Union Budget 2018 – Budget 2018 Analysis in a Very Simple Way

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ECONOMIC PERFORMANCE: 2017-18

State of Indian Economy

  • After registering GDP growth of over 7% for the third year in succession in 2016-17, the slower growth rate of 6.5% has been estimated in 2017-18.
  • The fiscal deficit has declined from 3.9% in FY 2015-16 to 3.5% in FY-2016-17. In the medium term, India is poised to meet its medium-term fiscal deficit target of 3.2% (2017-18) of GDP.
  • India’s forex reserves have been increased from US$ 360.2 bn. to US$ 370.0 bn. and is being targeted at a level of US$ 409.4 bn in FY 2017-18 and to US$ 1trillion in the long run.
  • Private Final Consumption Expenditure (PFCE) averaged 57.5 % in total GDP and has been the single most important driver of GDP growth in 2016-17. Additionally, Government Final Consumption Expenditure (GFCE) was 29%.
  • Public administration, defence and other services sector also registered double-digit growth in 2016-17 that largely owed to higher payouts in salaries and arrears on account of implementation of the recommendations of the seventh pay commission.
  • With world growth likely to witness moderate improvement in 2018, expectation of greater stability in GST, likely recovery in investment levels and ongoing structural reforms should be supporting higher growth.

Key Indicators

budget analysis 2018 key indicators

Sectoral Developments

Agriculture Sector

  • The share of agriculture and allied sectors in the GDP has declined to 16.4% in in 2017-18 (advance estimates) from 18.20% in FY 2012-13.
  • The total production of rice during 2017-18 is estimated at 94.5 million tonnes vis-à-vis 96.4 million tonnes in 2016-17.
  • The Government has launched ‘Pradhan Mantri Fasal Bima Yojana’ which is a yield index-based crop insurance scheme in 2016, it has made substantial progress.

Manufacturing Sector

  • The industrial output increased by 3.2% during April-November 2017-18 is-a-vis the corresponding period of previous year.
  • There is a growth in electricity generation at 5.2% and growth in mining and manufacturing sectors at 3.0% and 3.1% respectively.
  • The production growth of coal, natural, refinery products, steel, cement and electricity were positive. The Steel production has increased substantially, while the production of crude oil and fertilizers fell marginally during the period.

Infrastructure

  • Government has introduced the new umbrella program ‘Bharatmala Pariyojana’ which aims to achieve optimal resource allocation for a holistic highway roads development.
  • With financial assistance from Government of India, 425 km of metro rail systems are operational and about 684 km are under construction in various cities across India as in December 2017.
  • The programmes ‘Bharat Net’ and ‘Digital India’ aims at converting India into a digital economy. As on September 2017, number of telephone subscribers stood at 1207 million, out of which 502 million connections were in the rural areas.

Service Sector

  • Service Sector, as whole, to contribute 72.5% of the GDP Growth in 2017-18 (advance estimates).
  • India remained the eighth largest exporter of commercial services in the world in 2016 with a share of 3.4%, which is double the share of India’s merchandise exports in the world.
  • The foreign exchange earnings from tourism grew at 8.8% to US$ 22.9 billion in 2016.
  • The Information Technology-Business Process Management (IT-BPM) industry grew by 8.1% in 2016-17 to US$ 139.9 billion.

Other Reforms

  • Moody’s Investor service has also raised India’s rating from the lowest investment grade of Baa3 to Baa2. this has been made possible due to a host of measures undertaken by the Government including Implementation of GST, Insolvency & Bankruptcy code and announcement of Bank Recapitalization.
  • A number of other reforms were undertaken to boost industrial growth including Make in India Programme, Start-up India and Intellectual Rights Policy.

KEY POLICY ANNOUNCEMENTS

Monetary Policies

  • The fiscal deficit for 2017-18 at 3.5% and projected for 2018-19 at 3.3%
  • GDP growth rate projected for 2018-19 at 7.0% – 7.5% and expected for 2017-18 at 6.5% – 6.75%.
  • Divestment target for 2018-19 has been set at Rs 80,000 +++++crore

Financial Sector

  • RBI Act to be amended to accept uncollateralized deposits in liquidity operations.
  • Proposed, corporate sector should raise at least one-fourth of their funding requirement through bonds, while reducing minimum investment grade for corporate bonds to ‘A’ from ‘AA’.
  • The government will set up a unified authority for regulating all financial services in International Financial Service Centers (IFSC) in India.
  • Gold to be developed as an asset class by formulating a comprehensive Gold Policy, establishing a consumer friendly and trade efficient system of regulated gold exchanges in the country and Gold Monetization Scheme to be revamped to enable opening a hassle-free Gold Deposit Account.
  • Proposed to set a target of Rs. 3 lakh crore for lending under MUDRA yojna for 2018-19.

