Pravin Saraswat, FCA, CS, DISA
Significant Changes in Income Tax Provisions by the Finance Act, 2018 For FY 2017-18 and 2018-19 for SME Businesses
New changes in the Income Tax Law by the Finance Act, 2018 have come into the effect from 01/04/2018 and a few provisions are effective from 01/04/2017, which have been mentioned at relevant places.
1. Tax Rates
- 1. Tax Rates
- 2. TDS Rates:
- 3. Standard Deduction and Allowances for Salaried Persons:
- 4. Deduction u/s 80D for Mediclaim / Medical Expenditure of Senior Citizen:
- 5. Deduction u/s 80DDB for Specified Diseases:
- 6. Deduction u/s 80TTB for Senior Citizen:
- 7. Dividend Distribution Tax (DDT) on Equity Oriented Mutual Fund Schemes:
- 8. Deemed Dividend u/s 2(22)(e) by Closely Held Private / Public Companies:
- 9. Capital Gain:
- 10. Service Of Income Tax Notice/Order/Summon/Other Communication
- 11. Charitable Trusts And Educational Institutions:
- 12. Compensation For Modification/ Termination Of Business / Employment Contract:
- 13. Filing of ITR Within Due Date:
- 14. Deemed Business Income of Truck Owners:
- 15. Relaxation of Condition For Deduction For Employment of New Employees:
- 16. Special Tax Rate on Unexplained Credits, Investments / Expenditure, Money, Hundi Etc.
Tax rates /cess have been changed for the FY 2018-19 as under:
Cess has been increased by 1% by substituting the “Education Cess”, and “Secondary and Higher Education Cess”, by “Health and Education Cess on income tax”, leviable for AY 2019-20
|Cess||% on Income Tax & Surcharge|
|Upto AY 2018-19||From AY 2019-20|
|Secondary and Higher Education|| |
|Health and Education||–|| |
– In the case of small domestic companies, the tax rates would be as under:
|Assessment Year||Turnover||Tax Rates|
|2018-19||Upto Rs. 50 Crore in FY 15-16||25%|
|2019-20||Upto Rs. 250 Crore in FY 16-17||25%|
2. TDS Rates:
– There is no change in TDS Rates for FY 2018-19. Consequent to change in Cess rate, HE Cess on TDS deductible from Salary would stand increased from 3% to 4% for AY 2018-19.
– No TDS u/s 194A on Interest on `Time deposits with banks’ and `Housing Finance companies’ held by a Senior Citizen to the extent of Rs. 50000/-, would be made.
3. Standard Deduction and Allowances for Salaried Persons:
a) Standard deduction has been restored at Rs. 40000/- or net salary, whichever is less.
b) Exemption of Transport Allowance, which is exempt @ Rs. 1600/- per month and Medical Reimbursement which is presently exempt upto Rs. 15000/- a year, has been withdrawn.
Net gain for those who are in receipt of Transport / Medical would be Rs. 5800/- ( Rs. 40000 – Rs. 34200/-) only, but introduction of Standard Deduction would be beneficial for those employees/pensioners who are not in receipt of Transport Allowance / Medical Reimbursement.
4. Deduction u/s 80D for Mediclaim / Medical Expenditure of Senior Citizen:
a) Higher Deduction is now available for Individual / HUF, which is being summarized as under:
|Deduction For Individual / Family Upto 60 Yrs||Deduction For Individual / Family Beyond 60 Yrs||Deduction For Parents Aged Upto 60 Yrs.||Deduction For Parents Aged Beyond 60 Yrs.|
|i) Medi-claim Insurance||Incurred upto Rs. 25000/-||Incurred upto Rs. 25000/-||Incurred upto Rs. 25000/-||Incurred upto Rs. 50000/-|
|ii) Medical Expenditure (if insurance is not taken)||NIL||Incurred upto Rs. 50000/-||NIL||Incurred upto Rs. 50000/-|
|Maximum Deduction Rs. 50000/-|
It has to be noted that Mediclaim Insurance(except payment for `Preventive HealthCare Payments’) / Medical Expenses (e.g. Medicines/Hospital) have to be made in a mode other than cash.
b) Now, Mediclaim Insurance for more than a year can also be paid and proportionate amount for each of the years to which amount paid pertains, can be claimed.
5. Deduction u/s 80DDB for Specified Diseases:
Presently deduction of Rs. 60000/- for Senior Citizens and Rs. 80000/- for Super Senior Citizens is available for specified diseases. Now, with effect from 01/04/2018, the deduction upto Rs. 100000/- would be permitted for both Senior and Super Senior Citizens. Summarised position is as under:
|Type of Assessee||Age of Assessee / HUF Member||For AY 2018-19 |
|From AY 2019-20 |
|Assessee and Dependent or HUF Member||Upto 60 Years||40000/-||40000/-|
|Assessee and Dependent or HUF Member||Above 60 Years but below 80 Years||60000/-|| |
|Assessee and Dependent or HUF Member||Above 80 Years||80000/-|
6. Deduction u/s 80TTB for Senior Citizen:
Presently, deduction of interest earned on Savings Account held in a bank/post-office is allowed upto Rs. 10000/- u/s 80TTA. Besides to this, exemption of Rs. 3500/- in a single account and Rs. 7000/- in a joint account held in a Post Office Savings Account is also available u/s 10(15).
