Presentation on Budget 201712 Feb 2017CA. Sudha G. BhushanAssociate Director : International Transaction advisory servicesTaxpert Professionals 09769033172 || Sudha@taxpertpro.com

Gulmohar Road Study Circle, Institute of Chartered Accountants of India

Preface

Shifting of Budget to 1Feb

Forgoing of planned and unplanned

expenditure

Clubbing of Railway Budget

Global Economy Indian Economy

• A tectonic policy initiative

Goods and Services Tax

Demonetisation

Transform, Energise and Clean India

Transform the quality of governance and quality of life of people;

Energise various sections of society, especially the youth and thevulnerable, and enable them to unleash their true potential; and

Clean the country from the evils of corruption, black money and non-transparent political funding.

Government Agenda for next year

I. Farmers

II. Rural population

III. Youth

IV. The poor and the underprivileged

V. Infrastructure

VI. Financial sector

VII.Digital economy

VIII.Public service

IX. Prudent fiscal management

Ten distinct themes to foster broad agenda

Digital India is an initiative launched by Prime Minister Narendra Modion 01 July 2015 with a view to empower the people of India digitally,and bridge the gap between rural and digital India. It seeks totransform the country into a connected economy, attract investment inelectronics manufacturing, and create millions of jobs and supporttrade.

The wider goal of Digital India is to bring broadband connectivity in allpanyachats, wifi in all schools and universities, and public wifi hotspotsin all major cities in India by 2019.

The program will also contribute in the delivery of digital services in thehealth, education, agriculture, and banking industries.

Digital India

“A number of global reports and assessments, over the last two years, have shown thatIndia has considerably improved its policies, practices and economic profile. These arereflected in Doing Business Report of the World Bank; World Investment Report2016 of UNCTAD; Global Competitiveness Report of 2015-16 and 2016-17 ofthe World Economic Forum; and several other Reports. India has become the sixthlargest manufacturing country in the world, up from ninth previously. We are seen asan engine of global growth.”

From the Budget Speech

General Anti Avoidance Rule (GAAR)

Applicable from 1April 2017 (Vide CBDT on 27th Jan 2017)

An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it

• creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;

• results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

• lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or

• is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

An arrangement shall be deemed to lack commercial substance, if—

(a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or

(b) it involves or includes—

(i) round trip financing; (ii) an accommodating party; (iii) elements that have effect of offsetting or cancelling each other; or (iv) a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction; or

(c) it involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter) for a party; or

(d) it does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained (but for the provisions of this Chapter).

Round trip financing includes any arrangement in which, through a series of transactions—

(a) funds are transferred among the parties to the arrangement; and (b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit (but for the provisions of this Chapter), without having any regard to—

(A) whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement;

(B) the time, or sequence, in which the funds involved in the round trip financing are transferred or received; or

(C) the means by, or manner in, or mode through, which funds involved in the round trip financing are transferred or received.

Accommodating party, if the main purpose of the direct or indirect participation of that party in the arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit (but for the provisions of this Chapter) for the assessee whether or not the party is a connected person in relation to any party to the arrangement.

Arrangement to lack commercial substance

If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case, including by way of but not limited to the following, namely:—

(a) disregarding, combining or recharacterizing any step in, or a part or whole of, the impermissible avoidance arrangement;

(b) treating the impermissible avoidance arrangement as if it had not been entered into or carried out;

(c) disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

(d) deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount;

(e) reallocating amongst the parties to the arrangement—(i) any accrual, or receipt, of a capital nature or revenue nature; or

(ii) any expenditure, deduction, relief or rebate;

(f) treating—(i) the place of residence of any party to the arrangement; or

(ii) the situs of an asset or of a transaction,

at a place other than the place of residence, location of the asset or location of the transaction as provided under the arrangement; or

(g) considering or looking through any arrangement by disregarding any corporate structure.

For the above purposes —

(i) any equity may be treated as debt or vice versa;

(ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or

(iii) any expenditure, deduction, relief or rebate may be recharacterised.

Consequences of Impermissible avoidance arrangement

"Place of effective management" is defined in the Act to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.

Place of effective Management (POEM)

Extant Position

• a company is said to be resident in India in any previous year, if it is an Indian company or if during that year, the control and management of its affairs is situated wholly in India.

Revised position

• a company is said to be resident in India in any previous year, if-

• (i) it is an Indian company; or

• (ii) its place of effective management in that year is in India

Place of effective Management (POEM)

* Passive income shall be aggregate of:

(i) Income from the transactions where

both the purchase and sale of goods is

from/ to its AE's

(ii) Income by way of royalty, dividend,

capital gains, interest or rental income

Passive income* (wherever

earned) < 50% of total income ?

Yes

Assets in India < 50% Total Assets?

Yes

Employees situated in India; or are

resident in India < 50% of totalnumber of

employees

Yes

Payroll expenses incurred on such

employees < 50% of its total payroll

expenditure

Active Business Outside India

Active business outside India (‘ABOI’)

Yes No

1) POEM is considered to be outside India if majority of the meetings of the Board of directors are held outside India.2) However, if it is established that the BOD of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person (s) resident in India, then the POEM shall be considered to be in India.

Stage 1: Identification of persons who actually make the key management and commercial decision for conduct of the company’s business as a whole Stage 2: Determination of place where these decisions are in fact being made

Example 1: Company A Co. is a sourcing entity, for an Indian multinational group, incorporated in country X and is 100% subsidiary of Indian company (B Co.). The warehouses and stock in them are the only assets of the company and are located in country X. All the employees of the company are also in country X. The average income wise breakup of the company’s total income for three years is, -

(i) 30% of income is from transaction where purchases are made from parties which are non-associated enterprises and sold to associated enterprises;

(ii) 30% of income is from transaction where purchases are made from associated enterprises and sold to associated enterprises;

(iii) 30% of income is from transaction where purchases are made from associated enterprises and sold to non-associated enterprises; and

(iv) 10% of the income is by way of interest.

