102.

Section 115BAA and 115BAB – Request to allow deduction u/s 80G

100

130.

Section 115BAB(2)(b) -scope may be enlarged

100

104.

Section 115BAC – Mediclaim expenditure u/s 80D may be allowed/included and other concerns

100

105.

Section 115BBDA - Request to recommend suitable amendments when applying provisions of section 115BBDA and section 115JC of the Income-tax Act, 1961 simultaneously

104

106.

Section 115BBF – Rationalizing patent tax regime

106

107.

Section 115BBE – Need to reconsider the high rate of tax

107

108.

Section 115BBG - Income from transfer of carbon credits to be taxed @ 10% - Inclusion in definition of income under section 2(24) and clarification regarding tax treatment for prior assessment years

107

109.

Section 115BBH - Scheme for taxation of virtual digital assets (VDA)  - Certain Concerns to be addressed

108

Sr. No

Section

Issue/Justification

Suggestion

1.

Section 2(1B) - Definitionof Amalgamation

Section 2(1B) of the Act provides for definition of Amalgamation in relation to the companies. The definition also contains various conditions to be satisfied for the amalgamation to be treated as tax neutral under the Act. The conditions contained in item (iii) of the said clause is that the shareholders holding at least three fourth in value of shares in the amalgamating company immediately before amalgamation should become shareholders of the amalgamated company. It is a known fact that the Amalgamation is given effect from the appointed date whereas the shares are issued on the effective date. Generally, there is time lag between the Appointed date and the effective date. In case of change in the shareholding in between the two dates, it would not be able to comply with the condition if read literally. It is also a fact that shares can be issued to the shareholders of the amalgamating company only after the effective date as shares cannot be issued retrospectively from the Appointed date.

In order to clarify the position and avoid any litigation on the matter, it needs to be provided that the condition needs to be satisfied with reference to the shareholders as on the effective date and not the Appointed date.

It is suggested that the provisions of Section 2(1B) be amended to clarify that the shares are to be issued by the amalgamated company to the shareholders of amalgamating company as they exist on the effective date and not on the appointed date.

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

2.

Section 2(14) – Treatment of LIP as capital asset

Any sum received under life insurance policies (‘LIPs’) not exempt under section 10(10D) are taxable currently. Deduction of only premium while computing the net income / loss after surrender / withdrawal of policy doesn’t take care of inflation resulting in higher taxability.

Issue

Whether LIP can be regarded as capital asset?

It is suggested that LIP be treated as a capital asset falling within the definition of “property” under section 2(14) of the Act and accordingly be expressly clarified by amending the relevant provisions which would avoid unnecessary litigation. Indexation benefit (for premiums paid) will take care of inflationary impact -

resulting in parity with other

Sr. No

Section

Issue/Justification

Suggestion

capital assets.

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

3.

Section 2(18) – Company in which publicare

substantially interested

Section 2(18) of the Act provides for the definition of “company in which public are substantially interested”. This definition assumes importance as there is differential treatment under various provisions of the Act in respect of a company in which public are substantially interested vis-à-vis other companies. Under item (b), the company which is “not a private company” as defined under the Companies Act only are qualified to be included subject to satisfaction of the conditions specified therein. Further, under the Companies Act, 2013, while the definition of “private company” is there, the definition of public company provided under section 2(71) introduces a legal fiction under which a “private company” is deemed to be a public company for the purposes of the said Act. Section 2(71) is as under:

“public company” means a company which-

(a) is not a private company and;

(b) has a minimum paid-up share capital (omitted), as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be a public company for the purpose of this Act even where such subsidiary continues to be a private company in its articles;

An argument can be raised, leading to litigation, that the legal fiction of a private company being deemed to be public company is only restricted to the Companies Act and does not extend beyond that. It is clear that being a deemed public company, the company is bound  to  follow  same  regulatory

requirements as a public company under

It is suggested that section 2(18) may be amended to:-

(i) clarify that a deemed public company under Companies Act is “not a private company”, and

(ii) a foreign subsidiary, if whole of the share capital of such subsidiary is held by a company in which public are substantially interested, shall be deemed to be a company in which public are substantially interested.

