Budget 2017-18 : Hidden Facts and Analysis

Budget 2017-18

Finance minister Arun Jaitley presented the Union Budget 2017-18 in the Lok Sabha today. Here are the highlights of the Union Budget. Terming the Union Budget “futuristic”, Prime Minister Narendra Modi said it will usher in a new beginning to fulfil the dreams of every section. “This is a Budget for the future — for farmers, underprivileged, transparency, urban rejuvenation, rural development and enterprise,” Modi said in a televised message about the Budget proposals.

Lets have a look at major changes proposed in Union Budget 2017-18

Income Tax Slab Rate (Revised applicable from FY 2017-18 by Budget 2017-18)

Individual

Income Tax Slab Rate applicable from 2017-18 to male and female having age less than 60 years is as below:

Income Tax SlabRate of Tax
Income less than 2,50,000Nil
Income from 2,50,001 to 5,00,0005%
Income from 5,00,001 to 10,00,00020%
Income exceeding 10,00,00030%

Income Tax Slab Rate applicable from 2017-18 to senior citizen is as below:

Income Tax SlabSlab Rate
Income less than 3,00,000Nil
Income from 3,00,001 to 5,00,0005%
Income from 5,00,001 to 10,00,00020%
Income exceeding 10,00,00030%

It is to be noted that Tax Slab for super senior citizen remains same

Surcharge applicable from 2017-18 to Individual / HUF/ AOP / BOI is as below:

IncomeSurcharge
Up to 50,00,000Nil
from 50,00,001 to 1,00,00,00010%
Above 1,00,00,00015%

Firms / Local Authorities

Surcharge applicable from FY 2017-18 to Firm / Local authorities is as below:

IncomeSurcharge
Up to 1,00,00,000Nil
Above 1,00,00,00010%

Domestic Companies

Tax Rates for Domestic companies remains at 30%, however special privilege is given to MSME Companies having Turnover less than Rs. 50 cr in previous years is to be taxed at 25% applicable from FY 2017-18 as presented in budget 2017-18. It is to be noted that T/o is to be considered of FY 2015-16 for checking criteria of Rs. 50 cr.

Surcharge applicable from FY 2017-18 to Domestic Company is as below:

IncomeSurcharge
Less than 1,00,00,000Nil
from 1,00,00,001 to 10,00,00,0007%
Above 10,00,00,00012%

Other Major Amendments in Income Tax Act in Budget 2017-18

10(38) – Incomes not included in total income – Following clause is inserted to tax long term capital gain on shares and stock on which STT was not paid. Income arising from the transfer of a long-term capital asset shall not be exempt, being an equity share in a company, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax.

Hence now if except for specified transaction to be notfied by CG all long term gain on equity share shall be taxable if STT is not paid. This clause has small amendment but has far reaching impact and purpose is to cover all those transaction which are bogus entry of share purchase and sale and making LTCG exempt in penny stock.

However the complexity will be whether LTCG on bonus share will be taxable? whether LTCG on right share will be taxable? as STT is not payable on bonus share or right share. The answer is such type of transaction may be notified by CG as mentioned in amendment.

Section 35AD – Deduction in respect of expenditure on specified business – No expenditure exceeding Rs. 10,000 is allowed as deduction if it is incurred any mode other than account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account.

Section 36 – Other Deductions – Deduction avaialable to a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank for provision of bad and doubtful debt increased from 7.5% to 8.5% of total income.

Section 40A/ 43B – Expenses or payments not deductible in certain circumstances – No cash expenses allowed as deduction if value is more than Rs. 10,000 (earlier it was Rs. 20,000). Similarly is any expenditure is incurred for purchase of land or any other asset and such expenditure is incurred in cash for more than Rs. 10,000 then such expenditure shall be ignored for the purpose of calculating actual cost.

Section 44AA – Maintenance of accounts by certain persons carrying on profession or business – Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.

Specified person for this section is now having income from business or profession exceeding Rs. 2.5 Lacs (Rs. 1.2 Lacs earlier) or sales / Turnover / Receipt exceeding Rs. 25 Lacs (Rs. 10 Lacs earlier ).

So maintenance for book keeping condition is relaxed.

44AB- Audit of accounts of certain persons carrying on business or profession – Proviso is  now added that this section is not applicable to the person who declares Profits for the previous year in accordance with the  the provisions of sub-section (1) of section 44AD and his total sales, turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year.

