RSM India

India Union Budget 2018 – Insights & Updates

Catch up with India Union Budget 2018 expectations, updates, publication & analysis decoded by RSM here. Stay tuned as we bring our tax, regulatory & consulting expertise to the budget and provide actionable insights.

Transfer of Capital Asset from Holding Company to Subsidary Company and Vice versa -Tax Neutral

Views of Dr. Suresh Surana, Founder - RSM India

At present, the transfer of capital asset between a wholly owned subsidiary company and its holding company  is excluded from the purview of capital gains. However, there was no clarity at present under Section 56 (2)(x) in respect of receipt of capital asset by the recipient company without consideration or for inadequate consideration. As per the Finance Bill, Section 56 is being amended so as to exclude such transfer from holding company to subsidiary company and vice-a-versa from its scope. This would bring more certainty on tax implications for the transfer of capital assets amongst the holding and subsidiary company.

Long Term Capital Gains Tax Exemption Withdrawn

Views of Dr. Suresh Surana, Founder - RSM India

As present, long term capital gains exemption under Section 10(38) of the Income-tax Act is available on sale of listed shares or equity oriented mutual funds or a unit of a business trust (held for more than 12 months and on which STT has been paid). From FY 2018-19 onwards, it is now proposed to tax such long term capital gains exceeding Rs. 100,000, at the rate of 10%.

Personal Tax Rate Structure Tweaked

Views of Dr. Suresh Surana, Founder - RSM India

There are no major changes made on the tax rates front for the Individual tax payers, though there has been a significant increase in direct tax collections of 18.7% upto 15th January 2018 as compared to earlier year. The major changes are:

  • The slab structure has remained unchanged with basic exemption limit of Rs.2.50 lacs and slab rates of 5%, 20% and 30%. The surcharge has remained unchanged. The Health and education cess is proposed to be levied at 4% of the tax plus surcharge in lieu of present  ‘Education Cess on Income Tax’ and ‘Secondary and Higher Education Cess” aggregating to 3% of the tax plus surcharge. A resident individual having income upto Rs. 3,50,000 would continue to be entitled to a rebate of tax payable [excluding  health and education cess] or Rs. 2,500 whichever is less (same as FY 2017-18).
  • The standard deduction of Rs. 40,000 is proposed to be allowed to the salaried employees. However, the tax deduction available of medical reimbursement (Rs. 15,000) and Transport Allowance (Rs. 19,200) i.e. cumulatively Rs. 34,200 has been taken away.
  • There is no change in the deduction under section 80 C of the Income-tax Act for savings up to Rs. 1,50,000 in respect of certain investments such as Provident fund, ELSS, life insurance premium housing loan repayment and 5 year bank deposits.

The comparative tabular matrix of the tax rates for FY 2018-19 and FY 2017-18 is as under:

 

FY 2018-19

FY 2017-18

Income Slabs

Proposed Tax Rates

Income Slabs

Tax Rates

(Rs.)

(Rs.)

0 - 2,50,000 #

Nil

0 - 2,50,000 #

Nil

2,50,001 # – 5,00,000

5.2% [tax rate 5 % plus health and education cess 4% thereon] of income exceeding Rs. 2,50,000

2,50,001 # – 5,00,000

5.15% [tax rate 5 % plus cess 3% thereon] of income exceeding Rs. 2,50,000

5,00,001 – 10,00,000

Rs. 13,000 plus 20.8% [tax rate 20% plus  health and education cess 4% thereon] of income exceeding Rs. 5,00,000

5,00,001 – 10,00,000

Rs. 12,875 plus 20.60% [tax rate 20% plus  cess 3% thereon] of income exceeding Rs. 5,00,000

10,00,001 – 50,00,000

Rs. 1,17,000 plus 31.20% [tax rate 30% plus  health and education cess 4% thereon] of income exceeding Rs. 10,00,000

10,00,001 – 50,00,000

Rs. 1,15,875 plus 30.90% [tax rate 30% plus  cess 3% thereon] of income exceeding Rs. 10,00,000

50,00,001^ – 1,00,00,000

Rs.15,01,500 plus 34.32% [(tax rate 30% plus surcharge 10% thereon) plus  health and education cess 4% thereon] of income exceeding Rs. 50,00,000

50,00,001^ – 1,00,00,000

Rs.14,87,062 plus 33.99% [(tax rate 30% plus surcharge 10% thereon) plus  cess 3% thereon] of income exceeding Rs. 50,00,000

1,00,00,001^ and above

Rs. 33,63,750 plus 35.88% [(tax rate 30% plus surcharge 15% thereon) plus health and education cess 4% thereon] of income exceeding Rs. 1,00,00,000

1,00,00,001^ and above

Rs. 33,31,406 plus 35.535% [(tax rate 30% plus surcharge 15% thereon) plus cess 3% thereon] of income exceeding Rs. 1,00,00,000

               

#   Basic exemption income slab in case of a resident individual of the age of 60 years or more (senior citizen) & resident individual of the age of 80 years or more (very senior citizens) at any time during the previous year, continues to remain the same at Rs. 3,00,000 and Rs. 5,00,000 respectively.    

