Budget 2018: Direct tax—hits and misses On the tax front, following the trend of previous years, the Budget continues to focus on increasing taxpayer base and moves away from providing tax exemptions—it is a combination of various hits and misses.
Budget 2018: Union Budget FY19 provides much-needed thrust for the development of India at the micro level in order to ensure ‘ease of living’ across the length and breadth of the country. While India is expected to be one of the fastest-growing economies in the world, the Budget keeps pace with this aspiration and aims to facilitate this by focusing on developing the infrastructure, agriculture, rural and healthcare sectors. Direct tax—hits and misses On the tax front, following the trend of previous years, the Budget continues to focus on increasing taxpayer base and moves away from providing tax exemptions—it is a combination of various hits and misses.
• 25% corporate tax rate for MSME corporates only: The 25% corporate tax rate shall now be applicable to all corporates whose turnover is less than Rs 250 crore. As mentioned by the finance minister, this reduced rate is expected to benefit 99% of companies filing tax returns in India. While this is a welcome move and shall fare well with MSME companies, a higher rate of 30% continues to be applicable to non-corporate taxpayers (such as limited liability partnerships, partnership firms, etc) in the same turnover bracket. In order to bring parity across taxation of corporate and non-corporate taxpayers, the finance minister should consider reducing the corporate tax rate to 25% for non-corporate taxpayers as well, with a turnover less than Rs 250 crore. Also, the application of this rate to all companies remains uncertain. The government should consider bringing out a definitive roadmap of adopting the lower tax rate for all companies, as this will help bring about tax certainty and provide assurance to the investor community.
• ICDS provisions brought into the legislature: One of the expectations of Indian companies was the withdrawal of Income Computation and Disclosure Standards (ICDS), especially in view of the recent ruling of the Delhi High Court that had struck down various ICDS provisions. On the contrary, the Budget has proposed inclusion of ICDS provisions in the tax legislature itself, that too with retrospective effect from FY18, thus annulling the ruling of the Delhi High Court. Specifically, provisions of ICDS such as Percentage of Completion Method (POCM), Mark-to-Market losses, etc, which were scrapped by the Delhi High Court, are proposed to be incorporated into the tax law. These amendments are in contradiction to the promise of this government of promoting and sustaining a non-adversarial tax regime.
• No further clarity on MAT treatment of IndAS adjustments: The Budget FY18 had introduced provisions for tax treatment of IndAS adjustments. Thereafter, industry stakeholders made various representations, for clarifications and introduction of additional provisions for tax treatment of IndAS adjustments. Even though the MAT-IndAS Committee had proposed certain amendments in the MAT provisions, this year’s Budget seems to have given this a miss. Given that IndAS has already been implemented and is applicable on various companies, the need of the hour is prescribing of comprehensive tax provisions to gauge the impact of IndAS adjustments, with certainty, in the upcoming tax return filings.
• Tax certainty of conversion of stock in trade into capital asset: The Budget has proposed provisions for taxation of conversion of stock in trade into capital asset, wherein it has been provided that profits and gains arising on such conversion shall be taxable as business income. It has also been provided that the fair market value (FMV) on the date of transfer shall be treated as the consideration for this. Tax provisions for capital gains on sale of such assets are also proposed, wherein it is provided that the FMV on the date of conversion shall be treated as the cost of acquisition and the period of holding shall commence from the date of conversion. This provides much-needed clarity on the issue. However, tax treatment in case of the asset continues to be capitalised and remains a grey area, wherein the value at which tax depreciation shall be allowed—whether the FMV on the date of conversion or the actual cost of the asset (as the current provisions are worded)—remains ambiguous.
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• Benefits for companies enrolling for insolvency: In order to ease the hardship of companies enrolling under insolvency code, two measures have been proposed. In a welcome move, there is benefit of carry forward of business losses after change in shareholding for companies whose resolution plan has been approved. It is also proposed to amend the MAT provisions to provide for allowance of both unabsorbed depreciation as well as brought forward losses for companies whose application has been admitted for corporate insolvency. While these measures reflect the government’s intent of building a strong economic framework, in order to ensure ease of doing business for such companies further, the government may consider excluding such companies who have applied for insolvency, from the ambit of MAT. Also, it may have been provided that deeming income provisions of the tax legislature—such as Section 56(2)(x), Section 56(2)(vii)(b) of the Income-tax Act, 1961—do not apply on any conversion of shareholder loan/instruments into shares pursuant to an approved resolution plan for such companies.
• Stringent tax compliances: The Budget provides that in case a company does not file return of income, it shall be subject to prosecution, irrespective of whether there is any tax payable by such company. The intent of introducing these measure is to prevent non-compliance by companies. However, the government should clarify that foreign companies with no India presence are not subject to such stringent prosecution provisions (such as companies whose income has already been subjected to withholding taxes in India). This will help promote ease of doing business in India and auger well with the foreign investor community. No major surprises for corporate India The last full Budget of the government before the general elections is aimed at providing tax certainty, promoting tax compliances and expanding taxpayer base. It is an overall balanced Budget with no major surprises for India Inc. Some focus areas for consideration are clarity on tax treatment of IndAS, implementing 25% tax rate across all companies and withdrawal of ICDS.
Partner, Corporate Tax & International Tax, PwC