CA Animesh Singi
Hope is the only thing which drives us to look forward despite of all the sufferings we are going from. Who are We? We THE COMMON MAN. Budget 2018 is nothing but it was a last hope from this government term of 5 years, to get us some ointment on our healing wounds of compliances and harassment of tax policies. This year budget assumes importance being a last full budget of this government before upcoming Lok Sabha Elections. Everyone was curiously expecting a revamp framework of Income Tax wherein common people could take more salary at home, also reduction in corporate and dividend tax rate to encourage investment by companies. Finance minister (Hereinafter represents as “FM”) could revive the negative sentiments of market demand by enhancing purchasing power in the hands of common person through incentivise tax reforms. However, this budget disappointed most among all the budget of Modi’s Government. Government has thrown a bait to the common man to expect more reforms in future. Budget has clear push towards agriculture sector being a rural economy, healthcare, senior citizens, infrastructure development. FM has failed to balance fiscal discipline with balanced measures to appease the mass voters.
The post is written analysing 360 Degree view of Finance Bill 2018 and in a format, easy to your eyes. Post is classified in various sections so that it may be helpful to understand the impact by common people as well as my professional friends. Let’s start ripping off the Empty Budget Box 2018, whether it successfully marks the culmination of months of work or not.
Key Highlights of Non-Tax Part of Budget:
- has reduced the excise duty on branded as well as unbranded Petrol and Diesel by Rs. 2 per litre.
- National healthcare Scheme launched to provided medical assistance to 10 Crore Families by way of financial assistance for medical treatment up to Rs.5 Lakh Per Family. Someone can call it as a Modicare policy just like Obamacare running in USA.
- Minimum Support Price for Farmers is now increased to 1.5 times of the cost, which will substantially support agriculture economy.
Changes in Tax Rates:
- Ending the tradition of giving relief to Salaried Employees in every budget, this year FM spurned to provide any relaxation in Slab Rates for Individuals.
- Despite providing any relief in taxation rates, FM has shown audacity by increasing Ed. Cess charged on tax payable. Existing 3% education cess will be replaced by a 4% “Health and Education Cess” to be levied on the tax payable.
- Gigantic relief has been given to companies by reducing their taxation rates to 25% from 30%, if the total turnover or gross receipts of the previous year 2016-17 does not exceed Rs.250 Crores. Approximately 99% of the Companies registered in India will fall under this category. Some people can say that this is the consideration corporate sector received in lieu of colossal political contributions for elections.
What’s in the Budget Box for Salaried and Individuals?
- In this section, we could observe that numerous benefits have been given to Senior Citizens. As observed in previous section, FM disappointed Salaried people with no changes in slab rates. However, to woo the middle class, a standard deduction of Rs.40,000/- is introduced, that means your salary will not be taxed to the extent of above amount. You need not require to submit any proof or bill etc. for it. In lieu of this benefit FM withdrawn the deduction of Transport Allowance which is Rs.19,200/- and Medical Allowance which is Rs.15,000/-, which results in nominal benefit of Rs.5,800 only. The saving in tax would be Rs 290 for those currently paying 5% tax on this income; Rs 1160 for those paying 20% tax on this income; and Rs 1740 for those paying 30% tax on this income. This saving will also nullify as Ed. Cess increased to 4% from 3% on Tax Payable. FM has put a slap on the face of tax payers with such nominal benefits. These kinds of amendments in Budget oscillates from giving some relief and taking it out back from other hand. This provision is beneficial for pensioners, as presently they are not receiving any benefit of above allowances, thus standard deduction will straightaway save tax on income of Rs.40,000/- for them.
- FM proposes to tax any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its employment shall be taxable under section 56 of the Act i.e. under the head “Income from Other Sources”. It is important to note that, such provision was already there in the act under Section-17(1)(3) which defines Salary. Therefore, it is unfathomable to understand why this provision has been entered again to tax such income under different head.