^    Marginal relief is available to ensure that the additional income tax payable, including surcharge of 10% or 15% on the excess of income over Rs. 50,00,000 or Rs. 1,00,00,000 as the case may be is limited to the amount by which the income is more than Rs. 50,00,000 or Rs. 1,00,00,000 as the case may be. However, no marginal relief shall be available in respect of the health and education cess.

Implications on Personal Taxes

Views of Dr. Suresh Surana, Founder - RSM India

The Budget has provided certain relief on account of personal taxation particularly for those falling in lower income slabs and salaried employees and senior citizens:

Restoration of Standard Deduction for salaried employees

The standard deduction of Rs. 40,000 is proposed to be allowed to the salaried employees. However, the tax deduction available of medical reimbursement (Rs. 15,000) and Transport Allowance (Rs. 19,200) i.e.

cumulatively Rs. 34,200 has been taken away.

Exemption on Long Term Capital Gains on sale of listed shares and equity oriented mutual funds withdrawn

As present, long term capital gains exemption under Section 10(38) of the Income-tax Act is available on sale of listed shares or equity oriented mutual funds or a unit of a business trust (held for more than 12 months and on which STT has been paid). From FY 2018-19 onwards, it is now proposed to tax such long term capital gains exceeding Rs. 100,000, at the rate of 10%.

Further,  tax on distributed income by equity oriented mutual fund at the rate of 10%. This would remove the disparity between growth and dividend plans.

It may be noted that  relief is provided in respect of grandfathering of long term capital gains upto 31 January 2018 and gains after that period shall be taxable under the new rate of 10%. The gains from equity share held up to one year will remain short term capital gain and will continue to be taxed at the rate of 15%. However, the period of holding will be considered from the date of original investment and not from January 31, 2018. It may be also be noted that the long term capital gains arising in the financial year 2017-18 (even arising between February 1, 2018 to March 31, 2018) will continue to be exempt.

Tax-exemption to partial withdrawal from National Pension System (NPS) extended to non-employees subscribers

It is proposed to extend the exemption to partial withdrawal not exceeding 40% of the total amount payable to him on closure of his account or on his opting out. This exemption was earlier available only for employee subscribers 

Rationalization of deduction for Senior Citizens

At present, payments towards annual premium on health insurance policy, or preventive health check-up, of a senior citizen, or medical expenditure, a deduction under Section 80D has been allowed upto Rs. 30,000 which it is proposed to be raised to Rs 50,000/-. Similarly, deduction of Rs. 60,000 to Rs. 80,000 is available to an individual and Hindu undivided family with regard to amount paid for medical treatment of specified diseases of senior citizens which is now proposed to be raised  to Rs 1,00,000/- for both senior citizens and very senior citizens.

Deduction upto Rs. 50,000 of Interest earned from bank deposits for senior citizens

At present, a deduction upto Rs 10,000/- is allowed under section 80TTA to an assessee in respect of interest income from savings account.  It is proposed to insert a new section 80TTB so as to allow a deduction upto Rs

50,000/- in respect of interest income from bank deposits or deposits with post office held by senior citizens. Further, there would be no TDS deduction for senior citizens upto interest income of Rs 50,000/-.

Inheritance Tax & HNIs

Views of Dr. Suresh Surana, Founder - RSM India

One of the widespread apprehensions High Net Worth Individuals (HNIs) had regarding the Union Budget 2018 was the introduction of Inheritance Tax or Estate Duty. HNIs can now heave a sigh of relief as the Budget does not contain any such proposals. This reflects the pragmatic approach of the government which is focused on growth, revival of investment cycle and employment generation.