Now, the deduction to senior citizen would not be available u/s 80TTA and a new section 80TTB has been inserted to grant the deduction upto Rs. 50000/- to Senior Citizen as under:
– Interest on any deposit ( including savings or time) with Banks
– Interest on any deposit with Post Office Account
7. Dividend Distribution Tax (DDT) on Equity Oriented Mutual Fund Schemes:
Every type of dividend is exempt in the hands of recipient by virtue of section 10(34) except the total dividend from domestic companies in excess of Rs. 10 Lacs in a year.
Presently only Debt & Liquid Mutual Funds, who distributed the income, were liable for paying `Dividend Distribution Tax’. Now, with effect from 01/04/2018, the equity oriented funds would also be liable to pay the `Dividend Distribution Tax’ at the rate of 10% + SC + Cess effective rate = 12.9422%. Thus, the return for Equity Oriented Mutual Funds would stand reduced to this extent. The intention behind the proposed amendment is to bring a level playing field for income distribution by equity oriented mutual fund, in view of the new capital gains scheme on equity shares.
8. Deemed Dividend u/s 2(22)(e) by Closely Held Private / Public Companies:
Such companies, who have got accumulated reserves, can not give any advance to the beneficial shareholders, holding more than 10% holding to avoid the Deemed Dividend’ income in the hands of receiving shareholders. At the same time, payer-company is also liable to deduct TDS on Deemed Dividend.
Finance Act, 2018 has made fundamental change in this scheme. Companies making such advance would have to pay the `Dividend Distribution Tax’ on such advance @ 30% + SC + Cess effective rate = 34.944%. The amount in the hands of recipient-shareholders would be exempt by virtue of Section 10(34).
9. Capital Gain:
a) conversion of Stock-in-Trade into Capital Asset:
Hon’ble Supreme held in the case of Kikabhai Premchand v. CIT (1953) (24 ITR 506) that no one can earn the profit from himself, unless two parties are involved. However, now, the Government seeks to tax the hypothetical income earned on the conversion of Stock-in-Trade to Capital Asset by any assessee.
Conversion of stock-in-trade to Capital Asset would be permitted subject to following conditions:
i) Fair Market Value (FMV) of the Stock on the date of conversion would be treated as business income. Stock, which was being valued at `Lower of Cost or Market Value’ in Trading Account, would be now revalued at FMV and difference between Cost and FMV would be business income.
ii) Converted Stock would not be included in `Closing Stock’ of business and therefore, the Closing Stock would be lower to this extent. Such withdrawals of Closing Stock may affect the GP Rate in Trading Account, which would be required to be explained by assessee.
iii) Cost of converted Capital Asset would be FMV and the holding period of capital asset for the purpose of `Short Tem Capital Asset’ / `Long Term Capital Asset’ would start from the date of conversion.
Exemption of Long Term capital gain on transfer of STT paid shares / Units of equity oriented mutual fund is being withdrawn and such capital gain would be taxable @ 10% + SC + 4% Cess. However, to protect the LTCG already earned upto 31/01/2018 from tax, necessary provisions have been made in the law to substitute the `Purchase Cost’ by the highest rate quoted in stock exchange for such shares on 31/01/2018. However, basic exemption of Rs. 100000/- for such `Long Term Capital Gain from Shares’ would be available to every assessee.
STT which was levied earlier, in lieu of exemption on LTCG would also continue on sale / purchases shares thru the stock exchange.
c) Capital Asset Value in case of Immovable Proeperty:
In case, actual consideration paid ( purchase) or received ( sale) is lower than Stamp Value, then the difference between two values is liable for tax as `Capital gain’, Business Income or other income.
Now, if the difference between two values is 5% or lower, then such difference would be ignored. For example:
|Case||Actual Consideration||105% of Actual Consideration||Stamp Value consideration||Consideration to be taken for Tax Computation|
d) Capital Gain Bonds U/S 54ec:
Presently the capital gain bonds(NHAI/REC) can be purchased upto Rs. 50 Lacs per year with lock-in-period of 3 years for capital gains arising from any capital asset, within 6 months of sale of capital asset. Following changes have been made in this law effective from 01/04/2018:
i) Lock-in-period is being increased to 5 years on the bonds purchased after 31/03/2018
ii) Exemption would be available on Land or Building only and not on other capital asset
10. Service Of Income Tax Notice/Order/Summon/Other Communication
a) Service on the assessee:
– Physical Services may be made on the assessee thru post/courier or in the manner provided in the Code of Civil Procedure, 1908 at the address given in PAN, ITR filed or any other address furnished by assessee. If the service can not be made at these addresses, then Income Tax may use Address as per form 61 / 61A, Bank/insurance/local authority/Government records for service.
