Budget 2018: what works and what doesn't!

Rashmi Guptey
2nd February 2018

Being the last critical budget before the next general assembly elections, we all probably had some sense of what the budget would lay down. Here's a quick summary of what appealed and didn’t appeal from the "Funds/Venture Industry" perspective.

The budget aims to focus on agriculture, health care, infrastructure development and improving the quality of education.

The Government has aimed at inclusive development by addressing the needs of our farmers and also by attempting to improve infrastructure. Further, emphasis has also been laid on improving public health (under the flagship National Health Protection Scheme, which provides for health cover up to INR 5 lakh per family to approximately 10 crore poor and vulnerable families is certainly commendable!) together with various schemes to improve the quality of education (especially in the rural areas, which is a very vital step)

On the tax front:

1. LCGT is back

Re-introduction of the 10% long term capital gains on transfer of listed equity shares is a dampener especially since it doesn't allow for the benefit of any indexation. This move may impact the listed equity trading segment, and this is especially more worrisome as the current stock market rally (as a run up to the budget) was largely mutual funds-oriented!

2. Section 9 Changes

The impact of the proposal to amend Section 9 of the Income Tax Act, 1961 (“Act”) in order to align the scope of ‘business connection’ with the modified permanent establishment rule as per Multilateral Instrument, signed by the Government needs further in-depth assessment. Also, the proposal to amend Section 9 of the Act in order to provide that significant economic presence of a non-resident shall constitute "business connection" with India, needs to be assessed especially by offshore funds operating in India. Additionally, it has been proposed to define the phrase ‘significant economic presence’ in the Act. These provisions need to be examined to avoid any POEM/GAAR triggers for off-shore funds and MNC's.

3. Easier Tax Administration

It is proposed that income tax assessments will be done in an electronic mode which will almost eliminate person to person contact leading to greater efficiency. This will go a long way in removing the delays/ harassment/ logistic issues caused during the assessment process and make the system more robust and transparent. 

4. Corporate tax

The proposal to tax companies with a reported turnover up to INR 250Cr in the financial year 2016- 17 at a reduced rate of 25% is great and will boost the SME sector.

5. For Startups

The definition of ‘eligible business’ under the Act is proposed to be aligned with the modified definition notified by DIPP (which has a wider scope). It is further proposed to extend the incorporation date for a start-up for availing the benefit granted under section 80-IAC of the Act to 31st March, 2021 from 31st March, 2019 and rationalise the condition of turnover for availing the benefit.

 This will aid startups as registered under DIPP to claim tax benefits much more easily that was the case earlier.

Stamp Duty Reforms- It is rather wonderful move and we are glad to see the recognition of reform measures towards stamp duty on transactions relating to financial securities and a step towards consultation with the States to make necessary amendments to the Indian Stamp Act. It will be interesting to see what exclusions are provided for the financial services industry and we await more details.

ODI- The Finance minister highlighted that Outward Direct Investment (ODI) from India had grown to US$15 billion per annum and that a review of the existing guidelines and processes is bringing carried out to bring out a coherent and integrated Outward Direct Investment (ODI) policy. Progressive changes to the ODI policy are the need of the hour. Hope to see more flexibility for ODI investments for AIF's and corporates!

Startup and Hybrid Instruments- Recognition for the need of hybrid financial instruments for attracting foreign investments in several niche areas, especially for the startups and venture capital firms is very reassuring and awaits more details.

Crypto-currency, is not legal tender- While there were talks that the government could come out with a roadmap to regulate the cryptocurrency market in India, it has been clarified by the Finance Minister, in a move to regulate the cryptocurrency market in India, that crypto-currency is not legal tender and the government will discourage its use. However, it was mentioned that the government will look at the utilization of block chain technology which is an interesting sector to look out for!

Watch out for Penal Provisions for AIFs/InvIt/REIT: Penal provisions introduced under the SEBI Act to apply in case of failure to comply with the AIF / REIT / InvIT Regulations or any direction(s) issued by SEBI thereunder: This will impact our new AIF structure if we set up an AIF and requires more diligence and best practices for ensuring due compliance

Minimum Penalty - INR 0.1 million

Maximum Penalty - Higher of (i) INR 0.1 million per day till non-compliance subsist (subject to upper cap of INR 10 million); or (ii) 3 times the amount of gains made due to non-compliance . Further, penalty of upto INR 250 million shall be levied on any person managing the AIF / REIT / InvIT for failure to comply / breach of the listing and de-listing conditions under the SCRA Act

All in all, no major setback or victory from this Budget and look forward to some more sweeping reforms in the year to come!