Union Budget 2019: Overview of Income Tax Proposals

Amit Singhania

Tabled by the country’s first woman finance minister, Modi Government’s full Union Budget for 2019-2020 is special to India’s fiscal history and, needless to say, the budget did not disappoint.

Although restrained in its approach (given the impending direct tax reforms), the budget’s income tax proposals addressed several of the immediate policy concerns that were voiced by the business community – reduced corporate tax rate, resolution of angel tax issues and tax impetus for distressed companies.

Avowedly, other tax proposals were aimed at stimulating growth, encouraging digital economy, building transparency and simplifying tax administration.  In this article, we present an overview of a few key income tax proposals under Union Budget, 2019.

The tax proposals continued with the Government’s phased reduction in India’s corporate tax rate. Previously, companies with turnover of less than INR 2,500 million, would be entitled to a lower corporate tax rate of 25%. This benefit has now been extended to companies with a turnover of less than INR 4,000 million. This brings in 99.3% of India’s extant companies within the lower tax bracket, which should enhance India’s tax competitiveness in the global market.

Additionally, a spate of tax proposals has been introduced to encourage International Financial Services Centres (IFSCs). First, transfer of specified securities by Category III AIFs in IFSCs will be tax exempt provided all unitholders are non-residents and certain other conditions met.

Second, interest paid to non-residents by units in IFSCs will be tax exempt. Third, units of IFSC’s enjoyed exemption from dividend distribution tax in respect of dividends declared from their current income. This has now been extended to both dividends declared from their current and accumulated income.

Fourth, mutual funds located in IFSCs will be exempt from payment of any distribution tax. Fifth, a 100% tax holiday for IFSC units has been extended from 5 years to 10 years. 

Further, the safe harbour rules that were previously introduced to encourage fund managers locating to India without fearing permanent establishment or tax residency related exposures have been widely critiqued because of their impracticability. Acting on widespread representations, the Government has relaxed few of these conditions. Previously, the safe harbour rules applied only when the fund manager’s remuneration was arm’s length. The tax proposals have moved from the arm’ length test to remuneration that will need to meet a prescribed threshold. In addition, previously, the monthly average corpus of the fund had to be INR 100 crores or more for safe harbour rules except in case of a new fund, where such corpus was to be achieved at the end of the financial year. This rule has been relaxed to provide that such minimum corpus test can be met by a new fund either by the end of the financial year or within six months of establishment, whichever is later.

To spur debt inflow and following up on Government’s prior press release, interest income paid to non-residents on masala bonds during the period September 17, 2019, to March 31, 2019, has now formally been made exempt.

Angel Tax

Start-up (Angel tax) related tax issues were in the spotlight in this year’s budget, with the Finance Minister making an effort to ease some of their pain points. In a welcome move, the Finance Minister has proposed that investors and start-ups which file requisite declarations and provide information in their tax returns shall not be subject to any kind of scrutiny regarding valuations of share premiums/angel tax. The government has also proposed a system of e-verification to ascertain the identity of the investor and its source of funds with no human interface between the investors and the government officials.

On the transfer pricing front, the proposals in the budget seek to rationalize some of the provisions concerning secondary adjustments and Advance Pricing Agreements in order to provide much-needed clarity and to alleviate certain practical difficulties faced by the taxpayers in complying with the said provisions. 

In another welcome move, the Government has continued to use tax measures to facilitate the resolution of distressed companies. Previously, companies undergoing insolvency were exempted from the provision relating to the lapse of tax losses on change in shareholding. This exemption has now been extended to companies and their indirect subsidiaries if they are subject to certain proceedings before National Company Law Tribunal. This benefit will also apply to MAT benefits that are currently available to companies undergoing insolvency. 

Moreover, fair valuation norms under Section 56(2)(x) and Section 50CA of the Income-tax Act, 1961 will not be made applicable to cases where the share transfer consideration is approved by certain authorities or is beyond the control of the transferor (such cases  will be specified by the Central Board of Direct Taxes). 

Interestingly, the Hon’ble Finance Minister’s anecdote before setting out the tax proposals ushered in one of the key underlying themes for this year’s budget – preserving Indian tax base from evasion. Several of the tax proposals were directed to this end.  For instance, the withdrawal of cash in excess of INR 10 million (1 Crore) in any financial year has been weighed down with a tax deduction at source of 2 per cent. 

Additionally, gifts of cash and property located in India by a resident to a non-resident have been brought under the Indian tax net. Filing of tax returns has been made mandatory for persons, who do not meet taxable thresholds if they enter into high-value transactions such as cash deposits, foreign travel or electricity expense exceeding a specified amount. Similarly, the interchangeability of PAN with Aadhar is also aimed at keeping an audit trail of transactions. Even the idea of pre-filled tax returns is indicative of the fact that Government has ready data available on each taxpayers’ income and would discourage tax evasion. 

While the country absorbs the tax proposals in this year’s budget, there is small doubt that a lot more is to come from Modi Government 2.0 with its new direct tax legislation on the anvil.

The author is a Partner at Shardul Amarchand Mangaldas & Co.

Disclaimer: The views and opinions expressed in this article are those of the author’s and do not necessarily reflect those of Bar & Bench.

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