- Limit of deduction for health insurance premium paid under Section 80D for senior citizens increased from Rs.30,000/- to Rs.50,000/-. It is important to understand that senior citizen does not mean assesse being senior citizen, it means if assessee or assessee’s parents are senior citizens then deduction cap will be Rs.50,000/-. This can be understood from table given below:
|Assessee and Assessee’s Parents Senior Citizen
||Maximum Deduction Rs.1 Lakh (50K +50K)
|Assessee is not Senior Citizen but Parents are
||Max. Deduction Rs.75,000 (25,000+50,000)
|Asssessee and Parents both are not Senior Citizens
||Max. Deduction Rs.50,000 (25,000+25,000)
One of the key point which most of the people doesn’t noticed is that, earlier any medical expenditure incurred on health of Very Senior Citizen (i.e. Age > 80Yrs) was only allowed as deduction because they are unable to get health insurance coverage, but in current budget this has been replaced by Senior Citizen. Thus, now deduction in respect of Senior Citizen either assesse or assessee’s parents can be claim for any expenditure incurred on their heath. I should clarify that no deduction for medical expenditure incurred apart from preventive health check-up up to Rs.5,000/- for assesse and family who is not senior citizen.
Apart from above, in case of single premium health insurance policies having cover of more than one year, it is proposed that the deduction shall be allowed on proportionate basis for the number of years for which health insurance cover is provided, subject to the specified monetary limit.
- Deduction has been enhanced to senior citizen for medical treatment of specified diseases from Rs.60,000/- and for very senior citizen from Rs.80,000/- to Rs.1,00,000/- respectively. (Section 80DDB)
- New Section 80TTB introduced which will allow deduction of Rs.50,000/- to Senior citizen in respect of interest income earn from deposits. However, no deduction of under section 80TTA for Interest earned from Saving Bank account shall be allowed in these cases. Also, no TDS under section 194A will be deducted on interest income earned by senior citizen if such income does not exceed Rs.50,000/-.
- Women’s contribution reduced to 8.33% towards PF in the first 3 years for new EPF accounts. Government will contribute 12% of EPF contribution for new employees in all sectors for the next three years.
- Currently, as per Section 10(12A) an employee contributing to the National Pension scheme (NPS) is allowed an exemption in respect of 40% of total amount payable to him on closure of the account. This exemption was not available to non-employee subscribers, benefits to this section are extended to such subscribers also.
- In various sections (43CA, 50C & 56) of the Act it is mentioned that transaction should be carried out minimum at stamp duty value. However, in most of the cases stamp duty value varies depending upon the shape or location of plot, thus it is proposed that no adjustment in income shall be made in a case where the circle rate does not exceed 5% of the consideration. I would be more thankful to the FM, if he could resolve the double taxation of difference between actual sales consideration and Stamp duty value which is taxed in hands of purchaser under ‘Income from other source’ and in the hands of seller under ‘Income from Capital Gain’ as per Section 56 and Section 50C.
- Section 54EC allows exemption in Long term capital Gain on transfer of any capital assets if sales consideration is invested in bonds prescribed under the section for 3 Years. It is the only section which provides for exemption on capital gains arises out of transfer of any capital assets whether land or building or shares or jewellery or anything, and many of tax payers take advantage of it in case of large capital gains. However, unfortunately this section is now being amended to restrict exemption benefits only to Capital Gains arises on transfer of Land and Building. Also, the lock in period of investment has been raised to 5 Years from 3 Years. This has been a hard hit on pockets of the Tax payers.
New regime for taxation of Long Term Capital Gain on sale of equity shares.