 

Thrust on Employment Generation

Views of Dr. Suresh Surana, Founder - RSM India

In this Budget, there was renewed focus on new employment generation wherein constructive announcements were made from employee as well as employer perspective. As per an independent study quoted by the Finance minister, the number of new jobs created in the formal sector is 70 lakhs. Some of the notable proposals which would further incentivise employment creation are:

Government contribution of Employment Provident Fund @ 12% for New Employees -The H'ble Finance Minister announced that the government would contribute 12% of wages of new employees in EPF for all sectors for next 3 years. This announcement would be a booster measure for such new employees across all sectors.

Contribution of new women employees reduced to 8%- In order to increase the disposal salary income in the hands of women employees, it is proposed to reduce the women employees' contribution to 8% for the first 3 years of employment, as against the current contribution rate of 12% / 10%. For this necessary amendments shall be carried out in the Employees Provident Fund and Miscellaneous Provisions Act, 1952.

Benefit of section 80JJAA Rationalised to incentivise employment creation - Currently, for the purpose of availing the deduction under section 80JJAA of the Income-tax Act, 1961, the eligible new employee Is required to be employed for a minimum of 240 days during the year. The said limit was 150 days in case of apparel industry. As per the budget proposal to incentivise employment, the benefit of 150 days for new employment shall be extended to the footwear and leather industry.

Further, the benefit of section 80JJAA is proposed to be provided to the employers even where the new employee who has been in employment for less than the stipulated days in the first year, but continues to be in employment for the minimum stipulated days in the subsequent period. This would provide major relief to the employers as they shall be able to claim deduction under this section, even where the new eligible employee joins the service in the later half of the financial year (i.e. less than 240 / 150 days in the first year) and continues to be employed for more than the stipulated days in the subsequent years.

 

Insolvency Cases -Budget Balm

Views of Dr. Suresh Surana, Founder - RSM India

 

To facilitate Insolvency Resolution for revival of stressed Companies, certain amendments have been introduced under MAT and benefit of carry forward of losses (under normal provisions).

As per provisions related Minimum alternate tax (MAT), a deduction in respect of the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account, is available against the book profits.  Consequently, where the loss brought forward or unabsorbed depreciation is Nil, no deduction is allowed. To incentivize the Insolvency resolutions plans, it is proposed to allow the aggregate amount of unabsorbed depreciation and loss brought forward to be reduced from the book profit, if a company's application for corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 has been admitted by the Adjudicating Authority. This would reduce the overall MAT impact on write backs of various loans, creditors and other dues outstanding in the Company. However, it seems that there is no relief under Section 28 (iv) and

41(1) in respect of such write back of dues of creditors and lenders in the Finance Bill and would continue to be taxable as per normal provisions.

Further, in several cases under insolvency resolution under Insolvency and Bankruptcy Code, 2016, it would involve change in the beneficial owners of shares beyond the permissible limit of 51% under section 79.  This was a hindrance for the prospective bidders and for the Company to claim the losses on account of change in shareholdings. In order to address this problem, wherever resolution plan has been approved under the Insolvency and Bankruptcy Code, 2016, the provisions of Section 79 shall be relaxed after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner. This would act as a major boon for companies under Insolvency proceedings.

 

Crypto-Currencies Under Regulatory Cloud

Views of Dr. Suresh Surana, Founder - RSM India

The H'ble Finance Minister has specifically mentioned in his speech that the government does not recognize crypto-currencies as a legal tender and efforts would be taken eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.  While there is no clarification on taxation of crypto-currencies in the Finance Bill 2018, the same would be governed by the normal provisions of income-tax law. The common view is that where crypto currency is represented by underlying assets such as Bitcoins, the same may be treated as capital asset (unless held as stock-in-trade) and taxed as short term capital gain (for assets held for 3 years or less) at the normal tax rates. In case the asset is held for more than 3 years, the long term capital gains after indexation benefit are subject to tax @ 20%. In case the transaction is considered as a derivative transaction, the same is subject to normal tax rates. It may be noted that in case of Indian tax residents, the gain on sale of crypto- currencies is taxable in India even if arising outside India. It is also necessary to report foreign assets in schedule FA section of the Income-tax returns. Further, it is well settled that even in case of an illegal activity, the gains are subject to tax. Finally, the applicability of GST on purchase and sale of crypto-currencies is another contentious subject. The investments made by Indian residents outside India need to be in accordance with FEMA regulations. With the government all set to wage a war against crypto-currencies, there could be serious litigation in time to come.

