Presentation on analysis of India Budget 2017 by K C Mehta & Co.

2. Independent Member of
• Economy
• Direct Taxes
– Business Tax
– International Tax
– Substance over Form
– Capital Gains
– Personal Taxation
– Other Amendments
• Indirect Taxes
– GST
Agenda
2

3. Independent Member of
Economy

4. Independent Member of
• GDP growth at 7.1% estimated for 2016-17
– Actual at 7.2% for half year
– Key growth factors being pick-up in agricultural growth,
modernization in industrial and government service sector
• IMF Forecast - GDP growth of 7.2% and 7.7% in 2017 and 2018
• Fiscal deficit as percentage to GDP
– 3.5% revised estimate for 2016-17
– Estimated for 2017-18 – 3.2%
• FDI grew 36% in H1 2016-17 over H1 2015-16, despite 5%
reduction in global FDI inflows
• Foreign exchange reserves as on 20-01-2017 - USD 361 billion
Key Indicators
4

5. Independent Member of
Expenditure
5
As a % of Total Expenditure

6. Independent Member of
• CPI Inflation for April to December 2016 was 4.9%
– CPI-based inflation declined from 6% in July 2016 to 3.4% in
December 2016
– Declining trend due to good kharif production, pulses in
particular
• Reversal of WPI inflation, from -5.1% in August 2015 to 3.4 percent
in December 2016
– Impact of rising oil prices
– Wedge between CPI and WPI narrowed
• CPI Food inflation (CFPI) dipped to 2-year low of 1.4% in December
2016
Key Indicators
6

7. Independent Member of
WPI and CPI Inflation
7

8. Independent Member of
Direct Tax

9. Independent Member of
Business Tax

10. Independent Member of
• Headline Corporate tax rate continues to be 30%+
– New Manufacturing Companies – 25% subject to conditions
• Rate for SME Companies reduced to 25% (from 29%)
– If turnover for FY 15-16 < Rs. 50 crores
– No other conditions
• Incentive for Start – Ups
– Deduction for 3 out of initial 7 years (instead of 5)
– Carry forward and set off of loss incurred in first 7 AYs allowed if
shareholders continue to hold shares
• No threshold
• Overrides provisions of Chapter VI?
Corporate Tax
10

11. Independent Member of
• Gross based tax on carbon credits @ 10%
– No amendment in Section 2(24)
• Interest on certain NPA chargeable on receipt basis
– Benefit extended to co-operative Banks
• Gifts received by ‘any’ person taxable
– Provision now applicable to Trust and AOPs as well
– Scope of ‘property’ enlarged for companies / firms
• Notional Rental Income on HP held as stock
– No annual value for 1 year from end of year in which Completion
Certificate is received
Business Income
11

12. Independent Member of
• Limit of allowable cash expenses reduced to Rs. 10,000 per
payee per day
– Disallowance u/s 40A(3) / 35AD / 32 r.w.s 43
– Payment through ECS allowable
• 43B Disallowance on delayed interest payment to co-operative
banks
• Incentive for Affordable Housing Projects expanded
– Project completion period increased from 3 to 5 years
– Carpet area linked conditions instead of built-up area
Business Deduction
12

13. Independent Member of
• Deduction under Section 10AA
– To be allowed from Total Income after set-off
– Restricted to the Total Income
• Provision for Bad & Doubtful Debts for Banks
– Increased from 7.5% to 8.5% of total income
• Tax Credit of ‘disputed’ foreign tax to be allowed upon settlement
of such dispute
Business Deduction
13

14. Independent Member of
• Thin Cap Rules introduced
• Debt from Non Resident AE / other lenders if guaranteed by AE
– Explicit and implicit guarantees or corresponding matching
deposits
• Interest deduction capped at 30% of EBITDA
– Balance carry forward for 8 years
• Not applicable
– Interest expense < Rs. 1 crore
– For banks and insurance Co
• Rule of Debt-Equity ratio not applied
14
Thin Capitalization

