As the Hon’ble Finance Minister presented the tax proposals under the Union Budget, 2017, the key thrust of income tax policy appeared to be facilitation of a cash less economy, provision of relief to the middle class and ease of doing business in India, and incentivizing the real estate sector and start-ups. However, as is always the case the devil lies in the details. The income tax proposals under the Finance Bill, 2017 touch upon myriad issues that will have a significant impact day to day business transactions in India. Whist some of these proposals offer much needed respite to the taxpayer, the anti-avoidance measures introduced by Budget, 2017 against the backdrop of GAAR are likely to occupy centre-stage in the tax policy debate in the coming weeks.
The tax proposals in the cross-border space have been aimed at according certainty in the law and incentivising foreign investment. Redemption and sale of investments in category I and category II FPIs by non-residents have been exempted from indirect transfer rules. The concessional withholding tax rate of 5% has been extended to masala bonds. Moreover, capital gains from the transfer of masala bonds from a non –resident to another non-resident outside India has been exempted from tax. To further incentivize foreign lenders, the sunset date for the 5% withholding tax rate applicable to ECB loans and foreign currency bonds has been extended to borrowings made up to July 1, 2020. Similarly, the sunset date for 5% withholding tax rate applicable to FIIs and QFIs on interest income earned from rupee denominated bonds has been extended to interest payable on or before July 1, 2020.
Real estate sector and start-ups have been the key beneficiaries of tax incentives under Budget, 2017. With respect to the real estate sector, reduction of holding period for immovable property from 36 months to 24 months for long term capital gains tax treatment should propel activity in the real estate sector, which took a significant hit pursuant to the demonetization scheme. Developers engaged in affordable housing projects may also benefit from the liberalization of conditions for claiming tax holiday. Developers will also not be subject to income tax on notional income arising on unlet property for a year. Allowing land owners to defer their capital gains tax liability on transfer of land under joint development agreements to the tax year in which the project competition certificate is issued by the competent authority should also stimulate growth of the real estate sector. Moreover, revision of the base year for cost inflation index and determination of cost of acquisition to April 1, 2001 as against April 1, 1981, should also offer much needed respite to taxpayers. As far as start-ups concerned, Budget 2017 provides them the flexibility to carry forward previous years’ tax losses even when there is a change in their shareholding which is in excess of 49% so long as the old shareholders retain some holding in the company. This would give start-ups the flexibility to raise capital from investors looking for more skin in the game. Additionally, start-ups have been provided the flexibility to claim the tax holiday for three consecutive years within seven years from their incorporation as against five years from incorporation.
At the brink of GAAR, Budget 2017 also introduces several new anti-avoidance measures. Tax authorities can tax the FMV of shares to in the hands of the seller if such shares are sold for a consideration below the FMV. Currently, the deemed income provisions, which provide that the difference between the FMV of any property and the consideration paid for such property will be taxed in the hands of the acquirer where such property is acquired below FMV only applied to individuals and HUF. Further, deemed income provisions had limited application to unlisted companies and partnerships firms only with respect of acquisition of shares of unlisted companies. The proposed amendments extend the deemed income provisions to all categories of taxpayers for all kind of properties (including shares, whether listed or unlisted). Further, a new specific anti avoidance rule has been announced pursuant to which any interest expense claimed by an entity with respect to payments made to its associated enterprise will be capped to 30% of the EBITDA of the taxpayer. The interplay of such specific anti avoidance rule with GAAR needs to be evaluated. Moreover, limiting the capital gains tax exemption accorded to sale of listed shares on the market, which are held as long term capital assets to cases where such shares were acquired on payment of STT is also a notable anti avoidance measure.
In the realm of transfer pricing, domestic taxpayers have much to celebrate as the scope of domestic transfer pricing regulations has been significantly curtailed. Domestic transfer pricing rules will henceforth only apply in situations where one of the parties is claiming specified tax incentives. In the international transfer pricing space, however, secondary adjustments have been introduced in cases where the primary adjustment exceeds INR 1 crores.
Tax proposals to facilitate a cash less economy were the mainstay of the Finance Minister’s budget speech. For instance, cash expenditures in excess of INR 10,000 have been disallowed, presumptive tax rates have been reduced from 8% to 6% for a non-cash turnover and deductions on cash donations to charitable institutions has been limited to INR 2000.
Other notable income tax proposals include provision of specific tax exemption for conversion of preference shares into equity shares, merger of the Authority of Advance Rulings for income-tax, central excise, customs duty and service tax and rationalization of MAT provisions in light of IND-AS.
Safe to say Union Budget, 2017 contains several big ticket changes that are likely to impact Indian taxpayers. This is coupled with the Government’s decision not to defer GAAR or POEM any further, which came soon before the announcement of the Budget. Needless to say while the Government is looking to incentivize industry and facilitate business, it has re-emphasized its intolerance for black money, tax evasion and tax avoidance.