India: India Budget 2018 | Less Than 10 Days To Go: A Forecast

Last Updated: 24 January 2018
Article by Khaitan & Co Direct Tax Team

Most Read Contributor in India, August 2018

As the Modi Government prepares to present its last complete budget before the 2019 general elections, we reflect on the current fiscal year and evaluate the key target areas for the financial and tax reform proposals of 'Budget 2018'.

This year has witnessed sweeping legislative reform – introduction of the Insolvency and Bankruptcy Code, 2016 (IBC) to facilitate the corporate insolvency resolution process, passing of the Real Estate (Regulation and Development) Act, 2016 to regulate the real estate sector, and introduction of GST as single national tax which streamlines the indirect tax regime in India. Within the realm of direct taxes, the year witnessed the introduction of the General Anti-Avoidance Rules, thin capitalisation norms, secondary adjustments in India's extant transfer pricing regime, the issuance of the final guidelines on 'POEM' (i.e. place of effective management) as a test of corporate residency, the widening of fair valuation basis taxation and implementation of country by country reporting for transfer pricing.

Against the backdrop of this legislative overhaul, and the commitment of the present Government to establish an investor and business friendly regime, set out below is a quick round - up on the key expectations from 'Budget 2018'.

Reduction in Corporate Tax Rate

The Finance Minister had promised in his first budget to reduce the corporate tax rate from 30% to 25% and remove all tax sops in a phased manner. Thus far, the reduced tax rate of 25% has been extended to certain companies engaged in the manufacturing sector and those below the prescribed turnover limits only. In the changed world investment scenarios and the need for huge capital investments in India, there is a strong case to reduce the corporate tax rate to 25% with investment linked tax sops and reduce the accounting profits based minimum alternate tax (MAT) rate to less than half of the corporate tax rate in line with the practices in competing jurisdictions. One may not overlook the recently proposed corporate tax reduction from 35% to 20% in the United States.

Clarity in respect of Indirect Transfer Tax Provisions

Offshore transfer of shares or interest in a foreign company deriving 'substantial value' from Indian assets on 'specified date' triggers Indian tax. In order to assess whether the substantial value test under India's indirect transfer tax provisions is met, it is presently unclear whether the standalone or consolidated accounts / financial statements of the target foreign company are to be considered. Clarity in this regard is critical for global deals with Indian leg.

In this context, in view of the manner in which 'specified date' is defined for valuation purposes, even if the target foreign entity does not own any Indian assets on the date of transfer but held such assets on the last day of its accounting period immediately preceding the transaction date, the indirect transfer tax provisions may trigger. This needs to be addressed to avoid taxation when the target has already disposed of its Indian assets and paid the due taxes (subject to any relief that may be available).

Further, while law exempts a foreign merging/ demerging entity from the indirect transfer tax, there is no shareholder level exemption (unlike domestic tax neutral restructuring). This aspect needs to be addressed.

Replace DDT with a Withholding Tax

Currently, dividend distribution tax (DDT) is payable by an Indian company on the dividends distributed to its shareholders, in addition to corporate tax payable by the distributing company on its income. This can result in double taxation as foreign investors are often unable to claim credit of the DDT paid in India in their home jurisdiction. Thus, they bear the incidence of DDT plus tax on dividend income in their home jurisdiction, thereby reducing their return on capital employed. This can make India unattractive as an investment destination. Replacing DDT with a Dividend Withholding Tax (DWT) would enable the recipient shareholders to claim credit for taxes paid in India.

Clarity on Thin Capitalisation Norms

The language of the thin capitalisation provisions creates doubt as to whether interest paid to third party lenders would also be capped under the rules or only the interest paid to associated enterprises (or loans guaranteed by them). To address this, and in line with the intention of such measures, clarity should be provided that interest on third party loans should not be impacted by the interest cap limits. Further, these norms are attracted even where the debt is issued by an independent third-party lender, but an associated enterprise provides an "implicit or explicit guarantee" to such lender. The term "implicit or explicit guarantee" is rather vague, and could possibly cover within its sweep even simple comfort letters issued by an overseas parent in relation to a loan taken by an Indian subsidiary. Greater clarity could thus be expected on the meaning of the said term. Further, while an exemption from the applicability of thin capitalisation norms has been provided to Indian companies engaged in the business of banking and insurance, a similar exemption ought to be provided to non-banking financial companies and infrastructure companies with businesses with long gestation periods.

