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Sheetal Bhatia

Miss. Sheetal Bhatia - Deputy Manager, Direct Tax at International Business Advisors.

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Budget 2018 - Will it Overcome the Previous Budget’s “Mediocre” Title?

The list of taxpayers’ expectations is quite long and only time will reveal whose pleas will be heard and whose will remain overlooked!

Photo Credit : PTI,

The Union Budget 2018 is around the corner and taxpayers are indeed high on their expectations from the Modi government as it is their last chance to woo their audience before the 2019 general elections.

Whether it be the common man or the big corporates or even the MSMEs, everyone is looking forward to a reduced tax net.

Expectations with respect to the various direct tax propositions from the Budget 2018, which will be declared on 1st of February 2018, have been described below:

For corporate and non-corporate bodies:

•Tax rate:

Reduce the tax rates for both corporates and unincorporated bodies i.e. Firm, Limited Liability Partnership (LLPs), etc., to 25%

•Minimum Alternate Tax (MAT)

Reduce the MAT rate from existing 18.5% to a rate which will commensurate with the phasing out of tax exemptions and incentives

Allow MAT credit to be carried forward and set off for unlimited years

Profits which are exempt from levy of capital gains tax be also not taken as part of book profit

•Dividend:

Reduce Dividend Distribution Tax (DDT) rate to 10% (after including the education cess, surcharge and grossing-up of the dividend)

All dividends on which DDT has been paid, be allowed to be reduced from dividends irrespective of the percentage of equity holding

Genuine loans and advances, given on current market rate of interest and which are re-paid during the year, should be excluded from the scope of deemed dividend to avoid unnecessary litigation

•Place of Effective Management (POEM):

Defer the applicability of POEM guidelines till FY 2018-19 as the final rules in regard to implementation of POEM are yet to be notified and it would give very little time for the taxpayers to understand and apply the transition provisions

•Equalization levy

The levy should be introduced though a separate provision in the Act to address the issue of resultant double taxation in the hands of the Foreign Service provider due to non-availability of its credit in the foreign jurisdiction

The rate of levy should be brought down to 1% on gross basis since the digital ecosystem players are primarily being start-up companies facing losses in initial years

•General Anti-Avoidance Rules (GAAR):

The primacy of tax Treaty over GAAR should be maintained and the arrangement entered after compliance of the conditions spelt out in treaty should be kept out of the provisions of the GAAR. Similarly, the provisions should not apply to a transaction/arrangement where the same is otherwise covered under the BEPS Action Plan/s.

The threshold limit for applicability of GAAR provisions should be enhanced so as to capture only highly sophisticated structures.

A distinction between tax mitigation and tax avoidance should be made to ensure that legitimate business choices do not result in the invocation of GAAR

•Capital Gains

In case of provisions regarding Indirect Transfer of Capital Asset situated in India, clarification should be provided for the phrase ‘assets located in India’

Intra-group transfers as part of group re-organizations (other than amalgamation and demerger) should be exempt from the indirect transfer provisions

Listed companies to be excluded from the ambit of the indirect transfer provisions as the non-exclusion will cause serious hardship to shareholders in listed companies as well as pose several computational and practical challenges in cases where frequent trading of shares takes place on a daily basis.

Tax rate for Short-Term Capital Gains (STCG) under Section 111A for listed and unlisted companies to be 10% and 20%, respectively

The beneficial tax rate of 10% on long term capital gains on transfer of unlisted securities should be extended to resident shareholders

•Transfer Pricing

In case of “secondary adjustments”, clarification is required on many aspects, primarily on the computation of interest

To reduce litigations, an inter quartile range i.e. data points lying between 25th to 75th percentile should be prescribed as it is an internationally accepted norm

Detailed guidelines on issues like location Savings, Marketing Intangibles, Cost contribution arrangements, Intra-group services, benchmarking of loans and guarantees is required

In case of Safe Harbour Rules (SHRs), clarifications on the definitions of various eligible international transactions like KPO services vis-a-vis ITeS, Software development services vis-à-vis contract R&D services relating to software development as it leaves a lot of room for subjective interpretations

•Others

Deduction of CSR expenses incurred by the taxpayers pursuant to provisions of the Companies Act should be allowed under section 37 in computing business income.

Provisions of tax deduction at source from payments made to non-residents to come at par with payment to residents including 30% disallowance, instead of 100% disallowance for amount paid/payable to non-residents and no disallowance in cases where the due taxes have been paid by the nonresident payee’s; subject to conditions as applicable in case of resident payees

To withdraw or defer applicability of ICDS for a reasonable period of time

To exclude the payment for the use/access to online databases, reports, journals etc. and any other such payments made by the payer from the purview of royalty.

Both sections 56(2)(x) and 50CA be deleted as the same leads to incurring significant tax costs even on ordinary and legitimate commercial transactions

Personal Taxation:

•Individual tax rates

•The standard deduction for salaried employees should be reinstated to at least Rs. 100,000 to ease the tax burden of the employees and keeping in mind the rate of inflation and purchasing power of the salaried individual

•The following allowances/ deductions to be enhanced to the following limits:

•The limitation provided by the Finance Act, 2017 limiting the set-off of loss of house property to the extent of Rs. 200000 should be removed.

•Considering the undue hardship that can be caused to the taxpayer, timeline for filing a revised return should be restored to two years from end of the relevant financial year

The list of taxpayers’ expectations is quite long and only time will reveal whose pleas will be heard and whose will remain overlooked!

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house


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