This is the first article that we are publishing on our website, and we couldn't have asked for any better topic than the buzzword since past couple of days - the Union Budget of India, 2018. The focus of this article primarily is on direct taxes relevant for individuals & domestic businesses.
Our view on this budget overall is that it has provided the required support to Agriculture, Infrastructure and Employment generation and at the same time, ensured that the Revenue does not take any hit - just like all of us would like to do - protect our revenues, when we expect higher expenses. This will ensure that the nation can continue on its path to reduce the Fiscal Deficit in the longer run - an extremely tightrope walk, which has been tread quite well.
We are looking to divide this article into 3 main parts:
1) First we are covering the Key Highlights.
2) We will follow it up with our detailed analysis connecting the dots, explaining the rationale for our view.
3) Lastly, we are also covering our view on the legal position of Crypto Currency in India, since it had a mention in the budget speech, and seems there is some misinformation spreading around it.
1) Key Highlights:
- Individual Tax slabs for FY 2018-19 remain unchanged from FY 2017-18. We have covered the slabs and rates of income tax in the tabbed table above.
- Corporate (Domestic companies) income tax rate is reduced from 30% to 25%. This will be applicable for domestic companies if the total income or gross receipts do not exceed 250 crores in FY 2016-17. For all other domestic companies, the rate continues to be 30%. 99% of the domestic companies are expected the fit the criteria for the 25% tax rate.
Education Cess and Secondary & Higher Education Cess will be replaced by Health & Education Cess, levied at 4% (On amount of tax and/or Surcharge as applicable) from FY 2018-19.
Long Term Capital Gains (LTCG) on sale of - equity shares of a company, or a unit of an equity oriented fund, or a unit of business trusts - exceeding INR 1,00,000 in a Financial year will be taxed at 10% (without indexation benefit). Currently, such gains are exempt from taxes. The current regime is inherently biased against manufacturing and has encouraged diversion of investment in financial assets, instead of the core business activities.
This amendment will not apply if such gains are realized on or before 31 March 2018.
The cost of acquisition for the purpose of computing such LTCG will be either the cost of purchase or the Fair Market Value/NAV of the equity share/unit of equity oriented fund as on 31 January 2018 - whichever is higher.
Dividends distributed by equity oriented Mutual Funds will be subject to Dividend Distribution Tax at 10%. This is introduced to provide a level playing field between growth and dividend paying funds, in view of the new capital gains tax regime.
Deductions allowed to Individuals and HUFs, in respect of premiums paid for health insurance or preventive health check up of senior citizens under section 80D, is increased from INR 30,000 to INR 50,000.
Deductions allowed to Individuals and HUFs, for treatment of specified diseases (neurological disorders like dementia, Parkinsons disease, etc) in respect of senior citizens and very senior citizens under section 80DDB, is increased to INR 1,00,000. Currently, the deduction is allowed upto INR 60,000 for senior citizens & INR 80,000 for very senior citizens.
Deduction for Interest income (in respect of interest earned on deposits with banks) for senior citizens is increased from INR 10,000 to INR 50,000.
Standard deduction will be available to salaried individuals upto INR 40,000. Against this, the Transport Allowance of INR 19,200 and Reimbursement of Medical Expenses of INR 15,000 is being removed. However, Transport Allowance shall continue for differently abled persons.
Note: This means that other allowances like Fuel/ Car Maintenance allowances will continue.
- Prima facie adjustments to Total Income declared in the filed income tax return, on the basis of incomes appearing in Form 26AS/Form 16/Form 16A, which are not included in the filed return, will not be allowed - a positive step for all people filing their income tax returns.
E-assessment scheme is now extended to all assessees. This step will impart greater transparency and accountability, by eliminating the interface between the AO and the assessee, optimal utilization of the resources, and introduction of team-based assessment.
The benefit of tax-free withdrawal from NPS is now extended to non-employee subscribers as well. Currently, an employee contributing to the NPS is allowed an exemption in respect of 40% of the total amount payable to him on closure of his account or on his opting out. This exemption was not available to non-employee subscribers.
We are including this point primarily because there is a misinformation being spread, that deductions under section 80C, 80D etc will not be available, if return is not filed by due date:
- Tax holidays in respect of certain incomes not to be allowed unless return is filed by the due date.
Currently section 80AC provides that no deduction of incomes would be admissible u/s 80IA, 80IB, 80IC, 80ID or 80IE unless the return of income by the assessee is furnished on or before the due date.
