POST-BUDGET MEMORANDUM - 2017
DIRECT TAXES
AND
INTERNATIONAL TAX
THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF INDIA
NEW DELHI
The Institute of Chartered Accountants of India
POST-BUDGET MEMORANDUM 2017
A. INTRODUCTION
1.0 The Council of the Institute of Chartered Accountants of
India considers it a privilege to submit this Post-Budget
Memorandum to the Government.
1.1 In this memorandum, we have suggested certain
amendments to the proposals contained in the Finance
Bill, 2017 which would help the Government to achieve the
desired objectives.
1.2 We have noted with great satisfaction that the suggestions
given by the Committee in the past have been considered
very positively. In formulating our suggestions in regard to
the Finance Bill 2017, the Direct Taxes Committee and
Committee on International Taxation of the ICAI have
considered in a balanced way, the objectives and rationale
of the Government and the practical difficulties/hardships
faced by taxpayers and professionals in application of the
provisions of the Income-tax Act, 1961. We are confident
that the suggestions of the Direct Taxes Committee and
Committee on International Taxation of ICAI given in this
Memorandum shall receive positive consideration.
1.3 In this memorandum, suggestions on the specific clauses
of the Finance Bill, 2017 relating to Income-tax Act have
been given in detail.
1.4 In case any further clarifications or data is considered
necessary, we shall be pleased to furnish the same.
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The contact details are:
Name and Designation Contact Details
CA. Sanjay Kumar Agarwal,
Chairman, Direct Taxes agarwal.s.ca@gmail.com
Committee
CA. Sanjiv Kumar
Chaudhary,
Chairman, Committee on schaudhary@bsraffiliates.com
International Taxation
Secretary, Direct Taxes dtc@icai.in
Committee
Secretary, Committee on citax@icai.in
International Taxation
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B. Index
S. No. Particulars Page No
1.
1. Paragraph A of Part III to the First Schedule 8
Proposed Surcharge @ 10% for income exceeding
Rs 50 lakhs Removal of surcharge to ensure
parity in effective tax rates vis-à-vis small and
medium companies.
2. Paragraph E of Part III to the First Schedule 8
Reduction in corporate tax rate - Reduced
corporate tax rate to be applicable for erstwhile
firms recently converted into companies and also
LLPs and companies which were set up
subsequent to P.Y.2015-16.
3. Clause 3 Section 2(42A) Reduction in holding 10
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
4. Clauses 3, 23 and 25- Section 2(hf), section 12
47(xb) and section 49(2AE) - Tax neutral
conversion of preference shares to equity shares
Clarification regarding tax treatment for earlier
years
5. Clause 6- Section 10(38) - Exemption of long 12
term capital gains subject to payment of STT on
acquisition bona fide transactions to be
notified by the Central Government for
exemption even if STT not paid on acquisition
6. Clause 12 - Section 23(5) Deemed Taxability of 14
unsold stock of house property after 1 year of
lying vacant Non-applicability of restriction
contained in proposed section 71(3A)
7. Clauses 13 and 16 Section 35AD and 43(1) 16
Cash payment exceeding Rs 10,000 to be
disallowed Exceptions contained in Rule 6DD
may be extended to section 35AD and 43(1) also
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S. No. Particulars Page No
8. Clause 20 Section 44AB Increased threshold 17
for presumptive tax cases under section 44AD -
Consequential amendments required in section
194A/194H/194I & 194J
9.
1. Clause 22 - Section 45(5A) - Special provision 18
for computation of capital gain in case of joint
development agreement (JDA) - Certain
concerns to be addressed and scope to be
enlarged
10. Clause 26 and 29- Section 50CA and section 21
56(2)(x)(c)- Fair Market Value to be full value of
consideration in case of transfer of unquoted
shares Amendment required in view of double
taxation in the hands of seller as well as buyer
11. Clause 29- Section 56- Insertion of new clause 23
(x) in section 56(2) - Reference to be included in
the definition of income under section 2(24)
12. Clause 31- Section 71(3A) - Restriction on set-off 25
of loss from House property Restriction to be
done away with
13. Clause 32- Section 79- Carry forward and set off 27
of loss in case of eligible start-ups - Condition to
be further relaxed
14. Clause 44 - Section 115BBDA Scope of section 29
115BBDA, initially restricted to individuals,
HuFs and Firms, expanded Certain pooling
vehicles like Mutual funds, AIFs etc. to be
exempted
15. Clause 45 - Insertion of section 115BBG - 30
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.
16. Clause 37 -Section 80-IBA Relaxation of 31
certain conditions from 1.4.2018 Relaxation
may be effective from 1.4.2017
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S. No. Particulars Page No
17. Clause 46(a) Section 115JAA Extension of 32
period of carry forward of MAT credit from 10
years to 15 years - Clarity regarding carry
forward and set off of MAT credit in cases where
the ten year period has expired on or before AY
2016-17 but the fifteen year period has still not
expired
18. Clause 46(b) Section 115JAA(2A) - Restriction 35
on carry forward of MAT/AMT credit and claim
of FTC in relation to taxes under dispute -
Restriction to be removed
19. Clause 50 & 51 Section 132(1), 132(1A) and 36
132A(1) reason to believe to conduct a search,
etc. not to be disclosed retention of existing
provisions to reduce undue hardship to genuine
assessee
20. Clause 55 - Section 139(5) Reduction in time 36
limit for filing revised return Retention of
existing time limit for filing of revised tax return
at least in cases of claim of foreign tax credit
2.
21. Clause 62 - Claim of FTC pertaining to taxes 37
which are under dispute in the foreign country
Clarification required on certain issues relating
to period of limitation and documents which
shall constitute evidence of settlement
22.
3. Clause 63 Section 194-IB Requirement of tax 39
deduction at source by individuals/HUFs paying
monthly rent exceeding Rs.50,000 - Enabling
measures to facilitate ease of compliance to be
introduced & issue of clarification regarding the
amount on which tax has to be deducted at
source in a situation where monthly rent is
increased during the previous year and the
increased monthly rent exceeds Rs.50,000
23. Clause 71 Section 206C(1D) - Exclusion of 41
specific reference to sale of jewellery, cash
consideration exceeding Rs.5 lakhs -
Consequent implication
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S. No. Particulars Page No
24. Clause 75 Section 234F Fee for delayed filing 42
of return Removal of provision levying fees to
prevent undue hardship for the genuine
assessees
25. Clause 83- Section 269ST- Restriction on cash 43
transactions Certain concerns to be addressed
26. Clause 86- Section 271J- Penalty imposable on 47
chartered accountant for furnishing incorrect
information in reports or certificates Penalty
may be removed
27. Other Suggestions 52
Suggestions relating to International Taxation
28. Clause 4- Section 9(1)(i)- Benefit of non- 55
applicability of indirect transfer provisions in
case of Category I and II FPIs - Benefit to be
extended to Category III FPIs and provisions for
avoidance of double taxation in case of such
indirect transfer provisions, where direct transfer
has already been subject to tax
29. Clauses 39 and 40 Sections 90 & 90A 56
Clarification with regard to interpretation of
'terms' used in tax treaties under Section
90/90A but not defined in such treaties -
Concern to be addressed
30. Clause 42- Section 92CE- Introduction of 57
secondary adjustment
31. Clause 43- Section 94B- Limitation of interest 64
benefit provisions introduced certain concerns
to be addressed
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POST BUDGET MEMORANDUM 2017
C. Detailed Suggestions
1. Paragraph A of Part III to the First Schedule Proposed
Surcharge @ 10% for income exceeding Rs 50 lakhs Removal
of surcharge to ensure parity in effective tax rates vis-à-vis
small and medium companies
Surcharge @ 10% is proposed in cases where total income of an
individual/HUF/AOP/BOI exceeds Rs.50 lakhs but do not exceed
Rs. 1 crore. Surcharge of 15% would continue to be applicable
where the total income of an individual/HUF/AOP/BOI exceeds Rs
1 crore.
The levy of such surcharge would result in inequity in the effective
rate of tax (i.e., more than 30%) for individual/HUF/AOP/BOI
assessees with total income exceeding Rs.50 lakhs vis-à-vis the
rate of 25% proposed for small and medium companies. The
inequity would arise not only vis-à-vis salaried assessees but
individuals/HUFs engaged in small businesses would also have to
bear the brunt of surcharge which may go against the present
Government's aim of promoting ease of doing business.
Suggestion:
It is suggested that the proposed surcharge@10% for total
income between Rs.50 lakhs to Rs. 1 crore be withdrawn to
ensure equity in effective rate of tax vis-à-vis the proposed rate
for small and medium companies.
2. Paragraph E of Part III to the First Schedule Reduction in
corporate tax rate - Reduced corporate tax rate to be
applicable for erstwhile firms recently converted into
companies and also LLPs and companies which were set up
subsequent to P.Y.2015-16
The Finance Bill, 2017 proposes a concessional rate of 25% in
case of domestic companies whose total turnover or gross receipts
of previous year 2015-2016 does not exceed Rs.50 crore.
The Notes on clauses to the Finance Bill, 2017 dealing with
relevant provision reads as follows:
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`Paragraph E of this Part specifies the rates of income-tax in
case of companies. In the case of domestic companies the rate
of income-tax shall be twenty-five per cent of the total income
where the total turnover or gross receipts of previous year
2015-2016 does not exceed fifty crore rupees and in all other
cases the rate of income-tax shall be thirty per cent of the total
income. In the case of companies other than domestic
companies, the rate of tax will continue to be the same as that
specified for assessment year 2017-2018...'
The Hon'ble Finance Minister, in his Budget speech explained the
rationale of provision of such concessional rate, namely, to make
Micro, Small and Medium companies more viable and also to
encourage firms to migrate to company format.
Issues :
(i) Since the intent behind the proposed amendment is to
encourage firms to migrate to company format, it appears that in
case of firms which have been subsequently converted into
domestic companies, the turnover of the firm for P.Y.2015-16
would be considered for application of concessional rate of tax
for the company for A.Y.2018-19, i.e., a firm/LLP which had
turnover/gross receipts of Rs.50 crores or less in P.Y.2015-16
would also be eligible to claim benefit of 25 per cent tax rate for
A.Y.2018-19. To ensure clarity regarding this legislative intent,
appropriate clarification may be inserted in the Act to this effect.
(ii) Also, a situation may arise where a company was in existence in
P.Y. 2015-16 but the business had not commenced as at 31st
March 2016, consequent to which there was no turnover during
that year.
In such a case also, the company should be eligible for a
concessional rate of tax@25% during the A.Y.2018-19.
(iii) A company which has been set up in P.Y.2016-17 or P.Y.2017-
18 should also be eligible for the concessional rate if its turnover
during the said years is upto Rs.50 crores. Appropriate
provisions need to be incorporated for the same.
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(iv) In order to encourage LLP form of organization, which is
preferred over company form due to fewer compliances, the
concessional rate of tax may be extended to LLPs with turnover
of upto Rs.50 crores.
Suggestions:
It is suggested that:
a. In line with the Finance Minister's speech and his intention
to provide the beneficial tax rate of 25 per cent to firms that
migrate to company format, it may be clarified that such
benefit is available to those companies that existed as firms
during the P.Y.2015-16 and subsequently converted into
companies.
b. Companies which were in existence during the P.Y.2015-16
but had not commenced business in that year also should
be eligible for the beneficial tax rate of 25 per cent on the
basis of the turnover of P.Y.2016-17.
c. A company which has been set up in P.Y.2016-17 or
P.Y.2017-18 should also be eligible for the concessional rate
if its turnover during the said years is upto Rs.50 crores.
d. In order to encourage LLP form of organization, which is
preferred over company form due to fewer compliances, the
concessional rate of tax may be extended to LLPs with
turnover of upto Rs.50 crores.
e. Appropriate provisions may be incorporated to give effect to
the above.
3. Clause 3 Section 2(42A) Reduction in 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 Bill, 2017 proposes to amend section 2(42A) so as to
reduce the period of holding from the existing 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.
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Issues
(1) 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 proposed
amendment in section 2(42A). At present, these sections restrict
transfer of new assets purchased for 3 years.
(2) In order to avoid litigation, clarification is required on whether
leasehold rights and tenancy rights would be considered to fall
within the meaning of "land and building" to avail the benefit of
reduced holding period for being treated as a long-term capital
asset.
(3) Ambiguity may also arise with respect to flats in a co-operative
society i.e. whether shares in a co-operative society qualify
within the meaning of immovable property being land or
building or both to become eligible for lower holding period of
two years
Suggestions:
It is suggested that:
(1) 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.
(2) Circular may be issued/Explanation may be inserted to
clarify that leasehold rights and tenancy rights are also to
be treated as falling within the meaning of "land and
building" for the purpose of availing the benefit of reduced
holding period for being treated as a long-term capital
asset.
(3) In order to avoid any interpretation issue, it may be
clarified that flats in a co-operative society are also covered
within the meaning of immovable property being land or
building and are hence, eligible for lower holding period of
two years for computation of capital gains.
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4. Clauses 3, 23 and 25- Section 2(hf), section 47(xb) and section
49(2AE) - Tax neutral conversion of preference shares to equity
shares Clarification regarding tax treatment for earlier years
The Finance Bill 2017, proposes to amend Section 47 of the Act, by
virtue of which conversion of preference share of a company into
equity share of that company will not be regarded as transfer. The
amendment is proposed to be made by insertion of sub-section (xb)
in section 47.
Consequent amendments are also proposed to be made in section
2(42A) of the Act by insertion of sub-clause (hg) in clause (i) of
Explanation 1 to section 2(42A) for determining the period of
holding of such equity shares, by including the period of holding of
the preference shares as well.
Further, sub-section (2AE) is proposed to be inserted in section 49
to compute the cost of acquisition of the converted equity shares.
As per the proposed amendment, the cost of such equity shares
shall be deemed to be the cost of acquisition of preference shares.
Currently, conversion of bond or debenture of a company into
shares of that company is not regarded as transfer. However, no
similar tax exemption was available so far in case of conversion of
preference shares of a company into its equity shares.
Suggestion:
It is suggested that
a) Since this amendment has clarified the real legislative
intent, a clarification may be given by way of Explanation
in section 47 or by way of an Explanatory Circular that the
above provisions would be applicable in respect of earlier
years as well.
b) Also, conversion of warrants into equity shares may be
covered under section 47.
5. Clause 6- Section 10(38) - Exemption of long term capital gains
subject to payment of STT on acquisition bona fide
transactions to be notified by the Central Government for
exemption even if STT not paid on acquisition
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Section 10(38) of the Income-tax Act, 1961, inter alia, provides for
an exemption from tax on the income arising from the transfer of a
long-term capital asset, being an equity share in a company or a
unit of an equity oriented fund or a unit of a business trust, where
such transaction is chargeable to securities transaction tax under
Chapter VII of the Finance(No.2) Act, 2004.
The Finance Bill 2017 proposes to amend the said clause (38) so
as to provide that any income arising from the transfer of a long
term capital asset, being an equity share in a company shall not be
exempted, if the transaction of acquisition, other than the
acquisition notified by the Central Government in this behalf,
of such equity share is entered into on or after the 1st day of
October, 2004 and such transaction is not chargeable to securities
transaction tax under Chapter VII of the Finance(No. 2) Act, 2004.
The intent of the Government behind the proposed amendment is
to prevent misuse of section 10(38) of the Act whereby some
taxpayers declare their unaccounted income as exempt long-term
capital gains by entering into sham transactions. Further, the
Memorandum to the Finance Bill 2017 states that exemption for
genuine cases where the securities transactions tax could not have
been paid like acquisition of share in IPO, FPO, bonus or right
issue by a listed company, acquisition by non-resident in
accordance with FDI policy of the Government etc. would be
available and list of such transfers for which the condition of
chargeability to securities transactions tax on acquisition shall not
be applicable would be notified.
This anti-abuse measure appears to be targeted at gains arising
from transfer of penny stock also. Therefore, appropriate
provisions may be introduced to explicitly define the term "penny
stock" so as to deny exemption under section 10(38) in respect of
gains arising from transfer of the same.
Suggestion:
It is suggested that:
(1) Instead of the requirement of payment of STT on
acquisition, it would be desirable to categorically define a
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list of sham transactions which would not be entitled to
exemption of LTCG. This would automatically provide
benefit to genuine investors.
(2) Notwithstanding the above, alternatively, for the purposes
of section 10(38), it is suggested that the exemption list to
be notified should, inter alia, include:
Shares which get listed pursuant to an IPO/FPO;
Shares issued under ESOP/ESPS scheme;
Shares issued or transferred pursuant to corporate re-
structuring's such as merger / demerger;
Shares issued on Preferential allotment/QIP;
Shares acquired pursuant to a transaction not regarded as
transfer u/s Section 47 of the Act where STT was paid on
the underlying shares by the previous owner;
New shares received by the shareholders on consolidation
/ bonus / rights / split of existing shares where STT was
paid on the underlying shares;
Off-market share deals where such deal cannot be
executed on-market due to pricing restrictions (i.e.
transactions which do not meet the bulk deal / block deal
parameters);
Shares acquired pursuant to family arrangement/
settlement on where STT was paid on the underlying
shares by the previous owner;
Acquisition of shares on which STT was paid by way of
transmission, succession or inheritance;
Contribution of shares to LLP/ Partnership firm;
Inter-se transfer of shares within the promoter group which
is in compliance with Takeover Code or subject to SEBI
approval.
(3) Appropriate provisions may be introduced to explicitly
define the term "penny stock" so as to deny exemption
under section 10(38) in respect of gains arising from
transfer of the same.