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Sr. No

Section

Issue/Justification

Suggestion

the Companies Act and therefore for the purposes of Section 2(18) also considering the said company as not a private company is not in any manner contrary to the object and purpose of the said section.

It is therefore, necessary to clarify that deemed public company under the Companies Act shall be considered as not a private company for purposes of Section 2(18).

Further, there is lack of clarity regarding the status of foreign subsidiary / company. The Companies Act 2013, is silent on nature of subsidiaries incorporated outside India by Indian companies. The laws of host country apparently would govern the status of such subsidiary companies. However, clarity is necessary from the Income-tax Act perspective as such classification has tax implications like issues of deemed dividend etc. Therefore, while there may not be need for clarity from Company Law perspective considering its object and purpose, the same cannot be said for the Income-tax Act.

It is imperative that status of the foreign company particularly subsidiary of Indian company needs to be clarified. It is suggested that if the foreign company is wholly owned subsidiary of a company which is a company in which public are substantially interested then the foreign Subsidiary should be considered a “company in which public are substantially interested”.

4.

Section 2(19AA) - Demerger

The existing provisions of Section 2(19AA) define the “demerger” and if the demerger carried out as part of corporate restructuring satisfies the condition, then tax neutrality is ensured both for the companies involved and shareholders. The tax neutrality is both from capital gains and the dividend taxation.

It is suggested that section 2(19AA) may be amended to include in the definition of demerger, the corporate divestiture in form of spin-off under which a parent company transfers its shareholding in a subsidiary to its shareholders.

Sr. No

Section

Issue/Justification

Suggestion

Listed companies generally carry-on different businesses which are distinct and diverse from each other through the subsidiaries given the applicable regulatory environment or different risk profile or due to different set of investors for different business segments.

At a certain stage of growth or development of business of that subsidiary, a natural preference would be to list that subsidiary to secure its future investments and growth or to benefit from improved access of capital, an increased global profile and for greater access to liquidity or to give exit to the private equity investors etc.

Listing of a company is always beneficial to the company, to the investor, and to the public at large. It also adds to the economic activities in the country. An initial public offer (IPO) is one of the ways a company can get listed. To list a company through an IPO process is a time consuming and a high-cost event. One of the best international practices for simple and easier listing of a company could be - a listed company distributes its shareholding in a subsidiary to its shareholders. This is form of corporate divesture and is a category of demerger known in commercial world as “Spin- off”. After the distribution is completed, the spun off company is no longer a subsidiary of the parent and the parent’s shareholders hold not only the parent’s stock but also the subsidiary’s stock. As the parent is publicly held company, the subsidiary also becomes a publicly held company subject to necessary enabling provisions.

The Income-tax Act recognizes the importance of business reorganisation undertaken by the groups for various commercial reasons. In order to facilitate these reorganisations, the Act provides for tax neutrality for the same. A reference can be made to the Explanatory

Further, to ensure that distribution by the holding company to its shareholders of the shares of the subsidiary is not taxable as dividend, an exclusion also needs to be made for such distribution in case of Spin off from definition of dividend under section 2(22). Initially, such an inclusion be made only in respect of parent company being a listed company.

Draft of suggested amendment(s) is placed below:

(A) The provisions of section 2(19AA) may be amended as under

–

2(19AA). “demerger”, in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of -

(a) its one or more undertakings to any resulting company in such a manner that-

--------------------

(b) its specified shares to all its shareholders in proportion of their shareholding in such company;

……..

Explanation 7. For the purposes of this clause, “specified shares” means whole of the share capital as is held by demerged company in a subsidiary and the demerged company, being a company the shares in which (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) are on the day of transfer listed on a recognized stock exchange.

(B) The provisions of section 2(19AAA) may be amended as under –

Sr. No

Section

Issue/Justification

Suggestion

Memorandum to the Finance Bill 1999. Under the existing provisions of the Act, tax neutrality has been provided for both amalgamation and demerger of companies subject to certain conditions and also to the intra group transfer of assets between Subsidiary and Holding company.

