07 February 2018 India releases 2018-19 Union Budget The Finance Minister of India presented the Union Budget for tax year 2018-19 (the Budget 2018) on 1 February 2018. The Budget 2018 includes, among others, proposals to reduce the 30% corporate tax rate to 25% for certain companies, introduce tax on long-term capital gains from listed securities and expand domestic "business connection" thresholds. This Alert summarizes the key proposals. A reduced 25% corporate tax rate1 will apply to Indian companies with total gross receipts not exceeding INR2,500m (US$40m) in the tax year 2016-17;2 whereas the current 30% rate applies to all other Indian companies. This is a permanent reduction in the corporate tax rate; the tax year 2016-2017 is the base year for determining applicability of the 25% rate. Historically, long term capital gains derived from sale of equity shares, units of an equity oriented mutual fund or units of a business trust were exempt from capital gains tax, provided certain conditions were satisfied. The Budget 2018 introduces a concessional 10% tax on the gain exceeding INR0.1m (US$1,500) without the benefit of indexation or foreign currency fluctuation, if certain conditions are met. A grandfather provision is provided to investors for capital assets acquired before 1 February 2018, in respect of gains accruing before such date. Where assets are acquired before 1 February 2018, the taxable gains will be computed by deeming the cost of acquisition of the securities as the higher of the following: - Actual cost of acquisition
- Lower of:
- Actual sale on transfer of the securities
- Fair market value of the securities on 31 January 2018 determined in a specified manner
Expansion in scope of business connection A business connection is equivalent to a permanent establishment rule under the Indian domestic tax law, to evaluate if a nonresident (NR) taxpayer has a taxable presence in India. The scope of the term business connection is now expanded to cover the following: - Activities carried out through a person who habitually plays the principal role leading to conclusion of contracts which are: (i) in the name of the non-resident (NR); (ii) relate to transfer of the ownership or right to use in relation to a property owned by NR or in respect of which the NR has a right to use; or (iii) contracts which are for provision of service by NR. This provision is largely aligned with recommendations of Action Plan 7 of the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting project.
- Significant economic presence is defined as: (i) systematic and continuous soliciting of business activities or engaging in interaction with users in India through digital means, subject to certain thresholds to be prescribed; or (ii) transaction in goods, services or property carried out by an NR in India including provision of download of data or software in India, subject to certain thresholds to be specified.
Clarifications in relation to Country-by-Country Reporting (CbCR) - The Indian constituent entity (with an NR parent) will be required to furnish CbCR in India if the parent entity has no obligation to file such report in the home jurisdiction.
- The due date for filing CbCR is revised to12 months from the end of reporting accounting year of the ultimate parent entity, if the ultimate parent entity is resident in India or an Indian constituent entity is obligated to file CbCR in India.
Measures to promote start-ups The scope of the existing income tax holiday provisions applicable to start-ups has been extended for date of incorporation from 1 April 2019 to 1 April 2021 and covers "improvements of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation." - Loans and advances granted by Indian companies which qualify as deemed dividend under certain rules contained in the Indian tax law will be subject to a 30% dividend distribution tax in the hands of the Indian company without a gross up.
- Minimum Alternate Tax will not apply to foreign companies whose total income consists solely of profits and gains from business or industry which are subject to presumptive basis of taxation under normal computation, such as shipping, aircraft, oil and gas, civil construction.
- Transfer of a capital asset without or for inadequate consideration by a parent company to its wholly owned Indian subsidiary or vice versa will not subject the recipient to gift tax.
- Capital gains earned by an NR from the transfer of any bond, global depository receipt, rupee denominated bond of an Indian company or a derivative on a recognized stock exchange located in any International Financial Service Center and transacted in a foreign currency will be exempt from Indian taxation.
- Indian Permanent Account Number (PAN) will be required by every non-individual person that enters into a financial transaction of an amount exceeding INR0.25m (US$4,000) in an Indian tax year. In order to link the above financial transaction with a natural person, the requirement to obtain PAN is expanded to include directors, chief executive officer, principal officer, and similar officer of the companies.
- Failure to furnish an income tax return is subject to prosecution without a minimum threshold.
1 Additional surcharge and cess is applicable. 2 Taxable year begins on 1 April 2016 and ends on 31 March 2017. For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (India), Mumbai - Sudhir Kapadia
sudhir.kapadia@in.ey.com
Ernst & Young LLP (India), Hyderabad - Jayesh Sanghvi
jayesh.sanghvi@in.ey.com
Ernst & Young LLP, Indian Tax Desk, New York - Riad Joseph
riad.joseph1@ey.com - Sameep Uchil
sameep.uchil@ey.com
Ernst & Young LLP, Indian Tax Desk, Chicago - Roshan Samuel
roshan.samuel1@ey.com
Ernst & Young LLP, Indian Tax Desk, San Jose - Archit Shah
archit.shah@ey.com
Ernst & Young LLP, Indian Tax Desk, Dallas - Monika Wadhwa
monika.wadhwa1@ey.com
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore - Gagan Malik
gagan.malik@sg.ey.com
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London - Amit B Jain
amit.b.jain1@uk.ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York - Chris Finnerty
chris.finnerty@ey.com - Kaz Parsch
kazuyo.parsch@ey.com - Bee Khun Yap
bee-khun.yap@ey.com
———————————————
ATTACHMENT PDF version of this Tax Alert Document ID: 2018-5252 | 