One of the horrendous dreams of the investors for budget 2018 unfortunately turns out true. This move is expected due to low GST collections in past few months. Jaitley, re-introduced a long-term capital gains tax of 10 % vide Section 112A on the gains arise out of sale of Equity Shares or units of Mutual Funds, if such gain exceeds Rs.100,000/-. No indexation benefit will be given on such sale. Currently such long-term capital gain is exempted under Section 10(38). However, all gains till 31st January 2018 will be grandfathered. For example, if the equity share is purchased 6 months before 31st January 2018 at Rs. 1000 and the highest price quoted on 31st Jan is Rs. 1200. There will be no tax on the sale, if the stock is sold after 1 year. However, any gains in excess of Rs. 200 earned after 31st Jan 2018 will be taxed at 10 percent if this share is sold after 31st July 2018. This move is expected as new treaties signed with Mauritius, Singapore and Cyprus stipulates that India will levy capital gains tax on investments routed through these countries—a move seen as an attempt to clamp down investors to evade taxes by routing investments through shelf companies registered in these nations. Surprisingly FM didn’t remove STT on such transactions also, to mitigate the effect of LTCG tax, the government could do away with STT to pacify the investors. FM could change the definition of Long term to 2 or 3 years from 1 year, but this move will be going to hurt sentiments of Indian Equity Market. We could expect that foregoing gains earned up to 31.1.2018 would mitigate the adverse impact to large extent.
Business Related Provisions
- Under the existing provisions of the Act, certain types of compensation receipts are taxable as business income under section 28. However, the existing provisions of clause (ii) of section 28 is restrictive in its scope as far as taxation of compensation is concerned; a large segment of compensation receipts in connection with business and employment is out of the purview of taxation leading to base erosion and revenue loss. Therefore, section 28 amended to provide that any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its business shall be taxable as business income.
- Section 44AE provides for presumptive taxation scheme for transporters. Presently according to such scheme, transporters who owns less than 10 goods carriages (IRRESPECTIVE OF HEAVY or LIGHT) can offer income at the rate of Rs.7500/- Per Month Per Carriage. It is now proposed to amend that Income at the Rate of Rs.1000/- Per Tonn Per Month required to be offered on Heavy Goods Carriages now. Heavy Goods Carriages means any good carriage which weight exceeds 12000 Kgs. No changes have been made in Income declared in respect of Light Good Carriages.
- At present, conversion of capital asset into stock in trade is chargeable to tax under section 45 of the Act, but there is no tax on conversion of Stock in Trade into Capital Asset. In order to curb this tax planning various sections has been amended, now such income arising out of such transfer would be taxed as business income. Income would be calculated as difference between Fair Market Value of Inventory and cost. The date of conversion shall be relevant for calculating the period of holding of capital asset and the fair market value of the stock in trade on the date of conversion shall be the cost of acquisition for the purposes of calculation of Long Term/Short Term capital gain on transfer of such converted capital asset.
This amendment could be made in light of decision of CIT vs. Bright Star Investments (P) Ltd. (2008) 24 SOT 288 (Mumbai) wherein it was held that IT Act does not contain a provision similar to section 45(2) with respect to conversion of stock-in trade to capital asset. It was further held that holding period is to be considered from the date of acquisition. Whether in absence of specific provision in section 45(2) to deal with a situation where stock-in-trade is converted into investment and later on investment is sold on profit, formula which is favourable to an assessee should be accepted. Another decision which could be considered behind this is The Calcutta High Court in the case of Deeplok Financial Services Ltd. v. CIT  80 taxmann.com 51 (Calcutta)(decided on 4th April, 2017) after analysing the issue in the background of facts obtaining in the case, held that where assessee converts its stock-in-trade of shares into investments and sells the same at a later stage, profit arising from sale of such shares shall be deemed to be capital gains and not business income. It was held that as the shares were held as long-term capital asset, profit arising from sale of shares would be exempt from tax under section 10(38) of the Income-tax Act.The assessee thus, by sheer tax planning, and by virtue of the provisions of Income-tax Act lucidly was able to escape from the rigours of taxation.
