Budget 2017 - Highlights

The Honourable Finance Minister presented the Union Budget 2017 amidst a turbulent global economic environment resulting from major economic and political developments in the last one year. On the domestic front, the Budget 2017 has come at a time when the country has recently gone through a transformational reform in the form of demonetisation of high denomination bank notes, undertaken to weed out the parallel cash economy of the country and give impetus to digital transaction. The country is also on the verge of another transformational reform, i.e. the implementation of Goods and Service Tax, which is expected to be rolled out from July 2017.
Budget 2017 has been presented with a specific focus to promote affordable housing, provide stimulus to the infrastructure sector, digitisation of the Indian economy and foster ease of doing business in India. In this article, we have summarised select key highlights of the Budget 2017.
Rationalisation of Minimum Alternate Tax (MAT) in line with Indian Accounting Standard (Ind AS)
In terms of MAT provisions, a company is required to pay MAT on the basis of its ‘book profit’ after providing for adjustments as provided for. There was ambiguity as regards to the method that needed to be followed for computing book profits in a scenario where a company was mandatorily required to follow Ind AS. The provisions relating to MAT are proposed to be amended to provide for additional adjustments owing to mandatory adoption of Ind AS.
At the outset, it has been clarified that the starting point for computing book profits for the purpose of MAT is net profit before other comprehensive income (OCI). A summary of the adjustments proposed are as under:

  • Items excluded from computation of ‘book profit’ for MAT purposes

  • The following items are ignored for the purpose of computation of book profit under MAT

    • Amount credited or debited to OCI for the period starting from 01 April 2016 which will not be re-classified to profit or loss account (P&L A/c) in respect of:
    • revaluation surplus for Plant, Property, Equipment (PPE) and Intangible assets; and
    • gains or losses from investments in equity instruments designated at fair value through OCI

    • The amount excluded above will be considered in the year when above assets are retired, disposed, realised or otherwise transferred

    • The amounts adjusted in the other equity as on 01 April 2016 owing to transition of accounts to Ind AS:
    • equity component of compound financial instruments, capital reserve and securities premium reserve;
    • OCI which will be subsequently re-classified to the P&L A/c;
    • revaluation surplus for PPE and Intangible assets;
    • gains or losses from investments in equity instruments designated at fair value through OCI as deemed cost;
    • adjustments relating to items of PPE and intangible assets recorded at fair value as deemed cost;
    • adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost;
    • adjustments relating to cumulative translation differences of a foreign operation


  • Items taxable over the next five years starting from the financial year (FY) 2016-17

    • The amounts adjusted in other equity as on 01 April 2016 other than those discussed at (ii) above will be considered while computing profit under MAT for a period of five consequent years starting from FY 2016-17.

  • Items taxable each year from 01 April 2016

    • Amount credited or debited to OCI in respect of items other than those discussed at (i) above which will not be re-classified to P&L A/c will be considered in entirety in the year of debit or credit to OCI.

Incentives for start-ups

  • It is proposed that a start-up will be allowed 100% deduction of profits of eligible business for any three consecutive years out of seven years (increased from the current period of five years) from the year of its incorporation.
  • It is proposed that an eligible start-up shall not be denied carry forward and set-off of losses in case of change of shareholding by more than 51% subject to certain conditions.

Anti-abuse provisions

  • Limitation on Interest deductions

    • In line with recommendation of OECD’s BEPS Action Plan 4, it is proposed to restrict deduction of interest expense or similar consideration paid or payable by an entity to its associated enterprise (AE) to 30% of Earnings before interest, taxes, depreciation and amortisation (EBITDA) in the previous year.

    • Provision will be applicable to an Indian company, or a permanent establishment of a foreign company in India (other than engaged in banking or insurance business), being the borrower, who pays interest or similar consideration exceeding INR 10 million in respect of any debt issued by a non-resident AE.

    • Disallowed interest expense shall be carried forward up to eight assessment years immediately succeeding the assessment year for which the disallowance is first made; (deduction in subsequent assessment year will also be subject to above restrictions).
    • The term ‘debt’ has been defined in the proposed section and will deem to include implicit or explicit guarantee provided by AE to non-AE lender or deposits corresponding and matching amount of funds with the non-AE lender.

  • Additional condition for availing Long Term Capital Gain (LTCG) exemption on listed shares

    • LTCG on transfer of listed equity shares that is acquired and transferred on or after 01 October 2004 will be exempt provided the transfer as well the acquisition is subject to securities transaction tax (STT). Certain exceptions in this regard to be notified by the Central Government. The Memorandum explaining the Finance Bill, 2017 provides an illustrative list of exceptions, viz. acquisition of shares in the initial public offer, follow-on public offer, bonus, rights issue by a listed company; acquisition by non-resident in accordance with the foreign direct investment policy of the Government, etc.

