Budget 2018 could have led to a recent stock market rally of the investors to protect tax on long term capital gains, albeit it is benevolent foremost to the rural agrarian sector, followed by corporate sector with 25% corporate tax rate for financial year 2018-19 (applicable to the domestic companies having annual turnover below Rs. 250 crores in financial year 2016-17). The Finance Bill 2018 also proposed to propel investment and attract forex reserves by extending goodies to corporate sector by way of rationalization of tax treatment in the hands of the recipient in case of transfer of capital asset between holding and subsidiary, offering tax incentives to Farm Producing Companies (FPC), promoting start-ups, and International Financial Services Centre (IFSC).
A. 100% tax deduction to income of FPC
The existing provisions of the Income-tax Act 1961 (‘the Act’) already provide 100% deduction of income under section 80P of the Act to the co-operative societies engaged in primary agricultural activities. It is now proposed to extend this benefit to FPCs with less than 100 crores turnover, for five years starting financial year 2018-19 and assessment year 2019-20. The activities of such companies would typically be marketing, processing of agricultural produce and purchase of agro-inputs like seeds, machine, live-stock for agriculture for its members. Perceivable, the benefit available to the co-operative societies is now extended to the companies with an objective of increasing professionalism in post-harvest value addition.
However, there is ambiguity around the tenure of the deduction since the Finance Bill reads as”…in computing the total income of assesse for the previous year relevant to the any assessment year commencing 1 April 2019, but before the 1st Day of April 2015” giving a notion that the tenure of the deduction is six years. On the contrary, the Memorandum and the Finance Minister’s speech has provided the tenure to be five years. The Central Board for Direct Taxes (CBDT) may look into clarifying this ambiguity.
B. Nurturing start-ups
In the immediate previous year, the government provided incentive to start-ups under section 80-IAC of the Act whereby 100% of the profits from eligible business are deductible for three consecutive years out of five years provided total turnover of business does not exceed Rs. 25 crores beginning 1 April 2016 to 31 March 2021. The eligible business means a business, which involves innovation development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
It is now proposed to widen the scope of ‘eligible business’ is to include ‘scalable business model with a potential to high employment generation and wealth creation’. To further boost the start-ups, they can now choose three consecutive years out of seven years to claim this incentive. The benefit of deduction is currently available to start-ups incorporated from 1 April 2016 to 31 March 2019, whereas it is now proposed to extend the same to start-ups incorporated from 1 April 2019 to 31 March 2021. It is a welcome amendment for a start-up which will be achieving profits during this term.
This proposal is in line with the government’s focus on start-ups, employment and wealth generating businesses so as to achieve its ‘make-in-India’ mission
C. Promoting Investment in IFSC
With a view to promote IFSC in Gujrat International Financial Tech-city (GIFT), many goodies extended to them, such as –
These proposed amendments are pro IFSC and it will act as a booster for investors.
D. Tax neutral transfer of money or property (assets) from a holding company to a subsidiary or vice versa.
Immediate preceding Finance Act 2017, introduced section 56(2)(x) of the Act whereby receipts without consideration is subject to tax in the hands of the recipient. It provided certain exclusions like amalgamation, demerger etc. However, it did not provide exemption to the cases involving transfer of capital asset between holding and subsidiary which is available to the transferor company subject to fulfillment of certain conditions (including a lock-in period of 8 years).
With an intention to rationalize these provisions and facilitate transfer of money or property between holding and subsidiary company without tax effects to both the transferor and transferee, it is now proposed to amend section 56(2)(x) of the Act. Notably, this amendment would take effect from 1 April 2018 onwards and not applicable for financial year 2017-18 and this will worry certain transfers of assets between a holding –subsidiary since last one year wherein a position has been taken that the same is not taxable basis it is exempt in the hands of the transferor.
In addition to the above, it is proposed to allow handful of reliefs (allowing unabsorbed business and depreciation loss while calculating tax on book profits and not restricting carry forward and set off of loss in case of more than 51% change in shareholding) to companies under insolvency and bankruptcy code. Although these companies were expecting relief for non-taxability of loan / liability write offs, some respite to act as a soother in difficult times.
Apart from mobilizing resources for rural development, health, education and sanitation, the above listed proposals will rationalize the current provisions to some extent. Deployment of funds to specific initiatives are a hope for a revolutionary economic development in rural India, growth in the tax home or return on investment of a common-man, leading to a charismatic GDP growth.
The views expressed herein are personal of the authors.
Mansi Mehta, Senior Manager and Latha Sherlekar, Assistant Manager with Deloitte Haskins & Sells LLP