The Finance Minister of India, made the budget speech for the Financial Year 2018-2019 and presented the Finance Bill, 2018 on February 1, 2018.
Amongst several measures that were announced as part of the Budget Speech and Finance Bill, from a policy and developmental perspective, there were certain announcements made which may have impact in the corporate sector in general and particularly the mergers and acquisition activities in India. In addition to the several proposed amendments to the tax laws, it was announced that the provisions of Reserve Bank of India Act, 1934 (“RBI Act”), Securities and Exchange Board of India, Act 1992 (“SEBI Act”), Securities Contracts (Regulation) Act 1956 (“SCRA”), and Depositories Act 1996 (“Depositories Act”), will be amended. These proposed amendments have been provided in the Finance Bill.
Given below are various amendments proposed in the Budget Speech and the Finance Bill:
1. Section 17(1A) is being inserted in the RBI Act to provide for an additional business activity of RBI with respect to accepting of money as deposits, repayable with interest, from banks or any other person under the Standing Deposit Facility Scheme, as approved by the Central Board of Directors of the RBI, from time to time, for the purposes of liquidity management.
The concept of “standing deposit facility” was first introduced by the Urjit Patel Committee Report in 2014, which stated that standing deposit facilities are transparent facilities, available to banks and other counter parties without discretionary hurdles, and are generally considered as the safety valve of a liquidity management system. It is a remunerated facility that will not require the provision of collateral for liquidity absorption.
This provision has been proposed to be inserted in order to facilitate efficient liquidity management by RBI.
2. The penalties for failure to (i) furnish information, return, (ii) comply with provision of listing conditions or delisting conditions or grounds and (iii) furnish periodical returns, under the SCRA are proposed to be enhanced.
The amendment has been proposed to provide for penalties for certain contraventions under the SCRA and to further regulate wealth management funds such as real estate investment trust, infrastructure investment trust and alternative investment fund.
3. All settlement amounts, excluding the disgorgement amount and legal costs, realized under the SCRA, SEBI Act and Depositories Act are proposed to be credited to the ‘Consolidated Fund of India’.
All revenues received by the Government by way of taxes like Income Tax, Central Excise, Customs and other receipts flowing to the Government in connection with the conduct of Government business i.e. non-tax revenues are credited into the Consolidated Fund of India constituted under Article 266 (1) of the Constitution of India.
This amendment has been proposed to enhance the revenue of the Government.
4. Provisions with respect to continuation of SEBI recovery proceedings have been introduced under the SCRA, SEBI Act and Depositories Act against a legal representative for recovery of sums due from defaulter even when the defaulter person dies.
5. Sections 15EA is being inserted in the SEBI Act to provide that where any person fails to comply with the regulations made by the SEBI in respect of alternative investment funds, infrastructure investment trusts and real estate investment trusts or fails to comply with the directions issued by the SEBI, such person shall be liable to penalty which shall not be less than INR. 1 lakh but which may extend to INR. 1 lakh for each day during which such failure continues subject to a maximum of INR. 1 crore or three times the amount of gains made out of such failure, whichever is higher.
The amendment has been proposed to provide for penalties for certain contraventions with respect to wealth management funds such as real estate investment trust, infrastructure investment trust and alternative investment fund.
6. Section 15EB under the SEBI Act is being inserted which provides that an investment adviser or a research analyst who fails to comply with SEBI regulations would be liable for fine of not less than INR. 1 lakh. The quantum can extend to INR. 1 lakh for each day during which such failure continues subject to a maximum of INR. 1 crore.
7. New provision Section 23GA is being inserted to SCRA providing that where a stock exchange or a clearing corporation fails to conduct its business with its members or any issuer or its agent or any person associated with the securities markets in a manner not in accordance with the rules or regulations made by the SEBI and the directions issued by it under SCRA, the stock exchange or the clearing corporations, as the case may be, shall be liable to penalty which shall not be less than INR. 5 crores but which may extend to INR. 25 crores or 3 times the amount of gains made out of such failure, whichever is higher.
This amendment has been proposed in order to deal with the failure of a stock exchange or a clearing corporation to conduct its business in a manner, which is not in accordance with the rules and regulations made by SEBI.
8. Section 19FA is being inserted in the Depositories Act which provides that a depository which fails to conduct its business with its participants or any issuer or its agent or any person associated with the securities markets in a fair manner as per SEBI regulations would be liable for fine of not less than INR. 5 crores and extend up to INR. 25 crores or 3 times the amount of gains made out of such failure, whichever is higher.
9. It has been proposed that the provision of Section 79 of the IT Act regarding restriction on shareholding for the purpose of carry forward loss shall not apply in case of change of shareholding pursuant to an approved resolution plan under the Insolvency and Bankruptcy Code, 2016 (“IBC”) where an opportunity of being heard has been given to the principal commissioner or commissioner, appointed under the IT Act.
Under the Income Tax regime, a company is only permitted to deduct from its book profits, the loss brought forward or unabsorbed depreciation, whichever is lower, as per books of account. However, under the Finance Bill, it is proposed that in respect of companies where an application under IBC has been admitted by the adjudicating authority, it is proposed to provide that for the purpose of computation of Minimum Alternative Tax (“MAT”) the aggregate amount of unabsorbed depreciation and brought forward loss shall be allowed to be reduced from the book profit.
10. In order to encourage start-ups and to provide for an effective start-up regulation in India, the definition of “eligible business” for a start-up is proposed to be aligned with the modified definition notified by DIPP. It is further proposed to extend the incorporation date for a start-up for availing benefit under Section 80-IAC of the IT Act to March 31, 2021 from March 31, 2019 and rationalise the condition of turnover for availing the benefit.