15. Independent Member of
• Changes in light of Ind-AS
– To start with Net Profit (and not Total Comprehensive Income)
• Treatment of OCI for MAT purpose
– Notional or unrealized gains included in OCI should be considered in
Book Profit in the year when it is realized
– All adjustments in OCI, which are not to be reclassified to P&L in the
subsequent years should be considered.
• Treatment of Transitional Provisions
– 1/5th of Adjustments made in Other Equity, which would never be
reclassified to P&L in the subsequent years shall be considered in Book
Profit for each of first 5 years
• Distribution of non-cash assets on Demerger
– It be excluded in computing Book Profits
Minimum Alternate Tax
15

16. Independent Member of
• Carry forward and set off – increased to 15 years
• MAT Credit would be calculated based on comparison of MAT
and Normal Tax (net of FTC)
– In lines with FTC rules
• Similar changes applicable to AMT
Minimum Alternate Tax
16

17. Independent Member of
International Tax

18. Independent Member of
• Indirect transfer provisions not applicable to NR investors of FII
• 10% tax on transfer of shares of closely held company by NR to
be effective from AY 13-14
• Exemption for Rupee Denominated Bonds (‘Masala Bonds’)
– Transfer between 2 NRs not taxable
– Gain on account of rupee appreciation not taxable even for
secondary holder
Capital Gains
18

19. Independent Member of
• Recording ALP in books of account
– Primary adjustment suo moto by assesse / accepted by
assesse / Safe harbour, APA, MAP
• Repatriation of primary adjustment amount to India within
prescribed time limit
– Unrealised amounts to be treated as advance
– Interest on advance to be computed and added to income
• Provisions applicable to Primary adjustment > INR 1 Cr
– Adjustment related to AY 17-18 and subsequent years
Secondary Adjustments
19

20. Independent Member of
• Domestic Transfer Pricing
– Transactions with Sec. 40A(2)(b) parties excluded from SDT
• Terms not defined in DTAA but defined in ITA
– Definition as per ITA to be applied in interpreting DTAA
• Explanation given to it by Central Government would also be relevant.
– Terms like ‘Place of Effective Management’ in DTAA would partake
meaning from Section 6(3).
Other Amendments
20

21. Independent Member of
Substance over Form

22. Independent Member of
• Foreign Co. to be resident, if Place of Effective Management (POEM) is
in India
– Replaces the condition – control and management wholly situated
in India
– Global income of residents taxable
– Major impact on Outbound investments with Indian Promoters
• Final Guidelines issued on January 24, 2017
– Only Guiding Principles
– POEM depends upon facts and circumstances
– Emphasis on Substance over Form
Residence Test – AY 2017-18..
22

23. Independent Member of
• POEM defined as a place where “key management and
commercial decisions” that are “necessary for the conduct of the
business of an entity as a whole” are, “in substance, made”.
POEM – Definition
Key management
and commercial
decisions
Necessary for
overall conduct of
business
Of an Entity as a
whole
In substance
made
• Focus on Key Management (not control)
• Key decisions relating to management
• Place of implementation of decisions not relevant
• Executive level decisions – for overall conduct, in line
with broad strategies & policies formulated by BOD
• Day to day operations not relevant
• Substance over form
23

24. Independent Member of
Active Companies
Company
engaged in
“Active
Business
Outside
India”
Passive
Income
• Passive Income < 50% of Total income AND
• Assets situated in India < 50% of Total assets AND
• No. of employees situated in / resident of India <
50% of total no. of employees AND
• Payroll expenses on employees situated in / resident
of India < 50% of total payroll expenses
• Royalty, dividend, capital gains, interest, rental income +
• Income from transactions where both purchase and sale
of goods is from / to Associated Enterprises
Average data of previous year + 2 years prior to be considered
Shorter period for new companies
24

25. Independent Member of
Guidelines for Passive Co.
Top
Level
Mgt.
Operation Level
Management
Executive / Mid
Level
Management
Place where BoD makes key managerial
and commercial decisions
Place where executive directors or senior
management (i) formulate key strategies /
policies and (ii) ensure or oversee
execution and implementation thereof on
an on-going basis
Place where the day to day
business activities are carried out
/ conducted
25

