Budget 2018 was presented in the midst of widespread speculation that being the last full Budget before elections in 2019, it could end up being populist, hurting the economy and largely at the expense of the taxpayers. Thankfully, the government refrained from doling out freebies and reiterated its intent to stick to the fiscal path.
Nevertheless, tinkering to the tax code has been done. While long-term capital gains arising on sale of listed equity shares has made a comeback, most of the other proposed changes are intended to plug loopholes and fix the anomalies and contradictions in the law. Though there are no shocks and surprises, there are a few things which the corporates should keep in mind going forward.
Further headway has been made on the reduction of corporate tax rates where more corporates are now included in the reduced tax bracket of 25%. The reduction is however only for MSMEs having turnover of less than Rs. 250 crores. Large companies are yet to receive the tax cuts that were promised and with the exemptions being phased out, unless the reduction follows through, it may lead to an overall increase in the tax liability for large companies.
Dividend Distribution Tax
Payments made by companies (in which the public are not substantially interested) in the form of loans and advances or payments on behalf of; (a) a shareholder who beneficially holds not less than 10% of the voting power; or (b) any concern in which such person is a member and has substantial interest, constitutes deemed dividend which is chargeable to tax in the hands of the recipient. Presently, Dividend Distribution Tax (DDT) does not apply to such deemed dividend.
The Budget has changed the taxation approach by mandating that such deemed dividend will now be subject to DDT at the rate of 30% and payable by the company making the payment. Recipients of such income have long litigated with the tax authorities whether payments are in the nature of deemed dividend or no and going forward the onus will shift to the company making the payment since it will now be held liable for any default. One would expect companies to be more careful in making such payments to its shareholders. The amendment will also result in early as well as easy collection of tax by the government.
Some Merger & Acquisition (M&A) activity in India has been found to be driven solely by tax considerations where through abusive arrangements, amalgamation of companies results in effective distribution of profits to the shareholders without payment of DDT. The loophole is set to be plugged by way of legal mandate that accumulated profits of the amalgamating company (capitalised or not) will be directly added to the accumulated profits / loss of the amalgamated company. Steps like capital reduction coupled with the amalgamation route will no longer be able to avoid the levy of DDT.
Compensation received on termination or modification of business agreement
Compensation and receipts of capital nature received by a taxpayer for termination or modification of the terms of a business agreement was hitherto not chargeable to tax since the law did not intend to charge to tax, a 'capital receipt'. This is now sought to be amended and the proposals mandate that such capital receipts will now be taxed as business income. Accordingly, receipt of any non-compete fee, waiver of loan, etc. may be subjected to tax as business income.
The Budget proposals also mention that there will be a radical paradigm shift in the way the assessments will be done in the future. For this purpose, the Government will prescribe a scheme which will be placed before both Houses of Parliament.
Much emphasis is laid on eliminating the interface between the Assessing Officer and the taxpayer. One hopes that the elimination of such interface will not work against the taxpayer. As the CAG recently noticed in its audit, some assessing officers are guided by the targets allotted to them and without an interface in place, the assessments may be framed arbitrarily without the taxpayer getting a proper chance of being heard. Though the intention is noble, unless the scheme is firewalled and made optional for the taxpayer, it runs the risk of unintended consequences.
Other amendments provide much needed rationalisation of various aspects of the law, particularly companies under Insolvency resolution proceedings who will now be (a) eligible to reduce aggregate amount of unabsorbed depreciation and brought forward loss for computing book profits for the purpose of MAT (instead of only lower of the two); and (b) doing away with the requirement of continued 51% same shareholding for the purpose of carry forward of business loss. The steps were urgently required for insolvency resolution proceedings and it is good that the Government was proactive in the matter.
Given the political compulsions and constraints, one can understand why Budget 2018 is evolutionary rather than revolutionary. The government has sought to further streamline the law, maintain revenue while allocating resources judiciously. The steps are incremental but provide further clarity to corporates.
Rakesh Nangia is the Managing Partner and Rahul Jain is Partner at Nangia & Co LLP.