Union Budget - 2017Re-monetizing TEC India

Every year may not be good, but there is something good in every year. It was only a year back when the Indianeconomy was sailing smooth with a 7.6% GDP growth rate in the global turbulent times. Given the backdrop ofDemonetization, a fall in the GDP growth was an expected phenomenon. Although, a fall may not soundoptimistic, such a corrective measure was important to be taken at this stage, where the Indian economy wasbuoyant enough to take such radical shock. Even with such measures the Indian economy promises to be thefastest growing economy in the world with a corrected growth rate hovering around 6.75%- 7.5%, postdemonetization impact.

Despite of global slowdown and number of developments on account of Brexit, elections in the developedcountries, external monetary policies, India has still remained strong and resisted challenges. Through furtherfiscal consolidation and reforms, the path to growth would be sustained.

As expected by many, the budget has been a carrot against the pressures of demonetization that the countryhas witnessed over past couple of months. Widening the tax base has been the motto of the budget withinclusion of even low earning groups in the tax compliance bracket. Considering the sops given by theGovernment, an individual would be keen on fiscal participation and compliance. Further, the budget has takensome bold steps like combining the railway budget in Union budget, phasing out of FIPB, tightening screws andimprovement in transparency for the donation made to political parties, which goes a long way in establishingthe principle of good governance.

A Union budget is often looked from a taxation perspective that could provide us an insight in to the impactthat such tax proposals may have on an individual or body corporate. However, such tax proposals are anoutcome of the state of economy which needs detailed analysis of past performance and implementationof future strategies for development of sustainable economy.

Through this document we have analyzed the economic results and decoded the impact of budget proposals onsectors as well as summarized the direct and indirect tax proposal implications on you and your business.

Trust you will find the publication useful. Happy reading!!

In case you need any further clarification please feel free to e-mail me at akshaykenkre@transprice.in.

Thanks a lot.

Best Regards,

Akshay KenkreDirectorTransPrice

Preface

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Table of Content

Economic Highlights 4

- Economy Overview

Demonetization 6

Taxation Proposals 10

Understanding the Priorities Area 15

- Agriculture- Banking & Financial Sector- Manufacturing & Infrastructure

- Direct Tax Proposals -International Tax Proposals-Indirect Tax Updates

Glossary 18

About TransPrice 19

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Roadmap & Priorities 8

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Economic Highlights

Economic Indicators

Performance FY 2016-17

Targets FY 2017-18

% %

GDP Growth 6.50 7.60

Fiscal Deficit to GDP 3.50 3.20

Inflation CPI terms (Q3) 3.70 3.00

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Growth rate Inflation (CPI) Fiscal Deficit

Interplay - Economic Indicators

Economy Overview

Financial Year 2016-17 marked two most important policy developments, first being the passage ofConstitutional Amendment for implementation of GST and secondly demonetization and remonetisationof two highest denomination currency. While the GST aims to create an efficient indirect tax mechanism,the demonetization may have drawn the short term stick against long term carrots.

As a result GDP growth for current year 2016-17 has been pegged at 6.5% down from 7.6% recorded in thelast financial year. However, with no signs of slow down, India stands out as a bright spot amid worldeconomic gloom and expects growth to re-bound in the range of 6.75% - 7.5% for FY 2017-18, maintainingthe pole position for fastest growing economy. One of such sign is that the FDI in India increased by 36%,despite of global reduction of 5% in FDI Inflows.

Three main challenges identified for emerging economies:1. Monetary policy stance of US Federal Reserve to increase the policy rates2. Uncertainty over prices of crude oil3. Increasing retreat against globalisation and built up of pressures for protectionism

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Demonetization

Demonetization

On 8th November 2016, the two largest denomination currency notes of Rs. 500 and Rs 1,000 were takenout of system with immediate effect. The aim of the action was fourfold:

1. curb corruption2. eliminate counterfeiting3. eradicate terror financing4. purge black money

Unlike other countries experience of demonetization which was a result of hyperinflation, wars, politicalupheavals or extreme circumstances, India’s demonetization move was unique.