- This budget is more oriented towards agriculture sector. Over the last few years, several Farmer Producer Companies have been set up along the lines of co-operative societies which also provide similar assistance to their members. Earlier deduction was restricted to farmer cooperatives and casts taxation hailstorm for Farmer Producer Companies. Despite of being engaged in agriculture activities and doing same functions as Farmer cooperatives these entities are required to pay tax. In order to promote organic farming sector more and cure this injustice, FM introduced 100% deduction for Next 5 years under Section 80P for profit of cooperative society which provide assistance to its members engaged in primary agriculture activities. The benefit is extended to Farm Producer Company (FPC) having turnover less than 100 Crores for income earned from
- Marketing of agriculture produce grown by its members
- purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members
- processing of the agricultural produce of its members
Now a days organic farming has created a new enthusiasm in market with its demand and return. Many of organisation manifolds their turnover multiple times in few years. With this correction measures and policy good opportunity is emerged out to enter in this market. Also, government is encouraging such projects under scheme “Operation Greens” and “Sampada Yojna”.
- In last budget in order to promote Start up FM came out with special deduction under Section 80IAC. This year section has been amended to expand its benefit. Below is the comparison of old and new provision:
|Present Section 80IAC
||Proposed Section 80IAC
|Deduction under this section shall be available to an eligible start-up for three consecutive assessment years out of seven years at the option of the assessee, if-
|1. incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2019.
2. Total Turnover of business in any of the year between 1.4.2016 to 31.3.2021 doesn’t exceed Rs.25 Crores.
|1. Company can be incorporated after 1.4.2019 but before 1.4.2021.
2. Requirement of turnover not exceeding Rs. 25 Crores will apply to next seven years from date of incorporation.
|Eligible Business: Business which involves innovation, development, deployment or commercialization of new
products, processes or services driven by technology or intellectual property
|Eligible Business: Business which involves 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
- This incentive is in respect of Non-residents, wherein NO TAX will be levied, if any non-resident transfer capital assets (Bond or GDR or Rupee Bond of Indian Company or Derivative) ON a recognised stock exchange located in any International Financial Services Centre OF which consideration is paid or payable in Foreign currency.
- To, promote development of International Financial Services Centre, the AMT rates has been reduced to 9% from 18.5%.
- Deduction under 80JJAA provides for additional deduction of 30% of emoluments paid to new employees who have been employed for 240 days, this minimum period has been revised to 150 days in case of apparel industry and benefits has been extended to footwear and leather industry also.
- Profits derived from Agriculture Commodity derivatives are earlier held as Speculative Transactions due to technical error of section, this glitch has been removed and now these transactions will fall under non-speculative transaction category subject to if it is done through recognised stock exchange.
- Last year many notices have been issued by CBDT in wake of Section 143(1)(a)(vi) while processing returns for addition of income appearing in Form 26AS or Form 16A or Form 16, which created a huge harassment for salaried employees while filing return of income who couldn’t claim the deduction by submitting proofs to employer. To avoid such harassment clause vi has been deleted in this budget.
- In order to, bring in greater transparency and accountability, new scheme for scrutiny assessment is announced by amending Section 143. Earlier E-assessments had been rolled out in 102 cities only, which is now expanded across the country. Notification in respect of this will be issued in Official Gazette.
Income Computation and Disclosure Standards
Last year 10 Income Computation and Disclosure Standards had been notified by the Government, which was later challenged in Delhi high Court in the case of Chamber of Tax Consultants v. Union of India (2017) 87 taxmann.com 92 (Delhi), wherein most of them which overrules the provisions of Act are quashed and struck down as ultra vires to the Act. In the wake of that decisions certain amendments are made in various sections to nullify the effect of decision which are as under:
- ICDS-I : Marked to market loss or other expected loss as computed in the manner provided in ICDS, shall be allowed deduction under Section 36(1)(xvii).
- ICDS-VI: New section 43AA proposed to be introduced which will provide that any foreign exchange gain or loss in respect of all foreign currency transactions including transactions relating to monetary or non-monetary items, translations of financial statements of foreign operations, forward exchange contracts, foreign exchange translation reserve shall be treated as income or loss, if computed according to this ICDS. It empowers government to tax hypothetical gains also. It may be interesting to note that ICDS VI does not define nor deal with foreign currency translation reserves. Probably, ICDS VI may require some tinkering to accommodate this new concept.