Presently, the Act provides for tax neutrality only for a specific kind of demerger where only a business undertaking can be demerged into a separate resulting company.

The corporate divestiture in form of spin- off is not presently covered under the tax neutrality provisions. If the parent company distribute shares of subsidiary company, the said transaction would be considered as dividend distributed by parent company to its shareholders and accordingly fair market value of subsidiary shares received by the shareholder would be taxed as dividend income in the hands of shareholders.

However, considering the commercial reasons and in line with the tax neutrality provided to corporate reorganisation in form of amalgamation and demerger, there is need for providing tax neutrality for corporate divestiture by way of spin off subject to conditions. Providing tax neutrality for spin-off in case of a listed company would only result in deferral of taxes for a limited period. If there is no tax neutrality the tax on dividend gets charged up front. However, if tax neutrality is provided, the shareholder would pay capital gain tax subsequently as and when the shares of either company are sold by it and also continue to pay dividend tax on any dividends declared by either of the company post spin-off.

The Global practice also indicates that many countries have provided tax neutrality to spin-off transactions as part

2(19AAA) “demerged company” means the company whose undertaking or specified shareholding is transferred, pursuant to demerger, to a resulting company or the shareholders as the case may be;

(C) The provisions of section 2(22) may be amended as under –

2(22) "dividend" includes—

-------------

but "dividend" does not include—

-------

(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company);

(vi) any distribution of specified shares under a scheme of demerger by the demerged company to the shareholders of such company.

(D) The provisions of section 2(41A) may be amended as under –

2(41A).“resultingcompany”

means –

(a) one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger; or

(b) the subsidiary company, the

Sr. No

Section

Issue/Justification

Suggestion

of their tax regime related to corporate reorganisation. The broad contours of policy followed by some advanced economies indicates that basic emphasis of the countries, while giving tax neutrality to spin-off transactions, is to impose conditions so that it is not an abusive transaction. Certain conditions relating to control prior to spin-off, distribution of sufficient level of shareholding and active business being the subject matter of transaction are provided for to ensure that abuse of the provisions are avoided.

Under the existing provisions of the Act relating to tax neutrality to business reorganisation also, certain conditions have been imposed before neutrality is granted. The tax neutrality can be provided for spin-off transactions on the lines of existing provision for demerger of the company. Further, initially the benefit may be restricted to spin-off being undertaken by listed company. This will ensure that there is no risk of any abuse of the benefits.

shares of which are transferred in a demerger by the demerged company to its shareholders.

(E) The provisions of section 47 may be amended as under –

47. Nothing contained in section

45 shall apply to the following transfers :—

----------------

 (vie) any transfer of specified shares by the demerged company to its shareholders, in a scheme of demerger;

(F) The provisions of section 56(2)(x) may be amended as under

–

56(2)(x)-----

Provided that this clause shall not apply to any sum of money or any property received—

(IX) by way of transaction not regarded as transfer under clause

(i) or clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vie) or clause (vii) or clause (viiac) or clause (viiad) or clause (viiae) or clause (viiaf)] of section 47; or

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

5.

Section 2(19AA) – Demerger clarification

Section 2(19AA) of the Act provides for the definition and conditions under which a demerger involving transfer of an undertaking from a company (demerged company) to another company (resulting company) shall be tax neutral. One of the conditions mentioned in sub-clause (ii) of the said clause is that all liabilities related to the undertaking immediately before demerger become the liabilities of the

resulting company. Further, Explanation 2

It is suggested that the provisions of clause (19AA) of Section 2 be amended to clarify that for the purposes of Explanation 2(c), whether it is gross value of assets or net assets (after excluding assets corresponding to liabilities in clauses (a) and (b) as aforesaid).