Industry & Employment

  • Proposed an outlay of Rs.7148 crore for the textile sector in 2018-19 as against Rs.6,000 Crore in 2016.
  • The Budget has given big thrust to MSMEs, as a sum of Rs. 3794 crore has been provided for giving credit support, capital and interest subsidy and for innovations and it is proposed to set a target of Rs.3 lakh crore for lending under MUDRA for 2018-19.
  • Women workers’ contribution towards EPF will be reduced to 8% for the first three years of employment, without employer’s contribution being reduced.
  • Government will contribute 12% of the wages of the new employees in the EPF for all the sectors for next three years.
  • In order to encourage creation of new employment the deduction of 30 percent Under Section 80-JJAA with a further relaxation to 150 days in the case of the apparel industry, has been proposed to be extended to the footwear and leather industry.

Agriculture Sector and Rural Development

  1. Agriculture Initiatives
  • Minimum support price (MSP) of Kharif crops to be fixed at least 1.5 times of the production cost.
  • Institutional credit target for agriculture raised by 10% to Rs. 11 lakh crore for 2018-19.
  • Companies registered as Farmer Producer Companies with an annual turnover upto Rs. 100 crores, proposed to get income tax incentive through 100% deduction of their profit derived from post-harvest agriculture activities, for a period of 5 years from financial year 2018-19.
  • Removal of crop residue to be subsidized in order to curb pollution due to burning of crop residue.
  • The Niti Ayog, after discussion with state governments, will establish a mechanism to ensure farmers get adequate remuneration if crop prices fall.
  • Cluster-model approach to be adopted for agricultural production.
  1. Specific Fund Allocation
  • Agri-Market Development Fund with a corpus of Rs 2000 crore to be set up for developing agricultural markets
  • Restructured National Bamboo Mission to be launched with an allocation of Rs 1290 crore to promote bamboo sector.
  • For boost of allied-sectors, govt. will set up fisheries and aqua culture infra fund and animal husbandry infra fund with an outlay of Rs. 10,000 crore.
  • Rs 500 crore allocated for Operation Green to promote agriculture logistics
  • Funds allocated for the National Rural Livelihood Mission under the rural development ministry to be increased to Rs 5,750 crore in 2018-19,
  • Allocation of Rs 2600 crore to ensure irrigation facilities in 96 irrigation deprived districts.
  1. Rural Development
  • Free power connections to 4 crore homes under Saubhagya Yojana.
  • 8 crore free gas connections, instead of previous target of 5 crore, for poor women through Ujjwala Yojana.
  • In 2018-19, for creation of livelihood and infrastructure in rural areas, total amount to be spent by the Ministries will be Rs.14.34 lakh crore.

Infrastructure

  • Budgetary allocation on infrastructure for 2018-19 increased to Rs.5.97 lakh crore against estimated expenditure of Rs.4.94 lakh crore in 2017-18.
  • Using online monitoring system of PRAGATI alone, infrastructure projects worth 9.46 lakh crore have been facilitated and fast tracked.
  1. Digital Economy
  • NITI Aayog will initiate a national program to direct efforts in artificial intelligence.
  • The Budget doubled the allocation on Digital India programme to Rs 3073 crore in 2018-19.
  • The Finance Minister allocated Rs. 10000 crore in 2018-19 for creation and augmentation of Telecom infrastructure.
  • Proposed to set up five lakh wi-fi hotspots to provide net connectivity to five crore rural citizens.
  1. Railways
  • Railways Capital Expenditure for the year 2018-19 has been pegged at Rs.1,48,528 crore.
  • Redevelopment of 600 major railway station with over 25,000 footfall per day with escalators  by Indian Railway Station Development Co. Ltd
  • Railways would be procuring 12,000 wagons, 5,160 coaches and approximately 700 locomotives during 2018-19.
  • Project Bharatmala Pariyojana had been approved for providing connectivity to interior and backward areas and borders of the country by developing about 35,000 km of
  1. Airways
  • Proposal to expand the airport capacity more than five times to handle a billion trips a year under a new initiative – NABH Nirman.
  • Under the  Regional connectivity scheme of UDAN (Ude Desh ka Aam Nagrik) 56 unserved airports and 31 unserved helipads  would be connected.

