In an unexpected move, the finance minister levied 2 per cent TDS (tax deducted at source) on cash withdrawal of Rs 1 crore or more in a year. Nirmala Sitharaman justified this by saying that whatever has to be done with such a large amount of cash, can be done electronically too. The trading community has expressed its displeasure. V.K. Bansal, National General Secretary, Federation of All India Vyapar Mandal, says deposit and withdrawal of cash in business is a common activity and that the government should reconsider the move.
Apart from the cash withdrawal tax, direct tax announcements in the Budget were mostly welcomed by businesses.
Boost to Start-ups
Sitharaman decided to play angel, exempting start-ups from angel tax - a tax on the premium (over the fair value) received on its shares when sold to investors. The income tax provision, Section 56 (2)(viib), which is at the root of this problem was incorporated in the Income Tax Act in 2012 apparently to stop unaccounted money from being funnelled into corporate world. But it hit the funding of start-ups.
The Budget also relieved start-up investors of the scrutiny regarding their identity and source of money. In the Budget, the finance minister said that start-ups and investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums. Amit Singhania, Tax Partner, Shardul Amarchand Mangaldas, however, says the mechanism of e-verification needs to be clarified. The tax department may ask start-ups to quote the PAN or Aadhar of the investor so that tax officials can establish their identity, he adds.
The Budget extended the exemption for Category I Alternative Investment Funds from angel tax provision to Category II funds as well for investment made in unlisted companies. Subramaniam Krishnan, Partner, Private Equity and Financial Services, EY India, says: "This resolves the challenges faced by start-ups and other companies in justifying share issuances at a premium." Category I AIFs include angel funds and venture capital funds while Category II AIFs include PE funds and debt funds.
The bag of goodies had more for start-ups. The exemption of capital gains from sale of residential property on investment of the proceeds in equity shares of eligible start-ups has been extended by two years up to March 31, 2021. The condition of minimum holding of 50 per cent share capital or voting rights in the start-up has been reduced to 25 per cent.
Lower Corporate Tax Rate
The previous NDA government had promised reduction of corporate tax rates to 25 per cent (from the existing 30 per cent) in a phased manner by 2019. While this promise has not been met yet, the government extended the benefit of lower corporate tax rate to companies with an annual turnover of up to Rs 400 crore. Earlier, the limit was Rs 250 crore annual turnover. But the fact is that companies with profit before tax of Rs 100 crore or above account for 70 per cent of the corporate tax liability. The government expects to incur a revenue loss of Rs 4,000 crore due to this move.
Sudhir Kapadia, National Tax Leader, EY India, says: "While the promised reduction in the corporate tax rate of 25 per cent has been extended, the reality is that it is the large companies that have a great contribution to the overall economy and they are still taxed at the higher rate of 30 per cent."
Gift to GIFT City
The Budget gave more concessions and exemptions to companies setting shop in the Gujarat International Finance Tech (GIFT)-City, an Ahmedabad international financial service centre (IFSC). The slew of tax incentives announced for IFSCs include deduction of 100 per cent profits for any of the consecutive 10 years out of the 15 years from the commencement of operations, tax exemptions on interest on money lent by an NRI to any of the companies in an IFSC, exemption from capital gains tax from any securities traded in an stock exchange situated in an IFSC. Tapan Ray, MD and Group CEO, GIFT City, says: "The announcements have re-emphasised the importance of GIFT IFSC as an emerging global financial services hub. The policy pronouncement regarding GIFT IFSC give a tremendous boost to investor confidence both in India and abroad."
Tax laws require continuity of shareholding for carry forward and set-off of losses. Companies that see management changes under Insolvency and Bankruptcy Code (IBC) were deprived of the benefit. But the Budget exempted such companies from the conditions of continuity of shareholding for carry forward and set-off of losses. It also proposed that for the purposes of computation of Minimum Alternate Tax (MAT) liability of such companies, the aggregate of brought forward losses and unabsorbed depreciation will also be allowed as deduction.