(SUGGESTIONFOR

Sr. No

Section

Issue/Justification

Suggestion

to the said clause provides elaboration in respect of liabilities to be included and transferred to the resulting company. The said Explanation is as under:-

RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

“Explanation 2.—For the purposes of this clause, the liabilities referred to in sub- clause (ii), shall include—

(a) the liabilities which arise out of the activities or operations of the undertaking;

(b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and

(c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the

demerger.”

There is lack of clarity in respect of the apportionment of general or multipurpose borrowings. It is not clear as to whether for apportionment only gross value of assets has to be taken or the net value after reducing specific liabilities related to the assets has to be considered. This ambiguity at times is leading to avoidable

controversies and litigation.

It is therefore suggested that necessary clarity be brought in the section by clarifying as to whether gross assets shall be taken in computation of apportionment or the net assets (i.e assets as reduced by specific liability related to an asset) shall be taken. The same clarification would apply to both the numerator and the denominator of the apportionment formula.

Sr. No

Section

Issue/Justification

Suggestion

6.

Section 2(31) - Definitionof person

Section 2(31) of the Act provides for the definition of the term “person”. The status of person is critical and is the cornerstone of taxation under the Act.

Over the period of past several years, several special taxation regimes have been put in place in respect of various trusts like Special regime for taxation of Securitisation Trusts contained in Chapter XII-EA of the Act, Special regime for taxation of Alternate Investment Funds (AIFs) contained in Chapter XII-FB and Special regime for taxation of Business trusts (REITs and INViTs) under Chapter XII-FA etc.

However, there is no clarity in respect of status of these trusts as to whether they are Individual, AOP or BOI. There have been in past, certain judicial rulings which are clearly not applicable to the changed legal position by incorporating these special regimes. Further, there are large and diverse number of unit holders which are beneficiaries of such trusts. This has led to different treatments both by the taxpayers and also, the tax department leading to avoidable controversies and litigations.

It is suggested that necessary clarity needs to be provided in respect of their status as a person under the Act. It would be preferable that trusts are given a separate category and enumerated in the definition of person.

Apart from above, there is also a case for Co-operative Society assessee to have a separate status as person under section 2(31). Already, there are separate tax rates specified for such co-operative society assessee since long and the time has come to codify the same in the Act itself. In the absence of status as a specific person for co-operative society taxpayer, such assessees have to face certain difficulties. Currently, a lot of co- operative societies are being formed

under the respective state laws regulating

It is suggested that section 2(31) of the Act may be amended to specify the status of various trusts like AIFs, Business Trusts and Securitisation Trusts etc. with a number of unit holders being beneficiaries. Further, it is also suggested to provide a specific status to co-operative societies assessees under section 2(31) as already separate tax slabs are enacted for such assessees.

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Sr. No

Section

Issue/Justification

Suggestion

the co-operative societies. In case, a separate status is provided in the Act itself for co-operative society assessee, it would be easier for them to comply with provisions under the Income-tax Act, 1961.

7.

Section 2(41A) - Definitionof resulting company

Section 2(41A) provides definition of the resulting company in context of demerger which is defined under Section 2(19AA). As per section 2(19AA)(iv), one of the condition for tax neutrality of the demerger under the Act is that “the resulting company issues, in consideration of demerger, its shares to the shareholders of the demerged company”. Therefore, it is resulting company which must issue its shares.

Section 2(41A) containing definition of resulting company provides as follows

It is suggested that section 2(41A) may be amended to clarify that where the demerger of an undertaking is to a company which is wholly owned subsidiary then both the company to which the undertaking is transferred and holding company shall be treated as resulting company for purposes of demerger related provisions particularly in context of issue of shares as consideration of demerger.

“"resulting company" means one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issue shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger;”

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

From the above definition by inclusion of phrase “(including a wholly owned subsidiary thereof)” conveys a meaning that where an undertaking is demerged to a wholly owned subsidiary then both holding company and the subsidiary are resulting company. The implication are therefore, that in a demerger a parent of the demerged company can issue its shares to the shareholders of the demerged company instead of the subsidiary to which the undertaking has been transferred.

