Union Budget 2017-18 – Direct tax Proposals

Date posted: Saturday 4 February 2017

Departing from the colonial-era tradition of presenting the Union Budget on the last working day of February, the government, this year, presented the Budget on 1st February. We have come up with an analysis of the changes proposed in direct taxation by the Finance Minister, Mr. Arun Jaitley.

Business Taxation

  1. The threshold  limit  for  audit  of  business  entities  who  opt  for  presumptive income scheme proposed to be increased from 1 crore to Rs.2 crore. This is a clarificatory amendment.
  2. The threshold  limit  for  maintenance   of  books  for  individuals  and  HUF proposed to be increased from turnover of 10 lakhs to Rs. 25 lakhs or income from Rs. 1.2 lakhs to Rs. 2.5 lakhs.
  3. The scope of domestic transfer pricing to be restricted to cases where at least one of the entities involved in related party transaction enjoys specified profit- linked deduction.
  4. In order to promote the development of affordable housing sector, section 80- IBA proposed to be amended to restrict carpet area to 30 and 60 sq. in the place of restriction of built up area to 30 and 60 sq. mtr. Also, the 30 sq.mtr. limit will apply only in case of municipal limits of 4 metropolitan cities while for the rest of the country including in the peripheral areas of metros, limit of 60 sq.mtr. shall apply. In order to be eligible, the project can now be completed in 5 years after commencement (in the place of 3 years).
  5. Considering the  business  exigencies  in  case  of  real  estate  developers, section  23 is  proposed  to  be  amended  to  provide  that  where  the  house property consisting of any building and land appurtenant  thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.
  6. The time period for revising a tax return is being reduced to 12 months from completion of financial year, at par with the time period for filing of retur The time for completion of scrutiny assessments is also proposed to be compressed further from 21 months to 18 months for Assessment Year 2018- 19 and further to 12 months for Assessment Year 2019-20 and thereafter.


Corporate Taxation

  1. To give effect to the announcement made by the Finance Minister, in Union Budget 2015-16 that the corporate income tax rate would be reduced to 25% gradually and in order to make Medium and Small Enterprises more viable and to encourage firms to migrate to company format, the corporate tax rate is proposed to  reduce  to  25%  from  Y.  2018-19  for  Medium  and  Small Enterprises companies with annual turnover up to Rs.50 crore.
  2. The period for carry forward of MAT credit proposed to be increased from 10 years to 15 years. Similar amendment is proposed in section 115JD to allow carry forward of Alternate Minimum Tax (AMT) to 15 years
  3. Provisions relating to computation  of book profit for the purpose of levy of minimum alternate tax (MAT) for Ind-AS compliant companies introduced.


Capital Gain Taxation

  1. With a view to promote the real-estate sector and to make it more attractive for investment, the  period  of holding  for considering  gain  from  immovable property, being land or building or both to be long term is proposed  to be reduced from 3 years to 2 years.
  2. he base year for indexation proposed to be shifted from 1.4.1981 to 4.2001 for all classes of assets including immovable property. The change in base year will significantly lessen the capital gain tax liability while encouraging the mobility of assets.
  3. Presently, investment in bond issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited is eligible for exemption under section In order to widen the scope of the section for sectors which may raise fund by issue of bonds eligible for exemption, the said section proposed to be amended so as to provide that investment in any bond redeemable after three years which has been notified by the Central Government in this behalf shall also be eligible for exemption.