26. Independent Member of
GAAR – Effective from AY 2018-19
Applicability of
GAAR –
Impermissible
Avoidance
Agreements (IAA)
• Main purpose of Arrangement is tax benefit; AND
• Rights / Obligations not at arm’s-length; or
• Misuse / Abuse of Act ; or
• Lacks commercial/ economic substance; or
• Is not for bonafide purposes
Consequences of
GAAR
Overrides DTAA?
• Disregard / Recharacterize / Combine IAA or part
• Treat IAA as void
• Disregard accommodating parties / treat parties as one
• Reallocation / re-characterization of capital, incomes,
expenses, reliefs, etc.
• Relocation of place of residence / situs of asset or
transaction at a place / location
• Lifting corporate veil – Look through approach
26

27. Independent Member of
• GAAR not to be invoked if
– Aggregate Indian tax benefits < INR 3 crores
– FII not claiming DTAA benefit
– Sufficient anti-abuse provisions in DTAA
– Arrangement held as permissible by AAR
– Tax implications explicitly and adequately considered by
Court sanctioning the arrangement
– Merely because entity is located in tax efficient jurisdiction if
Non-tax commercial considerations exist and main purpose is
not tax benefit
– The arrangement is considered as permissible in one year
GAAR – CBDT Clarification
27

28. Independent Member of
• Capital Gains on Investments prior to 1st April 2017 grandfathered
– Lease contracts and loan agreements not grandfathered
• GAAR and SAAR can co-exist
• Claiming provisions of DTAA or Act, whichever is beneficial, can
be decided year on year basis
• No corresponding adjustment to other assessee
GAAR – CBDT Clarification
28

29. Independent Member of
• Assessee shall have opportunity to put up its case before AO and
CIT and Approving Panel before GAAR is invoked
• Approving Panel consist of 3 Members
– IRS, retired HC judge and eminent person
• Decision of Approving Panel is binding on department
– Assessee can file appeal before ITAT against the order of AO
GAAR Safeguards
29

30. Independent Member of
Capital Gains

31. Independent Member of
• Base year for CII shifted from FY 1981-82 to FY 2001-02
• Holding Period of immovable property reduced to 2 years
– To classify as long term capital asset
• Tax neutral conversion of preference shares to equity
– CoA and PoH similar to conversion of debentures
• LTCG on transfer of listed equity shares exempt only if acquisition
after October 1, 2004 chargeable to STT
– Exceptions will be notified to take care of genuine transactions
Capital Gains
31

32. Independent Member of
• Deemed Capital Gains based on Fair Market Value in case of
unquoted shares
• Tax on Joint Development only upon certificate of completion
– Consideration = stamp duty value + additional consideration
• Transfer under Andhra Pradesh Land Pooling Scheme exempt
• Transfer of shares of Indian Co. under demerger of foreign Co.
– CoA and PoH of Previous owner to be considered
• Other bonds may also be notified u/s 54EC
Capital Gains
32

33. Independent Member of
Personal Taxation

34. Independent Member of
• Tax rate for income up to Rs. 5 Lacs reduced to 5%
• Rebate u/s. 87A reduced to Rs. 2,500
• No tax on total income up to Rs. 3 Lacs
– Rs. 3.5 Lacs in case of Senior Citizen
• Surcharge @ 10% if income > Rs. 50 Lacs & < Rs. 1 Cr
• Loss from House Property to be set off against other heads of
income only up to Rs. 2 Lacs
• Limits for maintenance of books by individuals and HUFs
increased
– Income > Rs. 1.5 Lacs / Turnover > Rs. 25 Lacs
Personal Taxation
34

35. Independent Member of
• No tax audit covered by presumptive taxation and
turnover < Rs. 2 crores
• Income received by cheque / draft / ECS presumed to
be 6% of gross receipts
– Applicable to sales proceeds collected during year / by return
filing due date
– 8% continues on case of cash receipts
Presumptive Taxation
35

36. Independent Member of
• Partial withdrawal from NPS trust exempt up to 25% of
contribution
• Contribution to NPS up to 20% of GTI deductible for other than
employees
• Sunset of March 31, 2017 for investment to Rajiv Gandhi equity
Savings Scheme introduced
• Cash donations deductible u/s 80G up to Rs. 2,000 (instead of
Rs. 10,000)
Deductions and Exemptions
36