6. Clause 12 - Section 23(5) Deemed Taxability of unsold stock
of house property after 1 year of lying vacant Non-
applicability of restriction contained in proposed section
71(3A)
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The Finance Bill 2017 proposes to insert sub-section (5) in existing
section 23 to provide that where the house property consisting of
any building and land appurtenant thereto is held as stock-in-
trade and the property or any part of the property is not let during
the whole or any part of the previous year, the annual value of
such property or part of the property, for the period upto one year
from the end of the financial year in which the certificate of
completion of construction of the property is obtained from the
competent authority, shall be taken to be nil. The same is being
proposed considering the business exigencies in case of real estate
developers and would provide much needed relief to such
assessees.
Another related amendment has been proposed in section 71 by
insertion of sub-section (3A) so as to provide that set-off of loss
under the head "Income from house property" against any other
head of income shall be restricted to two lakh rupees for any
assessment year.
Now an issue has arisen in case of assessees engaged in the
business of real estate sector. Normally, the interest which the
builder assessee pays on borrowings which were taken for
construction purpose is allowable under section 36(1)(iii) as his
income is assessable under the head business and profession.
However, on a combined reading of proposed provisions as
contained in section 23(5) and 71(3A), i.e., if the notional income is
to be treated as "Nil" during the period of one year and thereafter,
as income from house property, it appears that the interest
deduction would be available under section 24 and consequently,
the restriction contained in section 71(3A) would apply. This would
create genuine difficulty, since the businesses were so far eligible
for deduction of entire interest under section 36(1)(iii). Therefore,
the restriction contained in section 71(3A) should not be applicable
in the case of interest deduction in respect of income from house
property held as stock-in-trade.
Thus, on one hand, the proposed insertion of sub-section (5) to
section 23 of the Act deems the annual value of house property
held as stock-in trade, as Nil, if the same is not let out; on the
other hand, the proposed amendment to section 71(3A) restricts
the claim of set off of loss from house property (arising mainly on
account of interest deduction) against income from any other head.
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This would curtail the benefit of entire interest deduction so far
available under section 36(1)(iii).
Suggestion:
Considering the interest deduction so far available under
section 36(1)(iii) in respect of loan borrowed for construction of
houses held as stock-in-trade, it is suggested that the
restriction proposed in section 71(3A) may not be applicable in
the case of interest deduction in respect of income from house
property held as stock-in-trade. This would go a long way in
avoiding any negative impact on the real estate sector.
7. Clauses 13 and 16 Section 35AD and 43(1) Cash payment
exceeding Rs 10,000 to be disallowed Exceptions contained
in Rule 6DD may be extended to section 35AD and 43(1) also
In order to discourage cash transactions even for capital
expenditure, the Finance Bill, 2017 proposes to amend section
43(1) to provide that where an assessee incurs any expenditure for
acquisition of any asset in respect which a payment or aggregate of
payments made to a person in a day, otherwise than by an account
payee cheque drawn on a bank or account payee bank draft or use
of electronic clearing system through a bank account, exceeds ten
thousand rupees, such expenditure shall be ignored for the
purposes of determination of actual cost of such asset.
Similar amendment is proposed in section 35AD. Further, cash
payment limit under section 40A(3) is also proposed to be reduced
to Rs.10,000.
Thus, the Finance Bill 2017 proposes to disallow even the capital
expenditure incurred in cash thereby restricting the amount of
allowable depreciation under section 32 with effect from 1 April
2018 i.e. AY 2018-19.
Issues
(1) There is no clarity whether disallowance will trigger if cash
expenditure is incurred post 1st April 2017 or if asset is
acquired after 1st April 2017.
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(2) As per the language of the proposed proviso to section 43(1),
it appears that whole of the expenditure for acquisition of
any asset may be disallowed even if only a small part of the
expenditure may have been incurred in cash. Say for
example, expenditure on asset costing Rs.1 crore may be
disallowed fully for depreciation purposes even if expenditure
incurred in cash is only Rs.10,000.
(3) Permissible exceptions to the provisions of section 40A(3)
and (3A) have been provided in Rule 6DD of the Income-tax
Rules, 1962 having regard to the nature and extent of
banking facilities available, considerations of business
expediency and other relevant factors.
Since similar situations may occur in case of compliance of
the proposed provisions/amendments to section 43(1)/35AD
restricting the maximum amount that can be paid in cash to
Rs.10,000, exceptions on the lines provided in Rule 6DD
may be considered.
Suggestions:
It is suggested that:
(i) In the interest of certainty and to avoid retro-applicability of
the provision, it is recommended that disallowance of
depreciation should trigger only if cash expenditure as well
as asset acquisition is on or after 1 April 2017.
(ii) Only such expenditure for acquisition of asset may be
disallowed which has been incurred in cash and
accordingly, depreciation under section 32 may be
permitted for balance portion expended in non-cash mode.
(iii) Exceptions on the lines contained in Rule 6DD may also be
provided with respect to the proposed amendments in
section 35AD and 43(1) which proposes to restrict the
maximum amount that can be paid/incurred in cash to
Rs.10,000.
8. Clause 20 Section 44AB Increased threshold for
presumptive tax cases under section 44AD - Consequential
amendments required in section 194A/194H/194I & 194J
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The Finance Bill, 2017 proposes to amend the section 44AB to
exclude the eligible person, who declares profits for the previous
year in accordance with the provisions of sub-section (1) of section
44AD and his total sales, total turnover or gross receipts, as the
case may be, in business does not exceed two crore rupees in such
previous year, from requirement of audit of books of accounts
under section 44AB. The said change is proposed by insertion of a
proviso to section 44AB.
It is a welcome amendment. However, consequential amendments
are required in sections 194A/194H/194I/194J wherein an
individual or a Hindu undivided family, whose total sales, gross
receipts or turnover from the business or profession carried on by
him exceed the monetary limits specified under clause (a) or
clause (b) of section 44AB during the financial year immediately
preceding the financial year in which such interest is credited or
paid, is liable to deduct income-tax under the respective section(s).
In other words, no consequential amendment has been proposed in
sections 194A/194H/194I/194J wherein an individual/HUF is
required to deduct tax at source if his/its turnover is exceeding
limits specified clause (a) and (b) of section 44AB. The monetary
limit as specified under clause (a) is still 1 crore which means that
a person is required to deduct tax under the aforesaid sections
despite the fact that he has opted for presumptive taxation under
section 44AD and his turnover is less than Rs.2 crores, due to
which he is not liable to tax audit under section 44AB.
Suggestion:
It is suggested that in line with the enhanced limit proposed in
section 44AB for a person opting for presumptive taxation
under section 44AD, consequential amendment may be made
in sections 194A/194H/194I/94J by including reference to
the newly inserted proviso to section 44AB.
9. Clause 22 - Section 45(5A) - Special provision for computation
of capital gain in case of joint development agreement (JDA) -
Certain concerns to be addressed and scope to be enlarged
The Finance Bill 2017 proposes to insert sub-section (5A) in the
existing section 45 to provide that the capital gains arising to an
individual or Hindu undivided family under a Joint Development
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Agreement shall be taxed in the year in which completion
certificate for the whole or part of the project is received, based on
the stamp duty valuation on the date of issue of certificate of
completion as increased by cash consideration received, if any.
However, the above provisions shall not apply where the assessee
transfers his share in the project on or before the date of issue of
said certificate of completion, and the capital gains shall be deemed
to be the income of the year in which such transfer takes place.
Relief is proposed to be provided to individuals and HUFs on
transfer of capital asset by postponing the date of taxability from
the date of transfer to the date of obtaining of the Completion
Certificate which was a matter of concern since quite a long time.
This is a very welcome provision which addresses the concern of
the tax payer in having to pay tax when he has still not realised the
income from the project.
Issues
a) In case the owner transfers his share of the property before
receipt of the Completion Certificate, then, the benefit
envisaged in this amendment will not be available to him.
This may cause genuine difficulty since typically in these
kinds of JDAs, the owner receives several units of flats/floors
as his share of property and while the project is in progress
some of the units may be sold by him. Since only some of
the units may be transferred when the project is in progress,
the benefit of this proposal may not be denied in respect of
capital gains arising from sale of his entire share of property.
b) The applicability of this section has been restricted to
Individuals and HUFs. The difficulty envisaged by the
legislature is faced by all assessees and therefore, this
section may be made applicable to all classes of assessees.
c) Due to sluggishness in the economy and scarcity of funds,
developers too are entering into this kind of arrangement
wherein they forgo part of their total profits by entrusting the
task of development to another developer who has the funds
required for development of the property. Therefore, similar
provision may also be introduced for property held as a
business asset.
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d) The aforesaid proposed provisions appear to be in line with
the existing provisions of section 50C. However, certain
safeguards contained in section 50C do not find place in the
proposed section 45(5A). For example, section 50C provides
that where the assessee claims before any Assessing Officer
that the value adopted or assessed or assessable by the
stamp valuation authority exceeds the fair market value of
the property as on the date of transfer, then the Assessing
Officer may refer the valuation of the capital asset to a
Valuation Officer.