This lack of clarity as to whether an

Sr. No

Section

Issue/Justification

Suggestion

option exists that either the subsidiary or its holding company can issue its shares as a consideration for the demerger has led to avoidable controversy and potential litigation.

The intention of the policymakers must be clearly brought out and it needs to be clearly mentioned that the shares of either parent or the subsidiary can be issued in consideration of demerger in case where such subsidiary is a wholly owned subsidiary.

8.

Section 2(42A) – Reductionin holding period in case of immovable property, being land or building or both, to qualify as long-term capital asset–

Consequential amendments to be made in sections 54, 54B, 54D and

54F

The Finance Act, 2017 amended section 2(42A) so as to reduce the period of holding from the 36 months to 24 months in case of immovable property, being land or building or both, to qualify as long-term capital asset. The same is done to promote the real estate sector and to make it more attractive for investment.

Issue

Consequential amendments for reducing the holding period of immovable property from 3 to 2 years is required to be made in sections 54, 54B, 54D and 54F in line with the amendment in section 2(42A). At present, these sections restrict transfer of new assets purchased for 3 years.

It is suggested that consequential amendments may be made in sections 54, 54B, 54D & 54F so as to enable the holding period of the new asset purchased to be reduced to 2 years from 3 years in case of land and/or building.

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

9.

Section 2(42A) – Request to include all immovable properties

Section 2(42A) was amended for land or building (reduction in holding period from 36 months to 24 months), while many real estate transactions take place on leaseholds, tenancies etc. To serve spirit of amendment, all immovable properties may be included to stimulate housing sector.

It is suggested to amend section 2(42A) further so as to include all immovable properties within its purview.

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

10.

Section 4 - Charge of Income-tax

Section 4 of the Act provides for charge of the income-tax. It provides that income tax shall be charged in respect of total income of the previous year of every person at the rate specified in the Act or the Finance Act of the relevant year. The charging section 4 of the Act provides for levy of tax in respect of “Total income”. “Total income” is defined in section 2(45) of the Act to mean “the total amount of

It is suggested that appropriate amendment may be made to clarify that receipts/accrual of money which is in the nature of income only is taxable under normal provisions as well as MAT.

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Sr. No

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income referred to in section 5, computed

in the manner laid down in this Act”.

The material portion of section 5 reads as under:-

“5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes, all income from whatever source derived which-”

Thus, the “total income” consists of all items of “income” as defined in clause

(24) of section 2 of the Act, 1961.

The charge of tax under the Act is thus in respect of items of receipt which are in nature of income. While it is true that definition of income as provided under section 2(24) of the Act is inclusive definition and therefore of wide amplitude but at the same time the fact is that for inclusion under the scope of chargeability the receipt should have characteristics of being income. Further, the capital receipts as a general proposition are outside the scope of the Act, subject to legal fiction being created in respect of specific items included in the definition of income over period of time.

Section 115JB of the Act, deems the book profit, subject to the adjustment provided under the said section to be deemed to be total income for purpose of computation of Minimum Alternate Tax (MAT) liability of the company. However, what can be taxed under section 115JB of the Act is the “total income” which is income as defined in section 2(24) of the Act and capital receipts which cannot form subject matter of the charge of tax under section 4; cannot form part of “total income” and cannot be subjected to tax either under the normal computation provisions or under section 11 5JB of the Act. The absence of provision in section 115JB of the Act for exclusion of such capital receipt credited to the profit and loss account cannot result in its taxation. The norm of the Act is to provide for specific inclusion in respect of capital receipts, therefore in absence of any specific

Sr. No

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provision directing inclusion of capital receipts in computation under section 115JB, the capital receipts cannot be included. A charge cannot be created by implication particularly when the taxing power under the Constitution is in respect of “income” and not capital receipts.

Even if the intention behind introduction of section 115J (predecessor of section 115JB) is seen in the Circular no. 495 dated 22/09/1987, para 36 states that by virtue of various tax concessions and incentives, certain companies making huge profits and also declaring substantial dividends, have been managing their affairs in such a way as to avoid payment of income-tax, and to plug such loopholes, section 115J was introduced. Thus, never the intention was to tax something which is otherwise not chargeable to tax.

