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Tax loophole plugged for corporate mergers The Union Budget for 2018-19 has proposed to tax all mergers and amalgamations in which a company with higher accumulated profit merges with a company with lower profits, or with a company that made losses, and reduced capital to avoid paying dividend distribution tax (DDT). The move assumes significance as companies, mainly multinationals and the unlisted ones, announced mergers in the past few years to escape the liability of paying tax on distributed profits in India. According to tax experts, this will impact all mergers — for listed as well as unlisted companies — that were announced in the past few years, and reduction of capital that took place in the last one year. “For the purpose of calculation of dividend under Section 2(22) of the Income Tax Act, accumulated profits shall also include accumulated profits of the amalgamating company on the date of amalgamation. This has plugged the loophole, wherein companies, by following...

Higher taxes spark panic among FPIs The government’s decision to reintroduce the long-term capital gains (LTCG) tax has spooked foreign portfolio investors (FPIs), who rushed to the finance ministry on Friday to seek relief. Sources said FPIs were concerned about the escalation in the costs for investing in India vis-àvis other Asian and emerging markets (EM). Overseas investors were also worried whether the ‘grandfathering’ relief would be extended to them. While news about the LTCG tax has been doing the rounds for a while, FPIs were hopeful of status quo on the tax benefit on shares held for the longer term. At the most, foreign funds had braced for an increase in the time period from one year to two years or three years for availing of the LTCG exemption. Most foreign funds are peeved over the reintroduction of the tax without the abolition of the securities transactional tax (STT). In 2004, the STT was introduced as a substitute for the LTCG tax. In the Union Budget on Thu...

RBI once again cancels Rs 110 bn-worth bond auction as yields shoot up This is the third time since December 29 that the central bank has cancelled, either fully or partly, an auction The Reserve Bank of India (RBI) on Friday once again cancelled its scheduled auction of dated securities, signalling its discomfort with yields. The cancellation of Rs 110 billion worth of bonds was a good enough reason for the 10-year bond yields to cool down by a steep 17 basis points from its day's highs. The yields topped 7.67 per cent at noon and then corrected to 7.50 per cent by the afternoon after rumours of potential secondary market bond purchases by the RBI, but the yields rose again to close at 7.56 per cent. This is the third time since December 29 that the central bank has cancelled, either fully or partly, an auction. While each time it didn't give a reason, it is clear that a sudden spike in yields was the reason for not accepting any bids that bidders would have placed w...

Fiscal deficit target revised to boost spending in 2018-19 However, the more worrying aspect is that the government’s revenue deficit shot up to 2.6% of GDP in 2017-18 from the budget estimate of 1.9% of GDP, showing signs of the deteriorating quality of fiscal consolidationFinance minister Arun Jaitley has set the fiscal deficit target for 2018-19 at 3.3% of the gross domestic product (GDP) to accommodate higher demand for expenditure against the earlier target of 3%. The government also revised the deficit target for the year ending in March 2018 to 3.5% of GDP from the targeted 3.2%.In his last full budget, Jaitley also accepted key recommendations of the N.K. Singh Committee on fiscal discipline to reduce debt-to-GDP ratio to 40% by 2024-25 from 50.1% in 2017-18 and has introduced amendments to the present Fiscal Responsibility and Budget Management Act. The government now aims to reduce its debt-to-GDP ratio to 48.8% in 2018-19, 46.7% in 2019-20 and 44.6% in 2020-21, while...

FM Seeks to bring digital firms under the tax net The government has sought to bring the digital economy into the tax net with a proposal to this effect in Thursday’s Union Budget.The proposal seeks to tax profits made by digital firms in India using the concept of significant economic presence. Analysts point out that this could apply to all online advertisements, online searches, cloud services and other digital products and ensure that profits of these firms attributable to Indian users is taxed in India. This could bring firms like Google, Facebook and Netflix with huge consumer bases in India into the tax net. Messages sent to Facebook, Google and Netflix remained unanswered till press time.To be sure, firms based in countries having double taxation avoidance agreements with India will be protected. Also, the provision will kick in only at a threshold that will be notified later. Significant economic presence has been defined in the finance bill as “any transaction in re...

Arun Jaitley raises rates to boost Make in India In his Budget speech, Finance Minister Arun Jaitley said there was potential for domestic value addition in certain sectors The government is hoping to garner Rs 60 billion by raising import duties on about 50 items — ranging from phones and TV parts to juices and edible oil — in the Budget for 2018-19. The customs duty hike in the range of 5 to 10 percentage points is aimed to encourage local manufacturing under the government’s flagship Make in India programme launched in 2014. This is the second hike in two months by the government, as it aims to achieve twin objective of boosting domestic manufacturing and garnering additional revenue amid floundering goods and services tax (GST) collections. There is a Rs 500 billion shortfall in GST revenue for Centre in the current fiscal. The customs duty on mobile phones was increased from 15 to 20 per cent, while that on parts of LCD and LED panels of televisions has been doubled to 1...