Similar safeguards may be incorporated in section 45(5A) as
well, in a case where stamp duty value is higher than FMV.
e) Competent authority is proposed to be defined in the
Explanation below section 45(5A) to mean the authority
empowered to approve the building plan by or under any law
for the time being in force. This does not appear to be in sync
with the definition of "competent authority" as per section 2
(p) of the Real Estate (Regulation and Development) Act,
2016.
f) The provisions of the proposed sub-section defers the
taxability of capital gains to the year of issuance of the
completion certificate. However, the time limit for claiming
benefit under sections 54 and 54F of the Act is reckoned
from the date of transfer.
Suggestions:
It is suggested that:
a) In a case where only some of the units of flats/floors are
transferred by the owner when the project is in progress,
the benefit of this proposal may not be denied in respect of
capital gains arising from sale of the entire share of owner's
property. The benefit may continue to be available in respect
of capital gains arising from those units which are
transferred after receipt of completion certificate. This would
address the concern of the tax payer and at the same time,
the Government would realise revenue at an early point of
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time in respect of those units which were transferred when
the project is in progress.
b) The benefit of this section may be extended to assessees
other than individuals and HUFs also.
c) The benefit of this section may also be extended to cases
where the property is held as a business asset.
d) The safeguards contained in section 50C may be
incorporated in section 45(5A) as well.
e) In order to ensure symmetry and consistency, the definition
of Competent authority may be the same as per section 2 (p)
of the Real Estate (Regulation and Development) Act, 2016
wherein "Competent Authority" has been defined as follows-
"competent authority" means the local authority or any
authority created or established under any law for the time
being in force by the appropriate Government which
exercises authority over land under its jurisdiction, and has
powers to give permission for development of such
immovable property;
f) In order to enable the assessee to claim exemption under
section 54/54F, it is suggested that the time limit under
sections 54/54F are reckoned from the date of issuance of
completion certificate.
10. Clause 26 and 29- Section 50CA and section 56(2)(x)(c)- Fair
Market Value to be full value of consideration in case of
transfer of unquoted shares Amendment required in view of
double taxation in the hands of seller as well as buyer
The Finance Bill 2017 proposes to insert new section 50CA to
provide that in case of transfer of shares of a company other than
quoted shares, the fair market value of such shares determined in
the prescribed manner shall be deemed to be the full value of
consideration for the purpose of computing income chargeable to
tax as capital gains.
Further, Explanation to the proposed section states that "quoted
share" means the share quoted on any recognised stock exchange
with regularity from time to time, where the quotation of such
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share is based on current transaction made in the ordinary course
of business.
The Finance Bill 2017 proposes to insert new clause (x) in sub-
section (2) of section 56 so as to provide that where any person
receives immovable property without consideration and its stamp
duty value exceeds Rs.50,000, the same would be subject to tax.
Likewise, if any person receives immovable property for inadequate
consideration, and the difference between the stamp duty value
and actual consideration exceeds Rs.50,000, the difference would
be subject to tax in the hands of the recipient under the head
"Income from other sources". Clause (x)(c) provides that where any
person receives any property other than immovable property -
Without consideration, the aggregate fair market value of which
exceeds fifty thousand rupees, the whole of the aggregate fair
market value of such property shall be chargeable to tax as
`income from other sources'.
For a consideration which is less than the aggregate fair market
value of the property by an amount exceeding fifty thousand
rupees, the aggregate fair market value of such property as
exceeds such consideration shall be chargeable to tax as
`income from other sources'.
In light of the aforesaid proposed amendment, there will be a
double taxation of the same income on deeming basis as explained
in the example below:
Example:
For example,' X' transfers his unquoted shares purchased at a cost
of Rs.8 lakhs to `Y' at Rs. 10 lakhs whereas the Fair Market Value
of the shares as determined in the prescribed manner is Rs. 1
crore. Then in this situation, the provisions of proposed Section
50CA would be attracted in the hands of the seller, whose full
value of consideration for computation of capital gains would be
Rs.1 crore. Further, `Y' who is purchaser would be liable to tax
under section 56(2)(x)(c) on Rs. 90 lakhs (i.e. Rs. 1 crore less Rs. 10
lakhs) as income from other sources.
Hence, the difference of Rs.90 lakhs between the fair market value
and the actual consideration will be taxable:
under section 50CA, in the hands of seller; and
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under section 56(2)(x), in the hands of recipient.
Further, even though the recipient, at the time of sale of such
shares at a later date would treat the FMV as the Cost of
Acquisition, tax has been collected upfront and at times it may
happen that the person may not sell shares at a later date.
Suggestions:
It is suggested that:
Keeping in mind the consequential double taxation arising
on account of the same income being subject to tax both in
the hands of seller and recipient, suitable amendment may
be made to prevent unjust enrichment of the revenue.
Notwithstanding the above, if provisions of Section 50CA
are to be retained, value determined as per Rule 11UA may
be considered as the FMV of unquoted shares.
The definition of quoted shares is very subjective and
complicated. In actual practice, it may involve problems of
interpretation, which would invite unending litigation. It is,
therefore, suggested that this section should be made
applicable to transfer of shares of a company in which the
public is not substantially interested.
11. Clause 29- Section 56- Insertion of new clause (x) in section
56(2) - Reference to be included in the definition of income
under section 2(24)
The Finance Bill, 2017 proposes to insert a new clause (x) in sub-
section (2) of section 56 so as to provide that receipt of the sum of
money or the property by any person without consideration or for
inadequate consideration in excess of Rs. 50,000 shall be
chargeable to tax in the hands of the recipient under the head
"Income from other sources".
While clause (vii) and (viia) Section 56(2) of the Act find a mention
in clause (xv) of Section 2(24) of the Act, being the definition of the
term `income', the newly inserted clause (x) of Section 56(2) does
not find a mention in Section 2(24) of the Act.
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While sunset provisions have been set in for clauses (vii) and (viia)
of Section 56(2) of the Act, there has been no inclusion of clause (x)
of Section 56(2) in the definition of the term `income' under section
2(24).
Suggestion:
It is suggested that an appropriate amendment should be
made in the definition of the term `income' under section 2(24)
of the Act to include any sum of money or value of property
referred to in clause (x) of section 56(2).
Further, the following are the concerns in respect of the proposed
section:
(i) The scope of section is proposed to be widened, but at the
same time, the limit of exemption of Rs. 50,000 fixed as
back as in 2006, has not been increased considering the
inflation and reduction in the value of money.
(ii) Revival of Sick Companies are necessary and is in overall
interest of the economy. Taxing the amount received by
the sick companies may not be fair. Considering this,
subvention granted by parent company to subsidiary
company to recoup the financial losses or to improve the
financial health of the company was considered as capital
receipt.
(iii) Cases of capital contribution and distribution of assets
need to be carved out.
Suggestions:
It is suggested that:
i. In order to avoid the unintended hardship to small
taxpayer, the limit of exemption may be increased from
Rs.50,000 to Rs. 5 lakhs.
ii. Suitable exception to carve out the case of subvention
granted by parent company to subsidiary company from
the purview of section 56(2)(x) may be provided.
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iii. Cases of capital contribution and distribution of assets
need to be carved out, for example-
Property settled in a trust by a settlor
Distribution of asset by trust to beneficiaries
12. Clause 31- Section 71(3A) - Restriction on set-off of loss from
House property Restriction to be done away with
The Finance Bill 2017 proposes to insert sub-section (3A) in
section 71 to provide that set-off of loss under the head "Income
from house property" against any other head of income shall be
restricted to two lakh rupees for any assessment year. However,
the unabsorbed loss shall be allowed to be carried forward for set-
off in subsequent years in accordance with the existing provisions
of the Act.
In light of the proposed insertion of sub-section (3A) in section 71,
there will be following implications:
Any person (individual or a corporate) who has income under
the head "Income from House Property" cannot claim a set
off of interest paid exceeding Rs. 2 Lakhs against any other
source of income. Such excess would be carried forward for
eight years.
This amendment may have a far reaching negative impact for
real estate sector and financial sector.
As section 71 does not carve out individuals, the honest tax
payers i.e., salaried class tax payers would be affected the
most. In this context, it is relevant to note that the Finance
Minister has, in his budget speech, clearly stated the
following: -
"While the Government is trying to bring within tax-net more
people who are evading taxes, the present burden of taxation
is mainly on honest tax payers and salaried employees who
are showing their income correctly..."
This amendment would have serious repercussions on the honest
taxpayer who have made bonafide investments in the house
properties and have incurred significant amount of interest
outflows from their hard-earned income. Considering that in most
of cases, the prices of properties have gone down by more than 20-
25 per cent in the past 3 to 4 years, the owners are already
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burdened with the reduction in the value of property combined
with interest cost. This provision would further compound the
misery of the owners as apart from the huge loss of capital and
outflow of interest, their tax burden would also increase
substantially.
Let us take a simple case of salaried individual paying interest on
housing loan, the details of which are given hereunder:
Particulars Amount (In Rs.)
