The article takes a close look at the highlights of Union Budget 2018 in terms of direct and indirect taxes
While Budget proposals of 2018 were
in all aspects people-friendly with
announcements on major reforms in
healthcare, agriculture, air pollution, job
creation, roads and railways and other
common problems of the common man, the direct tax
and indirect tax proposals were also landmarks on their
own account. 2018 being the first budget after introduction
of GST, a few changes are proposed on Indirect taxes
front. The nomenclature of central indirect tax regulatory
body has been proposed to be changed to demonstrate
the subsuming of excise duty on major goods within GST
ambit.
Accordingly, existing name is proposed to be changed from
Central Board of Excise & Customs (‘CBEC’) to Central Board
of Indirect Tax & Customs (‘CBIC’). Education cess and
Secondary and Higher Education cess has been proposed
to be abolished on imported goods. A new cess namely
‘social welfare surcharge’ shall be introduced (not to
be included while computing Integrated GST). Other
significant proposal is the levy of ‘road and infrastructure
cess’ of INR 8 per litre (from existing INR 6 per litre) on
petrol and diesel, as an additional excise duty on imported
goods. This is coupled with reduction of basic excise duty
on both fuels by INR 2 per litre. Accordingly, the combined
effect on consumers is nullified. The rationale behind
this change seems to provide for the shortfall in government coffers post GST roll-out since a cess is entirely
governed by Central government while basic excise duty
is a shared subject between State and Centre with States
entitled to more than 40 per cent of tax collections.
Besides this, Basic customs duty has been enhanced to
almost in an array of imported products making branded
and luxury commodities expensive. A surprising entry
to this list is the food processing category wherein BCD
has been increased on import of fruit juices and other
food preparations from 30 per cent to 50 per cent. This
seems to create tariff barriers for imported goods in order
to promote in-house domestic manufacturing of processed
food in India.
From direct tax perspective,
Income Computation Disclosure
Standards (‘ICDS’) were given a
fresh lease of life, after the recent
taxpayer favorable Delhi High
Court decision1 that rendered
those ICDS unconstitutional,
which overruled binding
judicial precedents. Finally,
budget proposals were
introduced to render
constitutional validity to ICDS
through the introduction of
six out of ten ICDS as part of
the Income Tax Act, namely
ICDS II (Inventory valuation),
III (Construction contracts), IV
(revenue recognition), VI (Forex
fluctuations), VII (Government
grants) and VIII (securities).
The change in section 36 (1) and
40A allows for market to market
losses arising from monetary
items. This change is in line with
the Supreme Court ruling in case
of CIT vs Woodward Governor
(312 ITR 254). On the other
hand, many landmark Apex Court
decisions stand overruled due to the specific introduction
of guidance provided in ICDS as part of Income tax
statute. For instance: losses arising on forward exchange
contracts in case of currency derivatives held for
trading or speculation purposes or hedging foreign currency
risk shall not be allowed while computing taxable income.
This tax position is diametrically opposite to the ratio
decided by Supreme Court in case of Sutlej Cotton Mills
vs CIT2 which held that foreign exchange loss incurred
on account of trading liability would be a deductible
expenditure.
Besides the above, there are certain differences between
the proposed sections (based on ICDS) in Income
tax Act in comparison to the ICDS notified in September
2016. Such anomalies should be creased out in the
final section at the time of approval of the Finance Bill.
One of such differences is the contrast that emerges
out of proposed definition of ‘securities’ as defined in
section 145A (iii) in comparison with para 3(1)(b) of
ICDS VIII. Whereas the tax standard defines securities
as defined under Securities Contracts (Regulations)
Act, 1956, the definition used in the proposed section
states that securities listed but not regularly quoted on a
recognized stock exchange shall be covered. Accordingly,
one may infer that the bucket approach of valuation shall
not apply on regularly traded
listed securities.
No horizontal corporate tax rate
change was announced except
for small and medium sized
companies as defined in the
Budget proposal. The corporate
tax rate was reduced to 25 per
cent for companies having
aggregate turnover/ gross
receipts not exceeding INR 250
crore. This was an extension of
benefit bestowed on small and
medium sized companies in
last budget, wherein a reduced
corporate tax rate benefit
of 25 percent was passed to
companies having less than INR
50 crore of business turnover.
Further, with no change in
surcharge rate, the existing
Education Cess at 2 percent and
Secondary and Higher Education
Cess at 1 percent is proposed to
be abolished. In its place, a new
‘Health and Education Cess’ is
proposed to be introduced at the
rate of 4 percent on Income Tax
plus surcharge (as applicable).
