presentation on india budget 2017

Independent Member of

• Economy

• Direct Taxes

– Business Tax

– International Tax

– Substance over Form

– Capital Gains

– Personal Taxation

– Other Amendments

• Indirect Taxes

– GST

Agenda

2


Economy


• GDP growth at 7.1% estimated for 2016-17

– Actual at 7.2% for half year

– Key growth factors being pick-up in agricultural growth, modernization in industrial and government service sector

• IMF Forecast - GDP growth of 7.2% and 7.7% in 2017 and 2018

• Fiscal deficit as percentage to GDP

– 3.5% revised estimate for 2016-17

– Estimated for 2017-18 – 3.2%

• FDI grew 36% in H1 2016-17 over H1 2015-16, despite 5% reduction in global FDI inflows

• Foreign exchange reserves as on 20-01-2017 - USD 361 billion

Key Indicators

4


Expenditure

5

As a % of Total Expenditure


• CPI Inflation for April to December 2016 was 4.9%

– CPI-based inflation declined from 6% in July 2016 to 3.4% in

December 2016

– Declining trend due to good kharif production, pulses in

particular

• Reversal of WPI inflation, from -5.1% in August 2015 to 3.4 percent

in December 2016

– Impact of rising oil prices

– Wedge between CPI and WPI narrowed

• CPI Food inflation (CFPI) dipped to 2-year low of 1.4% in December

2016

Key Indicators

6


WPI and CPI Inflation

7


Direct Tax


Business Tax


• Headline Corporate tax rate continues to be 30%+

– New Manufacturing Companies – 25% subject to conditions

• Rate for SME Companies reduced to 25% (from 29%)

– If turnover for FY 15-16 < Rs. 50 crores

– No other conditions

• Incentive for Start – Ups

– Deduction for 3 out of initial 7 years (instead of 5)

– Carry forward and set off of loss incurred in first 7 AYs allowed if

shareholders continue to hold shares

• No threshold

• Overrides provisions of Chapter VI?

Corporate Tax

10


• Gross based tax on carbon credits @ 10%

– No amendment in Section 2(24)

• Interest on certain NPA chargeable on receipt basis

– Benefit extended to co-operative Banks

• Gifts received by ‘any’ person taxable

– Provision now applicable to Trust and AOPs as well

– Scope of ‘property’ enlarged for companies / firms

• Notional Rental Income on HP held as stock

– No annual value for 1 year from end of year in which Completion

Certificate is received

Business Income

11


• Limit of allowable cash expenses reduced to Rs. 10,000 per

payee per day

– Disallowance u/s 40A(3) / 35AD / 32 r.w.s 43

– Payment through ECS allowable

• 43B Disallowance on delayed interest payment to co-operative

banks

• Incentive for Affordable Housing Projects expanded

– Project completion period increased from 3 to 5 years

– Carpet area linked conditions instead of built-up area

Business Deduction

12


• Deduction under Section 10AA

– To be allowed from Total Income after set-off

– Restricted to the Total Income

• Provision for Bad & Doubtful Debts for Banks

– Increased from 7.5% to 8.5% of total income

• Tax Credit of ‘disputed’ foreign tax to be allowed upon settlement

of such dispute

Business Deduction

13


• Thin Cap Rules introduced

• Debt from Non Resident AE / other lenders if guaranteed by AE

– Explicit and implicit guarantees or corresponding matching deposits

• Interest deduction capped at 30% of EBITDA

– Balance carry forward for 8 years

• Not applicable

– Interest expense < Rs. 1 crore

– For banks and insurance Co

• Rule of Debt-Equity ratio not applied

14

Thin Capitalization


• Changes in light of Ind-AS

– To start with Net Profit (and not Total Comprehensive Income)

• Treatment of OCI for MAT purpose

– Notional or unrealized gains included in OCI should be considered in Book Profit in the year when it is realized

– All adjustments in OCI, which are not to be reclassified to P&L in the subsequent years should be considered.

• Treatment of Transitional Provisions

– 1/5th of Adjustments made in Other Equity, which would never be reclassified to P&L in the subsequent years shall be considered in Book Profit for each of first 5 years

• Distribution of non-cash assets on Demerger

– It be excluded in computing Book Profits

Minimum Alternate Tax

15


• Carry forward and set off – increased to 15 years

• MAT Credit would be calculated based on comparison of MAT

and Normal Tax (net of FTC)

– In lines with FTC rules

• Similar changes applicable to AMT

Minimum Alternate Tax

16


International Tax


• Indirect transfer provisions not applicable to NR investors of FII

• 10% tax on transfer of shares of closely held company by NR to

be effective from AY 13-14

• Exemption for Rupee Denominated Bonds (‘Masala Bonds’)