Salary income 25 lakhs
Property purchased under 80 lakhs
construction in FY 2013-14
Loan taken on 1 Apr 2013 64 lakhs
Year of possession FY 2016-17
Annual rental amount 2.40 lakhs
Income from house property 1.68 lakhs (2.4 lakhs
less 30%)
Accumulated interest 18 lakhs
- FY 2013-14 INR 6 lakhs
- FY 2014-15 INR 6 lakhs
- FY 2015-16 INR 6 lakhs
Interest on housing loan to be claimed 9.6 lakhs
for FY 2016-17 (6 lakhs for FY 2016-17
and 3.6 lakhs as pre-
acquisition interest)
The total accumulated loss is Rs. 18 lakhs.
The assessee was setting off loss of Rs. 7.92 lakhs from house
property against salary income of Rs. 25 lakhs till now. If the
proposed amendment is effected, assessee will be losing on the
interest already incurred and paid and may not be able to claim
such loss in future year considering the low rentals. In this case,
the hit on monthly cash flow for the individual would be
approximately Rs. 20,000.
Generally, middle class and lower class people invest in property by
obtaining loan from banks. The amount of interest paid is always
higher than rental income earned such property and as per the
current provisions, the loss could be set-off against other income.
This has always been a motivator to invest in real estate. However,
now restrictive provisions are proposed in respect of set-off of loss
from house property. Further, the period for which such loss can
be carried forward for set-off against income from house property is
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only eight assessment years. However, practically there would not
be any positive income from house property since interest cost is
very high.
Suggestion:
It is suggested that:
a. This change in provision alters the position of taxpayer in
respect of transactions done by him taking into account the
prevailing tax laws. This change is also having the effect of
denying the benefit of set-off of pre-construction interest
against other income under other heads, if the same along
with current year interest exceeds Rs.2 lakh. In other
words, this change is having retroactive effect which is
against the stated policy of Government. If any change is
required to plug the tax benefit, the same should be in
respect of housing loans taken on or after 1.4.2017 or
houses purchased on or after 1.4.2017.
b. "House for all" is on priority list and the prime objective
and initiative of the Government. The proposed provision
may work against the initiative of the Government to
provide a fillip to the housing sector. Availability of
affordable houses on rent is also an essential priority of the
government. Considering the high priority of housing sector,
this restriction may be done away with.
13. Clause 32- Section 79- Carry forward and set off of loss in case
of eligible start-ups - Condition to be further relaxed
The Finance Bill, 2017 proposes to amend section 79 to provide
that where a change in shareholding has taken place in a previous
year in the case of a company, not being a company in which the
public are substantially interested and being an eligible start-up
as referred to in section 80-IAC of the Act, loss shall be carried
forward and set off against the income of the previous year, if
all the shareholders of such company which held shares
carrying voting power on the last day of the year or years in which
the loss was incurred, being the loss incurred during the period of
7 years beginning from the year in which such company is
incorporated, continue to hold those shares on the last day of such
previous year.
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The existing provisions provide for restrictions on carry forward of
losses in case of substantial change in shareholding of the Indian
company. As per the current provisions, shareholders of the
company at the end of the financial year in which the loss was
incurred must continue to own at least 51% of the shares in that
company in the year in which such carry forward loss is to be set
off; otherwise, the company loses the ability to carry forward such
loss.
The Government, in pursuance of the start-up action plan and
facilitating ease of doing business, proposes to introduce a
beneficial regime for start-up to carry forward and set off losses. It
has been proposed that as long as all the original shareholders of
the Company at the end of the financial year in which the loss was
incurred continue to be shareholders of such shares in the
financial year in which the loss is to be set off, the benefit of carry
forward of loss would be available.
Another issue is on account of turnover condition specified in
Explanation (ii)(b) of section 80-IAC for a company to qualify as
`eligible start up'. The condition is that turnover of such company
should not exceed Rs. 25 Crore anytime between F.Y. 2016-17 to
F.Y. 2020-21. This condition also creates uncertainty for start ups
in the matter of section 79 limitation as generally applicable to
closely held companies i.e., whether the turnover limit has to be
adhered to in the year of set-off as well.
The condition of continuing to hold all shares appears to be
applicable not only to the initial promoters but also all persons
investing subsequently in the start up, which may cause genuine
practical hardship. This may also be practically difficult for the
start-up company to achieve since PE investors generally look at
time frame of 3 to 5 years for exit at a higher price. The exit may
happen either through secondary sale in subsequent round of PE
funding or through IPO. Any such exit will trigger section 79
limitation for the start-up company.
Suggestion:
It is, therefore, suggested that the condition of continuous
holding of the promoters/investors (being persons holding
shares in the year of loss) be relaxed. Inter-se transfers
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between such shareholders be permitted. Also, it should
suffice that the group of promoters/investors hold upto 26% of
the voting power in the year of set-off. In any case, the
turnover condition for a company to be an `eligible start up'
may be omitted in Explanation (ii)(b) to section 80IAC.
Also, the period for carry forward and set-off of losses can be
extended based on period of gestation in the particular
industry instead of initial period of 7 years.
14. Clause 44 - Section 115BBDA Scope of section 115BBDA,
initially restricted to individuals, HuFs and Firms, expanded
Certain pooling vehicles like Mutual funds, AIFs etc. to be
exempted
The Finance Act, 2016 had inserted new Section 115BBDA to tax
dividend income in excess of Rs. 10 lacs in case of an Individual,
HUF and Firm at the rate of 10%.
The Finance Bill, 2017 proposes to extend the scope of section
115BBDA of the Act to include all categories of persons within its
purview except a domestic company, a fund or institution or trust
or any university or other educational institution or any hospital or
other medical institution referred to in section 10(23C)(iv) or
section 10(23C)(v) or section 10(23C)(vi) or section 10(23C)(via), a
trust or institution registered under section 12AA.
The amendment as proposed in section 115BBDA of the Act only
excludes certain specified persons from its purview. Therefore, by
implication, all other persons are covered within the purview of
Section 115BBDA of the Act.
The amendment particularly impacts some of the pooling vehicles
such as Mutual funds and Alternative Investment Funds (AIFs)
which represent multiple investors, to whom the income earned
has to be distributed.
Pursuant to the amendment proposed, dividend in excess of Rs. 10
lakhs would become taxable in the hands of the aforesaid pooling
vehicles even though the share of dividend income of each investor
in such pooling vehicles may not exceed Rs. 10 lakhs.
Suggestion:
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To remove such hardship, it is requested that a suitable
amendment may be brought in to exclude pooling vehicles like
Mutual funds, AIFs, etc. from the purview of section 115BBDA.
15. Clause 45 - Insertion of 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.
The proposed introduction of section 115BBG providing for a 10
percent tax on income from transfer of carbon credits is a welcome
move. This would go a long way in helping to resolve the
uncertainty and litigation over the taxability of income from the
transfer of carbon credits going forward.
Consequent amendment is required in the definition of the term
`income' under Section 2(24) of the Income-tax Act to include the
income from transfer of carbon credits.
Further, the position regarding taxability of income from transfer of
carbon credits for earlier years may be clarified since there have
been divergent decisions given by the courts on whether such
receipts are capital or revenue in nature. If the proposed tax
treatment is made applicable for earlier years also, it would garner
more revenue from assessees who have not offered the same to tax
on the ground that the same represents capital receipt. This would
also help avoid future litigation and complete pending
assessments.
The Government has also been taking several steps aimed at
curbing litigation. These include coming up with schemes for
dispute resolution both for legacy disputes arising out of
retrospective amendments as well as other disputes that are
pending in the appellate hierarchy. These measures and schemes
are welcome steps and have been commended by the taxpayers. A
similar scheme for income from transfer of carbon credits for the
past years would go a long way towards furthering the
Government's stated objective of curbing litigation.
Suggestion:
It is suggested that:
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a. Section 2(24) may be amended to include income from
transfer of carbon credits in the definition of "income".
b. for the periods prior to Assessment Year 2018-19, an
option may be given to taxpayers to voluntarily offer
income from transfer of carbon credits to tax at the same
10% rate as contemplated in section 115BBG. This can
help put an end to protracted litigation on the issue.
Considering that such receipts have been held as non-
taxable capital receipts by two High Courts, such a move
will also benefit the exchequer.
The option to pay tax on such receipts at 10% could be
structured as a one-time scheme open for a limited time,
say until 30 September 2017.
16. Clause 37 -Section 80-IBA Relaxation of certain conditions
from 1.4.2018 Relaxation may be effective from 1.4.2017
Under section 80-IBA, inserted by the Finance Act, 2016 from
1.4.2017, deduction of 100% of profits derived from development
of affordable housing projects approved on or after 1st June 2016
is available, subject to fulfilment of specified conditions. The
Finance Bill, 2017 has proposed amendments in section 80-IBA so
as to relax some of the conditions required to be fulfilled for grant
of deduction. These amendments provide for:
(i) Extending period within which housing project is to be
completed to five years from the date of approval;
(ii) Substituting references to "built-up area" with "carpet
area" as defined in the Real Estate (Regulation and
Development) Act, 2016;
(iii) Housing project located in the outskirts of metro cities
(i.e. located within 25 KM periphery of municipal limits of
metro cities), which were earlier required to comply with
conditions applicable for housing project located in metro
cities, now need to comply with less restrictive conditions
as applicable to housing project located in any other place
in India.