Education, Health and Social Protection

  • World’s largest govt. funded health care programme titled National Protection Scheme, providing a health insurance cover of ₹5 lakh per family per year announced to 10 crore poor and vulnerable families.
  • Allocate additional Rs.600 crore to provide nutritional support to all TB patients at the rate of Rs.500 per month for the duration of their treatment.
  • The government will be setting up 24 new Government Medical Colleges and Hospitals by upgrading existing district hospitals in the country.
  • Expenditure on health, education and social protection for 2018-19 is Rs.1.38 lakh crore against estimated expenditure of Rs.1.22 lakh crore in 2017-18 .

DIRECT TAX PROPOSALS

Rates of Income Tax

Slab Rate for Individual, HUF, AOP & BOI

  • No change in the tax rate and the slab.
  • No change in the rate of surcharge. [Existing rates; 10%, if total income exceeds Rs. 50 lakh but does not exceed Rs.1 crore and 15%, if total income exceed Rs.1 crore].
  • No change in the tax rebate of Rs. 2,500, if total income is less than Rs. 3,50,000.
  • Education Cess of 3% has been discontinued.
  • A New Cess by the name of Health & Education Cess of 4% will be levied on the tax payable.

Tax Rate for Co-operative Societies, Firms and Local Authorities

  • No change in tax rates
  • No change in Surcharge : 12% if total income exceeds Rs. 1 crore
  • Education Cess of 3% has been discontinued.
  • A new Cess by the name of Health & Education Cess of 4% will be levied on the tax payable

Tax Rate for Companies:  Domestic Company

  • No change in the tax rate of 30%. However, if turnover or gross receipts in the previous year 2016-17 does not exceed Rs. 250 crore, the tax rate will be 25%
  • No change in surcharge : 7%- if total income is between Rs. 1 crore and Rs. 10 crore; 12%- if total income exceeds Rs. 10 crore
  • Education Cess of 3% has been discontinued.
  • A new Cess by the name of Health & Education Cess of 4% will be levied

Foreign Company

  • No Change in tax rate -40%
  • No change in surcharge: 2% – if total income is between Rs. 1 crore and Rs. 10 crore; 5% – if total income exceeds Rs.10 crore
  • Education Cess of 3% has been discontinued.
  • A new Cess by the name of Health & Education Cess of 4% will be levied on the tax payable

direct tax proposals long term capital gains tax

Sale of long term listed equity shares / equity oriented mutual funds during February 1, 2018 to March 31, 2018 will not attract long term capital gains tax

DIRECT TAX PROPOSALS: Widening and deepening of tax base

Application of Dividend Distribution Tax to Deemed Dividend

deemed dividends budget 2018 analysis

DIRECT TAX PROPOSALS: Capital Gains

budget 2018 capital gains

DIRECT TAX PROPOSALS: Deductions budget 2018 analysis deductions

Relief to Salaried class

Under Section 16, it is proposed to provide standard deduction (No proof required, to claim this deduction) upto:

  • 40,000 or
  • Salary amount

whichever is less (Applicable from FY 2018-19 onwards)

Consequently, present exemption in respect of Transport Allowance of Rs. 1,600 p.m. (except in case of differently abled persons) and reimbursement of medical expenses of Rs. 15,000 (pa) is withdrawn. Consequential amendment made in section 17 deleting the benefit of medical reimbursement of Rs. 15,000.

DIRECT TAX PROPOSALS: Tax Incentive

Insertion of New Section 80PA

Newly Inserted Provisions

As per section 80PA, where the  gross total income of producer company does not exceed Rs.100 crores in any previous year, includes any profits and gains derived from eligible business, a deduction equal to the 100 percent of profits and gains derived from eligible business will be allowed to the company

The deduction would be allowed for 5 years from AY 2019-20 to 2024-25 only.

Eligible Business means the following activities :-

  1. The marketing of agricultural produce grown by the members
  2. The purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to the members; or
  3. The processing of agricultural produce of the members

What if deduction is also allowed to an assessee under any other provision of this chapter?

If Assessee is also entitled to deduction under any other provision of this chapter, the deduction under this section shall be allowed with reference to the income, if any, as referred to in this section included in the gross total income as reduced by the deductions under such other provision of this Chapter.

deducation part 2 budget analysis 2018

DIRECT TAX PROPOSALS: Widening and deepening of tax base

Presumptive income under section 44AE in case of goods carriage

Existing Provisions

The profits and gains shall be deemed to be an amount equal to Rs. 7,500 per month or part of a month for each goods carriage or the amount claimed to be actually earned by the assessee, whichever is higher.

