goods are imported or exported or who exercise effective control on goods - included in definitions of importer and/or exporter. 

Similarly, in Excise law, there is increase in Central Excise Tariff on few items and reduction in duty on few items. Also, exemption on point of sale devices and goods used in manufacture thereof extended till 30 June 2017. Also, changes made in Cenvat Credit Rules, 2004 concerning Banks, Financial Institutions and NBFC. 

In Service tax, services for carrying out any process amounting to manufacture or production of goods except liquor shall be tax exempt. Certain other changes made in exemptions concerning services provided by IIMs and others. For works contract services, service tax shall be levied at normal rate if value of land is not included. If the same is included, service tax shall be payable on reduced value from July 2010. 

In view of the above and looking at domestic and international factors existing and holding relevance in 2017, the Budget seems to have delivered on creating a boom for sectors such as housing, it does seem to be promoting foreign investment and ease of doing business in India, it seem to be doing its bit in view of new regulations of Ind-AS and GST, it also seem to be doing enough on International developements such as OECD BEPS initiative. But as a taxpayer one's expectations still remain. Honestly, it could have been great if the Budget could introduce provisions to simplify existing tax regime and focus on reducing and removing tax litigations. Also, there are mind boggling numbers to suggest that a large part of Indian economy is still out of tax administration reach. Thus, it would be interesting to see if there are changes made in future to specifically focus on the above.