- ICDS III:A new section 43CB is proposed to be inserted to provide that the ‘percentage completion method’ is an accepted method to compute the profits arising from specific construction contracts. Further, the contract revenue will include retention money and the contract cost will not be comprised of incidental interest, dividend and capital gains.
- ICDS II: It is proposed to amend section 145A to provide:
- Valuation of inventory will be at cost or Net Realizable value (NRV) whichever is less as computed under this ICDS
- Valuation of purchase and sale and of inventory will include allied tax, duty, cess or fee which were incurred to bring the goods or services to the place of its location and condition
- Valuation of unlisted securities to be made at actual cost initially recognised.
- Inventory being listed securities, shall be valued at lower of actual cost or NRV, valuation shall be done category wise.
- ICDS-IV:Proposed insertion of new section 145B which will provide that:
- Interest received on compensation or on enhanced compensation will be deemed to be income of the year of receipt
- Claims linked to price escalation or export incentives will be deemed to be income of the year in which reasonable certainty about its realization exists.
- ICDS-VII:It is proposed to insert a new section 145B to provide that recognition of subsidy or government grants etc. as income will be in the year of receipt, if it is not charged to tax earlier.
- ICDS-VIII:It is proposed to amend section 145A to further include that:
- Inventory of unlisted or listed but not quoted securities to be valued at actual cost initially recognized
- Inventory of category-wise listed securities may be valued at cost or NRV whichever is lower.
Above amendments are bring retrospective from 1.4.2017. It is now becoming trend of budget to reverse the decisions of Courts and amends the provision as per their will. Interpretation of ICDS along with the amendments will be shared soon in separate post.
- Section 139A (PAN) is proposed to amend and cast obligation to obtain PAN for non-individual entities (Such as Trust, Society, AOP, BOI etc.) if they enter into a financial transaction exceeding Rs. 2.5 Lakhs. This will help to widen the tax base regarding many trust and societies running without PAN.
- Section 2(22)(d) defines that dividend to include distribution of accumulated profits (whether capitalised or not) in case of reduction of capital. However, instances have been noticed wherein companies opt amalgamation route to reduce capital to escape from liability of paying tax on distributed profits. This loophole has been cured by amending clause that in the case of an amalgamated company, accumulated profits, whether capitalised or not, or losses as the case may be, shall be increased by the accumulated profits of the amalgamating company, whether capitalized or not, on the date of amalgamation.
- Presently there is no Dividend Distribution Tax (Tax collected by government on distribution of dividend) on dividend distributed in case of equity mutual funds. FM proposed to levy 10% DDT on such dividends. Investors relying on dividends from equity funds such as balanced funds would have to reconsider their investment strategies. DDT will reduce the in-hand return to investor, if the dividend option is opted for. The best way is still to opt for Growth plans in Mutual Funds.
- Amendment in taxability of Section -2(22)(e) Deemed Dividend: Heavy hammer has been tossed upon the one of the most draconian and litigious section of the Income Tax Act. Earlier tax on deemed dividend has been taxed in the hands of receiver at the applicable Marginal Rate, however it has posed serious problems of collection of tax liability apart from extensive litigation. In this budget, payment of tax on deemed dividend has been shifted to the shoulders of company from receiver at the rate of 30% (without grossing up). However constitutional validity of such clause is required to be check, that how can tax be collected from company who has not received any income.
- In our economy, most of the Trust and Societies openly violates the Income Tax law in absence of proper provisions dealing regarding their application of income. This issue lately but finally addressed partially by FM by bringing certain amendments in Section 10(23)(c) and Section 11. As of now Income applied for charitable or religious purpose is considered applied even if expense made in cash. In order to shun cash transaction, it is now proposed that in accordance with section 40(a)(ia) cash expenses exceeding Rs.10,000 will not be considered as Income applied. Also, these organisations are not complying with the TDS provisions since so long, many of them even didn’t obtain the TAN no., thus it is proposed that 30% of these expenses will be disallowed on which TDS is required to be deducted. It is important to note that NGO need to apply only 85% of their income in order to claim exemption. Also, these provisions will be futile until Tax Audit on such entities doesn’t become mandatory. Presently Tax Audit conditions on these entities are so liberal that only 2-5% of entities getting themselves audited and until these entities will not be audited then how will department know that they deducted TDS or not or they have made expenses in cash exceeding Rs.10,000/- or not. Thus, in short this amendments will be effective only for those entities who will be taken up for assessment by assessment officers.