 

Corporate Tax Rates Matrix

Views of Dr. Suresh Surana, Founder - RSM India

 

The Union Budget proposes to reduce tax rate to 25% [plus applicable surcharge and Health & education cess thereon] for the Financial Year (FY)

2018-19 for domestic companies with annual turnover or gross receipts not exceeding Rs. 250 crores. For this purpose, the  annual turnover or gross receipts in FY 2016-17 needs to be considered. At present (for FY 2017-18), the reduced tax rate of 25% [plus applicable surcharge and cess thereon] is applicable for companies with annual turnover or gross receipts not exceeding Rs. 50 crores. For this purpose, the  annual turnover or gross receipts in FY 2015-16 needs to be considered. This has resulted in a cery complex rate structure. The Health and education cess is proposed to be levied at 4% of the tax plus surcharge in lieu of present  'Education Cess on Income Tax' and 'Secondary and Higher Education Cess" aggregating to 3% of the tax plus surcharge. As a result, the effective tax rates for domestic companies for FYs 2018-19 and FY 2017-18 are as follows:

 

 

  1. Domestic companies having total turnover / gross receipt up to Rs. 50 crores

Level of total income

Effective Tax Rates

FY 2018-19

FY 2017-18*

Having total income exceeding       Rs. 10 Crores

29.12% [(tax rate 25% plus surcharge 12% thereon) plus Health & education cess 4% thereon]

28.84% [(tax rate 25% plus surcharge 12% thereon) plus cess 3% thereon]

Having total income exceeding  Rs. 1 Crore but not exceeding Rs. 10 Crores

27.820% [(tax rate 25% plus surcharge 7% thereon) plus Health & education cess 4% thereon]

27.553% [(tax rate 25% plus surcharge 7% thereon) plus cess 3% thereon]

Having total income upto Rs. 1 Crore

26.00% (tax rate 25% plus Health and education cess 4% thereon)

25.75% (tax rate 25% plus cess 3% thereon)

 

  1. Domestic companies having total turnover / gross receipt in FY 2016-17 exceeding Rs. 50 crores but upto Rs. 250 crores

Level of total income

Effective Tax Rates

FY 2018-19

FY 2017-18*

Having total income exceeding  Rs. 10 Crores

29.12% [(tax rate 25% plus surcharge 12% thereon) plus Health & education cess 4% thereon]

34.608% [(tax rate 30% plus surcharge 12% thereon) plus cess 3% thereon]

Having total income exceeding Rs. 1 Crore but not exceeding Rs. 10 Crores

27.820% [(tax rate 25% plus surcharge 7% thereon) plus Health & education cess 4% thereon]

33.063% [(tax rate 30% plus surcharge 7% thereon) plus cess 3% thereon]

Having total income upto Rs. 1 Crore

26.00% (tax rate 25% plus Health and education cess 4% thereon)

30.90% (tax rate 30% plus cess 3% thereon)

 

  1. Domestic companies having total turnover / gross receipt in FY 2016-17 exceeding Rs. 250 crores

Level of total income

Effective Tax Rates

FY 2018-19

FY 2017-18*

Having total income exceeding Rs. 10 Crores

34.944% [(tax rate 30% plus surcharge 12% thereon) plus Health & education cess 4% thereon]

34.608% [(tax rate 30% plus surcharge 12% thereon) plus cess 3% thereon]

Having total income exceeding Rs. 1 Crore but not exceeding Rs. 10 Crores

33.384% [(tax rate 30% plus surcharge 7% thereon) plus Health & education cess 4% thereon]

33.063% [(tax rate 30% plus surcharge 7% thereon) plus cess 3% thereon]

Having total income upto Rs. 1 Crore

31.20% (tax rate 30% plus Health and education cess 4% thereon)

30.90% (tax rate 30% plus cess 3% thereon)

 

*The tax rate for FY 2017-18 for domestic companies with annual turnover or gross receipts not exceeding Rs. 50 crores in FY 2015-16 was 25% [plus applicable surcharge and cess thereon]. In all other cases the tax rate was 30% [plus applicable surcharge and education cess thereon]

Note 1: Marginal relief is available to ensure that the additional income-tax payable, including surcharge of 7% on the excess of income over Rs. 1 Crore is limited to the amount by which the income is more than Rs. 1 Crore. Similarly, marginal relief is available to ensure that the additional income-tax payable, including surcharge of 12% on the excess of income over Rs. 10 Crores, is limited to the amount by which the income is more than Rs. 10 Crores. However, no marginal relief shall be available in respect of the Health and education cess.

Note 2: Existing MAT rate i.e. 18.5% and applicable surcharge on domestic companies remains unchanged. However, Health and education cess of 4% shall be applicable in lieu of current cess of 3%.