Interpretation: In this case passive income is 40% of the total income of the company. The passive income consists of, -

(i). 30% income from the transaction where both purchase and sale is from/to associated enterprises; and

(ii). 10% income from interest.

The A Co. satisfies the first requirement of the test of active business outside India. Since no assets or employees of A Co.are in India the other requirements of the test is also satisfied. Therefore, company is engaged in active business outside India.

Determination of POEM || Example 1

Example 2: The other facts remain same as that in Example 1 with the variation that A Co. has a total of 50employees. 47 employees, managing the warehouse, storekeeping and accounts of the company, are locatedin country X. The Managing Director (MD), Chief Executive Officer (CEO) and sales head are resident in India.The total annual payroll expenditure on these 50 employees is of Rs. 5 crore. The annual payroll expenditurein respect of MD, CEO and sales head is of Rs. 3 crore.

Interpretation: Although the first limb of active business test is satisfied by A Co. as only 40% of its totalincome is passive in nature. Further, more than 50% of the employees are also situated outside India. All theassets are situated outside India. However, the payroll expenditure in respect of the MD, the CEO and thesales head being employees resident in India exceeds 50% of the total payroll expenditure. Therefore, A Co.is not engaged in active business outside India.

Determination of POEM || Example 2

The provisions of Finance Bill, 2017 relating to direct taxes seek to amend the Income-tax Act, 1961 ('the Act') and the Finance Act, 2016A. Rates of Income-tax

B. Additional Resource Mobilisation

C. Measures for Promoting Affordable Housing and Real Estate Sector

D. Measures for Stimulating Growth

E. Promoting Digital Economy

F. Transparency in Electoral Funding

G. Ease of doing Business

H. Anti-abuse Measures

I. Rationalisation Measures

J. Benefit for NPS subscribers

Budget 2017 || Major Segments

As against estimated 4.2 crore persons engaged in organised sector employment, the numberof individuals filing return for salary income are only 1.74 crore. As against 5.6 croreinformal sector individual enterprises and firms doing small business in India, the number ofreturns filed by this category are only 1.81 crore.

Out of the 13.94 lakh companies registered in India up to 31st March, 2014, 5.97 lakhcompanies have filed their returns for Assessment Year 2016-17. Of the 5.97 lakh companieswhich have filed their returns for Assessment Year 2016-17 so far, as many as 2.76 lakhcompanies have shown losses or zero income. 2.85 lakh companies have shown profit beforetax of less than ` 1 crore. 28,667 companies have shown profit between 1 crore to 10 crore,and only 7781 companies have profit before tax of more than 10 crores.

Among the 3.7 crore individuals who filed the tax returns in2015-16, 99 lakh show income below the exemption limit of 2.5 lakh p.a., 1.95 crore showincome between 2.5 to 5 lakh, 52 lakh show income between 5 to 10 lakhs and only 24 lakhpeople show income above 10 lakhs.

Of the 76 lakh individual assesses who declare income above 5 lakh, 56 lakh are in thesalaried class. The number of people showing income more than50 lakh in the entire countryis only 1.72 lakh. We can contrast this with the fact that in the last five years, more than 1.25crore cars have been sold, and number of Indian citizens who flew abroad, either forbusiness or tourism, is 2 crore in the year 2015.

Table of Content

Individual Taxation

Corporate Tax

Capital Gains

Withholding Tax

Income Tax Returns

International Taxation

Procedural

Real Estate Sector

Miscellaneous

Foreign Exchange Management Act

Policy

Interesting Facts

Individual Taxation

Rates of Tax

There is no change in the Basic Exemption Limit of Individuals / HUF

However, it is proposed to reduce the existing rate of taxation for income between INR 250,000and INR 500,000 to 5%

It is also proposed to introduce surcharge at 10% for individuals having taxable income aboveINR 50,00,000 but not exceeding INR 1,00,00,000

In the view of rationalisation of tax rates for individuals in the income slab of Rs. 2,50,000 toRs.5,00,000, the rebate under Section 87A available for individuals whose total income does notexceed INR 5,00,000 is reduced from INR 5,000 to INR 2,500/-

It is also proposed to reduce the threshold limit for rebate under Section 87A from INR 5,00,000to INR 350,000

Surcharge will continue to be levied at 15% for individuals/HUFs having total income above INR100,00,000

• Education cess will continue to be levied at the rate of 3% of income tax (including surcharge)

Rationalisation of deduction under section 80CCD for self-employed individual

Currently, an individual who is an employee avails upto 20% of salary as a deduction forcontribution to NPS comprising of contribution of 10% by employer and 10% by self.However, a self-employed individual can claim deduction only upto 10% of the gross totalincome in the absence of employer’s share.

It is now proposed to enhance the deduction for self-employed individuals to 20% of the grosstotal income. However, this comes within the overall cap for deduction that remains at INR150,000.

Reason for change:

To provide parity between an individual who is an employee and an individual who is self-employed.

Tax-exemption to partial withdrawal from National Pension System (NPS) [Section 10(12A)]

As per the existing provision, the payment from National Pension System (NPS) trust to anemployee on closer of his account or opting out shall be exempt up to 40% of total amountpayable to him.

It is now proposed to exempt partial withdrawal from NPS, not exceeding 25% of thecontribution made by an employee in accordance with the terms and conditions prescribed underthe Pension Fund Regulatory and Development Authority Act, 2013

Reason for change:

To provide further relief to an employee subscriber of NPS. To provide further relief to an employeesubscriber of NPS

Phase out of deduction under Rajiv Gandhi Equity Savings Scheme[Section 80CCG]

Resident individuals who have invested in listed equity shares or units in equity oriented funds canclaim deduction of 50% of amount invested to the extent such deduction does not exceed INR25,000 for three consecutive years (subject to certain conditions).

It is proposed not to allow any fresh deduction under the scheme effective assessment year 2018-19. Nevertheless, those who have invested and claimed deduction earlier can continue to claim thededuction for the balance period.

