Changes made in the Budget 2018
Summary of the Budget 2018:-
- Income Tax Slabs remain unchanged
- Cess on Income Tax hiked from 3% to 4%
- Standard deduction of 40,000 in lieu of transport allowance and other medical expenses.
- Reintroduction of Long Term Capital Gains (LTCG) tax at 10% if exceeding 1 lakh
- Deduction of 50,000 to senior citizens u/s 80 D
- Exemption on Interest income for senior citizens up to 50,000 on deposits from banks, post office and also on FDs and RDs
- Dividend Distribution tax on equity oriented mutual funds at 10%
- Corporate tax reduced to 25% with turnover of 250 cr in 2016-17
- E-assessment of Income Tax Act to eliminate person-to-person contact
Effective Tax Rates
- No change in personal income tax slab rates.
- Cess rate increased from 3% to 4%.
- Long-term capital gain from the transfer of equity shares or equity oriented fund on which Securities Transaction Tax (STT) is paid will be taxable at 10% if the gain exceeds INR 100,000.
- The tax rate reduced from 30% to 25% for companies with turnover/gross receipts of INR 250 Crores or less in the Financial Year (FY) 2016-17.
- Cess rate increased from 3% to 4%.
- No reduction in the rate of Minimum Alternate Tax (MAT).
- Relief of lower tax rate not made available to Limited Liability Partnerships (LLP)s, firms and other taxpayers.
Long term Capital Gains tax on sale of Equity Shares
- Long-term capital Gains on sale of Equity shares will be taxed if more than Rs 1 lakh at @ 10% without the benefit of indexation from AY 2019-20 i.e. from 1st April 2018.
Extension of dividend distribution tax on dividend distributed in an equity oriented mutual fund
- Presently, equity oriented Mutual Funds are not chargeable to tax on distribution of income to its unit holders.
In view of the new capital gains tax regime for unit holders of equity oriented funds, it is proposed to provide that where any income is distributed by a Mutual Fund, being an equity oriented fund, the mutual fund shall be liable to pay additional income tax at the rate of 10% on such distributed income.
Updates in Section 54EC – Investments in Bonds
Restriction of exemption for investment in notified bonds –
- Presently, capital gain arising from the transfer of any long-term capital asset invested in notified bonds redeemable after three years is allowed as a deduction to the tune of Rs. 50 Lakhs.
- This benefit is now restricted only to long-term capital asset being land and/or building.
- Furthermore, the lock in period is increased to five (5) years from the earlier three (3) years in respect of bonds issued on or after 1 April 2018.
Restrictions in case of trust/non-profit organization claiming tax exemption
- Currently, as long as the income of charitable trusts and certain specified entities is applied or accumulated towards their objects or towards certain purposes, the income is treated as exempt from tax. Also, there is no disallowance for expenses incurred in cash or for non-compliance of withholding tax by these entities.
- It is proposed that expenses incurred in cash in excess of INR 10,000 and the expenses which have not been subjected to tax deduction as per the provisions of the law should be disallowed.
Clarity on the applicability of MAT to certain foreign companies
It is clarified that MAT is not applicable to foreign companies engaged in the shipping business, business of exploration or extraction of mineral oils, the operation of aircraft, the business of civil construction or erection of plant and machinery approved by the central government. (Applicable with retrospective effect from 1 April 2001 and shall apply from assessment year (AY) 2001-02.)
Expansion of Tax Base
Permanent Account Number (PAN)
Seeking to widen the tax base, the Budget has provided for making PAN mandatory for any entity entering into a financial transaction of Rs 2.5 lakh or more with effect from April 1, 2018.
Tax on Compensation in connection to business/employment
- The Budget proposed to include any compensation, whether capital or revenue, in connection with the termination or the modification of the terms and conditions of any contract relating to the business as business income.
Scope of ‘Business Connection’ modified
- Currently, the taxability of business income of non-residents is restricted. It interalia includes activities carried out through an agent which can be termed as a Dependent Agent Permanent Establishment.
- Furthermore, such income is taxable only to the extent it is attributable to the operations carried out in India.
- In order to bring this in line with the Action Plans suggested by the Organisation for Economic Co-operation and Development (OECD) and under Base Erosion and Profit Shifting (BEPS), it is proposed to extend this to an agent who not only concludes contracts but also plays a principal role for concluding the contract by the non-resident. For this purpose the contracts should be:
- – In the name of the non-resident; or
- – For the transfer of ownership of or for granting the right to use, property owned by that non-resident or that the non-resident has the right to use; or
- – For the provision of service by that non-resident.
- Keeping in mind the challenges of taxation in a digital economy, it is proposed that the significant economic presence of a non-resident without a physical presence could be in the form of:
- – Provision of download of data or software for specified amounts; and
- – Systematic and continuous soliciting of business or engaging in interaction with specified number of users; is proposed to be considered as constituting a business connection in India