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The above amendments are welcome and are likely to give a boost
to affordable housing in India. However, while section 80-IBA was
introduced vide Finance Act, 2016 and is effective from A.Y. 2017-
18 for housing projects that are approved on or after 1st June
2016, the above amendments vide Finance Bill, 2017 are proposed
to be effective only from A.Y. 2018-19.
Therefore, there is scope for litigation on the issue as to whether
amended provisions will apply to projects which are approved on or
after date of amendment being 1 April 2017 or also to projects
approved between 1 June 2016 and 31 March 2017.
Suggestions:
It is suggested that
(i) To avoid possible litigation as also to ensure that housing
projects approved prior 1 April 2017 are treated on par
with housing projects approved on or after 1 April 2017, the
amendments proposed in the Finance Bill 2017 relaxing the
conditions to be fulfilled under 80-IBA for availing the
benefit of deduction thereunder may be introduced with
retrospective effect from the date of insertion of the section
i.e. from A.Y. 2017-18.
(ii) Alternatively, CBDT may issue a clarification that housing
projects approved prior to A.Y. 2018-19 in respect of which
profits are earned during or after A.Y. 2018-19 will be
considered for tax holiday benefit as per the amended
provisions.
17. Clause 46(a) Section 115JAA Extension of period of carry
forward of MAT credit from 10 years to 15 years - Clarity
regarding carry forward and set off of MAT credit in cases
where the ten year period has expired on or before AY 2016-17
but the fifteen year period has still not expired
The Finance Bill, 2017 proposes to amend section 115JAA of the
Income-tax Act, 1961 to provide that the tax credit in respect of
Minimum Alternate Tax (MAT) paid by companies under section
115JB of the Act can be carried forward up to fifteenth assessment
year immediately succeeding the assessment year in which such
tax credit becomes allowable. This amendment is proposed to be
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effective from 1 April, 2018.
Currently, the MAT credit is not allowed to be carried forward
beyond ten assessment years. The relevant provisions of Section
115JAA of the Act are reproduced as under-
"(3A) The amount of tax credit determined under sub-section (2A)
shall be carried forward and set off in accordance with the
provisions of sub-sections (4) and (5) but such carry forward shall
not be allowed beyond the tenth assessment year immediately
succeeding the assessment year in which tax credit becomes
allowable under sub-section (1A).
(1A) Where any amount of tax is paid under sub-section (1) of section
115JB by an assessee, being a company for the assessment year
commencing on the 1st day of April, 2006 and any
subsequent assessment year, then, credit in respect of tax so paid
shall be allowed to him in accordance with the provisions of this
section." (Emphasis supplied)
An issue arises in cases where the ten year period has expired with
the assessment year 2016-17 owing to completion of 10 years
period on the basis of the current provisions.
In such cases, having regard to the proposed amendment, a
question arises as to whether the benefit which has already lapsed
will get a new lease of life. The ambiguity arises since the proposed
extension of carry forward period to fifteen years shall take effect
only from April 1, 2018 (i.e. A.Y. 2018-19).
It may be noted that a similar amendment was made in Section
115JAA in the Finance Act, 2009 wherein the carry forward of MAT
credit was extended upto 10 assessment years from 7 assessment
years. The Explanatory Memorandum to the Finance Act, 2009
reads as under:
".. .the assessees, being companies, who pay Minimum Alternate
Tax under section 115JB for any assessment year beginning on or
after the 1st day of April, 2006, it is also proposed to amend the
provisions of sub-section (3A) of section 115JAA..." (Emphasis
Supplied)
The issue discussed above did not exist when the tenure was
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extended from 7 to 10 years as the amendment was brought before
the expiry of the available bracket for carry forward.
The memorandum explaining the provisions of the Finance Bill,
2017 states as follows:
"Section 115JAA contains provisions regarding carrying forward and
set off of tax credit in respect of Minimum Alternate Tax (MAT) paid
by companies under section 115JB. Currently, the tax credit can be
carried forward upto tenth assessment years. With a view to
provide relief to the assessees paying MAT, it is proposed to
amend section 115JAA to provide that the tax credit determined
under this section can be carried forward up to fifteenth assessment
years immediately succeeding the assessment years in which such
tax credit becomes allowable...
....These amendments will take effect from 1st April, 2018 and
will, accordingly, apply in relation to the assessment year 2018-19
and subsequent years." (Emphasis Supplied)
It appears from the language of the Memorandum that the intent of
the legislature is to provide relief to the taxpayers paying MAT by
extending the carry forward period for MAT credit. However, the
strict interpretation of the provisions does not appear to sync with
this intent.
The issue in hand needs to be addressed so that taxpayers' whose
MAT credit carry forward period has lapsed should not be at a
disadvantage and suffer from the transitional impact of the
proposed amendment.
Suggestion:
In line with the intent of the proposed legislative amendment
and to ensure equity, it is suggested that appropriate
clarification either by way of an Explanation in section
115JAA or by way of an Explanatory circular be issued to the
effect that such benefit is available even in cases where the
ten year period expired before A.Y.2017-18 but the fifteen year
period has still not expired.
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18. Clause 46(b) Section 115JAA(2A) - Restriction on carry
forward of MAT/AMT credit and claim of FTC in relation
to taxes under dispute - Restriction to be removed
In line with Rule 128(7), the Finance Bill 2017 proposes to
insert second proviso to section 115JAA(2A) restricting
quantum of MAT credit to be carried forward to subsequent
years. The proposed proviso provides that where the amount
of FTC available against MAT/AMT is in excess of FTC
available against normal tax, MAT/AMT credit would be
reduced to the extent of such excess FTC.
Similar restriction is proposed to be inserted in S. 115JD(2)
on AMT credit.
Both the provisions are proposed to be effective from the 1
April, 2018 i.e. will apply in relation to A.Y. 2018-19 and
onwards as specifically provided in Notes on Clause and
Memorandum to the Finance Bill.
The rationale of aforesaid restriction/limitation is not clear.
The restriction on quantum of MAT/AMT credit to be carried
forward subjects taxpayer to duplicated MAT liability while
denying the rightful carryover of MAT/AMT credit.
The FTC credit is an alternative form of tax payment. For all
purposes including for grant of refund or levy of interest, FTC
is treated as advance tax paid to the extent the same is
creditable against tax liability in India. Once MAT liability is
admitted to be tax liability on income in India, there is no
justifiable reason for treating FTC separately depending on
whether FTC is creditable against normal tax liability or MAT
liability. The proposed amendment is inconsistent with the
Government's assurance that MAT is to be effectively phased
out and incidence of MAT is to be counter matched by grant
of extended period of MAT credit.
Suggestion:
The proposed restriction on carry forward of MAT/AMT credit
may be removed.
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19. Clause 50 & 51 Section 132(1), 132(1A) and 132A(1) reason
to believe to conduct a search, etc. not to be disclosed
retention of existing provisions to reduce undue hardship to
genuine assessee
It is proposed to insert an Explanation to section 132(1), 132(1A)
and 132A(1) to declare that the 'reason to believe' or 'reason to
suspect', as the case may be, shall not be disclosed to any person
or any authority or the Appellate Tribunal. The proposed
amendment could lead to unnecessary harassment of taxpayers.
Suggestion:
It is suggested that the requirement of `reason to believe' or
'reason to suspect' may be retained in these sections to reduce
undue hardship on genuine assessees. Such reasons may also
be permitted to be disclosed to appellate authorities
20. Clause 55 - Section 139(5) Reduction in time limit for filing
revised return Retention of existing time limit for filing of
revised tax return at least in cases of claim of foreign tax
credit
The Finance Bill 2017 proposes to amend section 139(5) to provide
that the time for furnishing of revised return shall be available upto
the end of the relevant assessment year or before the completion of
assessment, whichever is earlier.
This particularly impacts claims for any Foreign Tax Credit (FTC) in
respect of the taxes paid by the individual assessee(s) in the
overseas tax jurisdiction. Generally the information/ final payment
of foreign taxes/ tax return is unlikely to be available within the
proposed timeline for filing the revised tax return i.e. by the end of
the relevant assessment year.
As an example, USA follows calendar year as their tax year and the
first due date of filing a USA income-tax return is April 15th of the
following calendar year, meaning thereby, the USA income-tax
return for calendar year 2018 will be required to be filed by 15th
April, 2019.
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In a case of Indian income-tax return for tax year 2017-18, the due
date to file a revised return as per the proposed amendment will be
31st March, 2019.