Reason for change:

This amendment has been brought considering the fact that limited number of individuals availedthis deduction and also to rationalize the multiplicity of deductions available under Chapter VI-A ofthe Act.

Measures for promoting digital payments in case of small unorganizedbusinesses – Section 44AD

The provisions of section 44AD provides for a presumptive income scheme in case of eligibleassessees carrying out eligible businesses, and having total turnover or gross receipts not exceedingINR 2 crores in a previous year. In case of such eligible assessees, a sum of 8% of the totalturnover or gross receipts, or a higher sum declared by the assessee, is deemed to be the profitsand gains of such business.

It is proposed to reduce the presumptive rate of deemed total income of 8% to 6% of totalturnover or gross receipts, in case the amount is received by an account payee cheque or accountpayee bank draft or use of electronic clearing system through a bank account before the due datefor filing return of income for the year. This amendment is proposed to be effectiveretrospectively from assessment year 2017-18.

Reason for change:

This amendment is brought in order to promote digital transactions and to encourage smallunorganized business to accept digital payments

Deduction of tax at source in the case of certain Individuals and Hinduundivided family (Section 194-IB)

At present, individuals and HUF not liable to tax audit are outside the purview of deducting tax atsource on payment of rent for the use of any land or building or both.

It is proposed to introduce tax withholding at 5% by individuals / HUF (other than those liablefor tax audit) on rent payable to a resident for an amount exceeding INR 50,000 per month or partof a month. The proposed tax deduction shall be carried out when the tenant pays the rent for thelast month of the previous year or the last month of tenancy. Thus tax shall be deducted onlyonce in the year.

Reason for change:

This amendment is brought to widen the scope of Section 194-I.

Restricting cash donations (Section 80G)

At present, deduction is not allowed in respect of donation made of any sum exceeding Rs.10,000,if the same is not paid by any mode other than cash.

It is proposed to reduce the limit of INR 10,000 to INR 2,000. This amendment will take effectfrom 1st April, 2018.

Reason for change:

The proposed change is to provide cash less economy and transparency

Restriction on set-off of loss from House property [Section 71]

It is proposed that the set-off of losses from houseproperty against any other.Income shall be restricted upto INR 0.2 million for anyassessment year.

Rates of Tax – Analysis for small tax payers

Reducing the tax rate from 10% to 5%for total income falling between INR2,50,000 to INR 5,00,000 has resultedin taxation benefit to the small taxpayers

The Tax liability has cut down by 50%

Minor gains for small taxpayers

Existing After Budget

Gross income 500,000 500,000

Sec 80C deduction 150,000 150,000

NET INCOME 350,000 350,000

Basic exemption limit 250,000 250,000

Taxable income 100,000 100,000

Tax on income 10,000 5,000

Rebate under Sec 87 5,000 2,500

Total Tax Payable 5,000 2,500

Cess 150 75

TOTAL TAX 5,150 2,575

Yearly savings in Tax 2,575

CHANGE IN TAX CUT BY 50%

Rates of Tax – Analysis for middle class tax payers

Reducing the tax rate from 10% to 5%for total income falling between INR2,50,000 to INR 5,00,000 has resultedin some taxation benefit to the middleclass tax payers

The Tax liability has cut down by 10%

Some sops for middle class taxpayers

Existing After Budget

Gross income 1,200,000 1,200,000

Deduction claimed 200,000 200,000

NET INCOME 1,000,000 1,000,000

Basic exemption limit 250,000 250,000

Taxable income 750,000 750,000

Tax 125,000 125,000

Rebate Nil 12,500

Tax Payable 125,000 112,500

Cess 3,750 3,375

TOTAL TAX 128,750 115,875

Yearly savings in Tax 12,875

CHANGE IN TAX CUT BY 10%

Rates of Tax – Analysis for High Income Earners

And this Budget has brought intopicture the concept of high tax forhuge income earner.

The Tax liability for the huge tax earnerwill approximately increase by 9.2%.

High Income Earner pay Huge Tax

Existing After Budget

Gross income 6,000,000 6,000,000

Sec 80C and NPS deduction 200,000 200,000

NET INCOME 5,800,000 5,800,000

Basic exemption limit 250,000 250,000

Taxable income 5,550,000 5,550,000

Tax 1,565,000 1,565,000

Surcharge Nil 156,500

Rebate Nil 12,500

Tax Payable 1,565,000 1,709,000

Cess 46,950 51,270

TOTAL TAX 1,611,950 1,760,270

Additional Tax payable 148,320

CHANGE IN TAX HIKED BY 9.2%%

Corporate Tax

Tax Rates

There has been changes in the rates for Corporate Sector for Domestic Company.

The rates are as tabulated below:

Total turnover or Gross Receipt in the

P.Y. 2015-16

Existing Rates Revised Rates

<50 Crores 30% of Total Income 25% of Total Income

Others 30% of Total Income 30% of Total Income

Rationalisation of provisions of Section 10AA

Under the existing provisions of section 10AA, deduction is allowed, in respect of profits andgains of an SEZ unit, subject to fulfilment of certain conditions. However, courts have taken aview (while deciding the matter pertaining to section 10A which also contains similar provision)that the deduction is to be allowed from the total income of the undertaking and not from thetotal income of the assessee.

It is proposed that, the amount of deduction under section 10AA be allowed from the totalincome of the assessee computed in accordance with the provisions of the Act, before givingeffect to the provisions of section 10AA, and the deduction under section 10AA shall not exceedthe said total income.

Reason for change:

The amendment is clarificatory in natue.

No notional income for house property held as stock-in-trade (Section 23)

Section 23 of the Act provides for the manner of determination of annual value of houseproperty.

In case of real estate developers, it is proposed that annual value of the house property (beingbuilding or land appurtenant thereto) or part of such property, held as stock-in-trade, shall betaken to be nil in case such property or part thereof is not let during the whole or any part of theprevious year. This benefit is proposed to be available for a period up to one year from the end ofthe financial year in which the construction completion certificate for such property is obtainedfrom the competent authority.