37. Independent Member of
Other Amendments

38. Independent Member of
• 10% tax on dividends from domestic companies
– Extended to all resident assesse except domestic company
• Earlier only individuals, HUFs and Firms were covered
– Not applicable on deemed dividends
• Sec. 269ST - Cash receipt > INR 3 Lacs not permissible from
– Any person in a single day; or
– Any person in respect of single transaction; or
– Any person in relation to single event / occasion.
• Contravention of 269ST would lead to Penalty = amount of receipt
• TDS by Individual on payment of rent > Rs. 50,000 per month
38
Other Key Amendments

39. Independent Member of
• Mandatory fees for delayed / non-filing of return
• AO may withhold refund u/s 143(1) if assessment ongoing
• Penalty on CA, merchant banker, registered valuer for incorrect
certificate – INR 10,000
• Survey at places with charitable activities
• Centralised issuance of notice and processing of information u/s
133C
• Time limit for assessments revised
• Period of limitation extended to 10 years in certain post-search cases
39
Procedural Aspects

40. Independent Member of
• Reasons recorded for search and seizure would not be disclosed
to any authority including ITAT
– With retrospective effect
• Provisional attachment
– During search or seizure or within 60 days thereafter
– Prior approval of Principle DGIT, DGIT, Principle DIT or DIT
– To expire within 6 months from attachment order
• Valuation of property by valuation officer
• Time limit for completion of assessment rationalised
40
Search and Seizure

41. Independent Member of
• Removal of Sec. 197(c) of Finance Act 2016
– With retrospective effect
– Accrual or receipt of income / acquisition of asset was deemed in
the year in which AO issues notice u/s 142(1), 143(2), 148, 153A,
153C
• Where no declaration made
– Period of limitation
Income Declaration Scheme
41

42. Independent Member of
• Voluntary contributions by 10(23C) institutions to / from 12AA trusts
towards corpus
– Not to be ‘application of income for objects’ of the institution / trust
• No exemption to if cash donation received by political party > Rs.
2,000
– Cheques, bank drafts, ECS, RBI issued Electoral bond
• No exemption u/s 11 if change in object of Trusts not intimated within
30 days
42
Trusts and Political Parties

43. Independent Member of
Indirect Tax

44. Independent Member of
• Research and Development Cess Act, 1986
– Repealed with effect from April 2017
• Service Tax
– No change in existing rate of Service Tax
– All notifications have a life upto 30 June 2017
Legislative Changes
44

45. Independent Member of
• Section 104 inserted - Benefit of exemption notification
no.41/2016 –ST dated 22.09.2016 is being extended
retrospectively w.e.f.1st June, 2007 and ending with 21
September 2016.
– Industrial plot holders with a lease of 30 years or more can apply for
refund of Service Tax, already paid (to GIDC/ MIDC/such other
Government Industrial Development undertaking) within a period of six
months from the date on which Finance Bill 2017 receives assent of the
President.
• Section 105 inserted retrospectively - Service tax is proposed
to be exempted for taxable services provided by the Army,
Naval and Air Force Group Insurance Funds by way of life
insurance to its members.
Legislative Changes – Service Tax
45

46. Independent Member of
Removal from Negative List
• Following services are removed from Negative list
(section 66D).
– Services to carry out any process amounting to
manufacture or production of goods excluding alcoholic
liquor for human consumption. Already included/covered in
mega exemption notification under 25/2012. (Clause 120 &
121of the Bill).
– This amendment is in view of impending GST
implementation.
Legislative Changes – Service Tax
46

47. Independent Member of
• Amendment in Exemption Notification 25/2012
– Job work service now defined in exemption notification to
carry out any process amounting to manufacture or
production of goods excluding alcoholic liquor for human
consumption(being state subject). Therefore, the job-
worker shall liable to register under the Service Tax
authority.
– This amendment is in view of impending GST
implementation.
Regulatory changes – Service Tax
47

