Detailed analysis section wise of Direct Tax Proposals

Vispi T. Patel  
on 06 July 2019


HIGHLIGHTS OF ECONOMIC SURVEY

o To achieve the objective of becoming a $5 trillion economy by 2024-25, India needs to sustain a real GDP growth rate of 8%

o Growth is being driven by an expansionary fiscal policy with rising deficits, fiscal deficit for the year 2019-20 is estimated at 3.4% of GDP. However, according to IMF figures the current budget deficit stands at 6.9% of GDP. Total public sector borrowing is at 9% of GDP

o There are indications in the economic survey of a more laissez-faire policy stance going forward with a focus on increasing Gross Capital Formation (GCF). This bodes well for private investment and productivity growth

o Average inflation of the five years (2014-2018) is less than half inflation level of the preceding five year period. High real interest rates, demonetization and introduction of GST seem to have contributed to the successful targeting of price levels

o The survey argues that demographics and wages are the key factors that drive savings, not the level of nominal interest rates, and that a mildly positive real rate is good enough. Though this may be debatable

o The survey points out that small firms accounted for only 23% of the total employment in organized manufacturing in 2016-17, while the large firms accounted for over 77% of total employment. Small firms remain small due to disincentives stemming from our stringent labor laws

o Delays in contract enforcement and disposal resolution are the single biggest hurdle to the ease of doing business in India and higher GDP growth. Around 87.5% of pending cases are in District and Subordinate courts

o Economic policy uncertainty (EPU index) peaked in India during late 2011 and early 2012 and has since been declining with intermittent increases in between (according to EPU index). Economic policy uncertainty in India moved closely in tandem with global uncertainty until 2014. However, it started diverging since early 2015 and seems to have completely decoupled in 2018. Studies show a significant relationship between economic policy uncertainty and real macroeconomic variables, most notably gross fixed capital formation (GCF) and foreign investments (FII and FDI)

o India continues to enjoy the “demographic dividend” which gives a strong tailwind to economic growth. Working age population (20-59 years) comprised 50.5% of the population in 2011, will increase to about 60% in 2041

o The survey calls for a national minimum wage. The present system in India is complex with 1,915 minimum wages defined for various job categories in various states. And one in every three wage workers is not protected by the minimum wage law

KEY INCOME-TAX PROPOSALS:

CORPORATES:

Removing difficulties and facilitating demerger of Ind-AS compliant companies Definition of ‘demerger’ [Section 2(19AA)]

A new proviso is inserted after section 2(19AA)(iii) of the Income-tax Act, 1961 (the Act) to provide that the requirement of recording property and liabilities at book value by the resulting company shall not be applicable in a case where the property and liabilities of the undertakings received by it are recorded at a value different from the value appearing in the books of account of the demerged company immediately before the demerger in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015

VTPA Comments

The amendment is prospective, however, no clarification is issued about the companies which are already demerged on or before 31 March 2019

Deemed accrual of gift made to a person outside India
Income deemed to accrue or arise in India [Insertion of new clause (viii) in Section 9(1)]

- Section 9(1) read as:
The following incomes shall be deemed to accrue or arise in India…

- Insertion of new clause (viii):
“(viii) income of the nature referred to in sub-clause (xviia) of clause (24) of section 2, arising from any sum of money paid, or any property situate in India transferred, on or after the 5th day of July, 2019 by a person resident in India to a person outside India.”.

- Section 2(24)(xviia): "income" includes “any sum of money or value of property referred to in clause (x) of sub-section (2) of section 56;”

VTPA Comments

The income will be chargeable in the hands of person outside India, irrespective of the fact that whether the recipient person is resident or not. However, it seems the word should be ‘non-resident’ instead of ‘person outside India’.

Incentives to Non-Banking Finance Companies (NBFCs) 
Certain deductions to be only on actual payment [Section 43B] 
Special provision in case of income of public financial institutions, public companies, etc. [Section 43D]

- The benefit of section 43D and condition for section 43B is also proposed to be extended to NBFCs 

- Section 43B of the Act provides that any sum payable by the assessee as interest on any loan or advances from a deposit-taking NBFCs and systemically important non-deposit-taking NBFCs, shall be allowed as deduction if it is actually paid on or before the due date of furnishing the return of income, of the relevant previous year. [Section 43B(da)] 

- In the case of a deposit-taking non-banking financial company or a systemically important non-deposit taking non-banking financial company, the income by way of interest in relation to certain categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts, shall be chargeable to tax in the previous year in which it is credited to its profit and loss account actually received, whichever is earlier. [Section 43D]

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