Recently there have been spate of rulings of Judicial Authorities including High Courts wherein it has been held that capital receipts are not liable for inclusion under MAT provisions.

Considering the intent and spirit of the provisions of MAT, it is necessary that the provisions are amended to specifically clarify that an item of receipt which is not in nature of income like capital receipts and which are not chargeable to tax under section 4 would also not be included in book profits for MAT purposes. This clarification would lead to certainty in matter and avoid long term multiple litigations.

11.

Section 5 - Scope of Total Income & Section 7 - Income deemed to be received

Section 5 of the Act provides for scope of total income. The taxability of income under the Act is dependent upon either receipt, or accrual or arising of income or deemed receipt, deemed accrual or arising of income. Therefore, the time when the income is received or accrued is very relevant to determine the taxability of any sum.

Prior to Finance Act 2021, section 10(12) of the Act provided that any payment received from Provident Fund to which the

Provident Funds Act, 1925 (19 of 1925)

It is suggested that amendment be made to provisions of the Act to clarify the point in time when the interest accrued on PF (excess contribution) are taxable. It is suggested to tax interest income at the time of withdrawal.

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Sr. No

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Suggestion

applied or from any other provident fund set up by the Central Government and notified in the Official Gazette was exempt from tax. Also, for a recognised provident fund, exemption with respect to the accumulated balance due and becoming payable to an employee was available in specified circumstances.

The above exemption was available without any monetary limits. Finance Act, 2021 amended the above provisions. The amendment provided that the interest income accrued (on or after 1 April 2021) on the employees contribution to PF in excess of Rs 2.50 lakhs in a year shall be chargeable to tax (to be computed in a prescribed manner).

Vide notification dated 31 August 2021, Rule 9D has been inserted in the Income- tax Rules, 1962 for computing the taxable interest relating to contribution in a provident fund or recognised provided fund, exceeding specified limit as mentioned above.

There is lack of clarity in respect of the year of taxability of the interest accrued on the excess contribution. Section 10(12) refers to exemption in respect of “the accumulated balance due and becoming payable to an employee participating in a recognised provident fund to the extent provided in Rule 8 of Part A of the Fourth Schedule”. Therefore, what is exempt is “accumulated balance due and payable” to an employee. The Part A of the Fourth Schedule contains various regulations in respect of the Recognised Provident Funds. The regulations place several restrictions on when the funds can be withdrawn by the employee. Therefore, it is not that the employee has a vested right over the accretion that takes place during the year so as to say that income has accrued to the employee the moment credit takes place. Further, the placement

of proviso to section 10(12) also adds to

Sr. No

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Suggestion

the confusion as the main section refers to “accumulated balance due and payable” thereby deferring the operation of proviso till the time the accumulated balance becomes due and payable.

It is essential for avoiding controversy in future regarding the year of taxability of the interest on excess contribution that necessary clarity is brought in respect of point in time when the income is said to accrue or receive by the employee. Section 7 of the Act provides for cases of deemed receipt of income under certain circumstances. The provisions of said section may be amended to include the accrual of interest on excess amount of contribution to be case of deemed receipt in the year of credit.

It is suggested to tax interest income at the time of withdrawal, because there is in inflow of funds for a very long term, since this is considered as a retirement benefit.

Sr. No

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Suggestion

12.

Section10– Income not forming partofTotal Income -Exemption for Dividends under certain circumstances

Section 10 of the Act provides exemption in respect of various types of income contained in various clauses of the said section.

Under the existing provisions relating to taxation of dividend, the dividend income is taxable in the hands of a shareholder under the head “income from other sources” at the applicable marginal rate. Further, no expenses other than interest (limited to 20% of the Dividend) is allowed while computing income chargeable to tax.

Domestic company is provided deduction under Section 80M of the Act in respect of inter-corporate dividends received. The amount of deduction is limited to the amount which has been further distributed by the company before due date of filing of return for the relevant assessment year.

