The report highlights the key takeaways from the first budget of the second Narendra Modi government tabled by Finance Minister Nirmala Sitharaman in the Parliament on July 5, 2019.

Direct tax

Tax rates

• Increased surcharge of 25 per cent to now be levied (instead of 15 per cent) in case of Individuals/ AOPs/ BOIs having income between INR 20 million and INR 50 million. In case income exceeds INR 50 million, surcharge of 37 per cent to be levied. This translates to increase in effective tax rate by 3 per cent and 7 per cent, respectively.
• Beneficial corporate tax rate of 25 per cent is proposed to be extended to domestic companies with turnover up to INR 4 billion in financial year (“FY”) 2017-18.

Start-ups

• To facilitate ease in doing business, the Finance Bill, 2019 (“Bill”) proposes greater flexibility when it comes to carry forward and set-off of loss to eligible start-ups.
• To further incentivise investment in eligible start-ups, conditions for benefit of roll-over of long term capital gains arising from transfer of residential property to invest in eligible start-ups is proposed to be relaxed as follows:
  • Sunset date for transfer of residential property is proposed to be extended from 31 March 2019 to 31 March 2021;
  • De-minis condition of holding share-capital or voting rights is proposed to be reduced from 50 per cent to 25 per cent;
  • Restriction on transfer of new assets acquired by the eligible start-up is proposed to be reduced from 5 years to 3 years where such assets are in the nature of computers or computer software.
• Exemption from applicability of angel tax provisions is proposed to be extended to investments by Category II Alternative Investment Funds (“AIF”);
• Currently, eligible start-ups have been provided exemption from angel tax if certain conditions are met. In case there is failure to comply going forward with such conditions, it is proposed that the consideration received for issue of shares which exceeds the face value of such shares shall be deemed to be the income of the company, in the year of such failure.

International tax and Transfer Pricing (“TP”)

Relaxation of safe harbour conditions for offshore funds

• The current tax law, provides for a safe harbour to offshore funds. It provides that in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager located in India and acting on behalf of such fund shall by itself not constitute a business connection in India of the said fund. Further, an eligible investment fund is not treated as a resident in India merely because the eligible fund manager, undertaking fund management activities on its behalf, is located in India. The safe harbour is available subject to fulfilment of certain conditions.
• The conditions that need to be fulfilled in order to avail the safe harbour have been further relaxed:
  • Condition to have a fund corpus of INR 1 billion at the end of the relevant FY has been relaxed in case of newly incorporated funds. Such fund shall need to have a corpus of INR 1 billion at the end of 6 months from the end of the month of their incorporation or end of the relevant FY, whichever is later; and
  • Requirement of remuneration paid to eligible fund manager at arm’s length to be relaxed by prescribing a manner for computing the minimum remuneration for undertaking fund management activity.

Source rule for gift and receipt of property for inadequate consideration

• The Bill proposes that gift of money, immoveable property or other specified properties situated in India, on or after 5 July 2019 by residents to non-residents shall be deemed to accrue or arise in India. Treaty benefits and other exemptions under Section 56(2)(x) of the Income-tax Act, 1961 (“IT Act”), if any, shall however be available.

Advance Pricing Agreements (“APA”)

• Existing APA framework under the TP regulations allows a taxpayer to file modified return of income, and the income tax authority (“ITA”) to complete the assessment basis thereon, in order to give effect to the APA.
• In an event the assessment or re-assessment of a certain assessment year is already completed before filing of the modified tax return by the taxpayer, the ITA is also empowered to assess or reassess or re-compute the total income of the said assessment year in accordance with the APA. These words have wide connotation and often raised apprehensions regarding the overreach of ITA’s jurisdiction to commence fresh assessment or re-assessment. Changes are now proposed in the existing framework to clarify that in such cases, the ITA’s power will be limited to only modification of total income in accordance with the terms of the APA as opposed to ‘assessment or re-assessment’ of total income.

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