Reason for change:

The section is proposed to be amended considering the business exigencies in case of real estatedevelopers.

Disallowance in relation to capital expenditure incurred in cash[section 43(1) and section 35AD]

As per the extant provision, unlike provisions for disallowance of revenue expenditure incurred incash, there is no specific provision for disallowance in relation to capital expenditure incurred incash.

It is proposed that any payment for acquisition of an asset, otherwise than by an account payeecheque drawn on a bank or account payee bank draft or use of electronic clearing system througha bank account, exceeding INR 10,000 to a person in a day, shall not be considered as part of theactual cost of the asset and consequently no depreciation will be available in relation to such asset.Moreover, such capital expenditure will also not be considered for any investment linkeddeduction, available for specified businesses, under section 35AD.

Reason for change:

The section is proposed to be amended to discourage cash transactions even for capital expenditure.

Disallowance in relation to revenue expenditure [Section 40A(3)]

Under the extant provision section 40A(3), any expenditure, in respect of which payment is made,otherwise than by an account payee cheque drawn on a bank or account payee bank draft, to aperson in a day in excess of INR 20,000, is not allowed as deduction.

It is proposed to reduce the threshold of payment, made otherwise than by an account payeecheque drawn on a bank or account payee bank draft, to a person in a day to INR 10,000 for thepurpose of disallowance of expenditure.

Reason for change:

The amendments have been made to disincentivise cash transactions.

Taxation of dividend income [Section 115BBDA]

Under the existing provisions of section 115BBDA, income by way of dividend in excess of INR10 lakhs is chargeable to tax at the rate of 10% on gross basis in case of a resident individual,HUF or firm.

It is proposed to extend the scope of this provision to all resident assessees, except domesticcompanies and specified funds, trusts, institutions.

Reason for change:

The amendment is proposed to ensure horizontal equity among all categories of tax payers derivingincome from dividend.

Carry forward of MAT credit and AMT credit [Section 115JAA andsection 115JD]

Currently, the tax credit for Minimum Alternate Tax (‘MAT’) and Alternate Minimum Tax (‘AMT’)can be carried forward and set off for a period of ten assessment years.

It is proposed that the tax credit for MAT and AMT can be carried forward for a period of fifteenassessment years. It is further proposed to amend sections 115JAA and 115JD so as to providethat the amount of tax credit in respect of MAT/ AMT shall not be allowed to be carried forwardto subsequent year to the extent such credit relates to the difference between the amount offoreign tax credit allowed against MAT/ AMT and foreign tax credit allowable against the taxcomputed under regular provisions of Act.

Carry forward and set off of losses in case of eligible start-up[Section 79]

Currently, change in shareholding of more than 49% results in denial of benefit of carry forwardand set off of losses.

It is proposed to exclude a company which is an eligible start-up carrying on eligible businessand which is not a company in which the public are substantially interested from section 79, if allthe shareholders of such company which held shares carrying voting power on the last day of theyear or years in which the loss was incurred:

– continue to hold those share on the last day of such previous year; and

– such loss has been incurred during the period of seven years beginning for the year inwhich such company is incorporated.

Reason for change:

The amendment is proposed to facilitate ease of doing business and to promote start up India

Extension of claim period for start-ups [Section 80IAC]

Currently, it is provided that an eligible start-up shall be allowed a deduction of an amount equalto one hundred per cent of the profits and gains derived from eligible business for threeconsecutive assessment years out of five years beginning from the year in which such eligiblestartup is incorporated.

It is proposed that the deduction under section 80-IAC can be claimed by an eligible start-up forany three consecutive assessment years out of seven years beginning from the year in whichsuch eligible start-up is incorporated. This amendment will take effect from 1st April, 2018.

Reason for change:

Since the start-ups may take time to derive profit out of their business, the Section is amended toincrease the year of deduction.

MAT provisions proposed to be modified in line with Ind AS [Section 115JB] From financial year 2016-17, certain companies are mandatorily required to adopt Ind-AS (IFRS-compliant

Indian Accounting Standards). A key feature of Ind-AS is recording of transactions based on economicsubstance which could result in recognition of notional benefits and expenditures, changes in the timing ofrevenue recognition as compared to previous accounting standards, fair valuation of certain financial assetsand liabilities resulting in unrealised gains or losses

Issues

Industry expects that an effective transitory mechanism is provided in law for first-time adopters, whichrecognises the concept of real income

Another issue that needs clarification is whether the notional income and expenses recognised as per Ind-AS will be considered for the purposes of tax computation, both for minimum alternate tax and the regularprovisions of the Act

Impact

The government has addressed industry’s concern in relation to adopting Ind-AS by excluding taxation ofthe revaluation of gains or losses on property, plant or equipment, intangible assets or those arising frominvestment in equity instruments, till actual disposal/realisation for MAT purposes

In order to reduce the hardship anticipated by the first-time Ind-AS adopter, the Budget has also clarifiedthat an entity may use fair value in its opening Ind-AS balance sheet, as deemed cost for investment in asubsidiary, joint venture or associate in its separate financial statements without being subject to MAT levy

Capital Gains

Holding period in case of immovable property [Section 2(42A)]

Currently, to qualify for long-term asset, an assessee is required to hold the asset for more than 36months subject to certain exceptions

It is proposed to reduce the aforesaid period of holding to more than twenty four months.

Reason for change:

The amendment is to promote the real-estate sector and to make it more attractive for investment.

Cost of acquisition in Tax neutral demerger of a foreign company

Under the existing provision of section 47(vic), the transfer of shares of an Indian company by ademerged foreign company to a resulting foreign company is not regarded as transfer.

It is proposed to amend section 49 so as to provide that cost of acquisition of the shares ofIndian company referred to in section 47(vic) in the hands of the resulting foreign company shallbe the same as it was in the hands of demerged foreign company.

