Set out below is an overview of the key proposals under the Finance Bill, 2019 (‘Finance Bill’)[1]:

i.       Extension of the lower corporate tax rate of 25% (plus surcharge and cess) to all companies with total turnover or gross receipts not exceeding Rs. 400 crores (approx. USD 58 million) in the Financial Year 2017-18.

ii.      One of the conditions for a demerger to be tax neutral under the Income-tax Act, 1961 (‘ITA’) is that the assets and liabilities should be transferred at book value. Section 2(19AA) of the ITA is proposed to be amended, to provide that tax neutrality of the demerger will not be compromised, if the resulting company records the property and liabilities at a value different from the book value in compliance with the Indian Accounting Standards.

iii.     Section 50CA of the ITA provides that in cases involving transfer of unquoted equity shares at a price that is less than fair market value (‘FMV’) under the prescribed rules, FMV is regarded as the sale consideration for the purpose of computing capital gains. Further, Section 56(2)(x) states that if any person receives, inter alia, shares in a company at a price lesser than FMV, the variance will be subject to tax in the hands of such recipient. The Finance Bill has recognized that determination of FMV based on the prescribed rules may result in genuine hardship in cases where the consideration is approved by certain authorities and the transferor has no control over determination thereof. To confer relief in such transactions, it is proposed to empower the Central Board of Direct Taxes (‘CBDT’) to prescribe transactions undertaken by certain classes of persons to which Sections 50CA and 56(2)(x) of the ITA will be inapplicable.

iv.      Section 9 of the ITA is proposed to be amended to state that in case of receipt of money by a non-resident from a person resident in India, income for the purpose of Section 56(2)(x) of the ITA, will be deemed to accrue or arise in India. This is primarily to ensure that gifts made by residents to non-residents do not escape tax. The benefits under the relevant tax treaties, if any, will continue to apply.

v.       Carry forward of losses of certain companies is restricted under the ITA, where their voting shareholding changes beyond 49%. However, this limitation does not apply to companies which are undergoing corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). It is proposed to extend the benefit of carry forward of losses to companies (including their subsidiaries and subsidiary of each such subsidiary): (i) whose board of directors has been suspended by the National Company Law Tribunal (‘NCLT’) under Section 241 of the Companies Act, 2013 and new directors have been appointed by NCLT on the recommendation of the Central Government; and (ii) whose shareholding has changed in the previous year pursuant to a resolution plan approved by the NCLT. Further, for the purposes of computation of Minimum Alternate Tax liability of the said companies, the aggregate of brought forward losses and unabsorbed depreciation should also be allowed as deduction.

vi.      The Central Government has proposed various benefits for start-ups, in addition to the existing ones:

(a)      Angel Tax Issue:

a.       Investments by Category-II AIFs should be exempted from angel tax (currently the investments by VCFs and Category I AIFs are exempt from this tax); and

b.       In order to curb the practice of taking undue advantage of the benefit of exemption by eligible start-ups, upon the failure to adhere to the stipulated conditions for qualifying for angel tax exemption, any excess consideration received for issuance of shares by such entity over the FMV should be deemed to be its income for the year in which such failure took place and taxed accordingly.

(b)    Benefit of Carry forward of Losses: The restrictions on carry forward and set off of losses by start-ups in cases of change in their shareholding should be relaxed.

(c)      Capital gains tax exemption to individuals on investment in a start-up: The capital gains tax exemption in respect of sale of residential houses for investment in start-ups should be extended till March 31, 2021. Further, condition of minimum shareholding of 50% of share capital or voting rights in the eligible start-up by the investor should be relaxed to 25%. The restriction on transfer of new assets, being computer or computer software, should be relaxed from five years to three years.

vii.     The share buy-back tax of 23.296%, currently applicable to unlisted companies only, is proposed to be extended to listed companies on or after July 5, 2019.

viii.    Adverse tax consequences for default in withholding tax on payments made to non-residents to not apply where such non-resident payee: (i) files a return of income under the ITA; (ii) discloses the taxable sums in computing its income; and (iii) pays tax thereon and the payer furnishes a chartered accountant’s certificate to that effect. This provision already existed in the context of payments made to Indian residents.

ix.      While no change in income tax slabs has been envisaged, it is proposed to impose income tax surcharge on individuals, and certain other unincorporated persons. The current highest effective rate is 35.88%. As per the revised surcharge, the effective tax rates will be as under (subject to relief in marginal cases):

(a)      Where income of individual exceeds Rs. 1 crore (approx. USD 150,000), but does not exceed Rs. 2 crores (approx. USD 300,000), surcharge is 15%, the effective rate being 35.88%. This rate is unchanged.

(b)      Where income of individual exceeds Rs. 2 crores (approx. USD 300,000) but does not exceed Rs. 5 crores (approx. USD 730,000), surcharge is 25%, the effective rate being 39%.

(c)      Where income of individual exceeds Rs. 5 crores (approx. USD 750,000), surcharge is 37%, the effective rate being 42.744%.

x.       The safe harbour rules are proposed to be amended in respect of offshore funds having fund managers in India by relaxing the conditions relating to corpus of the fund and remuneration paid to the fund manager.

[1] The Finance Bill has been passed by both Houses of the Indian Parliament and has received the assent of the President of India.