48. Independent Member of
Amendment in Valuation Rules
• Amendment proposes to exclude value of the property in land/
undivided share from the taxable value of works contract.
(w.e.f. 7 July, 2010). The service tax will have to be paid on the
balance value of the works contract.
• Suresh Kumar Bansal V/s UOI (Delhi HC)
Regulatory changes – Service Tax
48

49. Independent Member of
Other amendment
• Exemption from service tax under notification 14/2012- ST
would not be available to a taxable service involved in import of
technology on which R & D cess is not payable. Credit of R&D
Cess will not be available.
Regulatory changes – Service Tax
49

50. Independent Member of
 Three months limit proposed for remission of excise duty from the
date of application where the duty on inventory was otherwise
payable.
 Proposes to merge present advance ruling authority with AR
authority under Income Tax Act
Regulation changes - Excise
50

51. Independent Member of
• Rule 6 – Amended to exclude Banks, FI and NBFCs from
reversal of Cenvat Credit of common Input services.
Therefore, the credit availability will increase to that extent.
• Rule 10 – Amendment proposes to limit the time for
transferring the Input credit from one location to another
location to three months. Consequently, on and from 2
February, 2017 all credit pending to be transferred to other
locations of an assesse will have to be transferred before the
expiry of the three months from that date
CENVAT Credit Rules
51

52. Independent Member of
Goods &
Service
Tax

53. Independent Member of
• Destination based tax
• Dual Administration
• Consolidation of taxes
• State wise determination of taxable person-no more
centralized registration
• Seamless credit amongst goods and services
Salient features on GST
53

54. Independent Member of
• GST would bring significant change in doing
business in India.
• For the implementation of GST, companies need to
understand GST policy and its implications for
planning and transition roadmap preparation.
• What is your action plan?
Game Changing Reform...
54

55. Independent Member of
GST-Framework
55
CA Gaurav Gupta
Excise duty on Medicinal and
Toiletries Preparation
Central Levies
Central Excise Duty
Central Sales Tax
Service Tax
Tax on lottery, betting and
Gambling
State Levies
Entertainment Tax
State VAT/ Purchase tax
Entry Tax
Luxury Tax
Additional duty of Excise on
Textile and Textile Products
CVD and SAD (on import of
goods)
Cesses and surcharges insofar
as far as they relate to supply
of goods or services
State cesses and
surcharges insofar as far as
they relate to supply of
goods or services
Taxes on Advertisement
CGST
SGST
IGST
55

56. Independent Member of
Concept of Supply
56CA Gaurav Gupta
Supply
Supply
for
consider
ation
Deemed
Supply
Supplies
made
without
consider
ation
Import
of
Service
Sale / Transfer / Barter /
Exchange / License /
Rental / Lease /Disposal
- Supply betweenAgent –
Principal
- Aggregator
-Permanent transfer of BusinessAssets
- Temporary use of assets for personal use
- Assets retained after deregistration
- Services used for personal purpose
-Supply to another person in course of
business
In the
course or
furtherance
of business
With or without
consideration
56

57. Independent Member of
Tax Structure
57

58. Independent Member of
• Government on its part has promptly given effect to various
provisions of the Constitutional Amendment Act, including
constitution of the GST Council. The GST Council held 9
meetings to discuss various issues relating to GST like;
– GST rate structure,
– threshold exemption and parameters for composition scheme
– details for compensation to States through Compensation Law
– examination of draft model CGST and SGST law,
– draft IGST law
– administrative mechanism for GST
– The preparation of IT system for GST is also on schedule.
Roadmap to GST
58

59. Independent Member of59
Focus Area in GST Planning
Redesigning
IT
System
Accounting
Logistics
&
Warehouse
Invoicing
Classification
of goods &
services
Tax
Planning
Litigation

60. This presentation is prepared exclusively for the benefit
and use of the clients of K. C. Mehta & Co. This should
not be used as a substitute for professional advice.
Reasonable care has been taken for ensuring the
accuracy and the authenticity of the contents of the
presentation. However, we do not take any responsibility
for any error or omission contained therein on any
account. It is recommended that the readers should take
professional advice before acting on the same. The
provisions contained in Finance Bill, 2015 are the
proposals and are likely to undergo amendments while
passing through the Houses of the Parliament before
being enacted.