Budget 2018 decoded: Impact on transactions

1. Rate of income tax: It has been reduced to 25% (from 30%) for companies having a turnover up to 2.5 billion INR (~38.5 million USD) in FY 16–17. This will immensely benefit the MSME segment, leaving enterprises with higher investible surpluses, which can be channelised into transactions and growth, as well as create employment opportunities.
   
2. Reintroduction of long-term capital gains tax (LTCG): Currently, LTCG on the sale of equity shares of listed companies and units of business’ trusts/equity-oriented funds is exempt from tax. The new regime introduced to tax LTCG has the following features:
       a) Tax exemption for LTCG only up to 1,00,000 INR
       b) Tax at a concessional rate of 10% only if Securities Transaction Tax (STT) is paid at the time of acquisition/transfer
       c) Grandfathering of tax liability up to 31 January 2018 by allowing the actual cost of the acquisition  to be replaced with the fair market value (FMV) of the asset (as on 31 January 2018)
       d) Indexation provisions withdrawn
       e) Government to notify STT paid transactions
   The above is also applicable to foreign institutional investors (FIIs); however, the fine print fails to provide grandfathering provisions for FIIs and clarification on this is awaited.
   
3. Insolvency resolution: The intention to revive distressed companies is clear as some proposals related to companies under the Insolvency and Bankruptcy Code (IBC) have been accepted. Such companies are provided with Minimum Alternative Tax (MAT) relief, and they would also be allowed to carry forward and set off the tax losses, albeit with the consent of the Commissioner.
4. Tax-neutral transfers: Any transfer of capital assets between the parent and subsidiary is exempt from capital gains tax liability, subject to certain conditions. However, there is no clarity on taxation in the hands of the recipient, in case the same is not transacted at FMV. This has been rationalised, and, henceforth, there would be no notional taxation on such transactions in the hands of recipients on the basis of FMV.
5. Safe harbour of 5% for immovable property transactions: Due to disparity between actual FMV and values recorded in stamp records, there is deemed dual taxation in the hands of the buyer and seller on the differential amount. There is an attempt to reduce the tax burden, but only if the value differential is less than 5%.
6. Deemed dividend determination: The scope of determining accumulated profits on mergers is widened; henceforth, dividend determination will include accumulated profits of the amalgamating company at the time of any distribution by the amalgamated company and subject to tax @15%. Also, going forward, loans and advances will be subject to dividend tax @30% at the time of granting such loans to specified recipients. These amendments are applicable w.e.f. 1 April 2017.

With inputs from Vishvesh Bhatt, Manager, M&A Tax, PwC India
The views expressed here are personal.