Tax Proposals to Reduce Cash Transactions and Promote Digital Economy

  1. No deduction to be allowed under section 80G in respect of donation by any mode other than cash, if such amount of donation exceeds Rs.2,000.  The present limit is 10,000.
  2. The threshold limit under section 40A(3) for allowability of revenue expenditure incurred in cash is proposed to be reduced from Rs.20,000  to Rs.10,000.
  3. Currently, there is no provision to disallow the capital expenditure incurred in cash. In order to discourage cash transactions even for capital expenditure, limit of Rs.10,000 is propo  Accordingly, capital expenditure incurred in cash shall be ignored for the purposes of determination of actual cost under section 43, if such amount of expenditure exceeds Rs.10,000.  Further, no deduction would be allowable under section 35AD, in respect of such capital expenditure incurred in cash for an amount exceeding Rs.10,000.
  4. To promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD proposed to be amended to reduce the existing presumptive taxation rate of 8% to 6%, in respect of the amount of such total turnover or gross receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub- section of section 139 in respect of that previous yea However, the existing rate of deemed profit  of 8% referred  to in section  44AD  of the  Act,  shall continue to apply in respect of total turnover or gross receipts received in any other mode. This amendment is proposed to be effective from A.Y. 2017- 18.
  5. Section 269ST  to be  inserted,  to provide  that  no person  shall  receive  an amount of 3 lakh or more, in aggregate from a person in a day; in respect of a single transaction; or in respect of transactions relating to one event or occasion  from  a  person,  otherwise  than  by  an  account  payee  cheque  or account payee bank draft or use of electronic clearing system through a bank account.  Simultaneously, new section 271DA  has  also  proposed  to  levy penalty of sum equal to the amount of such receipt on a person who receives such sum in contravention of the provisions of the proposed section 269ST.


Personal Taxation

  1. The existing rate of income tax applicable on income between Rs.2.5 lacs to 5  lacs   is  proposed   to   be   reduced   from   10%   to   5%   in  case   of individuals/HUFs or AOPs or BOIs.
  2. The rebate of 5,000 currently available under section 87A in case of an individual resident in India whose total income does not exceed Rs.5,00,000, is proposed to be  reduced  to Rs.2,500,  where  the  total  income  does  not exceed Rs.3,50,000 from A.Y. 2018-19.
  3. Surcharge  @   10%   of   tax   payable   is   proposed   to   be   levied   on individuals/HUFs or AOPs or BOIs whose total income exceeds 50 lakhs but  does  not  exceeds  Rs.1  crore.  Thereafter, surcharge @15%  would continue to be applicable on total income exceeding Rs.1 crore.


Tax Deduction At Source

  1. In order to widen the scope of tax deduction at source, new section 194-IB, proposed to be inserted to provide for tax deduction at source @ 5% by an Individuals or a HUF (other than those covered under 44AB), while making payment of rent to a resident of an amount exceeding 50,000 per month or part of  month.  To reduce compliance burden,  the  deductor  shall  not  be required to obtain TAN or file any separate TDS return for this purpose.
  2. In order to promote ease of doing business,  section  194J proposed  to be amended to provide for lower the rate of deduction of tax from 10 % to 2% in case of payments made or credited to a person engaged only in the business of operation of call centre.
  3. A concessional with-holding rate of 5% is being charged on interest earned by foreign  entities   in   external   commercial   borrowings   or   in   bonds   and Government securitie  This  concession  is  available  on  borrowings  made, under a loan agreement at any time on or after 1st July, 2012, but before 1st July, 2017; or by way of any long-term bond including long-term infrastructure bond on or after 1st October, 2014 but before 1st July, 2017, respectively. The  Concessional   rate  of  5%  proposed  to  be  extended  in  respect  of borrowings made before 1st July, 2020. This benefit is also proposed to be extended to Rupee Denominated (Masala) Bonds.


Penal Provisions

  1. For improving tax compliance, new section 234F is proposed to be inserted to provide for levy of fees for late filing of return after the due date. Rs.5,000 would be levied for return filed after the due date but on or before the 31st day of December of the assessment year and 10,000, in any other case. However, where the total income does not exceed Rs.5 lakh, the fee amount shall not exceed Rs.1,000.
  2. New  section  271J  proposed  to  be  inserted  to  provide  that  penalty  of Rs.10,000  would  be  levied,  if  an  accountant  or  a  merchant  banker  or  a registered valuer furnishes incorrect information in a report or certificate under any provisions of the Act or the rules made thereunder.

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