Rationalising Fair Value basis Taxation on Transfer of Shares

Since the scope of fair value basis taxation under the (Indian) Income-tax Act, 1961 (IT Act) was widened by the Finance Act 2017, and valuation norms to determine "fair market value" (FMV) were revised, there is a pressing need to rationalise these provisions to exclude certain transactions such as those which are specifically exempt from capital gains tax (like transfer of capital assets inter se parent-subsidiary). Further, there is lack of clarity on the manner of computation of FMV of shares of a foreign company (which falls within the purview of the provision) as valuation rules seem more suited to shares of an Indian company.

Further, in case of cross-holding structures, i.e. where company A holds certain unquoted shares of company B, and company B also holds unquoted equity shares of company A the valuation exercise leads to an unending loop, rendering the valuation exercise impossible. Special provisions are required to address this situation.

Harmonizing Income-tax Provisions for Companies under Insolvency

To bolster the revival of non-performing assets and accord success to the path breaking IBC, suitable amendments ought to be made to provide exemptions in relation to (i) tax on any write back of notional income pursuant to a resolution plan approved under the IBC; (ii) inability to carry forward and set off of tax losses on account of a change in control which generally applies; and (iii) book profits based MAT. There is also a need for certainty in relation to contingent liabilities relating to pending income-tax litigation, in order to encourage investor interest in distressed companies.

Alignment with provisions of Ind-AS

While the Government has pragmatically attempted to address diverse issues arising due to Ind AS (IFRS converged Indian accounting standards) under MAT provisions, the fundamental condition of a tax neutral demerger of recording the assets at 'book value' is not possible in case of a demerger involving unrelated entities, which needs to be recorded at 'fair value'. The change in income-tax implications due to change in accounting method is clearly an unintended consequence, and needs to be addressed.

Revising Monetary Thresholds for tax neutral conversion of Company to LLP

Currently, conversion of a company into a limited liability partnership (LLP) triggers an income-tax levy if the company's turnover exceeded INR 6 million or the value of its assets exceeds 50 million in any of the 3 years preceding such conversion. These limits are far too low, even for present – day MSMEs and it is unclear what objective it achieves. Budget 2018 should revise the limits for such conversion.

Exemption for Start-ups and SEZ Units from MAT

To make tax sops currently available under the IT Act to start-ups and export oriented units set up in Special Economic Zones (SEZ) more meaningful, concessions from the levy of MAT ought to be provided to such entities.

Taxation of Income from Cryptocurrencies

Even though the Ministry of Finance has disregarded cryptocurrencies as valid legal tender in India, it is impossible to ignore the overwhelming popularity that cryptocurrencies have assumed across the globe. While the income-tax authorities have issued notices to several high net worth individuals who have transacted in bitcoin, expectation is rife amongst professional circles that Budget 2018 will address the issue of the manner of taxability of cryptocurrencies, mainly its characterisation as business income (or speculative income/ capital gains).

Comment

In keeping with the consultative approach of the present Government in bringing about legal reform, the Finance Minister has already held several rounds of pre – Budget consultation meetings with industry – wide stakeholders.

A significant and urgent need is to reform the tax administration to make it less adversarial and more pragmatic. Courts have time and again passed strictures against overzealous and aggressive stances taken by tax officers on the ground. But lasting change requires administrative reforms. Target based tax collections have done more harm than good and must be replaced with an alternative mechanism. While a task force has already been formed to draft a new direct tax legislation, one sincerely hopes that the Government addresses some of the above concerns in this Budget. As a Government that would most certainly leave an indelible mark in the history of financial and tax reforms in the country, it would not be a stretch to expect Budget 2018 to have more hits than misses.

- Direct Tax Team

This article was first published in CFO magazine.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Nishith Desai Associates
Nishith Desai Associates
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Nishith Desai Associates
Nishith Desai Associates
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions