India's annual budget for 2017-18 was announced on February
1 2017. The key tax proposals announced are briefly summarised
The corporate tax rate has been reduced to 25% for companies
with a turnover of less than INR 500 million ($7.5 million) in
the financial year 2015-16, while the rate for companies with a
larger turnover remains at 30%.
Finance Minister Arun Jaitley has also proposed that
indirect transfer taxation (i.e. taxation of gains from
transfers of foreign company shares deriving value from
underlying assets in India) will not be applicable to
Category-I or Category-II foreign portfolio investors (FPIs).
This exclusion will apply with retrospective effect from
financial year 2011-12.
In addition, the concessional withholding tax rate of 5% on
interest payments in case of rupee denominated bonds issued to
FPIs will now be available for interest payable up to July 1
2020. This was due to expire in 2017. However, the transfer of
rupee denominated bonds by one non-resident to another will not
trigger capital gains. The benefit of exclusion of rupee
appreciation on redemption of rupee denominated bonds has been
extended to secondary holders (this was earlier available only
to subscribers of such bonds).
Separately, the conversion of preference shares into equity
shares will not trigger capital gains tax under the budget
proposals. In such cases, the cost of acquisition and the
period of holding such equity shares will be the same as that
of the original preference shares.
In the case of transferring unquoted equity shares, gains
will be calculated based on fair market value (FMV) if the
consideration received is lower than the FMV. The manner of
determining FMV will be prescribed.
The provisions relating to receipt of specified property
without consideration, or for inadequate consideration, have
been overhauled. Going forward, any specified property
(including immovable property, listed, unlisted shares, etc.),
received without adequate consideration by any taxpayer, will
be taxed under the head 'income from other sources'. However,
business reorganisations and other specified exclusions are
carved out from the same.
The time limit for completion of tax assessments (tax
audits) by income-tax authorities have been significantly
The finance minister proposed cutting the scope of domestic
transfer pricing provisions in the budget. Going forward, only
transactions between two domestic related parties where one of
the parties is claiming a profit-linked deduction will be
subject to domestic transfer pricing.
Separately, thin capitalisation rules are proposed to be
introduced in respect of interest payments exceeding INR 10
million paid to associated enterprises (not applicable to
banking and insurance companies). Key aspects include:
- Deduction of such interest is restricted
to actual interest paid/payable or 30% of EBITDA, whichever
- Excess interest paid will be allowed to be
carried forward for eight years; and
- Under certain circumstances, loans taken
from a third-party lender will be deemed to be from an
associated enterprise such as if an associated enterprise
provides an implicit/explicit guarantee to the third-party
Finally, taxpayers will be required to carry out secondary
adjustments where a primary adjustment to the transfer price
has been made in certain circumstances. It is also provided
that where a primary adjustment exceeding INR 10 million has
been made and funds have not been brought into India, such
amounts will be treated as an advance made and interest will be
imputed thereon in a prescribed manner.
Rakesh Dharawat (firstname.lastname@example.org)
and Hari Gangadharan (email@example.com)
Tel: +91 22 6108 1000