The Finance Minister, Arun Jaitley, unveiled the Union Budget 2018 in the Parliament on 1 February 2018. In the wake of representations received from various stakeholders, while moving the Bill for approval at the Lok Sabha, certain amendments were made. These amendments seek to address certain ambiguities arising from the original proposals as contained in the Finance Bill 2018 (the Bill). The key amendments made are highlighted below:

  • The Finance Bill has introduced the concept of ‘Significant Economic Presence’ to bring to tax the income of a foreign entity into India if certain specified criteria are met. The scope of ‘Significant Economic Presence’ in India is further expanded to cover transactions or activities of the foreign entity, even where the agreement is entered into outside India, if the specified criteria are met.
  • The actual cost of capital assets in the hands of the business entity for the purpose of depreciation, acquired on conversion of inventory into capital assets, shall be the Fair Market Value (FMV) of the inventory as on the date of conversion of inventory into a capital asset.
  • The period of holding for purposes of exemption under Section 54EC bonds issued on or after 1 April 2018 was increased to five years as against existing three years in the Bill. It is now clarified that exemption will be withdrawn if these are sold before five years.
  • The Finance Bill has introduced a new provision through Section 112A which provided for taxation of long-term capital gain @10% on listed equity shares, equity-oriented mutual funds and units of the business trust. The provision also provides that the benefit of indexation would not be available but the gains made up 31 January would be grandfathered.

There could be a possibility that the equity shares may not be listed on 31 January 2018 but could have been listed at the time of transfer of shares. This could arise if the Initial Public Offering (IPO) is made after 31 January. In that case, the shareholder would not be in a position to avail the benefit of grandfathering of gains up to 31 January as the shares were not listed on that day. An indexation benefit has been proposed to for such shareholders.

  • The condition of a turnover cap of INR 250 million for an eligible start-up to claim profit-linked deduction shall be checked in only in the previous years in which such a deduction is claimed and not for all the seven years beginning from the year in which the eligible start-up is incorporated.
  • The obligation to obtain a Permanent Account Number (PAN) on entering into a financial transaction over INR 0.25 million in a financial year has been relaxed and is proposed to be made applicable only to residents other than individuals. In the Finance Bill, it was proposed to be applied to all the entities other than an individual, which inter alia would have also included non-resident entities. Furthermore, the requirement of issuing a PAN card in a laminated form is done away with.
  • The amount standing to the credit of Public Provident Fund (PPF) shall not be liable to any attachment under any decree or order of a court in respect of any debt or liability incurred by the depositor.
  • The Finance Bill 2018 has proposed to extend the deadline to furnish the Country-by-Country Report (CbCR) from 30 November to 31 March of the next year from the end of the reporting accounting year. This is proposed to be applied to:
    1. The parent entity or the alternate reporting entity; and
    2. the constituent entity of the international group if the parent entity is a resident of the country with which India does not have an agreement the or exchange of report or there has been a systemic failure of the country to provide such a report.

The amendment now proposes that due date for the entities covered by condition (b) mentioned above for furnishing CbCR report would not be 31 March but would be notified by the government which would definitely be after 31 March.

The amendment proposed by Lok Sabha can be bucketed into three categories viz (i)which are against the taxpayers (ii) the provisions which are beneficial to taxpayers and (iii) provisions which are clarificatory in nature.

The provision which seeks to expand the reach of Significant Economic Presence even when the agreement for the transaction is signed outside India is adverse to foreign entities who are carrying out significant business transactions with India. Of course, where the country has treaty with India, this amendment would not have any impact till the time treaty is also amended.

However, the provisions introducing indexation benefit for unlisted shares as on 31 January, laying down the turnover cap of INR 250 million only during the years where the tax incentive for start up is claimed, doing away with compulsory acquisition of PAN by foreign entities where the transaction is entered into over INR 0.25 million in a financial year, relaxing the time limit for filing the CBCR report for some entitiesare some of the beneficial provisions for taxpayers.