In addition, the dividend income is also liable for tax under Minimum Alternative Tax (MAT). There is no relief from cascading effect of taxation under MAT even if the company has distributed dividends further to its shareholders.

The deduction under section 80M being conditional upon further distribution of the dividend induces a distortion by creating high tax cost for reinvestment of funds received by the recipient entity. The forced capital outflow from the business due to tax distortion is not a desirable policy outcome in cases of genuine business activities needing funds at competitive costs.

As an Example: If Rs 100 is the profit generated by a company. It pays tax of Rs

35 and distributes Rs 65 to its shareholder/ another company. The dividend received by the parent company is reinvested in the business and if it does not declare further dividend, within the due

date of filing return, then a tax of Rs 22.75

It is suggested that section 10 of the Act be amended to provide that a domestic company whose shares are listed on a recognized stock exchange or its subsidiaries shall be granted exemption in respect of any income by way of dividend received from a domestic company which is part of the same group. The same exemption shall apply to any dividend received from an InVIT set up by the listed company or its subsidiaries as sponsor. This exemption should ensure that relief from cascading taxation is provided under MAT.

A draft of suggested amendment in section 10 is placed below: “(34AA) any income by way of

dividends received by a domestic

company from other domestic company or a business trust where such domestic company, the other domestic company or the business trust belong to the same specified group;

Explanation: For the purposes of this clause, the expression “specified group “means a group of entities that includes,-

(a) a company, shares in which (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were as on the last day of the relevant previous year listed in a recognized stock exchange in India;

(b) any subsidiary company of the aforesaid company whether or not shares in such a subsidiary are listed in a recognized stock

Sr. No

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@35%(including SC and Cess) leaves only Rs 42.25 to be available for reinvestment. Further, as and when the shareholder of the parent receives this amount as dividend, the Rs 42.75 would also suffer tax of Rs 14.78 at the Applicable marginal rate. Thus, total tax payable on corporate profit of Rs 100 is Rs 72.53. This may further increase if the number of company layers are more than 2.

The reinvestment of internal generation within a group suffers high tax cost. Accordingly, the funds are forced to move out of the productive business cycle. Absence of any relief from MAT liability on dividend income irrespective of whether any retention of dividend has taken place at inter-corporate level or not compounds the problem of high tax cost significantly.

It is a known fact that due to regulatory reasons a company is required to set up subsidiaries and special purpose vehicles. Similarly, engagement in diverse businesses at times necessitates creation of multiple entities. Presence of different subsidiaries in a corporate structure is therefore an outcome of both regulatory and genuine commercial requirement.

If the tax induced distortions in allocation of capital cannot be eliminated, then the need of its reduction in a targeted manner is the most desirable policy response. It is on this fundamental basis that international best practice is to have “participation exemption” relief widely defined to avoid economic double taxation on inter-corporate dividends from shareholdings or participations. This ensures productive utilization of resources within a group without tax leakage.

The International practice indicates that in majority of countries the inter-corporate dividend is either exempt or a participation exemption is provided based on certain conditions. The general principle followed is of granting deduction in respect of dividends received from other companies

wherein   the   recipient   company

exchange in India;

(c)a business trust referred to in sub-clause(i) of clause (13A) of section 2 in respect of which the said company or any subsidiary thereof is a sponsor as defined under clause (zz) of Regulation 2 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014;”

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Sr. No

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Suggestion

shareholding exceeds certain minimum threshold. It may not be out of place to mention that the requirement of further distribution, within limited time span, by the recipient company to avail deduction in respect of Inter-corporate dividends under the Act is a concept not being followed in most of the countries. Further, absence of any relief while computing tax liability under MAT results in continued undesirable cascading effect of taxation.

The condition of further distribution under section 80M apparently is with the objective to prevent permanent deferral of taxes on dividends through utilization of interposed corporate entities. In case of private companies where the identity of shareholder and the company merges from a practical point of view due to lack of regulations and absence of governance norms, the indefinite deferral of taxes on dividends may be a realty that needs to be addressed.

