union budget 2017
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Union Budget 2017-18 Key proposed substantive amendments to Income Tax Act, 1961
1. Rate of Taxation In the case of domestic companies, the rate of income tax
has been reduced to 25% (twenty five percent) of the total
taxable income, if the total turnover or gross receipts of the
previous year 2015-16 does not exceed fifty crore rupees.
However, rate of taxation for other companies having
turnover or gross receipts in excess of fifty crore rupees
remains unchanged and any income of such companies shall
be taxable at the rate of 30% (thirty percent).
2. Tax Neutral Conversion of Preference Shares to Equity Shares In terms of the provisions of the Income Tax Act, 1961 (Act)
conversion of Preference Shares to Equity Shares is not a tax
neutral transaction and is liable for capital gains taxes. Vide
Finance Bill, 2017 it is proposed to introduce Sub Section
(xb) to Section 47 of the Act to not to consider the
conversion of Preference Shares into Equity Shares as
transfer, hence the charging provisions of Section 45 of the
Act pertaining to Capital Gains shall not be applicable.
Relevant amendments are also proposed to be made in
Section 2(42A) of the Act for the purposes of including in the
period of holding of equity shares the period of holding of
preference shares prior to conversion. Thus, in other words
for the purpose of adjudging the nature of the equity shares,
being short term capital asset or long term capital asset, the
India Mauritius Tax Treaty
Now, since amendments
are being proposed to
make conversion of
Preference Shares into
Equity Shares as Tax
Neutral and to include in
the period of holding of
Equity Shares the period
of holding of the
preference shares, it is
worthwhile to analyze
under the India
Mauritius Protocol shall
be available to
Preference Shares issued
prior to April 1, 2017 but
converted to Equity
shares post April 1, 2017
and then subsequently
period of holding of preference shares prior to conversion into equity shares shall also be
Also, amendments are proposed in Section 49 of the Act, to take the cost at which the
preference shares were acquired as the cost of acquisition of the converted equity shares.
Thus, no capital gains tax shall be levied at the time of conversion of preference shares into
equity shares and at the time of transfer of equity shares, cost of acquisition and the time of
acquisition of preference share to be considered.
3. Capital Gains Tax Exemption to Rupee Denominated Bonds Vide Finance Act, 2016, inter alia amendments were made in Section 48 of the Act so as to
provide that the gains arising on account of appreciation of rupee against a foreign currency
at the time of redemption of rupee denominated bond of an Indian company (Masala Bonds)
subscribed by the Non-Resident, shall be ignored for the purposes of computation of full
value of consideration.
The benefit of Section 48 as introduced vide Finance Act, 2016 are proposed to be extended
to the subsequent non-resident holders of the bond vide the instant Finance Bill.
It is further proposed to exempt the capital gains arising on transfer of such bonds by a Non-
Resident to a Non-Resident. Amendments are proposed in Section 47 of the Act so as to
provide that any transfer of such bonds by a Non-Resident to another Non-Resident shall not
be regarded as transfer.
4. Lower Withholding Tax Rate on Interest payment in case of borrowings in foreign currency Section 194LC of the Act provides for a lower withholding tax rate of 5% on interest payable
to a non-resident by a specified company on borrowing made by it in foreign currency from
sources outside India under a loan agreement or by way of issued of long term bonds.
However, the period prescribed for availment of such lower withholding tax rate is on the
payment of interest arising on any such loans availed or bonds issued on or after July 1, 2012
but before July 1, 2017.
In view of the representations received to extend the concessional rate of withholding tax, it
is proposed vide the instant Finance Bill, to extend the benefit of lower withholding taxes on
interest payments arising on borrowing made before July 1, 2020.
Furthermore, the benefit of 5% withholding tax is also provided on interest payments made
on rupee denominated bonds issued outside India before July 1, 2020.
5. Thin Capitalization Rules A company is said to be thinly capitalized when a greater proportion of its capital-structure
is made up of debt than of equity. The interest payments generated on debt capital is
treated as a finance charge, and is allowable as a deduction in the taxable corporate income,
thereby reducing the corporate tax burden. Hence, higher proportion of debt results in tax
Honble Bombay High Court in the case of Director of Income-tax, International Taxation-II,
Mumbai v. Besix Kier Dabhol SA [ITA No. 776 of 2011] held in favour of the assesse and held
that since no thin capitalization rules are in force in India, interest expenditure on debt even
in abnormal debt equity ratio of 248:1 could not be disallowed.
To prevent such abuse, it is proposed to introduce a new Section 94B of the Act in line with
the recommendation provided by Organisation for Economic Co-Operation and Development
in BEPS Action Plan 4.
The provisions of the proposed Section 94B of the Act shall be applicable to an Indian
company or a permanent establishment of a foreign company, who being the borrower pay
interest to the non-resident in respect of debt issued by such non-resident, being an
associated enterprise. Furthermore, debt shall be deemed to be issued by the associated
enterprise if the associated enterprise instead of directly issuing the debt, indirectly provides
an implicit or explicit guarantee to any other lender or deposits corresponding and matching
amount of funds with such lender so as to issue debt to the Indian company.
Interest expenses claimed by the Indian company or permanent establishment of a foreign
company in lieu of the aforesaid debt received from an associated enterprise directly or
indirectly shall be restricted to 30% (thirty percent) of its earnings before interest, taxes,
depreciation and amortization (EBIDTA) or interest actually paid or payable to associated
enterprise whichever is less.
However, if the interest expenses claimed are higher than 30% of EBIDTA, a carry forward of
the disallowed (excess) interest expense shall be allowed to eight assessment years
immediately succeeding the assessment year for which the disallowance was first made. The
carried forward expense shall be eligible for deduction as expense from profits and gains from
business and profession, subject to the cap of interest expense being 30% of EBIDTA.
The amendment is proposed to be effective from April 1, 2018 ie. Assessment Year 2018-19
and shall only be applicable in a scenario where interest payments are more than Rs. 1 Crore.
If the interest expense is below Rs. 1 Crore, no disallowance would be made under the said
6. Secondary Adjustments in Transfer Pricing Finance Bill, 2017 proposes amendments to the Transfer Pricing Rules to provide for
secondary adjustments. While various countries are already following the concept of
secondary adjustments, the Indian government has taken a leap to align itself with the
recognized guidelines across the world and a step to raise more voluntary adjustments.
Secondary adjustment means an adjustment in the books of accounts of the assesse and
its associated enterprise to reflect that the actual allocation of profits between the assesse
and its associated enterprise are consistent with the transfer price determined as a result of
primary adjustment, thereby removing the imbalance between the books of accounts and
actual profit of the assesse.
A new section 92CE is proposed to be inserted, with effect from April 1, 2018, ie. Assessment
Year 2018-19, wherein, the assessee shall be required to carry out secondary adjustments
when the primary adjustment to transaction price (to compute arms length price), has been
1. suo motu by the assessee; or
2. by the Assessing Officer; or
3. is determined by an advance pricing agreement; or
4. is made as per the safe harbour rules; or
5. is arising as a result of resolution of an assessment by way of the mutual agreement
And where as a result of primary adjustment to the transaction price the excess money which
is available with its associated enterprise, if not repatriated to India within the time as may
be prescribed shall be deemed to be an advance made by the assesse to such associated
enterprise and the interest on such advance, shall be computed as the income of the
assessee, in the manner as may be prescribed.
The provisions of the proposed Section shall not be applicable in a scenario wh