Another landmark budget proposal was the re-introduction
of long term capital gains tax in the taxing statute. The
current exemption from long term capital gains (LTCG) tax
was introduced in 2004 with introduction of Securities
Transaction Tax (STT). After 14 years, exemption from
LTCG is proposed to be removed with proposal for removal
of section 10(38) and insertion of a new section 112A to tax
such LTCG.
Concessional LTCG tax of 10 per cent has been proposed,
arising from transfer of an equity share, or a unit of an
equity-oriented fund or a unit of a business trust where
STT is paid both at the time of purchase and sale. In certain
cases, STT is not paid initially at the time of purchase of
shares viz. in case of bonus shares, sweat equity shares
etc. There is no clarity yet as to the rate of LTCG that shall
apply to such situations where STT is not paid at the time
of purchase. Further, STT on capital gains was introduced
with a view to simplify taxing such through imposing tax on
securities turnover. Whilst the proposal for imposing LTCG
tax at 10 per cent is made, no indication of removal of STT
is yet made. Imposing both taxes on a share transaction
is burdensome for taxpayers. Also, suitable amendments
are not made in section 48 resulting in indexation benefit
being still available for computing LTCG. Accordingly, does
the taxpayer need to compute LTCG in accordance with both
section 112A (without indexation) and section 48 (with
indexation) and should derive at the beneficial result for
the purpose of imposing the LTCG rate of tax, is still to be
clarified.
Such long term capital gains tax shall be levied on
gains in excess of INR one lac. It needs to be clarified
whether the exemption of 1 lac rupees is available as
a standard deduction or whether the entire long term
capital gains shall be taxable if the total long term gain
exceeds one lac. No indexation benefit shall be provided.
The proposals shall take effect from April 01, 2018 with
grandfathering provisions being available for shares
purchased prior to January 31, 2018 and sold after
March 31, 2018. CBDT has provided clarity on various
aspects of the proposed provisions including clarity
on long term capital gains computation, applicability
of grandfathering provisions on Foreign Institutional
investors (FIIs) and withholding tax implications in hands
of residents, non-residents including FIIs3. Transfers made
between February 01, 2018 and March 31, 2018 will be
eligible for capital gains tax exemption under section 10(38)
since the new tax regime shall be applicable to transfers
made on or after April 01, 2018. Further, no withholding
tax provisions shall be applicable on payments of long term
capital gains made to FIIs in view of section 196D of the
Act. Accordingly, FIIs need to deposit advance tax on their
own assessment of long-term capital gains taxes and file
tax return in India.
Another vexed issue touched upon in the Budget pertained
to regulating cryptocurrency in India. It has been clarified by
Finance Minister that Cryptocurrency is not legal tender and
government shall discourage its use. In the same breath, a
mention was made by FM that government shall look into the aspect of utilization of blockchain technology. Similar
announcements were made earlier also by government
stating that cryptocurrencies were not legal tenders and
several red flags were raised to abstain investors from
investing in the aforesaid currencies. Alongside, there were
reports around no registrations being granted to companies
intending to act as exchange portals for blockchain
currencies. With little clarity yet available on the actual
classification of cryptocurrencies, the announcement
from government to study its utilization and efficacy is a
welcome move.
On international tax front, few amendments are proposed
viz. amendments to section 9 and changes in Country by
Country Reporting (CbCR) provisions.
No significant changes proposed on transfer pricing law
except for a few clarifications on CbCR. There has been a
proposal of extension of time allowed for furnishing CbCR
to twelve months from the end of the reporting accounting
year. This announcement aims at aligning Indian transfer
pricing regulations with the Organization for Economic
Cooperation and Development (OECD).
Further, the due date for furnishing of the CbCR by the
Constituent Entity in India that has an overseas parent
entity, is proposed to be aligned with the stipulated reporting
year of the parent company for accounting purposes. The
due date for furnishing the CbCR by Alternate Reporting
Entity (ARE) is also proposed to be aligned with its local
jurisdiction timelines in a similar manner.
In yet another blow at countering digital economy and
cross border e-commerce activity, after equalization levy,
India has made another important landmark announcement
in the international tax domain by introducing concept
of ‘significant economic presence’ in the tax statute
through linking it with the definition of business connection
under section 9 of the Income Tax Act. Once business
connection is established, the income earned in India by
a foreign company is subject to corporate tax in India
on net basis. The newly proposed concept of significant
economic presence includes within its domain all types
of transactions, whether pertaining to goods, services,
systematic and continuous soliciting of business activities
or engaging in interaction with a prescribed number
of users in India through digital means. The essential
word here is ‘digital means’, irrespective of a physical
presence or place of business in India. However, the
budget proposal aims at providing a threshold for
attracting significant economic presence, which is yet to be
prescribed.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.
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