Macro Impact of Demonetization: Demand shock due to cash crunch Supply shock where economic activity was dependent on cash Uncertainty shock

Impact Analysis of Demonetization:

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Particular Short term impact Long term impact

Availability of cash In short supply Recover but settle at lower level

Interest Rates Deposit rates declined Lending rates to decline further

Black Money Fall in holding Formal checks to be in place

Real Estate Decline in prices Further fall in price expected

Broader economy Job losses, decline in farm incomes Stabilise gradually

GDP Growth slowed, as demonetisation reduced demand, supply liquidity and increased uncertainty

Beneficial in long run

Tax collection Increased due to voluntary disclosures Efficient tax collection due to reduction in cash economy and formalization

Credibility Short term in crease in uncertainty Credibility would be strengthened if complimentary measures follow. Early and full remonetisation essential

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Roadmap & PrioritiesRoadmap & Priorities

Roadmap & Priorities

With world economies hovering around GDP growth of 3.6% and emerging economies with 4.1% -4.5%,India’s growth is way above the average. To continue with such growth path, the budget has beenstructured around 10 clear priority areas

Agenda for 2017-18 is “Transform, Energize and Clean India” – TEC India

TEC India seeks to:• Transform the quality of governance and quality of life• Energize various sections of society, especially the youth and unleash their true potential• Clean country from the evils of corruption, black money and non transparent political funding

Ten distinct themes to foster this broad agenda:

1. Farmers: committed to double the income in 5 years; (Agriculture)

2. Rural Population: providing employment & basic infrastructure; (Agriculture)

3. Youth: energizing them through education, skills and jobs; (Infrastructure)

4. The Poor and the Underprivileged: strengthening the systems of social security, health care and

affordable housing; (Infrastructure)

5. Infrastructure: for efficiency, productivity and quality of life; (Infrastructure)

6. Financial Sector: growth & stability by stronger institutions; (Banking and Finance)

7. Digital Economy: for speed, accountability and transparency; (Infrastructure)

8. Public Service: effective governance and efficient service delivery through people’s participation;

9. Prudent Fiscal Management: to ensure optimal deployment of resources and preserve fiscal

stability; (Taxation Proposals)

10. Tax Administration: honouring the honest (Taxation proposals)

(bracket denotes the section wherein above-mentioned priorities are captured in this document)

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Taxation Proposals

Direct Tax proposals

Individual taxation:

Rates of taxes

SUPER RICH TAX u/s 115BBDA @ 10% by way of dividend in excess of Rs. 10 Lakh proposed applicableto all persons except company and certain funds, trusts, institutions etc.

TDS on Rent by Individuals - Individuals to deduct tax @ 5% u/s 194-IB on payment of rent, if exceedingRs 50,000 per month. No requirement on application of TAN (w.e.f 1 June 2017)

Period of holding for being a long term asset with regard to immovable property to be reduced fromexisting 36 months to 24 months, thereby being attractive to investment in real estate sector

Change of base year for computation of FMV for the purpose of capital gain changed from 1981 to 2001

Scope of Section 54EC (infrastructure bond exemption for Capital Gain) widened to include any bondredeemable after 3 years , as notified by CG

No 80G deduction on donation of any sum exceeding Rs. 2,000 unless other than cash

Real Estate:

In order to promote affordable housing, it is proposed to amend S. 80IBA to provide (w.e.f. 1 Apr 2018)• Change of term ‘built up area’ to ‘carpet area’ – provides 30% more floor space• Extension of period of completion to 5 years from 3 years

In case of joint development agreement between developer and land owner, capital gains to becomputed in the previous year of receipt of completion certificate. Stamp duty value as increased bymonetary consideration in excess of stamp duty value to be considered as full value of consideration. Nobenefit if the taxpayer transfers shares before completion of such project. Further, a tax deduction @10% by the developer to be made under S. 194-IC