Section 44AD – Special provision for computing profits and gains of business on presumptive basis – Presumptive tax rate of 6% instead of 8% will be applicable if  in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in subsection (1) of section 139 in respect of that previous year

Section 45 – Capital gain  where the capital gain arises to an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority. For the purposes of section 48 – Computing Capital Gain, the stamp duty value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by the consideration received in cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

Provided that the provisions of this sub-section shall not apply where the assessee transfers his share in the project on or before the date of issue of said certificate of completion, and the capital gains shall be deemed to be the income of the previous year in which such transfer takes place and the provisions of this Act, other than the provisions of this sub-section, shall apply for the purpose of determination of full value of consideration received or accruing as a result of such transfer.

“specified agreement” means a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash

Key Amendments relating to Capital Gain in budget:

Taxation of income arising on transfer of capital asset has been a matter of interpretational challenges together with computational hurdles. Over the years, different amendments have been made with a view to streamline these challenges and differences. This year’s Budget is no exception and the amendments are proposed primarily with a view to rationalise capital gains provisions.

Shifting of base year

The Budget has proposed to shift the base year for the purpose of indexation from year beginning April 1, 1981 to April 1, 2001. This implies that for the purpose of computing indexation benefit, the cost of acquisition of any property purchased before April 1, 2001will be deemed to be higher of actual cost or the fair market value as on April 1, 2001.

Cost of inflation index (‘CII’) notified for the purpose of computing the capital gains has shown a fourfold increase from the year 1981 to 2001, whereas there has been a fivefold increase in the rate of inflation over the same period. This has led to lower indexed cost of acquisition, increasing the tax liability. Shifting of base year will help reduce this gap. This will also mitigate the difficulties of tax payers in computing the capital gains due to non-availability of information regarding the fair market value in the old base year beginning April 1, 1981.

Reduction in holding period of immovable property

At present, in order to avail the indexation benefit and the concessional tax rate of 20% on transfer of a long-term capital asset, certain assets are required to be held for a period of more than 36 months. With a view to promote investment in the real estate sector, the Budget proposes to reduce the holding period for immovable property from 36 months to 24 months.

Investment of Long term Capital Gains

The current tax provisions provide for exemption of long term capital gains to the extent of INR 50 lakhs from tax, if the taxpayer invests the whole or any part of capital gains in National Highway Authority of India or Rural Electrification Corporation Limited bonds within the specified time. In order to stimulate investment and growth in other sectors through funding, the Budget proposes to extend this incentive to other Central Government notified bonds redeemable after 3 years. Though the tax payer will have options for investing in different bonds, the investment limit of INR 50 lakhs has not been altered.

Capital gains arising in Joint Development Agreements (‘JDA’)

The taxability of capital gains arising on transfer of title to the land from the land owner to the developer in a JDA has always been a contentious issue. From the perspective of land owner, taxability of capital gain arises once the land is transferred for ascertained consideration. To address the satisfaction of the term ‘transfer’, the definition was widened to include ‘transfer’ as contemplated under provisions of Transfer of Property Act. However, there was no prescription for ascertainment of the consideration. This situation led to litigation as the consideration was received by the land owner only over the duration of the project. The timing difference resulted in undue burden of paying high capital gains tax for land owners without having the funds to do so.

In order to reduce the burden on land owners being individuals or HUFs, the Budget proposes to consider the transfer as taking place in the year in which the development of the project is completed and taxing the capital gains in the year in which the certificate of completion is issued. The fair value of consideration for such transfer shall be deemed to be the aggregate of the stamp duty value as on the date of issue of the completion certificate and the consideration received in cash. Tax withholding at 10% is also proposed on the cash consideration payable to the land owner.

Though the proposed provisions intend to provide certainty, practical aspects such as part transfer of rights, do leave scope for anxieties and litigation.

Exemption under Section 10(38) of the Act

It has been proposed to restrict the exemption available on sale of listed shares, only to such shares which have suffered STT on purchase. The exceptions to this provision are as follows:

–  Shares purchase before October 1, 2004

–  Other shares to be notified by the Central Government, which are indicated:

–  Shares acquired in IPO

– Shares acquired in FPO

–  Shares issued as bonus or right shares, etc.

Though this provision has been introduced as an anti-abuse measure, it is important to note that the instances of sham transactions on any stock exchange are far and few. Further, the notification outlining the acquisition of shares not liable to these restrictions, should specifically include shares issued as part of ESOPs and shares acquired before the listing of the company.

Conversion of Preference shares to Equity shares to be tax neutral

The Budget 2017-18 proposes to amend section 47 of the Act, stating that conversion of preference shares of a company to equity shares will not be treated as transfer. The absence of this provision had raised concerns as conversion of debentures into equity was specifically not treated as transfer. This is therefore a welcome move and should provide certainty going forward. Having said so, though this provision is proposed to be prospective, it is likely that the tax payer may contend that this amendment is clarificatory and should not adversely impact conversion in past.