However, at the same time, there is a need to have differentiated policy response in case of companies in which public are substantially interested vis-à-vis closely held companies. It is undeniable fact that companies whose shares are listed on the recognized stock exchange and their subsidiaries are working under a stringent regulatory regime enforced by market regulators like SEBI and the Ministry of Corporate Affairs which ensures transparency and good governance. The fear of misuse contemplated in a closely held corporate structure may not be there in a structure involving companies in which public are substantially interested. Further, listed companies do follow a pattern of dividend distribution and having public shareholding ensures its compliance.

The merit of differential regime for companies in which public are substantially interested has been well

recognized in the various provisions,

Sr. No

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Suggestion

particularly anti abuse provisions, in the Act as enumerated below:

1. Exception from applicability of deemed dividend provisions under section 2(22)(e),
2. Exception from applicability of anti- abuse provisions of section 56(2)(viib) for companies in which public are substantially interested, and
3. Exception from the widened scope of increased burden under proviso to Section 68.

Considering the regulatory and governance oversight, the risk of indefinite deferral of taxation of Dividends in case of listed companies and its subsidiaries is not real. Accordingly, there is an urgent need to provide a special regime in respect of taxation of inter-corporate dividends in cases of companies in which public are substantially interested particularly for listed companies and its subsidiaries.

The amendment of the Act be considered in order to include a special dispensation in respect of inter-corporate dividends received by a listed company and its subsidiaries from domestic companies and InVITs which are part of the same group.

13.

Section 10(10D) –

Certain issues

Currently exemption under section 10(10D) is based on premium to actual capital sum assured ratio. This results in LIP with higher premiums due to age factor, occupational / lifestyle diseases (blood pressure, diabetes, etc.), being treated as taxable. Policyholders in absolute need of insurance cover are denied tax relief due to higher premiums in such cases.

Issue I

Needs to provide exemptions to Life Insurance Policy.

Issue II

Surrender value on assignment of Key Insurance Policy (KIP) to employee is taxed under section 17(3)(ii) of the Act and again the entire amount received

(i) It is suggested that tax exemption should not be linked based on premium to sum assured ratio. Rather, all LIPs with policy term of 10 years or more should be exempt. Tax exemption based on policy term helps in medium to long term investments.

(ii) It is suggested that taxing the same policy twice results into double taxation of KIP. Further, in any case, the maturity proceeds received on death of the assignee should be kept as tax exempt. This benefit is similar to the exemption provided in respect of LIP, where the annual premium paid does not exceeds 10% of sum assured.

Sr. No

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Suggestion

under such assigned policy is taxed on maturity.

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

14.

Section 10(11) & 10(12) – Request to reconsider and/or raise the limit of Rs 2,50,000/5,00,000 of

taxability of Interest on various funds where income is exempt

The Finance Act 2021 amended section 10(11) and 10(12) of the Act so that the provisions of these clauses shall not apply to the interest income accrued during the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of contribution made by the person exceeding Rs. 2,50,000/5,00,000 in a previous year in that fund, on or after 01.04.2021, computed in such manner as may be prescribed.

Currently, section 10(11) provides for exemption with respect to any payment from a provident fund to which the Provident Funds Act, 1925 applies or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette. Similarly, Clause (12) of this section provides for exemption with respect to the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule.

Issue

The contribution limit of Rs. 2.5/5 lakh appears to be on lower side. In most of the cases, interest on employee contributions within 12% of basic salary will become taxable. The limit may be reconsidered and may be hiked appropriately say at least 12% of basic salary or Rs.5 Lakh whichever is higher to protect retirement corpus of genuine middle-class taxpayers to cater in absence of any social security scheme in place. The current law to levy Income tax on so much of the interest as is attributable to the amount deposited in excess of Rs. 2.5/5 lakh during any of the previous year appears to be harsh on those who plan

their retirement themselves by putting in

It is suggested that limit of Rs 2,50,000 in section 10(11) and section 10(12) of the Act may be reconsidered and may be raised suitably.

(SUGGESTIONFOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Sr. No