FM  Shuns Ambitious  Targets For FY 19 Having set an ambitious target in 201718, the government seems to have turned realistic on garnering non-tax revenues for 201819. On the revenue side,a slippage in projected non-tax revenues collections was the major factor for the government exceeding by 0.3 percentage points the fiscal deficit target set under the fiscal consolidation road map for 201819. The 13.5 per cent shortfall in nontax revenue collections (over the Budget Estimates) has occurred in FY18 despite the fact that the Reserve Bank of India (RBI) transferred an additional Rs100 billion to the government.In all, RBI has transferred surpluses of RS  406.59 billion (Rs 306.59 had been transferred earlier), which was, however, lower than the Rs 600 billion projected in the Budget Estimates (BE). As a result, the government projected a modest rise ofa3.8 per cent (Rs 2.45 trillion) in non tax revenues for 2018-19 even on the lower base of RE of 201718. If t...

GOVERNMENT SET TO REAP Rs  1 TRN THIS YEAR The Centre is set to garner its highest ever proceeds of Rs  1 trillion through divestment of state owned entities in 201718, compared to a budgeted estimate of RS 725 billion. And, for 2018-19, Finance Minister Arun Jaitley has setatarget of RS 800 billion for the Department of Investment and Public Asset Management (DIPAM).The revised estimates of Rs 1 trillion is around RS 110 billion more than the disinvestment proceeds of the previous two fiscal years put together. The centrepieces are, of course, the acquisition of HPCL´s 51 per cent stake by ONGC for Rs 369 billion and the launch of the Bharat 22 exchange traded fund (ETF) for Rs 145 billion.The finance minister also said that DIPAM will launch a debt focused ETF in the coming fiscal “The government has approved[the] listing of 14 CPSEs (central public sector enterprises), including two insurance companies, on the stock exchanges.The government has also initiated the ...

Budget will strengthen ´ new India´ vision: Modi Terming the Union Budget for 201819 “development friendly”, Prime Minister Narendra Modi said on Thursday it had focused on the needs of rural areas and would strengthen the vision ofa ´new India´ Modi said the Budget had devoted attention to all sectors, ranging from agriculture to infrastructure, and was “farmer friendly, common citizen friendly, business environment friendly, and development friendly”.On MSME sector The Prime Minister said the government would soon announce concrete steps to address the non-performing asset and stress account issues for the micro, small &medium enterprises (MSME) sector. “For a long time, MSMEs faced a lot of burden on the tax front.In this Budget, we have also reduced the corporate taxes that MSMEs owe. Now, they have to pay only 25 per cent tax instead of 30 per cent,” he said. On ´Ayushman Bharat´ scheme Modi said the Ayushman Bharat scheme would allow the poor to receive up to RS 500,0...

Defence budget increases 8 percent, unlikely to cover rise in cost The 2018-19 Budget has raised defence allocations from the current year´s revised estimate of Rs 3.74 trillion to Rs 4.04 trillion, an increase of Rs 303.61 billion, or 8.1 per cent, which, analysts say, is insufficient to even cover year on year inflation in manpower and equipment costs. These figures include all government expenditure on defence, such as allocations to the ministry, defence pension, revenue and capital expenditure, research and development (R&D), and production.The defence ministry, for reasons unclear, excludes pension from the Budget figures. While military planners would be dissatisfied with the small overall increase, the silver lining is the expenditure of the entire capital budget this year without surrendering billions of rupees, as the military did the previous two years. However, the increase in capital allocations, which have risen from Rs 0.91 trillion in the current year to R...

GST hurdle: E way bill put on hold The government on Thursday deferred the electronic way (eway) bill indefinitely on the first day of countrywide rollout as consignments faced delays.Businesses faced disruptions after the portal stopped functioning from around noon, causing wide spread confusion. Companies were seen approaching the National Informatics Centre (NIC), which is developing the e-way portal, with a flood of complaints over the past couple of days. “In view of difficulties faced by the trade in generating eway bill due to initial tech glitches, it has been decided to extend the trial phase for generation of e-waybill, both for inter and intrastate movement of goods,´´ GST@GoI, the official government handle, posted on Thursday evening. The new rollout date will be announced later.The NIC has sought 15 days to fix the problems. E-way bill will help the central and state tax authorities track interstate and intrastate movements of goods that are part of consignments o...