Pitched against a bunch of hopes and expectations from industry and individuals alike, Finance Minister Arun Jaitley presented his last full Budget before the general elections. While Union Budget 2018 brings about an array of direct tax amendments, two among them stand out: the re-introduction of capital gains tax on long-term listed equity securities and the extension of the lower corporate tax rate to a much larger group of corporations.
Here are some key takeaways from the Union Budget 2018 from a direct tax standpoint:
Capital gains tax on long-term listed equity securities
Union Budget 2018 introduces a new regime to tax long-term capital gains sale of equity shares, units of equity-oriented funds and units of business trusts, which are exempt under the existing regime (provided that securities transaction tax is paid on the same). From April 1, 2018 onwards, long-term capital gains arising on these securities shall be taxable at the rate of 10 per cent (on gains in excess of Rs 1 lakh).
The move to bring in the long-term capital gains tax is a major amendment impacting all investors including foreign portfolio investors as well as retail investors. The manner in which long-term capital gains will be taxed is novel since the accretion in the value of the shares/equity-oriented mutual funds as on January 31, 2018, will be available as the cost of acquisition, thus giving some investors a cost step-up. It is important to clarify that long-term capital gains tax is effective from April 1, 2018 and so shares sold up to 31 March 2018, will continue to be exempt from tax.
Lower corporate tax rate for companies having a turnover up to Rs 250 crore
As part of his commitment to a phased reduction of corporate tax rates from 30 per cent to 25 per cent over four years, the finance minister has widened the benefit of the corporate tax rate of 25 per cent for the financial year 2018-19 to domestic companies having a turnover of up to Rs 250 crore in the financial year 2016-17. All other domestic companies will continue to be taxed at the rate of 30 per cent.
Interestingly, this benefit has not been extended to Limited Liability Partnerships (LLP).
The increase in education cess
To fund health care and education programmes, benefiting rural and BPL families a “Health and Education cess” at the rate of 4 per cent replaces the existing “Secondary and High Secondary Education Cess” at the rate of 3 per cent.
The 1 per cent increase in cess is slated to increase the domestic maximum marginal corporate tax rate to 35 per cent (from the existing rate of 34.61 per cent) and at the same time marginally dilute the benefit of lower corporate tax rates on micro, small and medium-sized companies.
Measures to promote trading in IFSC
In order to promote trading in the International Financial Services Centre or IFSC (at present there is only one IFSC in India i.e. GIFT city in Gujarat), the Union Budget provides for a complete tax exemption for capital gains derived by foreign investors from sale of derivatives, rupee-denominated bonds and GDRs. This has been done to encourage relocation of trading in offshore markets such as Singapore and comes in the backdrop of a recent announcement by the Singapore stock exchange permitting trading in futures of 50 Indian stocks.
Impact on Individual taxpayers
Proposals include an increase in deduction for the medi-cal INSurance premium of senior citizens from Rs 30,000 to Rs 50,000 and a new section to provide a deduction of up to Rs 50,000 against their interest income from deposits.
A marginal relief in the form of standard deduction of Rs 40,000 substituting the existing transport allowance and medical reimbursement, leading to a maximum tax benefit of Rs 1,740 has been proposed for the salaried class. But this could be offset by the additional 1 per cent increase in health education cess.
Other key amendments
Recently, the Delhi High Court had struck down certain Income Computation and Disclosure Standards (ICDS) as ultra vires the income-tax law. The Union Budget, however, has brought about more amendments in the law to bring it in sync with the ICDS.
Benefit of deduction has been extended to start-ups incorporated up to April 1, 2021, and the scope of eligible business has been extended to include scalable business models with a high potential of employment or wealth creation.
A dividend distribution tax of 10 per cent is to be levied on income distributed by equity-oriented mutual funds.
Overall, from a direct tax perspective, the government has tried to achieve a fine balance against the backdrop of a high direct tax collection pursuant to the amendments and actions undertaken in the last couple of years.
(The writer is partner, Deloitte India)