Budget 2018 from Direct Tax Perspective

The Finance Minister has presented Budget 2018 dated 1^st February 2018. Certainly, in every budget taxpayer expects certain relief from Direct Tax perspective. Whilst income slabs, tax rates and surcharges remain mostly un-fiddled, certain key changes proposed as discussed below:

• Amendment with respect to Personal Direct Tax
• Amendment with respect to Corporate Direct Tax
• Other Amendments

A. Amendment with respect to Personal Direct Tax

1. Substitution of Education Cesses with Health and Education Cess

Education cess (EC) at the rate of 2% and Secondary and Higher Education cess (SHEC) at the rate of 1% was leviable on income tax. These cesses are now proposed to be substituted by ‘Health and Education Cess’. HEC is required to be calculated at the rate of 4% on income-tax and surcharge. This cess is introduced so as to fulfil the commitment of the Government to provide and finance quality health services and universalised quality basic education and secondary and higher education.

2. Exemption of National Pension Scheme (NPS) is extended to the all the assesses

At present, any payment from the NPS Trust to an employee on closure of his account or on his opting out of the pension scheme is available as deduction from total taxable Income as per section 80CCD of the Income Tax Act up to 40% of the total amount payable to him at the time of such closure or his opting out of the scheme.

Now, it is proposed to amend the said clause to extend the aforesaid exemption to all the assessees who have subscribed to the National Pension System Trust.

3. Standard deduction of INR. 40,000/- is allowed to salaried employee

As per the existing provisions of the section 16 of the Income Tax Act, the income chargeable under the head “Salaries” shall be computed after making certain deductions specified therein.

It is now proposed to provide deduction of INR 40,000 or the amount of the salary, whichever is less, for the purpose of computing the income chargeable under ‘Salary’. However, it is to be noted that exemption currently available for transport allowance amounting to INR 19,200 per annum and reimbursement of medical expenses amounting to INR 15,000 per annum is proposed to withdrawn. Given this, net befit for salaried employee increased to INR 5,800 only.

4. Increase in deduction for health expenditure incurred

Section 80 D of the Income Tax Act, inter alia, provides deduction of INR 30,000/- for medical insurance or preventive health check-up of a senior citizen. Further, in the case of very senior citizens, said section also provides for a deduction of medical expenditure within the overall limits of INR 30,000/-. Further, Section 80DDB of the Income Tax Act allowed deduction in respect of medical treatment of specified disease relating to senior citizen and very senior citizen of INR 60,000/- and INR 80,000/- respectively.

Now, it is proposed to amend these sections so as to provide that the deduction of INR 50,000 in aggregate shall be allowed to senior citizens in respect of medical insurance or preventive health check-up or medical expenditure available as per Section 80D of the Income Tax Act. Further deduction with respect to 80DDB enhanced to INR 1,00,000 from existing limits of INR 60,000 and INR 80,000/- for senior citizen and very senior citizen respectively.

(Clause 24 and Clause 25 of Finance Bill)

5. Deduction for Interest Income for senior citizen introduced

At present, deduction up to INR 10,000 is available for interest received on saving account under section 80TTA of the Income Tax Act.

Now, deduction for Interest Income of INR 50,000 on the deposit held by senior citizen is introduced and current deduction of saving interest is no longer separately available.

(Clause 45 and Clause 25 of Finance Bill)

6. Increase in lock-in Investment period for capital gain deduction under Section 54 EC of the Income Tax Act

As per Section 54 EC of the Income Tax Act, capital gain arising from the transfer of a long-term capital asset, invested in the long-term specified asset (i.e. any bond, redeemable after three years and issued on or after the1st day of April, 2007 by the National Highways Authority of India or by the Rural Electrification Corporation Limited; or any other bond notified by the Central Government in this behalf) at any time within a period of six months after the date of such transfer, shall not be charged to tax subject to certain conditions specified in the said section.

Now, it is proposed to increase the lock -in period of specified asset to 5-years form earlier 3-years. Hence, specified bond is not allowed to be redeemed for 5-years.

B. Amendment with respect to Corporate Direct Tax

7. Corporate tax reduced to 25% for MSME

In the case of domestic companies, the rate of income-tax proposed to be 25% of the total income where the total turnover or gross receipts of previous year 2016-2017 less than or equal to INR 250 crore rupees else it shall be 30%. It is to be noted that, in the case of companies other than domestic companies, the rate of tax will continue to be the same as that specified for assessment year 2018-2019.

8. Scope of Accumulated Profit widened for the purpose of dividend

It is proposed to provide that in the case of an amalgamated company, accumulated profits or loss in the hands of the amalgamated company shall be increased by the accumulated profits of the amalgamating company, whether capitalised or not, on the date of amalgamation.

9. Certain changes proposed for Insolvency

At present, if a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cen of the voting power on the last day of the year or years in which the loss was incurred.

Now, it is proposed to provide that losses of the Companies under the Insolvency allowed to be carried forward and set-off despite of change in shareholding more than 49%. Further for the purpose of computing book profits, aggregate of unabsorbed depreciation and loss brought forward shall be reduced for the Companies under insolvency.

C. Other Amendments

10. Other amendment proposed in Budget 2018

• In case of start-ups definition of “eligible business” expanded to include start up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation.
• It is proposed to amend the alternate minimum tax for the assessee being a person which, is a unit located in an International Financial Service Centre and derives its income solely in convertible foreign exchange to be 9%.
• If the difference between Stamp Duty Value and Sale Consideration for transfer of immovable property is less than or equal to 5%, then no adjustment will be required for sale consideration. (i.e. Actual Sale Consideration is acceptable)
• 100% deduction of Income for the period of 5-years is introduced to the Farm Producer Companies having turnover up to INR 1000 million.
• E-Assessment is proposed to be introduced by way of notification so that to expatiate procedure of litigation.
• Conversion of stock in trade to capital asset to be taxable as a business income on the date of conversion at Fair Market Value.

Given the aforesaid, one can conclude that, the Budget 2018 focuses mainly on growth of MSME’s, agricultural growth and effectively on the Government’s current agenda of ‘Transform, Reform and Perform’.