This provision is now extended to the entire heading “C.—Deductions in respect of certain incomes” in Chapter VIA like Sec 80P (Deduction in respect of income of Co-operative Societies), Sec 80RRB (Deduction in respect of royalty on patents) etc.
Accordingly, it is clear that there is no such requirement for deductions under sections 80C, 80D etc.
2) Our Analysis:
Our analysis of the holistic picture - this is purely based on:
- Highlights covered above and a few other aspects of the budget, which are not specifically covered in the points above, but are important to connect the dots.
- Our insights in respect of the macro factors relevant for India, viewed in conjunction with past and current budgets.
- The agricultural sector has been tested and under some stress since some time now - due to the drought situation for a couple of years, followed by flood situation in recent times. There have been lots of talks about the hardships faced by farmers due to these contrasting situations arising out of natural factors.
- In order to give some relief to the already stressed sector, the MSP for all summer crops will be 1.5 times the input costs. Additionally, there is a focus on infrastructure development in Rural areas. These measures include providing for wireless internet access in villages, coupled with the e-NAM portal, which will enable the farmers to sell their produce directly to bona fide buyers, rather than going through various layers of agents.
- There have been quite a few other measures even in Agriculture support services, like extending the benefits under section 80P (100% deduction of profits for co-operative societies which provide assistance to its members engaged in agricultural activities) to Farm Producer Companies with a total turnover 100 Crores.
- Lastly, trading in commodity derivatives is now encouraged by treating it as a non speculative business, so that farmers can eventually get a better price for their produce.
Yes, one may want to paint these measures as freebie/populist measures, but there is no reason why this shouldn't have been done even from a pure economic standpoint.
- In terms of Healthcare, there was a historic announcement that could benefit almost 40% of the population mostly in the middle/lower middle income groups, to provide them a hospitalization cover of upto INR 5,00,000 pa per family - this number is currently INR 30,000.
- INR 1,200 Crores have been allocated to setup health & wellness centers across the country, coupled with a proposal to setup 24 new Medical colleges - making it 1 college in each state.
Below direct measures have been announced to boost employment:
There are direct incentives like extending the additional 30% deductions to employers hiring first time employees, and also removing procedural difficulties in claiming this deduction - leaving more disposable income with businesses to expand operations.
Specified tax relaxations available to eligible startups have been extended to startups incorporating upto 1 April 2021.
In addition to this, our view is that below listed measures too will have a positive impact on the employment scenario:
Increasing customs duty on certain imported electronic items like mobile phones, smart watches etc. This step will encourage production of these goods in India (be it domestic or a foreign company), which will create more jobs in India.
Taxing of Long Term Capital Gains in excess of INR 1,00,000 in a financial year. It was observed that the non operating incomes of quite a few corporates were increasing on account of transactions in equity shares, which ended up being tax exempt. Effectively instead of expanding their core operations, they focused on non core activities like equity investments, to avoid taxes. Now these companies will be pushed to focus more on their core business, since one of the key attraction of equity gains is partly taken away.
All these, combined with a reduction in corporate income tax from 30% to 25% for companies with an annual turnover or gross receipts upto INR 250 Crores, will leave them with much more money to expand operations and give more incentives to their employees and/or create more jobs.
Now despite all this, the Finance Minister is still committed to a fiscal deficit target of 3.5% of GDP for FY 2017-18 and 3.3% for FY 2018-19 - a number just marginally above the original estimate of 3% for FY 2018-19. Fiscal deficit is nothing but the excess of expenditure over incomes of the government.
Why this kind of fiscal prudence is important? Below are some of key factors explaining the reasons:
Sovereign rating of the nation factors in the financial discipline shown by a government. If a nation always spends a lot more than it earns, it doesn't go down well with the rating agencies. This is because the government is viewed as a spendthrift, with less ability to sustain financial shocks. It's ability to repay debt/capital is dented in times of financial shocks. Around 2013-14, our sovereign rating was at the border of being classified as junk, with a negative outlook. But today, this rating is improved by 1 level, with a stable outlook. If a sovereign is given a junk rating, it would immediately increase the interest burden on the government and also, have a cascading impact on the foreign exchange rates (INR to USD, GBP, EUR, etc). Plus many investors would be forced to exit their investments in the country, forced by their policies to not invest more than a particular percent of their portfolios in junk rated economies. This will end up impacting the fiscal deficit further, leading to a downward spiral.