Amended Provisions

  • In the case of heavy goods vehicle (more than 12MT gross vehicle weight), the income would deemed to be an amount equal to Rs.1,000 per ton of gross vehicle weight or unladen weight, as the case may be, per month or part of a month for each goods vehicle or the amount claimed to be actually earned by the assessee, whichever is higher.
  • The vehicles other than heavy goods vehicle will continue to be taxed as per the existing rates.

Effective Date : A.Y. 2019-20

This amendment is aimed at providing tax equity by taxing large capacity goods carriages at a higher rate than small capacity goods carriages.

Scope of Accumulated profits for the purposes of Dividend

budget 2018 dividends part 2

  • Section 9 of the Act deals with cases of income which are deemed to accrue or arise in India.
  • Explanation 2 to clause (i) of sub-section (1) of section 9 defines business connection and includes business activities carried on by non resident through dependent agents.
  • The scope of “business connection” under section 9 is similar to the provisions relating to Dependent Agent Permanent Establishment (DAPE) in India’s Double Taxation Avoidance Agreements (DTAAs).
  • In terms of the DAPE rules in tax treaties, if any person acting on behalf of the non-resident, is habitually authorized to conclude contracts for the non-resident, then such agent would constitute a PE in the source country.
  • With a view to avoid establishing a permanent establishment (hereafter referred to as ‘PE’) under Article 5(5) of the DTAA, the person acting on the behalf of the non-resident, negotiates the contract but does not conclude the contract.
  • The OECD under Base Erosion and Profit Shifting (BEPS) Action Plan 7 reviewed the definition of ‘PE’ with a view to preventing avoidance of payment of tax by circumventing the existing PE definition by way of commissionaire arrangements or fragmentation of business activities.
  • BEPS Action plan 7 recommended modifications to Article 5(5) to provide that an agent would include not only a person who habitually concludes contracts on behalf of the non-resident, but also a person who habitually plays a principal role leading to the conclusion of contracts.
  • BEPS Action Plan 7 also recommends the introduction of an anti-fragmentation rule as per paragraph 4.1 of Article 5 of OECD Model tax conventions, 2017 so as to prevent the tax payer from resorting to fragmentation of functions which are otherwise a whole activity in order to avail the benefit of exemption under Article 5(4) of DTAAs.
  • The recommendations under BEPS Action Plan 7 have now been included in Article 12 of Multilateral Convention to Implement Tax Treaty Related Measures (herein referred to as ‘MLI’).
  • India is also a signatory to MLI and consequently, these provisions will automatically modify India’s bilateral tax treaties covered by MLI, where treaty partner has also opted for Article 12 of MLI.
  • As a result , the DAPE provisions in Article 5(5) of India’s tax treaties, as modified by MLI, shall become wider in scope than the current provisions in Explanation 2 to section 9(1)(i).
  • Similarly, the anti fragmentation rule introduced as per paragraph 4.1 of Article 5 of the OECD Model Tax Conventions, 2017 has narrowed the scope of the exception under DTAA Article 5(4), thereby expanding the scope of PE in DTAA vis-a-vis domestic provisions contained in Explanation 2 to section 9(1)(i).
  • In effect to above, the relevant provisions in the DTAAs are wider in scope than the domestic law.

Section 90(2) of the Act provides that the provisions of the domestic law would prevail over corresponding provisions in the DTAAs, to the extent they are beneficial. Since, in the instant situations, the provisions of the domestic law being narrower in scope are more beneficial than the provisions in the DTAAs, as modified by MLI, such wider provisions in the DTAAs are ineffective.

  • In view of the above, the provision of section 9 of the Act has been amended so as to align them with the provisions in the DTAA as modified by MLI so as to make the provisions in the treaty effective.

budget 2018

  • The OECD under Base Erosion and Profit Shifting (BEPS) Action Plan 1addressed the tax challenges in the digital economy.
  • It further recommended that revenue factor may be used in combination with the aforesaid factors to determine ‘significance economic presence.
  • In view of the above, the amendment in provision of section 9 of the Act has been proposed. The significant economic presence of a non-resident in India shall constitute “business connection” in India.
  • The threshold of “revenue” and the “users” in India will be prescribed by the government in due course.
  • Unless corresponding modifications to PE rules are made in the DTAAs, the cross border business profits will continue to be taxed as per the existing treaty rules.

direct tax proposals rationalisation measures

budget 2018 direct tax proposals amendments

w.e.f. April 1, 2017): This amendment would bring certainty in the wake of recent judicial pronouncements on the issue of applicability of ICDS and to shall regularize the compliance done by tax payers with ICDS.