Conclusion

Above are some of the important budget proposals which are likely to have far reaching impact on the taxation of different classes of taxpayers and are also likely to throw up newer litigation challenges going forward.

Section 48 – Mode of Computation of Capital Gain – Explaination is added to “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001, whichever is later

Impact – Any property purchased before 2001 will have impact of reduction in long term capital gain by changes in budget 2017-18.

Section 50CA – Special provision for full value of consideration for transfer of share other than quoted share (New Section) –  Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed, the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer.

Section 71 – Income from House Property –  in respect of any assessment year, the net result of the computation under the head “Income from house property” is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two lakh rupees, against income under the other head

Section 79 – Carry Forward of Losses – New clause is added for eligible startup companies – in the case of a company, not being a company in which the public are substantially interested but being an eligible start-up as referred to in section 80-IAC, the loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, if, all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred,—

(i) continue to hold those shares on the last day of such previous year; and (ii) such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.

80CCD – Deduction in respect of contribution to pension scheme of Central Government – Ceiling limit of employee for contribution in this scheme is increased from 10% of gross total income to 20%.

80CCG  – Deduction in respect of investment made under an equity savings scheme – Rajiv Gandhi Equity Savings Scheme will no longer continue, govt proposes to discontinue from 01-04-2018. However who has acquired listed equity shares or listed units of an equity oriented fund in accordance with the scheme referred to in sub-section (1) and claimed deduction under this section for any assessment year commencing on or before the 1st day of April, 2017, shall be allowed deduction under this section till the assessment year commencing on the 1st day of April, 2019, if he is otherwise eligible to claim the deduction

80G – Deductions for Donations – Now no cash donations will be allowed exceeding Rs. 2,000 as compared to present limit of Rs. 10,000

80-IAC – Special provision in respect of specified business (Startups) – 100% profit is exempt for such business for 3 consecutive years out of 7 years beginning from the year in which the eligible start-up is incorporated.

87A – Rebate – Rebate amount shall be reduced from Rs. 5,000 to Rs. 2,500 to only those assesses having income below Rs. 3,50,000 (present limit – Rs. 5,00,000)

115BBF – Tax on income from transfer of carbon credit – this section come in to effect from 01-04-2018.

  1. Where the total income of an assessee includes any income by way of transfer of carbon credits, the income-tax payable shall be the aggregate of(a) the amount of income-tax calculated on the income by way of transfer of carbon credits, at the rate of ten per cent.; and (b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).
  2. Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1).

Explanation-For the purposes of this section “carbon credit” in respect of one unit shall mean reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases which is validated by the United Nations Framework on Climate Change and which can be traded in market at its prevailing market price.

115JB – MAT  –Amendment is brought to allow carry forward of MAT credit for 15 years as compared to present 10 Years.

Other significant amendments are inserted due to convergence to IND AS compliant financials. In nutshell purpose of this amendment is to avoid taxes due reclassification, restatement of financial statement as per the provision of Ind AS.

194-IA – Payment of rent by certain individuals or Hindu undivided family – Any person, being an individual or a HUF responsible for paying to a resident rent exceeding fifty thousand rupees for a month or part of a month during the previous year then he shall deduct an amount equal to five per cent of such income as income-tax thereon.

Tax shall be deducted on such income at the time of credit of rent, for the last month of the previous year or the last month of tenancy, if the property is vacated during the year, as the case may be, or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.

TAN is not required to be obtained bu person covered in this section.

194J – TDS on fees for professional or technical fees – Amendment is added that when the payment is made to payee engaged in the business of operation of call centre then TDS shall be deducted at 2% instead of 10%

234F – Fees for default in furnishing return of Income

This amendment of budget 2017-18 has far reaching impact. As per the amendment if person fails to furnish the return of income under section 139 as per the time limit of 139(1) he shall pay fees as below –

(a) five thousand rupees, if the return is furnished on or before the 31st day of December of the assessment year

(b) ten thousand rupees in any other case

The fee payable under this section shall not exceed one thousand rupees if income is below Rs. 5 Lacs.

So, these are the major amendments i tried to cover in this article which are made in the Union Budget 2017-18.

Source: http://indiabudget.nic.in/ub2017-18/fb/bill.pdf

Image Source: https://www.finmin.nic.in

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Author: smit shah

I am a passionate Chartered Accountant having deep interest in taxation with combination of blogging.

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