No notional income from house property for taxpayer who treat such property as stock in trade until 1year from the end of financial year in which completion certificate is received

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Income slabs Rate of tax

Up to Rs. 250,000 NIL

Rs. 250,001 - Rs. 500,000 5%

Rs. 500,001 – Rs. 1,000,000 20%

Above Rs. 1,000,000 30% *

Surcharge: 10% if income exceeds Rs. 50 Lakhs but does not exceed Rs. 1 Crore

Surcharge : 15% if income exceeds Rs. 1 crore

Lower slab of Rs. 300,000 for senior citizens and Rs. 500,000 for super senior citizens

Direct Tax proposals

Corporate tax proposals:

A. Rate of taxes:

In case of domestic company rate of tax to be 25% if the total turnover or gross receipts of the previousyear 2015-16 does not exceed Rs. 50 crores. In all other case, rate remains unchanged

Start ups to choose any 3 consecutive years out of initial 7 years for 100% deductions u/s 80-IAC

Carry forward of MAT/ AMT to be allowed for 15 assessment years. FTC allowable against MAT/ AMTonly to the extent of credit available against normal provisions of the Act

B. Promotion of digital economy

No deduction of depreciation u/s 32 or expenditure on specified projects u/s 35AD if purchase of assetor expenditure is made in cash or cash equivalents

Limit of cash expenditure in a single day reduced from Rs. 20,000 to Rs. 10,000 per person

Presumptive profits u/s 44AD to be reduced from 8% to 6% for income received through banking anddigital channels

S 269-ST : No person to receive above Rs. 300,000 in cash or cash equivalents from a person in a day, orin respect of single transaction or in respect of transaction relating to one event or occasion fromperson. w.e.f 1 April 2017

Transparency in electoral funding and restriction of receiving donations in cash

C. Tax provisions

Enabling of filing self declaration for non deduction of tax @ 5% for commission income, declaring thattax on estimated total income of the relevant previous year would be nil

Requirement for audit of books of accounts for person carrying on business increased to Rs. 2 crores

Special provision of tax deduction u/s 194J for TDS @ 2% for person engaged in operation of call center

Tax neutral conversion of preference share to equity shares

U/s 115-BBG income from transfer of carbon credits to be taxable at 10% on gross amount

It has been decided by the Government to merge the Authority of Advance Ruling for Income-taxes,.Central Excise, Custom Duty and Service Tax

Insertion of Section 50CA to provide for transfer of share of a company (other than quoted share) if at avalue less than FMV, then such FMV to be the full value of consideration [Reference drawn to Section56(2)]

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Transfer Pricing:

Reduction of scope of SDT : In order to reduce compliance burden of tax payers, it is proposed to excludepayments made to persons referred to in S.40A(2)(b) from the ambit of transfer pricing

Incorporation of Secondary Adjustments : Given the circumstance that the transactions between the AEsis not considered at ALP, then in addition to the primary adjustments that were in place till date, asecondary adjustment is proposed to be levied in case of difference in the adjusted profit and real cashsituations. This provision is incorporated to harmonize Indian transfer pricing with global regulations. Theadjustment is based on the concept of excess money that would be available with the AE, and would betreated as a deemed advance made by the taxpayer to the AE. Threshold of Rs. 1 crore to apply forprimary adjustments, and applicable from assessment year 2017-18 .

Example:

- Total declared income Rs .100 crore- Adjustment of Rs. 10 crore on the international transaction

Hence the computation would be as follows:

International taxation:

Adoption of BEPS Action plan no 4: Limitation of interest deduction to the extent of claim by the taxpayeras expense to AE shall be restricted to 30% of its profit before interest, taxes, depreciation andamortization. Provision shall allow carry forward of disallowed interest to eight assessment years.Threshold of interest expenditure of one crore rupees for applicability.