Reason for change:

To provide clarification in the Cost of Acquisition in case of Transfer from demerged foreigncompany to resulting foreign company.

Fair Market Value to be full value of consideration in certain cases

New section 50CA inserted.

Section 50CA to provide that where consideration for transfer of share of a company (other thanquoted share) is less than the Fair Market Value (FMV) of such share determined in accordancewith the prescribed manner, the FMV shall be deemed to be the full value of consideration for thepurposes of computing income under the head "Capital gains". This amendment will take effectfrom 1st April, 2018.

Tax neutral conversion of preference shares to equity shares [Section49(2AE) and 47(xb)]

Currently, conversion of securities from one form to another is regarded as taxable transfer. Taxneutrality on conversion of bond or debenture into shares of a company is provided, however noneutrality is provided for conversion of preference share into equity share of that company.

It is proposed that the conversion of preference share into equity share will not be regarded as ataxable transfer.

Consequential amendments are also proposed in respect of cost of acquisition and period ofholding

Investment in long term bonds for long term capital gains [Section54EC]

Currently, Capital gain to the extent of Rs. 50 lakhs arising from the transfer of a long-term capitalasset shall be exempt if the assessee invests the whole or any part of capital gains in certainspecified bonds, within the specified time. Currently, investment in bond issued by the NationalHighways Authority of India or by the Rural Electrification Corporation Limited is eligible forexemption under this section.

Investment in any bond redeemable after three years which has been notified by the CentralGovernment in this behalf shall also be eligible for exemption. This amendment will take effectfrom 1st April, 2018.

Reason for change:

To widen the scope of the section for sectors which may raise fund by issue of bonds eligible forexemption under section 54EC.

No exemption for Long term capital gain of listed equity shares[Section 10(38)]

As per the existing Section 10(38), exemption is available if the income arising from transfer ofCapital Asset, being an equity share in a Company is available only if the transaction of sale ofsuch equity share is entered on or after 1st October, 2004 and such transaction is not chargeable toSecurities Transaction Tax.

It is proposed that the aforesaid exemption will be available to equity shares acquired onor after 01 October 2004 only if on such acquisition securities transaction tax waschargeable. Certain exceptions in this regard such as acquisition of shares in IPO, bonus, rightissue, etc., for which condition of chargeability of securities transaction tax on acquisition is notapplicable, would be notified.

Reason for change:

To protect the exemption for genuine cases

Withholding Tax

TDS on payments to call center [Section 194J]

Section 194J provides for TDS @ 10% on payments to a resident towards fees for professional ortechnical services.

It is proposed that TDS @ 2% will apply in respect of payments to persons engaged only in thebusiness of operation of call center.

Reason for change:

To promote ease of doing business.

Self-declaration for no TDS on insurance commission [Section 197A]

Currently, section 197A permits nil TDS if recipient of certain payments furnishes a self-declaration in Form 15G / 15H. However, payments towards insurance commission beyondthreshold limit as specified is not covered under this section.

It is proposed to extend the benefit of nil TDS on the insurance commission as well, if therecipient furnishes such self-declaration.

Reason for change:

To reduce compliance burden in the case of Individuals and HUFs

Income Tax Return

Time limit for filing revised return [Section 139]

Currently, a return of income can be revised before the expiry of one year from the end of therelevant assessment year or before the completion of assessment, whichever is earlier

It is proposed that the time limit for furnishing the revised return will be available only upto theend of the relevant assessment year or before the completion of assessment, whichever is earlier.

Reason for change:

To expedite assessments of the Department.

Fee for late filing of return [Sections 140A, Section 234F and Section271F]

Fee for delay in furnishing of return shall be levied for assessment year 2018-19 and onwards in acase where the return is not filed within the due dates specified for filing of return under sub-section (1) of section 139. The proposed fee structure is as follows:—

(i) a fee of five thousand rupees shall be payable, if the return is furnished after the due date but onor before the 31st day of December of the assessment year;

(ii) a fee of ten thousand rupees shall be payable in any other case.

Reason for change:

In view of the non-intrusive information-driven approach for improving tax compliance andeffective utilization of information in tax administration.

International Taxation

Clarification with regard to interpretation of 'terms' used in an agreemententered into under section 90 and 90A.

As per Section 90 and 90A of the Act that any 'term' used but not defined in this Act or in theagreement referred to in sub-section (1) of respective provisions shall have the meaning assignedto it in the notification issued by the Central Government in the Official Gazette in this behalf,unless the context otherwise requires, provided the same is not inconsistent with the provisions ofthis Act or the agreement.

It is proposed to clarify that where any ‘term’ used in any agreement entered into with foreigncountries or specified association in the specified territories for double taxation relief, is definedunder the agreement, such term shall be assigned the meaning as provided in the said agreement.It is further clarified that where such term is not defined in the said agreement, but defined in theAct, then it shall be assigned the meaning as defined in the Act and any explanation issued by theCentral Government.

Reason for change:

The amendment is clarificatory in nature.

Extension of eligible period of concessional tax rate under section 194LD

Lower TDS at the rate of five percent in the case of interest payable at any time on or after 1stJune, 2013 but before the 1st July, 2017 to FIIs and QFIs on their investments in Governmentsecurities and rupee denominated corporate bonds provided that the rate of interest does notexceed the rate notified by the Central Government in this behalf.

The Concessional rate of five percent TDS on interest will now be available on interest payablebefore the 1st July, 2020. This amendment will take effect from 1st April, 2018.

Reason for change:

The amendment is made considering the representations received from stakeholders.

Extension of eligible period of concessional tax rate under section 194LD

The interest payable to a non-resident by a specified company on borrowings made by it in foreigncurrency from sources outside India under a loan agreement or by way of issue of any long-termbond including long-term infrastructure bond shall be eligible for concessional TDS of five percent. It further provides that the borrowings shall be made, under a loan agreement at any time onor after the 1st July, 2012, but before the 1st July, 2017; or by way of any long-term bond includinglong-term infrastructure bond on or after the 1st October, 2014 but before the 1st July, 2017,respectively.

