Indian Union Budget Insights - 2017

The general union budget by Mr. Arun Jaitley, Finance minister this week was something like a 'short and sweet' one. The IE quotes the budget more like a Dravid than a Sehwag. No surprises and stick to the basics. The Income Tax exemption being the biggest dole out plan, is expected to raise spending in India. 

While the economy is still reeling under the brunt of demonetization introduced on November 8th last year, this year’s Budget assumed even greater significance. In the past few weeks, the impact of demonization on India’s GDP has been the subject of wide spread discussions, speculation and analysis. The expectation was that while the budget would provide a fillip to economic growth.

India’s Finance Minister Mr. Arun Jaitley on 1st March 2017 announced the Budget for the

financial year 2017-2018 the central theme being rural welfare & poverty alleviation,

expansion of the tax net while simultaneously ensuring a fairer administration of tax laws,

enhancing the ease of doing business in India and providing a further stimulus to the move

towards a digital economy. In the gist the Budget has focused to “Transform, Energize

and Clean India”. The roadmap and priorities of the 2017 budget is to transform the

quality of governance and quality of life of our people. 

The key tax proposals announced in Budget 2017 are as follows:

A. TAX

Reduction in individual tax rates for income upto INR 5, 00, 000/- Net Income Range (INR) Income Tax Rates Surcharge Cess (% of income-tax & surcharge)

Upto 2,50,000/- Exempt Nil Nil

2,50,000/- to 5,00,000/- 5% of (total income- 2,50,000/-)

Nil 3%

5,00,000/- to 10,00,000/- 12,500+20% of (total income- 5,00,000/-)

Nil 3%

10,00,000/- to 50,00,000/- 1,12,500+20% of (total income- 10,00,000/-)

Nil 3%

50,00,000/- to 1,00,00,000/- 13,12,500+30% of (total income- 1,00,00,000/-) 10% of

Income Tax 3%

Above 1,00,00,000/- 28,12,500+30% of (total income- 1,00,00,000/-) 15% of Income Tax 3%

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 The Budget proposes to reduce the marginal rate of tax in the income bracket between

INR 2, 50, 000/- to INR 5, 00, 000/- from 10% to 5%. Consequently, a rebate of INR

12,500/- will be available to a taxpayer across all income ranges.

 Individual/HUF/AOP/BOI/artificial judicial person having income above INR 50 Lakh

will be subject to surcharge of 10% of income-tax. In case the income is above 1 Crore, the current existing surcharge will continue. 

 Rebate under section 87A of the Income Tax Act will be available only if total income

(i.e. taxable income) of a resident individual does not exceed INR 3.5 Lakh. In such a

case the rebate will be 100% of total income or INR 2,500/- whichever is lower.

Reduction in rates for Small Companies

 Since the medium and small enterprises pay tax at effectively higher rates than large companies. In order to make medium and small enterprises more viable, the Budget has proposed a reduced tax rate of 25% (as opposed to the current rate of 30%) for domestic companies whose total turnover or gross receipt does not exceed INR 500 million (approx. USD 7.4 million).

Cross Border Taxation

 5% concessional withholding tax rate on interest income earned on foreign currency denominated debt issued outside India under the External Commercial Borrowing guidelines or by way of long term bonds extended to rupee denominated bonds.

Moreover, the sunset date for such concessional rate also extended to borrowings made before July 1, 2020. Further, the sunset date for 5% concessional withholding tax rate on interest income earned by Foreign Institutional Investors/Foreign Portfolio Investors (“FPI”) and Qualified Foreign Investors on rupee denominated bonds and government securities extended to interest payable on or before July 1, 2020.

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B. CAPITAL GAINS

 For long-term capital gain, the base year will be shifted from 1981 to 2001. Fair market value on April 1, 2001 can be adopted as cost of acquisition if an asset is acquired prior to April 1, 2001.

 Currently, for immovable property to be considered as a long term asset, a holding period of thirty six (36) months is applicable. With the objective of incentivizing investment in real estate, the Budget has proposed to reduce this holding period to twenty four (24) months and bring it in line with the holding period for unlisted shares.

 Transfer of rupee denominated bonds issued outside India from a non-resident to another non-resident outside India will be exempt from capital gains tax. 

 Non-residents will not be subject to capital gains tax on the transfer (whether by way of sale or redemption) of investment, held directly or indirectly, in SEBI registered Category-I and Category-II FPIs.

 A specific capital gains tax exemption has now been introduced for conversion of preference shares to equity shares. The cost of acquisition and holding period of the equity shares so converted will be the same as the preference shares.

 For computing capital gains on sale of shares of a company which are not ‘quoted’ i.e. quoted on a recognized stock exchange, it is proposed that where the sale consideration received by the taxpayer is less than the FMV of such shares (as may be prescribed), such FMV will be considered as full value of consideration in the hands of the taxpayer. 

 In a Joint Development Agreement, capital gain shall be taxable in the previous year in

which completion certificate is issued.

C. GENERAL

 Transactions above INR 3 Lakh should be permitted only by an account payee cheque/draft/use of electronic clearing system through a bank account. The limit of INR 3 Lakh will be applicable in respect of a single transaction or in respect of a number of transactions with a person in a single day.

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 Business expenditure in cash/bearer cheque/crossed cheque above INR. 10,000/- (as against INR. 20,000/-) will be disallowed under section 40A (3). Likewise under section 80G, donation given by any mode other than cash in excess of INR 2000 (as against the present ceiling of INR 10,000/-) will not be eligible for deduction.

 Political party cannot accept donation above INR 2000/- in cash.

 Loss from let out property exceeding INR 2 Lakh will not be deductible from income other than house property income during the current year (carry forward will be allowed).

 Under the presumptive income-tax scheme of section 44D, business income will be calculated at 6% in respect of turnover of the gross receipt which is received by an account payee cheque/draft/electronic clearing system on or before the due date of submission of income.

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