– Transfer between 2 NRs not taxable

– Gain on account of rupee appreciation not taxable even for

secondary holder

Capital Gains

18


• Recording ALP in books of account

– Primary adjustment suo moto by assesse / accepted by

assesse / Safe harbour, APA, MAP

• Repatriation of primary adjustment amount to India within

prescribed time limit

– Unrealised amounts to be treated as advance

– Interest on advance to be computed and added to income

• Provisions applicable to Primary adjustment > INR 1 Cr

– Adjustment related to AY 17-18 and subsequent years

Secondary Adjustments

19


• Domestic Transfer Pricing

– Transactions with Sec. 40A(2)(b) parties excluded from SDT

• Terms not defined in DTAA but defined in ITA

– Definition as per ITA to be applied in interpreting DTAA

• Explanation given to it by Central Government would also be relevant.

– Terms like ‘Place of Effective Management’ in DTAA would partake

meaning from Section 6(3).

Other Amendments

20


Substance over Form


• Foreign Co. to be resident, if Place of Effective Management (POEM) is

in India

– Replaces the condition – control and management wholly situated

in India

– Global income of residents taxable

– Major impact on Outbound investments with Indian Promoters

• Final Guidelines issued on January 24, 2017

– Only Guiding Principles

– POEM depends upon facts and circumstances

– Emphasis on Substance over Form

Residence Test – AY 2017-18..

22


• POEM defined as a place where “key management andcommercial decisions” that are “necessary for the conduct of thebusiness of an entity as a whole” are, “in substance, made”.

POEM – Definition

Key management

and commercial

decisions

Necessary for

overall conduct of

business

Of an Entity as a

whole

In substance

made

• Focus on Key Management (not control)

• Key decisions relating to management

• Place of implementation of decisions not relevant

• Executive level decisions – for overall conduct, in line

with broad strategies & policies formulated by BOD

• Day to day operations not relevant

• Substance over form

23


Active Companies

Company

engaged in

“Active

Business

Outside

India”

Passive

Income

• Passive Income < 50% of Total income AND

• Assets situated in India < 50% of Total assets AND

• No. of employees situated in / resident of India <

50% of total no. of employees AND

• Payroll expenses on employees situated in / resident

of India < 50% of total payroll expenses

• Royalty, dividend, capital gains, interest, rental income +

• Income from transactions where both purchase and sale

of goods is from / to Associated Enterprises

Average data of previous year + 2 years prior to be considered

Shorter period for new companies

24


Guidelines for Passive Co.

Top

Level

Mgt.

Operation Level

Management

Executive / Mid

Level

Management

Place where BoD makes key managerial

and commercial decisions

Place where executive directors or senior

management (i) formulate key strategies /

policies and (ii) ensure or oversee

execution and implementation thereof on

an on-going basis

Place where the day to day

business activities are carried out

/ conducted

25


GAAR – Effective from AY 2018-19

Applicability of

GAAR –

Impermissible

Avoidance

Agreements (IAA)

• Main purpose of Arrangement is tax benefit; AND

• Rights / Obligations not at arm’s-length; or

• Misuse / Abuse of Act ; or

• Lacks commercial/ economic substance; or

• Is not for bonafide purposes

Consequences of

GAAR

Overrides DTAA?

• Disregard / Recharacterize / Combine IAA or part

• Treat IAA as void

• Disregard accommodating parties / treat parties as one

• Reallocation / re-characterization of capital, incomes,

expenses, reliefs, etc.

• Relocation of place of residence / situs of asset or

transaction at a place / location

• Lifting corporate veil – Look through approach

26


• GAAR not to be invoked if

– Aggregate Indian tax benefits < INR 3 crores

– FII not claiming DTAA benefit

– Sufficient anti-abuse provisions in DTAA

– Arrangement held as permissible by AAR

– Tax implications explicitly and adequately considered by

Court sanctioning the arrangement

– Merely because entity is located in tax efficient jurisdiction if

Non-tax commercial considerations exist and main purpose is

not tax benefit

– The arrangement is considered as permissible in one year

GAAR – CBDT Clarification

27


• Capital Gains on Investments prior to 1st April 2017 grandfathered

– Lease contracts and loan agreements not grandfathered

• GAAR and SAAR can co-exist

• Claiming provisions of DTAA or Act, whichever is beneficial, can

be decided year on year basis

• No corresponding adjustment to other assessee

GAAR – CBDT Clarification

28


• Assessee shall have opportunity to put up its case before AO and

CIT and Approving Panel before GAAR is invoked

• Approving Panel consist of 3 Members

– IRS, retired HC judge and eminent person

• Decision of Approving Panel is binding on department

– Assessee can file appeal before ITAT against the order of AO

GAAR Safeguards

29


Capital Gains


• Base year for CII shifted from FY 1981-82 to FY 2001-02

• Holding Period of immovable property reduced to 2 years

– To classify as long term capital asset

• Tax neutral conversion of preference shares to equity

– CoA and PoH similar to conversion of debentures

• LTCG on transfer of listed equity shares exempt only if acquisition

after October 1, 2004 chargeable to STT

– Exceptions will be notified to take care of genuine transactions

Capital Gains

31


• Deemed Capital Gains based on Fair Market Value in case of

unquoted shares

• Tax on Joint Development only upon certificate of completion

– Consideration = stamp duty value + additional consideration

• Transfer under Andhra Pradesh Land Pooling Scheme exempt

• Transfer of shares of Indian Co. under demerger of foreign Co.