Insertion of section 43AA

Subject to the provisions of section 43A, any gain or loss arising on account of effects of changes in foreign exchange rates in respect of monetary/non-monetary items; translation of financial statements of foreign operations; forward exchange contracts; foreign currency translation reserves, shall be treated as income or loss, which shall be computed in the manner provided in ICDS.

This amendment would bring certainty in the wake of recent judicial pronouncements on the issue of applicability of ICDS and to shall regularize the compliances done by tax payers with ICDS

Effective Date: Retrospectively w.e.f. April 1, 2017

Insertion of section 43CB

Profits arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method and that the contract revenue shall include retention money, and contract cost shall not be reduced by incidental interest, dividend and capital gains.

Other methods prescribed for certain types of service contracts such as:

(i) Contracts with duration of not more than ninety days  – Project completion method

(ii) involving indeterminate number of acts over a specific period of time  – Straight line method.

This amendment would bring certainty in the wake of recent judicial pronouncements on the issue of applicability of ICDS and to shall regularize the compliances done by tax payers with ICDS

Effective Date: Retrospectively w.e.f. April 1, 2017

Insertion of New section 145A in place of erstwhile section 145A

For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”

  • The valuation of inventory shall be made at lower of actual cost or net realizable value computed in the manner provided in ICDS.
  • The valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation.
  • Inventory being securities not listed, or listed but not quoted, on a recognised stock exchange, shall be valued at actual cost initially recognised in the manner provided in ICDS
  • Inventory being listed securities, shall be valued at lower of actual cost or net realisable value in the manner provided in ICDS and for this purpose the comparison of actual cost and net realisable value shall be done category-wise.

This amendment would bring certainty in the wake of recent judicial pronouncements on the issue of applicability of ICDS and to shall regularize the compliances done by tax payers with ICDS

Effective Date: Retrospectively w.e.f April 1, 2017

Insertion of New section 145B

  • Interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received.
  • The claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved.
  • Any subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by what ever name called) shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year.

This amendment would bring certainty in the wake of recent judicial pronouncements on the issue of applicability of ICDS and to shall regularize the compliances done by tax payers with ICDS

Effective Date: Retrospectively w.e.f April 1, 2017

Provisions in ICDS have been virtually brought in the statute to negate the possibility of courts over-ruling ICDS.

DIRECT TAX PROPOSALS: Facilitating Insolvency Resolutions

Relief from liability of Minimum Alternate Tax (MAT)

Existing Provisions

Minimum alternate tax (MAT) is levied on the “book profits” of a company. In computing the book profit  a deduction in respect of the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account is provided. Consequently, where the loss brought forward or unabsorbed depreciation is Nil, no deduction is allowed.

Amended Provisions

If a company’s application for corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 has been admitted by the Adjudicating Authority, then, the aggregate amount of unabsorbed depreciation and loss brought forward (excluding unabsorbed depreciation) shall be allowed to be reduced from the book profit.

Effective Date : A.Y. 2018-19

This amendment is aimed at removing the non-deduction barrier to rehabilitate companies seeking insolvency resolution

Benefit of carry forward and set off of losses

Existing Provisions

Section 79 provides that carry forward and set off of losses in a closely held company shall be allowed only if there is a continuity in the beneficial owner of the shares carrying not less than 51% of the voting power, on the last day of the year or years in which the loss was incurred.

Amended Provisions

This section shall not apply to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.

Effective Date: A.Y. 2018-19

This amendment is aimed at removing the hurdle for restructuring and rehabilitation of company seeking insolvency resolution.

budget 2018 pic 1

budget 2018-19 pic 2

 Transfer Pricing (Section 286)

Time lines for filing CbCR under section 286(2), in Form 3CEAD has been extended from Nov 30 of each year to 12 months from end of reporting accounting year. Therefore, for filing CbCR for FYE March 31, 2018, the deadline will be March 31, 2019 instead of Nov 30, 2018. No change in the existing deadline of March 31, 2018 for FYE March 31, 2017.

Further, CbCR is required to be filed in India even in a case where the parent entity is not obligated to file the report. There was no such provision earlier even though these amendments have been cited as clarificatory in nature. Amendment will be applicable from AY 2017-18 onwards.        

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