As the Lok Sabha passed the Finance Bill, 2018, amid din and without any discussion on Wednesday, the government dashed whatever faint hope investors in listed equity had nurtured of their investments being adjusted to inflation for the purpose of the newly imposed long-term capital gains (LTCG) tax. An amendment to the Bill also widened the scope of India taxing the so-called digital income that some multinationals earn in the country without a permanent establishment here, by buttressing the “significant economic presence” clause introduced in the Budget. However, in the case of shares that were unlisted as on January 31, 2018, and may get listed on April 1 this year or later, the cost of acquisition will include what the cost inflation index for 2017-18 allows. A commensurate relief will be extended to mergers of listed and unlisted entities. Barring in a deflationary scenario, a cost inflation index could inflate the acquisition cost and, hence, deflate the value of the gains to be taxed and reduce the tax liability. For other asset classes like immovable property, the LTCG tax applies on (lower) gains computed after the indexation but in case of listed equity, this facility has now been expressly denied. The government has clarified that if a non-resident undertakes transactions or has activities that constitute significant economic presence (SEP) in India, the income it earns from the country (practically via digital means) will be taxable here, whether or not it has entered into an agreement for such transactions in the country. Also, for such tax liability, the non-resident need not have a residence or place of business in India, nor render services here.
In the Budget, finance minister Arun Jaitley introduced LTCG tax of 10% on gains over Rs 1 lakh arising from transfer of listed equity shares and units of equity oriented funds held for over a year, but grandfathered the gains up to January 31, 2018. Investors have been clamouring for the indexation benefit to listed equity as well, as they reckon that this would have reduced their LTCG tax liability. Even if the tax rate is 20%, on a par with other asset clauses, the indexation could offer a net gain, especially if the investments are held for longer periods, analysts felt. Unlike investors in other assets, transactions on the stock exchanges are also subject to securities transaction tax. Short-term capital gains from listed shares are taxed at 15%; while one year is termed long-term for equity; the holding period for LTCG tax on immovable property is two years.
The stock market had reacted negatively to the LTCG tax proposal, though Jaitley had strongly justified it in the budget speech, saying “the total amount of exempted capital gains from listed shares and units is around Rs 3,67,000 crores as per returns filed for assessment year 2017-18”. The major part of such gain, he noted, has accrued to corporates and limited liability partnerships and this has created “a bias against manufacturing, leading to more business surpluses being invested in financial assets”. According to Rajesh H Gandhi, partner at Deloitte India, the leeway for unlisted firms “is an easier way of giving grandfathering benefit to them, rather than asking for a valuation of unlisted shares and could help shareholders of companies like NSE which could be listed in the future”.
The Budget had brought in the SEP clause in compliance with the multilateral Base Erosion and Profit Sharing (BEPS) norms which allow a country to tax share of revenue a multinational earns in its jurisdiction without any permanent establishment. Although ongoing amendments to bilateral tax treaties address the issue, this could potentially be a long-drawn process. “This now widens the ambit of digital taxation and how this amendment will evolve needs to be seen,” said Rajiv Chugh, tax partner at EY India. He added that the tax may be applied on “any transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the tax year exceeds the amount as may be prescribed; or systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.”
In addition, the amended Finance Bill passed by the Lower House allows start-ups full deduction of profits (for any three of the seven years from April 2016), if the turnover doesn’t exceed Rs 25 crore in the year the incentive is availed. Currently, a start-up can avail the benefit only if its revenue remained below the threshold for the entire seven-year period. So once the Finance Bill gets the president’s assent, a start-up which, say, has a turnover higher than Rs 25 crore in the seventh year but had availed full deduction in two of the previous years won’t need to cough up the gains. “The current provision is restrictive, as exceeding the turnover threshold in later years could have jeopardised the claim for earlier years,” said Jiger Saiya, partner, tax and regulatory services, at BDO India.
PTI reported: “With opposition paralysing the functioning of Parliament in the second half of the Budget session over issues ranging from India’s biggest bank fraud at Punjab National Bank to sharing of Cauvery waters and special package for Andhra Pradesh, the government decided to bring the Budget for approval even though the session is scheduled to go on till April 6. It was taken up soon after the House met after the first adjournment of proceedings at the beginning of the day.”