– CoA and PoH of Previous owner to be considered

• Other bonds may also be notified u/s 54EC

Capital Gains

32


Personal Taxation


• Tax rate for income up to Rs. 5 Lacs reduced to 5%

• Rebate u/s. 87A reduced to Rs. 2,500

• No tax on total income up to Rs. 3 Lacs

– Rs. 3.5 Lacs in case of Senior Citizen

• Surcharge @ 10% if income > Rs. 50 Lacs & < Rs. 1 Cr

• Loss from House Property to be set off against other heads of

income only up to Rs. 2 Lacs

• Limits for maintenance of books by individuals and HUFs

increased

– Income > Rs. 1.5 Lacs / Turnover > Rs. 25 Lacs

Personal Taxation

34


• No tax audit covered by presumptive taxation and

turnover < Rs. 2 crores

• Income received by cheque / draft / ECS presumed to

be 6% of gross receipts

– Applicable to sales proceeds collected during year / by return

filing due date

– 8% continues on case of cash receipts

Presumptive Taxation

35


• Partial withdrawal from NPS trust exempt up to 25% of

contribution

• Contribution to NPS up to 20% of GTI deductible for other than

employees

• Sunset of March 31, 2017 for investment to Rajiv Gandhi equity

Savings Scheme introduced

• Cash donations deductible u/s 80G up to Rs. 2,000 (instead of

Rs. 10,000)

Deductions and Exemptions

36


Other Amendments


• 10% tax on dividends from domestic companies

– Extended to all resident assesse except domestic company

• Earlier only individuals, HUFs and Firms were covered

– Not applicable on deemed dividends

• Sec. 269ST - Cash receipt > INR 3 Lacs not permissible from

– Any person in a single day; or

– Any person in respect of single transaction; or

– Any person in relation to single event / occasion.

• Contravention of 269ST would lead to Penalty = amount of receipt

• TDS by Individual on payment of rent > Rs. 50,000 per month

38

Other Key Amendments


• Mandatory fees for delayed / non-filing of return

• AO may withhold refund u/s 143(1) if assessment ongoing

• Penalty on CA, merchant banker, registered valuer for incorrect

certificate – INR 10,000

• Survey at places with charitable activities

• Centralised issuance of notice and processing of information u/s

133C

• Time limit for assessments revised

• Period of limitation extended to 10 years in certain post-search cases

39

Procedural Aspects


• Reasons recorded for search and seizure would not be disclosed

to any authority including ITAT

– With retrospective effect

• Provisional attachment

– During search or seizure or within 60 days thereafter

– Prior approval of Principle DGIT, DGIT, Principle DIT or DIT

– To expire within 6 months from attachment order

• Valuation of property by valuation officer

• Time limit for completion of assessment rationalised

40

Search and Seizure


• Removal of Sec. 197(c) of Finance Act 2016

– With retrospective effect

– Accrual or receipt of income / acquisition of asset was deemed in

the year in which AO issues notice u/s 142(1), 143(2), 148, 153A,

153C

• Where no declaration made

– Period of limitation

Income Declaration Scheme

41


• Voluntary contributions by 10(23C) institutions to / from 12AA trusts

towards corpus

– Not to be ‘application of income for objects’ of the institution / trust

• No exemption to if cash donation received by political party > Rs.

2,000

– Cheques, bank drafts, ECS, RBI issued Electoral bond

• No exemption u/s 11 if change in object of Trusts not intimated within

30 days

42

Trusts and Political Parties


Indirect Tax


• Research and Development Cess Act, 1986

– Repealed with effect from April 2017

• Service Tax

– No change in existing rate of Service Tax

– All notifications have a life upto 30 June 2017

Legislative Changes

44


• Section 104 inserted - Benefit of exemption notification

no.41/2016 –ST dated 22.09.2016 is being extended

retrospectively w.e.f.1st June, 2007 and ending with 21

September 2016.

– Industrial plot holders with a lease of 30 years or more can apply for

refund of Service Tax, already paid (to GIDC/ MIDC/such other

Government Industrial Development undertaking) within a period of six

months from the date on which Finance Bill 2017 receives assent of the

President.