Clarity relating to Indirect transfer provisions: It is clarified that explanation 5 on indirect transfers shallnot apply to asset or capital asset mentioned therein being investment held by non –resident, directly orindirectly in FII and registered Category I or Category II FPI.

International Tax proposals

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Particulars Amount (Rs.)

Declared income 100 crores

Add: Primary adjustment 10 crores

Add: Secondary adjustment (treat 10 crores as advance given to AE and impute an interest, say @ 10%)

1 crore

Total adjusted income 111 crore

Indirect Tax update

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Goods and Service Tax

The GST Council has finalized its recommendation on almost all the issues based on consensus on thebasis of 9 meetings held

Preparation of IT System for GST is also on schedule

The extensive reach-out efforts to trade and industry for GST will start form 1 April 2017 to make themaware of new taxation system

Indirect tax rates

No change in peak rate of customs duty or median rate of excise duty/ service tax

Other changes to boost ‘Make In India’ or protect domestic industry

Certain industries provided correction to inverted duty structure - No categorical change for pharmaindustry

RAPID (Revenue, Accountability, Probity, Information and Digitization)

Maximize efforts for e-assessment in the coming years

Enforcing greater accountability of officers of tax department for specific act of commission and omission

Understanding the 10 priority areas

Agriculture

The Agriculture sector estimates a growth of 4.1% for FY 2016-17, which is in line with the twelfth fiveyear plan ( 2012-2017) and up from 1.2% in FY 2015-16.

The above growth could be attributed to a normal rainfall during the year

Price certainty to be brought by fixation of Minimum Support Price and related policies

Credit for agriculture was pegged at Rs. 9 Lakh crore in FY 2016-17, 6% higher than the earlier year

Budget Highlights:

Commitment to double the income of farmers in next 5 years

Target for agriculture credit in 2017-18 has been fixed at record level of Rs. 10 Lakh crore

Support extended to NABARD for computerization and integration of 63,000 Primary Agriculture CreditSocieties

Agriculture Insurance increased from 30% of cropped area to 40% in 2017-18 and 50% in 2018-19

Establishment of mini labs in all Krishi Vigyan Centers for soil sample testing

Dairy processing and Infrastructure Development fund to be set up in NABARD

Poverty eradication to be the core and make 50,000 panchayats poverty free by 2019

MGNREGA allocation to be the highest ever at Rs. 48,000 crores in 2017-18

Pace of construction of rural roads accelerated to 133 km per day in 2016-17

100% village electrification by 1 May 2018

Sanitation coverage in rural India gone up by 13%

The Economic Survey 2016-17 has advocated the concept of Universal Basic Income (UBI) as analternative to the various social welfare schemes in an effort to reduce poverty

Total allocation to Rural, Agriculture and Allied Sectors is Rs. 187,223 crores

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Manufacturing and infrastructure

The manufacturing and the industrial sector showcased a decline

The production of capital goods declined steeply and consumer non durable goods suffered a modest

contraction

To meet the challenge of job creation and opportunities for export, it is proposed to focus on the low skill

and high labor intensive manufacturing of clothes and shoes

Many new initiatives taken to boost the sector including Make in India, Invest India, Start Up India, e-biz

Mission Mode Project

Measures to facilitate ease of doing business implemented

Budget Highlights:

Skill enhancement and education given a priority and expense allocation.

Incredible India 2.0 Campaign to be launched across the world to promote tourism and employment

Affordable housing to be given infrastructure status

Serious health issues taken up for eradication till 2025

Two new All India Institutes of Medical Sciences to be set up in Jharkhand and Gujarat

An allocation of Rs. 241,387 crores has been made for transportation sector including rail, roads and

shipping

First time in history , railway allocations were discussed with the Union budget with a total capital and

development expenditure pegged at Rs. 131,000 crores out of which Rs. 55,000 crores would be funded

by Government.