Beneficial TDS rate of 5% on interest payable to FIIs and QFIs in respect of investments in rupeedenominated bonds of an Indian company or Government securities is also proposed to beextended to interest payable before 1 July 2020.

Reason for change:

The amendment is made to boost the economy by way of introduction of foreign capital.

Extension of eligible period of concessional tax rate on interest in case of ExternalCommercial Borrowing – Section 194LC

The existing provisions of Section 194LC of the Act provide that the interest payable to a non-resident by a specified company on borrowings made by it in foreign currency from sourcesoutside India under a loan agreement or by way of issue of any long-term bond including long-term infrastructure bond shall be eligible for concessional TDS of five per cent.

It is proposed to amend section 194LC to provide that the concessional rate of five per cent. TDSon interest payment under this section will now be available in respect of borrowings made beforethe 1st July, 2020.

Reason for change:

The amendment is made to boost the economy by way of introduction of foreign capital.

Transfer Pricing

Rationalization of transfer pricing regulations for domestictransaction [Section 92BA]

Section 92BA of the Act, inter-alia provide that any expenditure in respect of which payment hasbeen made by the assessee to certain "specified persons" under section 40A(2)(b) are coveredwithin the ambit of specified domestic transactions.

Expenditure in respect of which payment has been made by the assessee to a person referred to inunder section 40A(2)(b) are proposed to be excluded from the scope of section 92BA of the Act.

Reason for change:

The amendment is to reduce the compliance burden of taxpayers.

Introduction of secondary adjustment in transfer pricing regulations[Section 92CE] Section 92CE provides that the assessee shall be required to carry out secondary adjustment where the

primary adjustment to transfer price, has been made suo motu by the assessee in his return of income; ormade by the Assessing Officer has been accepted by the assessee; or is determined by an advance pricingagreement entered into by the assessee under section 92CC; or is made as per the safe harbour rules framedunder section 92CB; or is arising as a result of resolution of an assessment by way of the mutual agreementprocedure under an agreement entered into under section 90 or 90A.

It is proposed to provide that where as a result of primary adjustment to the transfer price, there is anincrease in the total income or reduction in the loss, as the case may be, of the assessee, the excess moneywhich is available with its associated enterprise, if not repatriated to India within the time as may beprescribed, shall be deemed to be an advance made by the assessee to such associated enterprise and theinterest on such advance, shall be computed as the income of the assessee , in the manner as may beprescribed. It is also proposed to provide that such secondary adjustment shall not be carried out if, theamount of primary adjustment made in the case of an assessee in any previous year does not exceed onecrore rupees and the primary adjustment is made in respect of an assessment year commencing on orbefore 1st April,2016.

Reason for change:

In order to align the transfer pricing provisions in line with OECD transfer pricing guidelines and internationalbest practices.

let’s take a case of a captive service provider, Company A, providing services to its Principal, Company B on a cost plus basis:

- Actual transaction price: Cost of 1000 + 10% mark -up = 1100

- Arm’s length price: Cost of 1000 + 15% mark-up = 1150

- Primary adjustment in the hands of Company A: 1150 – 1100 = 50 on which tax will be paid

- Excess cash in the hands of Company B: 50

A Secondary Adjustment seeks to address the impact of the excess cash of 50 in the hands of Company B. Put differently, it seeks to address the impact of cash deficit of 50 in the hands of Company A.

Had the transaction been conducted at arm’s length originally, the amount of 50 would have been reported in the books of accounts of Company A, and collected in the ordinary course of business. Eventually, Company A would incur cost related to repatriation of the amount of 50.

Per Finance Bill 2017, Secondary Adjustment is proposed to operate in the following manner:- Every company with a Primary Adjustment must capture such amount (50) in its books of accounts, and also the books of accounts of the related party

- The amount so booked (50) must be received within a stipulated period, else interest would be applied at a specified rate (to be prescribed)

In other words, if the amount of primary adjustment is not received into the country, such balance would be treated as an advance on which interest would be applied in a manner, yet to be prescribed.

Example of Secondary adjustment

Further Adoption of BEPS

Limitation of Interest deduction in certain cases

In line with the

recommendations of

OECD’s BEPS Action

Plan 4, it is proposed to

restrict the deduction of

excess interest claimed

by an entity on debt from

its associated enterprise.

Salient features of these

provisions are as follows:

Procedural

Restriction on cash transactions

To omit the provision relating to tax collection at source at the rate of one per cent. of saleconsideration on cash sale of Jewellery exceeding five lakh rupees. The amendments will takeeffect from 1st April, 2017

Reason for change:

To achieve the mission of the Government to move towards a less cash economy to reducegeneration and circulation of black money.

Processing of return within the prescribed time and enable withholding ofrefund in certain cases

It is proposed to insert a new section which authorizes the AO to withhold refund due to theassessee upto the date on which the assessment is made, if notice is issued and he is of theopinion that grant of refund may adversely affect the revenue. However, the AO will be requiredto record reasons in writing and obtain prior approval of the Principal Commissioner orCommissioner for the same. The above provision will apply from assessment year 2017-18.

Reason of insertion:

To address the grievance of delay in issuance of refund in genuine cases which are routinely selectedfor scrutiny assessment

Interest on refund due to deductor

Section 244A of the Act provides that an assessee is entitled to receive interest on refund arisingout of excess payment of advance tax, tax deducted or collected at source, etc.

It is proposed to insert a new sub-section (1B) in the said section to provide that where refund ofany amount becomes due to the deductor, such person shall be entitled to receive, in addition tothe refund, simple interest on such refund, calculated at the rate of one-half per cent. for everymonth or part of a month comprised in the period, from the date on which claim for refund ismade in the prescribed form or in case of an order passed in appeal, from the date on which thetax is paid, to the date on which refund is granted.