• Section 105 inserted retrospectively - Service tax is proposed

to be exempted for taxable services provided by the Army,

Naval and Air Force Group Insurance Funds by way of life

insurance to its members.

Legislative Changes – Service Tax

45


Removal from Negative List

• Following services are removed from Negative list

(section 66D).

– Services to carry out any process amounting to

manufacture or production of goods excluding alcoholic

liquor for human consumption. Already included/covered in

mega exemption notification under 25/2012. (Clause 120 &

121of the Bill).

– This amendment is in view of impending GST

implementation.

Legislative Changes – Service Tax

46


• Amendment in Exemption Notification 25/2012

– Job work service now defined in exemption notification to

carry out any process amounting to manufacture or

production of goods excluding alcoholic liquor for human

consumption(being state subject). Therefore, the job-

worker shall liable to register under the Service Tax

authority.

– This amendment is in view of impending GST

implementation.

Regulatory changes – Service Tax

47


Amendment in Valuation Rules

• Amendment proposes to exclude value of the property in land/

undivided share from the taxable value of works contract.

(w.e.f. 7 July, 2010). The service tax will have to be paid on the

balance value of the works contract.

• Suresh Kumar Bansal V/s UOI (Delhi HC)


48


Other amendment

• Exemption from service tax under notification 14/2012- ST

would not be available to a taxable service involved in import of

technology on which R & D cess is not payable. Credit of R&D

Cess will not be available.


49


Three months limit proposed for remission of excise duty from the

date of application where the duty on inventory was otherwise

payable.

Proposes to merge present advance ruling authority with AR

authority under Income Tax Act

Regulation changes - Excise

50


• Rule 6 – Amended to exclude Banks, FI and NBFCs from

reversal of Cenvat Credit of common Input services.

Therefore, the credit availability will increase to that extent.

• Rule 10 – Amendment proposes to limit the time for

transferring the Input credit from one location to another

location to three months. Consequently, on and from 2

February, 2017 all credit pending to be transferred to other

locations of an assesse will have to be transferred before the

expiry of the three months from that date

CENVAT Credit Rules

51


Goods & ServiceTax


• Destination based tax

• Dual Administration

• Consolidation of taxes

• State wise determination of taxable person-no more

centralized registration

• Seamless credit amongst goods and services

Salient features on GST

53


• GST would bring significant change in doing

business in India.

• For the implementation of GST, companies need to

understand GST policy and its implications for

planning and transition roadmap preparation.

• What is your action plan?

Game Changing Reform...

54


GST-Framework

55CA Gaurav Gupta

Excise duty on Medicinal and

Toiletries Preparation

Central Levies

Central Excise Duty

Central Sales Tax

Service Tax

Tax on lottery, betting and

Gambling

State Levies

Entertainment Tax

State VAT/ Purchase tax

Entry Tax

Luxury Tax

Additional duty of Excise on

Textile and Textile Products

CVD and SAD (on import of

goods)

Cesses and surcharges insofar

as far as they relate to supply

of goods or services

State cesses and

surcharges insofar as far as

they relate to supply of

goods or services

Taxes on Advertisement

CGST

SGST

IGST

55


Concept of Supply

56CA Gaurav Gupta

Supply

Supply for consideration

DeemedSupply

Supplies made

without consider

ation

Import of

Service

Sale / Transfer / Barter /

Exchange / License /

Rental / Lease /Disposal

- Supply betweenAgent –

Principal

- Aggregator

-Permanent transfer of BusinessAssets

- Temporary use of assets for personal use

- Assets retained after deregistration

- Services used for personal purpose

-Supply to another person in course of

business

In the

course or

furtherance

of business

With or without

consideration

56


Tax Structure

57


• Government on its part has promptly given effect to various

provisions of the Constitutional Amendment Act, including

constitution of the GST Council. The GST Council held 9

meetings to discuss various issues relating to GST like;

– GST rate structure,

– threshold exemption and parameters for composition scheme

– details for compensation to States through Compensation Law

– examination of draft model CGST and SGST law,

– draft IGST law

– administrative mechanism for GST

– The preparation of IT system for GST is also on schedule.

Roadmap to GST

58

Independent Member of59

Focus Area in GST Planning

Redesigning

IT

System

Accounting

Logistics

&

Warehouse

Invoicing

Classification of goods &

services

Tax

Planning

Litigation

This presentation is prepared exclusively for the benefit

and use of the clients of K. C. Mehta & Co. This should

not be used as a substitute for professional advice.

Reasonable care has been taken for ensuring the

accuracy and the authenticity of the contents of the

presentation. However, we do not take any responsibility

for any error or omission contained therein on any

account. It is recommended that the readers should take

professional advice before acting on the same. The

provisions contained in Finance Bill, 2015 are the

proposals and are likely to undergo amendments while

passing through the Houses of the Parliament before

being enacted.