Second phase of solar park development to be taken up for additional 20,000 MW capacity

Proposed to set up strategic crude oil reserve at 2 more locations, namely in Odhisa and Rajasthan

Select airports in Tier II cities to be taken up for operations and maintenance in PPP model

Digital Economy given a boost with linkages to Aadhar, promotion of digital transactions and cashless

economy

Focus on leather and shoes manufacturing to generate skilled employment

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Banking & financial sector

NPAs has climbed to almost 12 per cent of gross advances for public sector banks at end-September2016

At this level, India’s NPA ratio is higher than any other major emerging market, with the exception ofRussia.

India taking efforts to solve the twin balance sheet issue i.e. corporate + bank’s financial position

One of such method was use of decentralized approach where banks were put in charge of restructuringdecisions

Current position remains that NPA keeps growing, while credit and investment keep falling

Time to consider a different approach – A centralized Public Sector Asset Rehabilitation Agency, thatcould take charge of largest , most difficult cases and practically take tough decisions to reduce debt

Budget Highlights:

• FIPB to be abolished in 2017-18 and further liberalization of FDI policy under consideration

• Bill relating to curtail the menace of illicit deposit schemes to be introduced

• A time bound listing of identified CPSEs on stock exchanges. Shares of PSEs like IRCTC, IRFC and IRCONwill be listed in stock exchanges

• A new ETF with diversified CPSE stocks and other Government holdings will be launched in 2017-18

• Rs. 10,000 crores for recapitalization of banks provided in 2017-18

• Lending target under Pradhan Mantri Mudra Yojna to be set at Rs. 2.44 lakh crore

• Introduction of new law to confiscate Indian asset of a person who is an economic offender and has fledthe country to escape the reach of law

• Increase in deduction limit in respect of provision of bad and doubtful debts from 7.5% to 8.5%

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Glossary

Act – Income-Tax, 1961 IT- Information Technology

AMT – Alternative Minimum Tax IRCTC – India Railway Catering And Tourism Corporation

BEPS – Base Erosion And Profit Shifting IRFC – Indian Railway Finance Corporation

CG - Capital Gains IRCON - Indian Railway Construction Company Limited

CPI - Consumer Price Index MAT – Minimum Alternate Tax

CPSE – Central Public Sector EnterpriseMGNREGA - Mahatma Gandhi National Rural Employment Guarantee Act, 2005

ETF – Exchange Traded FundsNABARD - National Bank for Agriculture and Rural Development

FDI - Foreign Direct Investment NPA - Non-Performing Assets

FIPB - Foreign Investment Promotion Board PSE – Public Sector Enterprise

FPI – Foreign Portfolio Investor SDT – Specified Domestic Transaction

FTC – Foreign Tax Credit TCS – Tax Collected At Source

GDP - Gross Domestic Product TDS – Tax Deducted at Source

GST - Goods and Service Tax TEC - Transform, Energies and Clean

HUF – Hindu Undivided Family US – United State

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About TransPrice:

TransPrice is a tax firm focused on Transfer Pricing and international taxation. The firm's vision is 'to provide high quality Transfer Pricing solutions and be an advisor of choice for the Indian businesses'. TransPrice is a member firm of Quantera Global, a leading transfer pricing and valuation specialist firm worldwide.

As much as an MNE would like to optimize its tax results, it equally would like to be compliant with laws of the land for a smooth business operation. We understand that tax planning and compliance are one of the key drivers for any Multinational Corporation in India and we provide expert tax solutions to balance the two.

We add value with plethora of tax planning and structuring activities that helps you build effective tax structures. We are aware that documentation is the heart of any Transfer Pricing solutions and we believe in elaborate, extensive and contemporaneous documentation for our clients.

We advocate specialization and believe that focus is vital for expert advice, especially in the field of Transfer Pricing , where every issue is unique. As Transfer Pricing deals with different and dynamic business scenarios, we tailor make every solution for you.

We at TransPrice are strong advocates of research and knowledge base. Our continuous learnings and updates in the field of Transfer Pricing help us and our clients to stay up to date on various key issues in an around Transfer Pricing fraternity.

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