Section 80-IAC inter alia, provides that deduction under the said section shall be available to an eligible start-up, if it is incorporated on or after the April 01, 2016 but before the April 01, 2019; the total turnover of its business does not exceed twenty-five crore rupees in any of the previous years beginning on or after the April 01, 2016 and ending on the March 31, 2021; and it is engaged in the eligible business.
The aforesaid amendment to Section 80-IAC will take effect from April 01, 2018 and will, accordingly, apply in relation to the assessment year 2018-2019 and subsequent years.
11. A new explanation 2A to Section 2(22) of the Income Tax Act, 1961 (“IT Act”) has been inserted which widens the scope of the term “accumulated profits”. Under the new provision, accumulated profits, whether capitalised or not, or losses as the case may be, shall be increased by the accumulated profits of the amalgamating company, whether capitalised or not, on the date of amalgamation.
This amendment has been proposed to curb companies from distributing proceeds to their shareholders in the form of dividends. Under the current regime, the companies with large accumulated profits adopted the amalgamation route to reduce capital and circumvent the provisions of sub-clause (d) of Section 2(22) of the IT Act, which states that dividend includes any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not.
12. Section 56(2)(xi) has been inserted under the IT Act to provide that any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto, shall be chargeable to income tax under the head "Income from other sources".
The amendment by making all compensations (whether capital or revenue in nature) received on termination of contract subject to tax has proposed to remove the ambiguity on whether any compensation received on the termination of a contract is taxable under the IT Act, considering that it was arguable to treat such compensation as capital receipt.
13. It has been proposed that all listed shares held for more than 1 (one) year will be subjected to long term capital gains tax of 10 (ten) percent if the capital gains on transfer of such listed shares exceeds INR.1,00,000.
Currently, such transactions are exempted from long term capital gains. However, a relaxation has been provided by the Government that it exempted any long-term capital gains made until January 31, 2018 from the aforesaid levy of income tax.
In light of the proposed amendment, the compliance and operational cost for investing in India will increase for foreign institutional investors (FIIs) as there will be dual tax for listed equities i.e. capital gains and securities transactional tax (STT).
Other amendments proposed under the Budget Speech:
1. The Finance Minister noted that hybrid instruments are suitable for attracting foreign investments in several niche areas, especially for the startups and venture capital firms and accordingly, has proposed that the Government will evolve a separate policy for the hybrid instruments. Currently, the eligible capital instruments under the FDI Policy are equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares. With the notification of this amendment, the Indian companies will also be able to raise foreign investment by issuing hybrid instruments by complying with the procedures proposed to be laid down by the Government.
2. The Government has proposed to bring out a coherent and integrated Outward Direct Investment (ODI) policy in India. Currently overseas direct investment from India is governed under the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 read with RBI Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad.
3. The Finance Minister stated that the Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system.
Earlier, the Ministry of Finance had issued a press release dated December 29, 2017, titled “Government Cautions People Against Risks in Investing in Virtual ‘Currencies’, Says VCs are like Ponzi Schemes”, which stated that:
§ the virtual currencies (“VCs”) don’t have any intrinsic value and are not backed by any kind of assets. The price of bitcoin and other VCs therefore, is entirely a matter of mere speculation resulting in spurt and volatility in their prices; and § there is a real and heightened risk of investment bubble of the type seen in ‘Ponzi schemes’ which can result in sudden and prolonged crash, exposing investors, especially retail consumers losing their hard-earned money. Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes. Further, the Finance Minister, in the ‘Question Hour’ session of the Rajya Sabha, answered to a query relating to regulation of cryptocurrencies that “The Government does not consider cryptocurrencies to be a legal tender”.
4. It has been proposed that the capital market regulator SEBI will consider mandating corporates, beginning with large corporates, to meet about one-fourth of their financing needs from the bond market. The proposed amendment is aimed at deepening the corporate bond market. Making it mandatory to raise one-fourth of the total borrowing through bonds will increase the demand and supply for bond market in India.
5. The Government has proposed that no adjustment shall be made in respect of transactions in immovable property, where the circle rate value does not exceed 5% of the consideration. This amendment has been proposed to minimize hardship in real estate transactions.
6. Micro Units Development & Refinance Agency Ltd. (“MUDRA”) provides loans at low rates to micro-finance institutions and non-banking financial companies (“NBFC”) which then provide credit to micro, small and medium enterprises (“MSMEs”). It has been proposed that refinancing policy and eligibility criteria set by MUDRA will be reviewed for better refinancing of NBFCs.
The Government has taken cognizance of more funding requirements for MSMEs and accordingly, this amendment has been proposed to encourage growth of MSMEs by providing easy norms for refinancing of NBFCs which will further provide loans to MSMEs.
7. Alternative investment funds are privately pooled investment vehicles that collect funds from both Indian and foreign investors, and are one of the most developing fund based wealth management activities in India. In recent times, there has been tremendous increase in investment made by the venture capital funds and angel investors in alternate investment funds, especially after liberalization under the FDI Policy.
Accordingly, the Finance Minister noted that venture capital funds and the angel investors need an innovative and special developmental and regulatory regime for their growth and accordingly, it has been proposed that the Government will take additional measures to strengthen the environment for their growth and successful operation of alternative investment funds in India.
8. The Government has proposed that it will take reform measures with respect to stamp duty regime on financial securities transactions in consultation with the States and make necessary amendments the Indian Stamp Act, as adopted by different States.