Union Budget 2017 addressed needs of dynamic economic environment, plugged abuse of tax provisions

The Budget was a fine balancing act which addressed the needs of a dynamic economic environment and also plugged abuse of the tax provisions

Union Budget 2017 addressed needs of dynamic economic environment, plugged abuse of tax provisions

The Budget 2017 is budget of reforms for Indian economy which strongly needed boost after demonetisation where the government has given specific thrust on agriculture and rural development, infrastructure, digital economy, etc, by focusing on 10 distinct themes in a laudable manner. There was a wide expectation from corporate India to lower the corporate tax rate and abolish Minimum Alternate Tax. The finance minister partially fulfilled their wishes by reducing the income tax for smaller companies with annual turnover of upto R50 crore by 5%. On the M&A front, the FM has come out with some relief measures by clarifying a few provisions which needed immediate clarity. It is all clear that GAAR is here to come from April 1, 2017, nevertheless, there are more Specific Anti-avoidance Rules (SAAR) provisions which are proposed in this Budget.

Currently, income arising from transfer of a long term capital asset, being equity shares of a company or a unit of an equity-oriented fund is exempt from capital gains tax if the transaction of sale is undertaken after paying securities transaction tax (STT). To restrict the misuse of this provision, it is proposed that the aforesaid exemption will be available to equity shares acquired on or after October 1, 2004, only if on such acquisition STT was paid. Although, certain carve-outs are proposed to be notified, such as the acquisition of shares in IPO, FPO, bonus, right issue by a listed company, acquisition of shares by non-residents, etc, the notification should also cover shares originally held by promoters or PE funds pre-IPO, shares allotted in preferential allotment/QIP and listed shares acquired through off market routes like gifts/ corporate restructuring/esop trust.

The existing provisions of Section 56(2)(vii) of the Income Tax Act, 1961 provide for the taxation of receipt of specified assets for inadequate or without consideration in the hands of individuals or HUFs. Whereas the provisions of Section 56(2)(viia) of the Act provide for the taxation of receipt of shares of a closely held company by another closely held company/firm for inadequate or without consideration. The proposed new section 56(2)(x) will expand both the category of assets and recipients to bring under the tax net, for example, receipt of even a listed shares by a closely held company/firm for inadequate or without consideration would be taxable. However, in this regard, certain exceptions have also been specifically provided.

Currently, there is a provision of Section 50C of the Act which provides for deeming the full value of consideration such as stamp duty value for transfer of immovable property. Similar provisions has been introduced by way of Section 50CA to provide that where consideration for transfer of share of a company (other than quoted share) is less than the fair market value of such share determined in accordance with the prescribed manner, the fair market value shall be deemed to be the full value of consideration under the head ‘capital gains’. This section is one more addition in anti-abuse provisions, however, it could lead to double taxation in the case of transfer for inadequate consideration as the recipient was anyways taxable under provisions of Section 56(2)(x).

Current law provides tax neutrality on the conversion of bonds or debentures into shares of a company. However, no such clarity was there for the conversion of preference shares into equity shares which had led to multiple views and possible litigation. Now, with the introduction of Section 47(xb) it is proposed that the conversion of preference shares into equity share will not be regarded as a taxable transfer and the cost and period of holding of preference shares would be available for equity shares.

Minimum Alternate Tax (MAT) provisions for the computation of book profits have been amended to align with Ind-AS provisions. As per the current law, for a demerger to be tax neutral, the assets and liabilities are required to be transferred by the demerged company at book values. However as per Ind AS, in the case of demergers between third parties, the transfer has to be done at fair values which could result in possible MAT implications in the hands of the demerged company on such notional gains. A clarification has been provided that for computation of MAT such adjustment in profit and loss account of the demerged company is to be excluded.

Start-ups are a critical element for our economy’s growth. To promote start ups in India and ensure that they are able to get necessary funding for their business, the carve out has been provided for eligible start-up entities from the provisions of Section 79, which provide for a denial of the benefit of carry forward and set off of losses in case of a change in shareholding of more than 49%. It is now proposed that the benefit will be continued provided that there is no divestment by the transfer of shares by existing promoters.

To sum it up, the Budget was a fine balancing act which addressed the needs of a dynamic economic environment and at the same time had more specific provisions to plug abuse of the tax provisions.

Shah is executive director, and Pandya, director with deal advisory, M&A Tax, KPMG in India. Views are personal

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