It is also proposed to provide that the interest shall not be allowed for the period for which thedelay in the proceedings resulting in the refund is attributable to the deductor.

Restriction on cash transactions

Insertion of section 269ST in the Act to provide that no person shall receive an amount of three lakhrupees or more,—

(a) in aggregate from a person in a day;

(b) in respect of a single transaction; or

(c) in respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or account payee bank draft or use of electronic clearingsystem through a bank account.

Transactions of the nature referred to in section 269SS are proposed to be excluded from the scopeof the said section. The amendments will take effect from 1st April, 2017

Restriction on cash transactions – Section 271DA

To provide for levy of penalty on a person who receives a sum in contravention of the provisionsof the proposed section 269ST. The penalty is proposed to be a sum equal to the amount of suchreceipt. The said penalty shall however not be levied if the person proves that there were goodand sufficient reasons for such contravention. It is also proposed that any such penalty shall belevied by the Joint Commissioner. The amendments will take effect from 1st April, 2017.

Reason for insertion:

To achieve the mission of the Government to move towards a less cash economy to reducegeneration and circulation of black money.

Shifting base year from 1981 to 2001 for computation of capital gains

Currently, in computing capital gains arising on transfer of capital assets acquired before 01 April1981, the assessee has been allowed an option to adopt the fair value of the property as on 01April 1981 or actual cost as the cost of acquisition of such asset

it is proposed to shift this base year from 01 April 1981 to 01 April 2001 thereby allowing theassessee to substitute fair market value of the capital asset as on 01 April 2001 as the cost ofacquisition. Consequentially, the provisions governing the cost of acquisition and cost ofimprovement are also proposed to be amended.

Reason for change:

The base year for computation of capital gains has become more than three decades old, assesseesare facing genuine difficulties in computing the capital gains in respect of a capital asset, especiallyimmovable property acquired before 01.04.1981 due to non-availability of relevant information forcomputation of fair market value of such asset as on 01.04.1981.

Real Estate Sector

Real Estate (Regulation and Development) Act, 2016

Ministry of Law and Justice has notified the Real Estate (Regulation and Development) Act, 2016(‘RERA’) which has come into force effective 1 May 2016.

RERA aims at ensuring efficiency and transparency in the real estate sector, protecting consumerinterest by promoting fair play in the sector and encourages timely delivery of projects.

RERA envisages achieving the said objectives by:

i. Establishing the Real Estate Regulatory Authority (Authority) for regulation and promotion ofthe real estate sector:

a. Registration of the real estate project and

b. Registration of the real estate agents

ii. Ensuring sale of plot, apartment or building in an efficient and transparent manner and toprotect the interest of consumers in the real estate sector

iii. Establishing the Real Estate Appellate Tribunal

Computation of capital gains in case of joint developmentagreements and withholding tax obligation [Section 45(5A) andsection 194-IC]

Insertion of new section 45(5A)

In case of an assessee being individual or Hindu undivided family, who enters into a specifiedagreement for development of a project, the capital gains shall be chargeable to income-tax asincome of the previous year in which the certificate of completion for the whole or part of theproject is issued by the competent authority. The amendment will take effect from 1st April, 2018

Reason for change:

The amendment is to minimise the genuine hardship which the owner of land may face in payingcapital gains tax in the year of transfer as per Section 45.

Rationalisation of provisions to promote affordable housing [Section80-IBA]

The existing provisions of section 80-IBA provide for 100% deduction in respect of profits and gainsderived from developing and building certain housing projects, subject to specified conditions.

The revision in the section shall provide the following relaxation:

(i) The size of residential unit shall be measured by taking into account the "carpet area" as defined in RealEstate (Regulation and Development) Act, 2016 and not the "built-up area".

(ii) The restriction of 30 square meters on the size of residential units shall not apply to the place locatedwithin a distance of 25 kms from the municipal limits of the Chennai, Delhi, Kolkata or Mumbai.

(iii) The condition of period of completion of project for claiming deduction under this section shall beincreased from existing three years to five years.

The amendment shall be effective form 1st April, 2018.

Reason for change:

To promote the development of affordable housing sector

Miscellaneous

Widening scope of Income from other sources

A new clause (x) in sub-section (2) of section 56.

Receipt of the sum of money or the property by any person without consideration or forinadequate consideration in excess of Rs. 50,000 shall be chargeable to tax in the hands of the allthe recipient under the head "Income from other sources". These amendments will take effectfrom 1st April, 2017.

Disallowance for non-deduction of tax from payment to resident

Section 58 of the Act, specify the amounts which are not deductible in computing the incomeunder the head "Income from other sources" which include certain disallowances made incomputation of income under the head "Profits and gains of business or profession".

Provisions of section 40(a)(ia) shall, so far as they may be, apply in computing income chargeableunder the head "income from other sources" as they apply in computing income chargeable underthe head "Profit and gains of business or Profession". This amendment will take effect from 1stApril, 2018.

Reason for change:

With a view to improve compliance of provision relating to tax deduction at source (TDS).

Transparency in Electoral Funding

In order to discourage the cash transactions and to bring transparency in the source of funding topolitical parties, the following additional conditions are proposed for availing the benefit of thesaid section:

i)No donations of INR 2000/- or more is received otherwise than by an account payee cheque drawnon a bank or an account payee bank draft or use of electronic clearing system through a bankaccount or through electoral bonds,

ii) Political party furnishes a return of income for the previous year in accordance with the provisionsof sub-section (4B) of section 139 on or before the due date under section 139.

Further, in order to address the concern of anonymity of the donors, it is proposed to amend thesaid section to provide that the political parties shall not be required to furnish the name andaddress of the donors who contribute by way of electoral bond

Foreign Exchange

Foreign Direct Investment (FDI) Enhancement Foreign direct investment (FDI) has picked up this year, hitting an all-time high in Q2 FY17 with inflows to

the tune of USD 14.03 billion. In contrast, funds worth USD 7.6 billion came in in the first quarter ofFY17. This was after reaching a figure of USD 40.02 billion in FY16, the highest level of inflows recordedin one year.

