Feb 1, 2017

Union Budget 2017 – Snapshot

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The Finance Minister presented Budget 2017 with agenda to Transform quality of governance, Energise the Youth and Vulnerable and Clean India from corruption and black money. The Fiscal deficit target has been maintained.

With 90% of the FDI transactions in automatic route, FIPB has been abolished which is again a welcome move and an expert committee is constituted for integrating spot and derivative markets.

Focus in this Budget has been given on initiatives to promote Digital and Cashless India including an attempt to bringing transparency in Political funding by restricting maximum amount of Rs 2,000 from 1 source in cash and the ban on cash transactions in excess of Rs. 3 lakhs. 100% penalty has been proposed in this case. Depreciation and deduction shall not allowed on cash payments in excess of Rs 10,000.

On corporate Tax, Reduction of tax rate to 25% for companies having turnover up to INR 50 Crores is a welcome step which will benefit 96% of the companies paying taxes and encourage people to migrate to company form. There is some reduction in tax rates by 5% at the lowest slab of Rs.2.5 lakh to Rs. 5 lakh but at the cost of those earning between Rs.50 lakh to Rs. 1 crore in form of additional surcharge of 10%.

The budget has also taken measures to help expand the tax net through benefits like no scrunity of first time I-T return filers and also by doing data mining post demonitisation. Clarifying that Indirect Transfer provisions are not applicable to FPI’s also gives a relief to the markets.

The change that Domestic transfer pricing to apply only if one of the domestic related party with whom transaction being considered is enjoying a special tax exemption is a big move towards ease of business.

The benefits for promoters of Affordable Housing projects has been proposed and it has also been given the infrastructure status which will help the Real Estate sector.

The period of holding in case of Long Term Capital Gains on Land and Building has also been reduced to 2 years to match it with the unlisted shares. The Base year for Indexation has been changed to 2001 which will simplify the process and could also lower taxes. No notional income shall be imposed for house property held by real estate developers as stock in trade for a period of 1 year from end of financial year in which certificate of completion of construction of property is obtained.

Start-ups have been given benefit of carry forward of losses subject to continuation of holding by the original shareholders when the company was incorporated. The 51% beneficial shareholding would not apply to eligible start-ups. Further, the period for claiming exemption by start-ups has been extended for any 3 assessment years out of the 7 years in which such start up is incorporated.

Tax Audit Limits has been increased to Rs. 2 crores and thresholds for maintenance of books of accounts in case of Individual and HUF has been increased.

In indirect taxes, No changes has been done in Service Tax rates.

Interestingly, annexure 3 to the budget speech contains more details to the tax provisions including the following interesting aspects-

  1. Levy of Tax @10% on Dividend Income exceeding INR 10 Lakh in hands of all resident persons. Presently it is applicable only to Individual, HUF and Firms.
  2. The scope of Section 56 (Gift Tax) is being expanded to any person, subject to certain exemptions. Presently a view is that this does not apply to certain entities like AOP/Trusts.
  3. Exemption from LTCG in case of transfer of Listed shares shall be available if STT has been paid at time of their acquisition where they have been acquired after 1.10.2004, subject to certain exceptions. Presently there is no such condition for LTCG exemption u/s 10(38). The memorandum clarifies that the genuine cases where STT could not have been paid like in IPO, FPO, Bonus or Rights Issue, acquisition by Non Resident under FDI policy etc. shall not be covered in this case. This could however be controversial and requires finer reading of the further notifications and exemptions.
  4. Thin Capitalisation rules have been proposed stating that interest paid by an Indian Company in excess of 30% of its EBITDA or interest paid to its associated enterprises, which is less, shall not be allowed as deduction in computing its Taxable profits. Presently there are no such Thin capitalisation rules in Indian Tax laws.
  5. Set off of losses from House Property is restricted to be set off against any other head during current year upto Rs. 2 lakh.
  6. A concessional rate of tax of 10% is provided in case of income from sale of carbon credits.
  7. It is proposed to do away with the provisions enabling the A.O. not to process the return and withhold the refund where the case is selected for scrutiny, subject to exceptional circumstances.
  8. It is proposed to levy a fee in case of delay in filing of ITR’s
  9. Penalty of Rs. 10,000 is proposed for each default if Accountant, Merchant Banker or Registered Valuer furnishes incorrect information in a report or certificate.
  10. Tax neutrality in case of conversion of Preference shares of a company into equity shares of that company is proposed
  11. AAR for Income Tax and Customs, Excise and Service Tax is proposed to be merged
  12. The Provisions pertaining to computation of Book Profits for MAT are aligned with the Ind AS
  13.  It is clarified that the concessional rate of tax in case of transfer of shares of a private company shall be applicable retrospectively from A.Y. 2013-14
  14. A sunset clause in respect of deduction allowed to certain persons in respect of investment in listed equity shares and listed units of equity oriented mutual fund in proposed.
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