– E-mail Address Delivery: At e-mail address in the last ITR filed or e-mail address in the return to which such communication relates or any other e-mail address made available by assessee.
Therefore, every assessee should use correct e-mail ID in Income Tax Returns/PAN/ Income Tax Site, on which he can receive such notices/communication from department and he should also regularly check his e-mail box.
b) Now all assessment proceedings u/s 143(2) , barring search cases, are to be made thru `E-proceedings Mode’. All notices/summons/orders are to be digitally signed by the issuing officer. Assessee would also submit the replies and documents thru electronic mode under his/her digital signature. In case assessee feels the need of explaining any matter, then he may request for personal hearing.
11. Charitable Trusts And Educational Institutions:
Trusts/education institutions are covered by the Trust Provisions (Section 10 to 13) and Provisions of Business Income (Section 28 to 44) are not applicable to them. However, some of the provisions now would be applicable on such trusts / educational institutions.
a) Provisions of Section 40A(3) and 40A(3A) provides for disallowance of payments made in cash or bearer / non-account payee cheques in excess of Rs. 10000/- per day. Therefore, such payments would not be treated as `Application of Income’ of trust.
b) Provisions of Section 40A(ia) provide for disallowance of domestic payments if assessee fails to deduct the applicable Payments made without TDS by Charitable /Educational Institutions would not be treated as `Application of Income’
Further, such disallowances (at a) and b) above would attract the tax at Maximum Marginal Rate i.e. 30% plus SC plus Cess by virtue of Section 164(2).
12. Compensation For Modification/ Termination Of Business / Employment Contract:
Any type of compensation received on modification/termination of present or future business contract would now be treated as business income. Any type of compensation received on modification/termination of present or future employment contract would now be treated as `Income from other Sources’.
Though, the provision already exists u/s 17(3)(i), however, it did not include a case, where there was no employment but only a proposal of employment. New amendment seeks to tax any compensation received or receivable in connection with termination or modification of the terms and conditions of any contract relating to employment
13. Filing of ITR Within Due Date:
a) Income Based Deductions to be Denied if the ITR is Not Filed Within Due Date :
Benefits of income based deduction contained u/s 80IA to 80RRB would not be available if the ITR is not filed within due dates. This provision is effective from Financial Year 2017-18 and therefore the ITRs for this year should be filed in time.
b) Late Fees For Delayed Filing of ITRs:
Section 234F now lays down for late fees if the ITR is not filed in time from FY 2017-18 onwards. Late fees provisions are as under:
|Total Income||If Return Is Filed Upto 31st December||If Return is Filed Between 01st January to 31st March|
|Uto Rs. 5 Lacs||Rs. 1000/-||Rs. 1000/-|
|Above Rs. 5 Lacs||Rs. 5000/-||Rs. 10000/-|
14. Deemed Business Income of Truck Owners:
Presently, the truck owners having upto 10 Nos. of goods carriages are covered by section 44AE wherein, their income is deemed to be Rs. 7500/- per month per truck or actual income, whichever is higher. This rate of Rs. 7500/- does not differentiate between light or heavy trucks.
Now the provisions are being amended to prescribe the following level of deemed income:
|Capacity of Truck||Deemed Income Per Month or Part of Month|
|Upto 12000 Kgs. Of Gross Vehicle Weight||Rs. 7500/- per month per truck|
|Exceeding 12000 Kgs.||Rs 1000/- per month per ton of each truck|
15. Relaxation of Condition For Deduction For Employment of New Employees:
Section 80JJAA relating to deduction in respect of employment of new employees provides for a deduction of thirty per cent of emoluments paid to a new employee for three years. In order to claim the deduction, the new employee must be employed for more than two hundred and forty days in the year of employment or one hundred and fifty days in case of business of manufacturing of apparel, subject to certain conditions.
a) It is now provided to extend the reduced minimum period of employment of 150 days as applicable in the case of apparel industry to footwear and leather industry.
b) It is further provided that where a new employee is employed during the previous year for less than the specified period but is employed for said period in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly.
16. Special Tax Rate on Unexplained Credits, Investments / Expenditure, Money, Hundi Etc.
The section applies to all assessees – irrespective of the legal status i.e. it applies to individuals, HUFs, firms, LLP, companies, irrespective of their residential status i.e. it applies to residents as well as non-residents, including those covered by COFEPOSA, IPC, PMLA, etc. including those covered by presumptive taxation under sections 44AD / 44ADA / 44AE. The section applies irrespective of the minimum threshold i.e. the section applies to even Rs. 5000/-
Section 115BBE is operative with effect from FY 2016-17 (AY 2017-18) which lays down that if assessee fails to explain any credits in books of account/ bank account, source of investment/expenditure, then his income is liable to be taxed at following rates for AY 2019-20:
|Tax Rate (Including Surcharge / Cess)||Penalty||Total Tax & Penalty|
|If such Income is included in the ITR by assessee||78%||78%|
|If such Income is not included in the ITR by assessee and added by Assessing Officer||78%||6%||84%|
(The author is a Jaipur based practicing Chartered Accountant and can be reached on 09829063908, email@example.com)