In terms of sector specific flow, the services sector has shown strong performance in the first two quartersof FY17. Services attracted the largest portion of FDI inflows at 24.5% in FY17 (Apr to Sep), as well asthe highest quantum of investment at USD 5.3 billion. This was followed by the telecom sector attractinginvestment worth USD 2.8 billion and a share of 12.9% in FY17 (Apr-Sep), possibly an effect of the Makein India and Digital India flagship schemes. The improvement in FDI inflows seems to be on account ofan advance in the perception of the prevailing business climate from an international viewpoint, and thegovernment’s willingness to bring in more business friendly reforms amid a gloomy world economy.

Further, the government has brought in a number of positive initiatives such as quicker approval processof FDI with less conditionality under the PRAGATI initiative, and the opening up of various sectors, withmost of them now open to FDI under automatic approval route. Some of the key changes announced inJune 2016 include up to 100% FDI in the defense sector, 100% FDI in brownfield airport projects underautomatic route, up to 74% FDI in brownfield pharmaceuticals under automatic route, and 100% FDI incivil aviation with up to 49% under automatic route. All these reforms have boosted investor sentiment andgiven FDI in recent quarters an upwards push.

FDI is likely to remain stable in the coming months as the government continues its efforts to streamlineprocedures while also initiating reforms.

Extension of capital gains exemption to Rupee Denominated Bonds[Section 47 and Section 48]

Currently, gains arising on account of appreciation of rupee against foreign currency at the timeof redemption of Rupee Denominated Bond of an Indian company is to be excluded from fullvalue of consideration only in those instances where the bonds were initially subscribed by thenonresident.

It is proposed to extend the benefit even to those non-residents who are not the initial subscribersand have acquired such bonds subsequently.

Further, with a view to facilitate transfer of Rupee Denominated Bonds issued by an Indiancompany outside India from a non-resident to another non-resident, it is also proposed that suchtransfer will not be regarded as a taxable transfer.

Reason for change:

With a view to provide relief to non-resident investor, in the wake of permission to the Indiancorporates by the Reserve Bank of India (the RBI) to issue rupee denominated bonds outside Indiaas a measure to enable the Indian corporates to raise funds from a source outside India

Trade Infrastructure for Export Scheme (TIES)

A new and restructured Central scheme with a focus on export infrastructure, namely, TradeInfrastructure for Export Scheme (TIES) will be launched in 2017-18.

Reason for change:

The amendment will be a measure to promote export infrastructure in competitive world.

Clarity on applicability of indirect transfer provisions [Section 9]

Section 9 of the Act deals with cases of income which are deemed to accrue or arise in India.Explanation 5 in section 9(1)(i) clarified that an asset or capital asset, being any share or interest ina company or entity registered or incorporated outside India shall be deemed to be situated inIndia, if the share or interest derives, directly or indirectly, its value substantially from the assetslocated in India

The indirect transfer provisions are proposed to be amended to clarify that they shall not apply toany asset or capital asset being investment held by non-resident, directly or indirectly, in a ForeignInstitutional Investor registered as Category-I or Category II under the Securities and ExchangeBoard of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities andExchange Board of India Act, 1992.

Reason for change:

The proposed amendment is clarificatory in nature and is applicable retrospectively with effect fromassessment year 2012-13.

Policy

MGNREGA

Current Government has made a conscious effort to reorient MGNREGA to support our resolve todouble farmers’ income. While providing at least 100 days employment to every rural household,MGNREGA should create productive assets to improve farm productivity and incomes. The targetof 5 lakh farm ponds and 10 lakh compost pits announced in the last Budget from MGNREGAfunds will be fully achieved. In fact, against 5 lakh farm ponds, it is expected that about 10 lakh farmponds would be completed by March 2017. During 2017-18, another 5 lakh farm ponds will be takenup. This single measure will contribute greatly to drought proofing of gram panchayats.Participation of women in MGNREGA has increased to 55% from less than 48% in the past.

Honourable Members would be happy to note that the budget provision of `38,500 crores underMGNREGA in 2016-17 has been increased to `48,000 crores in 2017-18. This is the highest everallocation for MGNREGA. The initiative to geo-tag all MGNREGA assets and putting them inpublic domain has established greater transparency. The Government is using space technology in abig way to plan MGNREGA works.

Digitalisation

Promotion of a digital economy is an integral part of Government’s strategy to clean the system and weed outcorruption and black money. It has a transformative impact in terms of greater formalisation of the economyand mainstreaming of financial savings into the banking system.

The BHIM app has been launched. The app will set free the power of mobile phones for digital payments andfinancial inclusion. 125 lakh people have adopted the BHIM app so far. The Government will launch two newschemes to promote the usage of BHIM; these are, Referral Bonus Scheme for individuals and a CashbackScheme for merchants.

Aadhar Pay, a merchant version of Aadhar Enabled Payment System, will be launched shortly by theGovernment. This will be specifically beneficial for those who do not have debit cards, mobile wallets andmobile phones. Government has a mission will be set up with a target of 2,500 crore digital transactions for2017-18 through UPI, USSD, Aadhar Pay, IMPS and debit cards. Banks have targeted to introduce additional10 lakh new PoS terminals by March 2017. They will be encouraged to introduce 20 lakh Aadhar based PoSby September 2017.

The focus would be on rural and semi urban areas through Post Offices, Fair Price Shops and BankingCorrespondents. Steps would be taken to promote and possibly mandate petrol pumps, fertilizer depots,municipalities, Block offices, road transport offices, universities, colleges, hospitals and other institutions tohave facilities for digital payments, including BHIM App. A proposal to mandate all Government receiptsthrough digital means, beyond a prescribed limit, is under consideration.

Thanks..CA. Sudha G. BhushanAssociate Director : International Transaction advisory servicesTaxpert Professionals 09769033172 || Sudha@taxpertpro.com