The law makers should have understood that Section 14 and five heads of income do not apply to NGOs. It is a settled law that the computation of income of NGOs should be made only under section 11 to 13 the other provisions of the Act are not applicable. Linking a section from the chapter pertaining to business and profession will result in needless confusion and controversies. Further in case of NGOs, unlike other assessees, the taxable income is not computed. The exempt income is only computed therefore any increase of decrease in expenditure does not result in a change in taxable income. In any case if Charitable trusts or institutions having tax-free status when caught within the mischief listed above, whether they would be taxed at the individual rate of tax or at the maximum marginal rate, could become a matter of litigation.
- It was expected from FM that government will consider the problems looming over a successful conclusion of insolvency process. However, attention has been given only to few area and rest of things remains unsorted. As per present Section 115JB Brought forward losses or Unabsorbed depreciation, whichever is lower is allowed as deduction, wherein Unabsorbed depreciation remains Nil for such rehabilitant companies seeking insolvency, thus they were not getting benefit of this clause while calculating profits under MAT. In this budget lacuna, has been cured by removing unabsorbed depreciation condition for such companies. Another roadblock which has been addressed is carry forward and set off losses of insolvent company to buyer. Earlier as per section 79 same was not allowed as majority shareholders changed during insolvency proceedings, this has been cured by bringing amendment in section 79. The only thing which remain unsorted is valuation of distressed assets attracting provisions of section 50C for properties transferred to the buyer of insolvent company. Also, Finance Bill does not address the concern on inclusion of notional/capital gains in book profits for computation of MAT liability.
- Presently due to drafting error of Section 115BBE, no deduction is allowed for any expenses against the Income taxed this section for Section 68, 69, 69A, 69B, 69C, 69D in case if assesse Suo motto declares the income under return of income filed. Section is now amended to extend such disallowance for the income taxed in above sections on determination by the Assessing Officer.
- Section 271FA provides for penalty on account of late filing of Annual Information Return, penalty under such section increased from 100Rs. Per day to 500Rs. Per Day.
- In last budget Penalty for furnishing incorrect information in reports and certificates was introduced vide section 271J. Penalty levied under such section was not appealable before Tribunal as per Section 253. Section 253 now amended so that appeal can be made by aggrieved assesse for such penalty before tribunal.
- No clarificatory provisions are introduced or amended regarding Transfer Pricing. Transfer Pricing is becoming more litigious day by day due to certain issues such as transactions in respect of intra group services, marketing intangibles where TPO mostly determined ALP as Nil. There were various other issues under transfer pricing area where amendments were anticipated.
- Taxability of Crypto Currencies is not dealt with.
- Leave Travel Allowance is exempted for employee only if vacations are taken place within India. The benefit can be extended for travel outside India.
- Deduction limit under Section 80C of Rs.1.5 Lakhs and Section 24 of Rs. 2 Lakhs is very less; these could have been revised.
- FM taxed any compensation received on termination of contract by employee, but no provision for deduction if employee has to pay certain sum while leaving company.
There were expectations of the likelihood of more tax incentives for the salaried class, of a likely increase in the holding period for determining long-term capital assets and the resultant impact on computation of capital gains etc. Most of such speculations have now been put to rest by the Finance Minister in his Budget proposals on 1 February 2018. Overall, the budget tries to contain benefits for farmers and few sectors with an eye on the elections, the Government seems to be in a mode to play safe and attempts at taking baby steps towards various key reforms.
Disclaimer: The Contents of the document are solely for information purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Comments on misinterpretation and mistakes are wholeheartedly invited.
(Author can be reached at [email protected], www.animeshsingi.blogspot.com, +91 9098589691)