In the above situation, the assessee may not have his final tax
return available with him till 15th April 2019, hence, such
assessee will not be able to claim the FTC of the final USA taxes
paid by him in his Indian income-tax return as he may not have
the final USA tax details by 31 March 2019.
Suggestion:
Keeping in mind the above hardship of double taxation which
may arise to the individual assessee as he may not be able to
claim foreign tax credit in the absence of overseas income-tax
return, there is a need to retain the time limit for filing of
revised tax return at any time before the expiry of one year
from the end of the relevant assessment year or before the
completion of assessment, whichever is earlier. Therefore, the
existing time limit may at be retained at least in respect of
revision required for claiming foreign tax credit.
21. Clause 62 - Claim of FTC pertaining to taxes which are under
dispute in the foreign country Clarification required on
certain issues relating to period of limitation and documents
which shall constitute evidence of settlement
Section 155(14A) proposes to provide that where the payment of
foreign tax is under dispute credit of such taxes will be available in
India in the year in which the dispute is settled, on satisfaction of
certain conditions. To give effect to this an enabling provision shall
be inserted through which Tax Authority will rectify the
assessment orders or an intimation order and allow credit of taxes
in the year in which the taxpayer furnishes the evidence of
settlement of dispute and discharge of foreign tax liability.
However, the proposed amendment does not provide for time limit
within which the Assessing Officer has to rectify the assessment
order. The proposed amendment only gives a reference to
section 154. Section 154 provides a time limit of 4 years for
reassessment, excluding anything specifically provided under
section 155. Issues may arise on what is period of limitation which
may apply for section 155(14A) and how it should be applied.
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The proposed amendment provides that the Assessing Officer shall
amend the earlier order which denied FTC, if the taxpayer, within
six months from the end of the month in which the dispute is
settled, furnishes to the Assessing Officer, evidence of settlement of
dispute and evidence of payment of tax. Time threshold of six
months from date of dispute settlement gives a very small window
for taxpayers to claim the benefit for previous years, hence, giving a
limited scope to the benefit.
It is also not clear as to what could constitute sufficient evidence
on the part of taxpayers to claim the FTC benefit on dispute
settlement.
Suggestions:
(i) The time limit applicable for rectification of order may be
clarified. Since all the sub-sections in section 155, provide
for the time limit to be applied and some of the sub-sections
provide for a different time limit, it may be expressly
clarified that what is the period of limitation which may
apply to cases covered by the proposed section 155(14A).
(ii) It may also be clarified that the period of limitation (e.g. if it
4 years), should be 4 years from the end of the year in
which the amended order is passed and it should not be
the date of the original order. This is for the reason that if
the dispute in the foreign country takes more than 4 years
to get resolved and if the limitation period is considered to
be 4 years from the date of the original order, the taxpayer
may not get credit for taxes which he has actually paid.
Such may not be the intent of the proposed amendment.
A similar provision is contained in S.155(16) which
provides that where the compensation for compulsory
acquisition is reduced by any Court or Tribunal, then the
period of limitation shall be reckoned to be 4 years from the
end of the year in which the order of the Court or Tribunal
is passed.
(iii) The time limit may be amended to provide for 6 months
from date of settlement of dispute or date of effect of the
amended order passed u/s. 155(14A), whichever is later.
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(iv) Clarification may be provided on what is the
documentation which shall constitute as sufficient evidence
for justifying that the dispute has been settled. This may be
done by specifying an illustrative set of documents, which
shall constitute as evidence for settlement of dispute.
Illustratively the following may be considered as evidence
for settlement of dispute
Final assessment order/ final demand notice of the tax
authority of the foreign country
Judgment of the Court of Law along with the final
demand notice of the tax authority based on the
judgement
Proof of payment of taxes
Self-declaration
22. Clause 63 Section 194-IB Requirement of tax deduction at
source by individuals/HUFs paying monthly rent exceeding
Rs.50,000 - Enabling measures to facilitate ease of compliance
to be introduced & issue of clarification regarding the amount
on which tax has to be deducted at source in a situation where
monthly rent is increased during the previous year and the
increased monthly rent exceeds Rs.50,000
The Finance Bill, 2017 proposes to insert new section 194-IB to
provide that an Individual or a HUF (other than those covered
under clause (a) & (b) of section 44AB of the Act), responsible for
paying to a resident any income by way of rent exceeding fifty
thousand rupees for a month or part of month during the previous
year, shall deduct an amount equal to five per cent. of such
income as income-tax thereon.
It is further proposed that tax shall be deducted on such income at
the time of credit of rent, for the last month of the previous year
or the last month of tenancy if the property is vacated during the
year, as the case may be, to the account of the payee or at the time
of payment thereof in cash or by issue of a cheque or draft or by
any other mode, whichever is earlier.
Issues:
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(1) The amount on which tax needs to be deducted in the last
month of the previous year would generally be the total rent
paid during the previous year. However, in a case when the
monthly rent currently does not exceed Rs.50,000 but the
same is increased, say, in the month of February and the
increased rent amount exceeds Rs.50,000 per month, then it
is not clear on what amount the tax needs to be deducted.
Whether the tax needs to be deducted on the rent paid
during that previous year although the rent per month for
some of the months is less than Rs.50,000 p.m or the rent
needs to be deducted on the aggregate amount of rent for the
months where rent has exceeded Rs.50,000 pm.
(2) Since it is also proposed that the deductor shall be liable to
deduct tax only once in a previous year, requisite measures
for one time remittance of tax by such deductor may be
implemented to facilitate easy compliance.
Suggestions:
It is suggested that:
(i) a suitable clarification be issued clarifying the amount
on which tax needs to be deducted under section 194-IB
in case the monthly rent has been increased during the
year and the amount of rent per month before such
increment was less than Rs 50,000.
(ii) a simple challan-cum-statement for one-time remittance
of tax by the lessee/rent payer be notified and a
reasonable time period for remittance of rent may be
prescribed in Rule 30 in line with sub-rule (2A).
The PAN of the lessor/landlord and lessee/tenant may
be required to be quoted in the challan so that the
lessor/landlord can take credit of tax deducted and
remitted.
The said suggestions are in line with provisions
applicable for compliance of provisions of section 194-IA.
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23. Clause 71 Section 206C(1D) - Exclusion of specific reference
to sale of jewellery, cash consideration exceeding Rs.5 lakhs -
Consequent implication
Section 206C(1D) provides for TCS obligation on sale of jewellery,
sale of bullion, and residuary limb being any other goods (other
than bullion or jewellery) ,if the value of consideration received in
cash exceeds specified limits as under:
For sale of jewellery, cash consideration exceeding Rs. 5 lakhs
For sale of bullion and any other goods in residuary category, cash
consideration exceeding Rs. 2 lakhs .
The Finance Bill 2017 proposes to omit specific reference to
`jewellery' from section 206C(1D) such that post amendment, TCS
obligation would be in respect of cash sale of "bullion" or "any
other goods (other than bullion)" of an amount exceeding Rs. 2
lakhs. The proposed amended provision would read as under:
"(1D) Every person, being a seller, who receives any amount in
cash as consideration for sale of bullion or jewellery [or any other
goods (other than bullion or jewellery) or any other goods (other
than bullion)or providing any service], shall, at the time of receipt
of such amount in cash, collect from the buyer, a sum equal to one
per cent of sale consideration as income-tax, if such
consideration,--
(i) for bullion, exceeds two hundred thousand rupees; or
(ii) for jewellery, exceeds five hundred thousand rupees; [or]
(iii) for any goods, other than those referred to in clauses (i) and
(ii), or any service, exceeds two hundred thousand rupees:"
An issue arises as to whether the proposed amendment intends to
take out sale of jewellery completely from TCS levy or intends to
retain the TCS levy on jewellery but with lower threshold of Rs. 2
lakhs.
A plain reading of the amended s. 206C(1D) (as reproduced above)
would suggest that jewellery would now be covered under residuary
clause "any other goods (other than bullion)" with lower threshold
of Rs. 2 lakhs. The understanding, that the proposed amendment
lowers the threshold of cash sale of jewellery from 5 lakhs to 2
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The Institute of Chartered Accountants of India
lakhs, is also in line with the provisions of proposed 269ST
restricting the amount of receipt in cash receipt by any person in
excess of Rs. 3 lakhs. There seems to be no reason to exclude cash
sales of jewellery beyond Rs. 2 lakhs from out of TCS levy- more
particularly, jewellery is identified as source of investing black
money.
However, the Explanatory Memorandum while dealing with the
proposal in the Finance Bill, 2017 on introduction of section 269ST
suggests as "It is also proposed to consequentially amend the
provisions of section 206C to omit the provision relating to tax
collection at source at the rate of one per cent of sale consideration
on cash sale of jewellery exceeding five lakh rupees."
The Notes to Clauses also states as `It is proposed to omit the said
clause in view of restriction on cash transaction as proposed to be
provided in section 269ST.
Therefore, there exists confusion as to whether the proposed
amendment intends to take sale of jewellery completely out of the
purview of TCS levy or jewellery would still be covered under the
residuary clause with a threshold of Rs. 2 lakhs as applicable.
