L Badri Narayanan, S Vasudevan and R Subhashree analyse updates to tax laws and other measures proposed for companies in the 2018 Budget

Finance Minister Arun Jaitley quoted Swami Vivekananda’s vision of a New India emerging “from the peasant’s cottage … from markets and from hills and mountains” before commending the budget to the house. The focus on agriculture, health, education and small industries was clearly visible. The Finance Bill, 2018, did not largely deviate from the tone of the previous year that ushered in thin capitalization rules, secondary adjustment and discouraging payment of expenses in cash. Thus, while incentivizing startups, reducing the corporate tax rates for smaller companies, proposing e-assessment and team-based assessment to reduce interface between the taxpayer and the assessing officer, this year, the finance minister also proposed a number of measures to improve tax compliance.

Reduction in corporate tax

In the 2015 budget speech, the finance minister had promised to bring down corporate tax rates to ASEAN levels of 25% gradually while also phasing out many incentives and allowances. The corporate tax rate is now proposed to be reduced from 30% to 25% (exclusive of surcharge and cess) and will be applicable to companies having turnover up to ₹2.5 billion (US$38.5 million) in financial year 2016-17. However, no similar reduction in tax rate has been proposed in respect of foreign companies.

Incentives for startups

Presently startups incorporated on or after 1 April 2016, but before 1 April 2019, can enjoy a 100% deduction of profits and gains for three consecutive years out of seven years if their total turnover does not exceed ₹250 million and are engaged in eligible business involving innovation, commercialization of new products, etc., driven by technology or intellectual property. As per proposed amendments, the benefits will also be extended to startups incorporated between 1 April 2019 and 1 April 2021. The amended definition of eligible business would include a scalable business model with high potential for employment or wealth generation.

Tax on long-term capital gains

Long term capital gains (LTCG) on transfer of listed equity shares, units of equity-oriented funds and units of business trusts, which are presently exempt are proposed to be brought within the tax net. An amendment is proposed to tax capital gains made by the transferor on sale of such securities under LTCG tax if gains exceed ₹100,000 in a year. The rate of taxation is proposed to be at 10% without any benefit of indexation (calculation of cost of acquisition of asset after accounting for inflation). This tax will be applicable only on transfers made on or after 1 April 2018.

Tax benefits to transactions in centres

It is proposed to extend the benefit of exemption from capital gains tax to transfer of bonds or global depositary receipts (GDRs) or rupee denominated bonds made by a non-resident on a recognized stock exchange located in any international financial service centre in India. The consideration for such transaction is paid or payable in foreign currency. Presently, any transfer of bonds, GDRs or rupee denominated bonds of an Indian company (bond issued outside India) made outside India by a non-resident to another non-resident are considered as tax neutral transfers.

Relief for insolvent companies

An amendment is proposed to be made to allow deduction of both brought forward losses and unabsorbed depreciation for calculation of book profits on which the minimum alternate tax rate is applied. This benefit will be available if an application for insolvency resolution has been admitted under the Insolvency and Bankruptcy Code, 2016 (IBC). Also, another amendment is proposed to be made for allowing carry forward and set-off losses even if there is change in shareholding provided such change is in accordance with an approved resolution plan under the IBC.

Taxation on modification of contracts

To tax compensation and other such receipts received on termination or modification of certain contracts, amendments are proposed to sections 28 and 56 of the Income Tax Act, 1961 (ITA). This amendment is very widely worded and businesses will have to factor in the taxation of compensation amounts which hitherto may have not been taxable as capital receipts for impairment to profit making structure or being a causal receipt.

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L Badri Narayanan and S Vasudevan are partners and R Subhashree is principal associate at Lakshmikumaran & Sridharan.