As covered earlier, there have been droughts and floods faced by our farm sector in past few years. Despite this, the inflation rates are pretty much under control. Even the Consumer Price Inflation rate for December of about 5.2% is the highest rate seen in 17 months. It seems we are way past those times when there used to be double digit or close to double digit inflation rates.
There were quite a few internal and external macro events/disruptions like Chinese slowdown, Greek crisis, Brexit, Demonetisation and GST. Our economy has withstood all these shocks and we are still one of the fastest growing economy in the world. There was a mild dip in the quarterly GDP number a few months back, primarily due to destocking during GST, but we are already back on track. Additionally, it was estimated that Demonetisation will reduce the GDP, and GST will create inflationary conditions, as has been observed in few other countries. However, GDP is largely unaffected (we have already covered that one off dip), and inflation is well under control.
All this has enabled the RBI to lower the interest rates regularly. Today, most loan rates - be it home loans or personal loans or anything in between - are down by 2 percentage points across the board.
Few classes, especially salaried class might be disappointed by looking at the budget upfront - if looked at the direct tax proposals for salary incomes in isolation. However, taking a holistic view - there are many more aspects which are having numerous positive impacts in an indirect way as discussed above. Be it employment generation, be it more disposable funds with the employers for incentives, or be it direct benefits like reintroduction of Standard deduction for salaried people (many salaried employees faced hardships in claiming the medical reimbursements, which are now gone), higher deduction on Health Insurance premiums, and medical treatments.
Investors could feel that the LTCG benefit has been removed, but in the long run, it will encourage the corporates to focus more on their core business. The corporate earnings have already started to pick up. This, coupled with the backdrop of a strong economy, which is all set to be the fastest growing economy in the world, will far outmatch the tax outflow due to the introduction of LTCG tax on such gains exceeding INR 1,00,000 in a financial year. Also, after all no one would be in the equity market purely because LTCG was tax free - it can be only 1 of the numerous factors.
Plus, there has been a sustained easing down of tax compliances in past few years, with 2 notable additions in 2018 budget - You won't get a tax notice for prima facie differences in total income declared in the income tax return as compared to your Form 26AS/Form 16/16A, and also, with e-assessment proceedings extending to everyone, you virtually won't be required to visit the tax office ever.
It takes real courage and a strong political will to announce this kind of a balanced budget, with minimal freebies which actually aren’t freebies, but more of a need of the hour, with focus on continuing with their plans laid out in the first budget, till the last full budget.
3) Crypto Currency:
There was a statement read out by the Finance Minister during the 2018 budget speech in Parliament:
“The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system. The Government will explore use of Blockchain technology proactively for ushering in digital economy”
This statement caused quite a stir amongst people already into trading in Crypto Currencies.
- This statement is no different from the statements released in the past, where it was mentioned that crypto currency is not a legal tender in India.
- This only implies that no one in India is bound to accept any crypto currencies as a consideration and/or settlement of any dues. As a matter of fact, no one is bound to accept even gold or equity as a consideration, but still it gets used on numerous instances as a form of barter.
- Further, there have been instances where it was found that crypto currencies were used for illicit purposes. The only intent of the statement was to curb such illegitimate activities.
Accordingly, we do not see any violation in respect of trading in crypto currencies on Indian exchanges, where there are strict KYC procedures in place.
(This view has also been expressed by the Head of Blockchain and Cryptocurrency committee of India. Link to the full article.)
- As long as trading by Indian citizens is done purely on Indian Cryptocurrency exchanges, there is certainly no violation involved.
- However, when it comes to trading on exchanges located outside India, even if it is using digital assets acquired in India, it could be dicey.
- Our interpretation of the FEMA (Section 3) says that it could possibly be a violation if these digital assets are transferred to exchanges and/or wallets outside India.
- The scope of Section 3 is very wide, and covers assets that are not currencies too.
Until there is any explicit clarification relaxing the rules, it is strongly recommended to trade on Indian Cryptocurrency exchanges only.
Income Tax on Cryptocurrency transactions:
In terms of income tax, we suggest applying the existing provisions to select the relevant Head of Income for disclosing gains/losses on cryptocurrency trading - for large volume, high frequency transactions, especially in cases where digital assets are bought/sold on behalf of others, we would recommend disclosing the same as a business income, and all other provisions applicable to a business income may apply. In any other cases, it may be shown as Income from Capital Gains (Long term/Short term depending on standard holding periods).
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