  • Consideration for transfer of shares other than quoted shares

    • It is proposed to insert a new provision to provide that where consideration for transfer of shares of a company (other than quoted shares) is less than the Fair market value (FMV) of such share determined in accordance with the prescribed manner, the FMV shall be deemed to be the full value of consideration under the head Capital gains.

      For this purpose, ‘quoted share’ is defined to mean share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transactions made in the ordinary course of business.

  • Widening the scope of income from other sources

    • Under the existing income-tax provisions, the following income is subject to tax as income from other sources:

    • Assessee

      Nature of receipt

      Consideration

      Amount taxable

      Individual/HUF

      Any sum of money exceeding INR 50,000

      Nil

      Whole of the aggregate value of such sum

      Immovable property/property stamp value/fair value of which exceeds INR 50,000

      Nil

      Stamp value/Fair value

      Immovable property/property

      Less than stamp value/ fair value by INR 50,000

      Stamp value/Fair value less consideration

      Closely held company/Firm

      Shares of closely held company fair value of which exceeds INR 50,000

      Nil

      Fair value

      Shares of closely held company

      Less than fair value by INR 50,000

      Fair value less consideration



    • It is proposed to extend the aforesaid anti-abuse provisions to all persons. In this regard, certain exceptions have been provided, viz. distribution on partition of HUF, transfer in a scheme of amalgamation and demerger, transfer of shares of Indian company pursuant to amalgamation or demerger of foreign companies, etc. It is further proposed that once the recipient is liable to tax in the aforesaid manner, the value which has been subjected to tax will be available as cost in the hands of such recipient.

Rupee Denominated Bond (RDB)

  • The benefit of Withholding Tax (WHT) at concessional rate of 5% has been extended to interest on RDB issued outside India with effect from 01 April 2015 (to give effect to Press Release dated 29 October 2015).

  • In relation to the capital gain on transfer/redemption of RDB, it is proposed that:

  • any transfer of RDB issued outside India, by a non-resident to another non-resident shall not be regarded as transfer

  • relief available to original subscribers in respect of capital gains arising due to appreciation of rupee on redemption of RDB be extended to all the subsequent holders

WHT on interest payable on certain borrowings

The concessional rate of WHT at the rate of 5% applicable on interest payable by an Indian company or business trust to a non-resident in respect of borrowings in foreign currency is applicable in respect of borrowings made up to 30 June 2020 resulting in three years extension from the current terminal date of 30 June 2017.

Capital Gain

  • Conversion of preference shares into equity shares will not be regarded as transfer. Consequential amendments are proposed in respect of cost of acquisition and period of holding.

  • It is proposed to shift the base year for indexation purposes to 01 April 2001. Further, it is proposed that the cost of acquisition of an asset acquired before 01 April 2001 shall be allowed to be taken as FMV as on 01 April 2001.

  • It is proposed to reduce the period of holding of immovable property, being land or building or both, from 36 months to 24 months to qualify as long term capital assets.

  • It is proposed to clarify that provisions of indirect transfer shall not apply to any non-resident investor in Foreign Portfolio Investor (FPI) registered as Category I & II FPIs. Further, the Finance Minister in the Budget speech stated that the indirect transfer provision shall not apply in case of redemption of shares or interests outside India as a result of, or arising out of redemption or sale of investment in India which is chargeable to tax in India.

Measures to discourage cash transactions

  • It is proposed that no depreciation/deduction will be allowed in respect of capital assets if payment exceeding INR 10,000 is made in a day otherwise than by an account payee cheque/draft or use of ECS through a bank account.

  • A penalty equal to the amount received in cash shall be levied on a person who receives an amount of INR 300,000 or more per day/per transaction/per event or occasion otherwise than by an account payee cheque or account payee bank draft or use of ECS through a bank account.

Transfer pricing

  • Taxpayer shall be required to carry out a secondary adjustment in case primary adjustment, i.e transfer pricing adjustment exceeding INR 10 million has been made in relation to transactions of FY subsequent to FY 2015-16 under following circumstances:

    • By the taxpayer in its return of income (suo motu adjustment)

    • By the Assessing Officer and subsequently accepted by the taxpayer

    • Pursuant to an agreement reached in an Advance Pricing Agreement

    • In conformity to the margins/rates prescribed by the Safe Harbour Rules

    • Pursuant to a Mutual Agreement Procedure resolution
  • Excess money available with the associated enterprise consequent to the primary adjustment, if not repatriated to India within the prescribed time, shall be deemed to be an advance made by the taxpayer, requiring imputation of interest income.

With the advancement of the presentation of Budget to 01 February 2017, the Finance Minister aims to operationalise all schemes and projects (including new schemes), at the onset of the next FY. The proposals of the Budget 2017 can, therefore, be expected to be enacted before 01 April 2017.
Authored by: Vijay K. Dhingra (FCA), Geeta Ramrakhiani (ACA) and Priyanka Jain (ACA) - Deloitte Haskins & Sells LLP
Views expressed are personal

 

© Copyright 2015-16. All rights reserved.