Suggestions:
It is suggested that:
i. A suitable clarification on this issue (either by way of
Circular or legislative amendment) may be issued.
ii. Since the value limit for bullion and the other goods both
are at par (that is, Rs. 2 lakhs), the distinction is no longer
relevant.
The provision may be redrafted providing levy of
TCS@1%on sale of any goods (including bullion and
jewellery) or provision of services.
24. Clause 75 Section 234F Fee for delayed filing of return
Removal of provision levying fees to prevent undue hardship
for the genuine assessees
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The Finance Bill, 2017 proposes to levy fees of Rs.5,000 in case
where return is furnished after the due date but on or before 31st
December of the relevant assessment year and Rs.10,000, in other
cases. However, it is also proposed to restrict the fees to Rs.1,000,
where the total income does not exceed five lakh rupees.
Current provisions provide for penalty of Rs.5,000 under section
271F in case where return is furnished after end of relevant
assessment year provided there is no reasonable cause for such
delay.
The proposal is made with a view to ensure that returns are filed
within the due dates specified in section 139(1). However, fees
proposed under section 234F will be leviable on all assessees who
have furnished return beyond the due date specified under section
139(1) irrespective of the reason for such delay and whether all the
taxes have been paid through TDS or Advance Tax.
Also, the assessee cannot justify his cause for delay under any
appeal against the same as there is no proposed provision to
consider the reasonable cause for delay on the part of assessee.
Further, fee is generally levied in respect of services rendered.
Whereas collection of tax by the Government is a sovereign
function, as such, there is no rendering of services. Delay in filing
of return is in contravention of law for which penalty should be
attracted. The same can be waived if reasonable cause is proved.
Suggestion:
It is suggested that proposed fees under section 234F for
delayed filing of return may be withdrawn and necessary
amendments be made in section 271F.
25. Clause 83- Section 269ST- Restriction on cash transactions
Certain concerns to be addressed
In order to achieve the mission of the Government to move towards
a less cash economy to reduce generation and circulation of black
money, the Finance Bill 2017 proposes to insert section 269ST in
the Act to provide that no person shall receive an amount of three
lakh rupees or more,--
(a) in aggregate from a person in a day; or
(b) in respect of a single transaction; or
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(c) in respect of transactions relating to one event or occasion from
a person,
otherwise than by an account payee cheque or account payee bank
draft or use of electronic clearing system through a bank account.
Issues
(i) The phrase "transactions relating to one event or
occasion" is very subjective and prone to multiple
interpretations and may result in avoidable litigation.
Receipts exceeding Rs. 3 lakhs in respect of transactions
relating to one "event or occasion" from a person is
prohibited. Say for example, if salary/ wages is paid in
cash to supervisor/ consultant every month such that
yearly aggregate exceeds threshold limit of Rs. 3 lakhs,
tax authorities may argue that such receipt is covered by
section 269ST since payment of salary constitutes one
event or occasion even though payments might have been
disbursed monthly and raise a demand notice. Hence, it
may be suggested that third limb of "event or occasion"
should be explicitly kept out of the scope to avoid any
litigation and protect honest taxpayers. Similar
controversy may also arise in case of second limb which
covers receipt in respect of a "single transaction".
Suggestion:
It is suggested that suitable clarificatory guidelines may be
issued to illustrate the intent of the phrase "transactions
relating to one event or occasion from a person". In the
alternative, clause (c) may be removed.
(ii) Some exceptions on the lines of Rule 6DD need to be
provided. As per literal interpretation, even though receipt
by banking company is permitted, withdrawal of cash
from bank may be sought to be covered; payment of fund
amongst relatives, say for household expenses or medical
emergencies, is not exempted; money received may have
been deposited into the bank the same day and yet it may
be considered as a case of default, settlement of debt by
book entry or conversion of loan into equity may also
stand covered since it does not strictly fall within the
specified modes mentioned above.
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Suggestion
Exceptions on the lines of Rule 6DD may be provided.
(iii) The Finance Minister, in his budget speech has
mentioned that promotion of a digital economy is an
integral part of Government's strategy to clean the system
and weed out corruption and black money. It has a
transformative impact in terms of greater formalisation of
the economy and mainstreaming of financial savings into
the banking system.
Accordingly, the Finance Bill 2017 has, introduced
provisions encouraging payment through electronic
clearing system like, section 13A, section 35AD, section
40A etc. Further in section 269ST also, receipt in excess
of Rs.3 lakh otherwise than by way of account payee
cheque or account payee bank draft or use of electronic
clearing system (ECS) through a bank account is not
permissible and would attract penal provisions.
It is pertinent to note that debit cards, credit cards and e-
wallets are being widely used to make payments and
these instruments leave an audit trail. However,
technically, they do not fall within the scope of "Electronic
Clearing System" as per the meaning of the said term
clarified by RBI through its FAQs given at
https://www.rbi.org.in/Scripts/FAQView.aspx?Id=55
and reproduced below
"Electronic Clearing Service (ECS) is an electronic mode of
payment / receipt for transactions that are repetitive and
periodic in nature. ECS is used by institutions for making
bulk payment of amounts towards distribution of dividend,
interest, salary, pension, etc., or for bulk collection of
amounts towards telephone / electricity / water dues, cess
/ tax collections, loan instalment repayments, periodic
investments in mutual funds, insurance premium etc.
Essentially, ECS facilitates bulk transfer of monies from
one bank account to many bank accounts or vice versa.
ECS includes transactions processed under National
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Automated Clearing House (NACH) operated by National
Payments Corporation of India (NPCI)."
Suggestion:
It is suggested that payment made through banking channels,
including debit cards, credit cards and e-wallets, may be
permitted under the various provisions of the Income-tax Act,
1961. Alternatively, ECS may be specifically defined in the
Income-tax Act, 1961 to include reference to these modes of
payment.
(iv) The expression, `amount' has been used u/s 269ST
whereas the expression `sum' has been used u/s 271DA,
which may create confusion and result in avoidable
litigation.
Suggestion:
It is suggested that a uniform expression, `amount' or `sum
of money' may be used at both the places i.e. under section
269ST as well as under section 271DA.
(v) In Note no. 83 of notes on clauses, the following
amounts/ nature of transactions are proposed to be
excluded: -
"Any receipt from sale of agricultural produce by any person
being an individual or Hindu Undivided family in whose
hands such receipts constitutes agricultural income "
This transaction has been inadvertently omitted from the list of
exclusions proposed in section 269ST.
Suggestion:
It is suggested that the above highlighted transaction as
referred to in notes to clauses be excluded from the operation of
section 269ST by suitably amending the proviso to section
269ST.
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It is also suggested that the benefit of the above exclusion be not
restricted only to individual and HUF but also to other assessee's
also who are deriving agricultural income only.
26. Clause 86- Section 271J- Penalty imposable on chartered
accountant for furnishing incorrect information in reports or
certificates Penalty may be removed
In order to ensure that the person furnishing report or certificate
undertakes due diligence before making such certification, new
section 271J is proposed to be inserted so as to provide that if an
accountant or a merchant banker or a registered valuer, furnishes
incorrect information in a report or certificate under any provisions
of the Act or the rules made there under, the Assessing Officer or
the Commissioner (Appeals) may direct him to pay a sum of ten
thousand rupees for each such report or certificate by way of
penalty.
a) C&AG Report and Response of Ministry of Finance to the
Observations of C&AG in its report No. 32 of 2014 : No
requirement for additional penal provisions in the
Income-tax Act, 1961 against CAs
Observations of C&AG in its report No. 32 of 2014
(i) The observations of C&AG in its report No. 32 of 2014 have been
viewed seriously by ICAI. Suitable steps have been taken by ICAI in
respect of various observations of C&AG. The C&AG in its report
had stated that it is the joint responsibility of ITD and ICAI to
ensure the compliance of the Act. Assuming the said responsibility,
the ICAI, on its part, has also suggested changes in the return
format so as to plug the possibility of a chartered accountant
exceeding the specified limit in respect of number of tax audit
assignments but the same is yet to be given effect to by the CBDT.
It is pertinent to note that the C&AG has, in its report, also made a
mention of cases where the report of chartered accountants was
not fully utilized by the Assessing Officers despite audit objection of
a CA, the deduction/exemption has been allowed by the Assessing
Officer.
(ii) It is pertinent to mention that C&AG in its Report No.32 of 2014
had recommended incorporation of penal provisions against erring
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CAs found indulging in gross professional misconduct. The
response of the Ministry of Finance as stated in the aforesaid
report is as under:
"The Ministry stated (October 2014) that there is no
need for any fresh provision in the Income-tax Act for
taking penal action against CAs who signed incorrect
reports as there were already sufficient provisions in
sections 277, 277A and 278 of the Act."
In light of the specific and pertinent observations of Ministry of
Finance and without prejudice to the other suggestions given
below, it is suggested that status quo be maintained and the
proposed provision be dropped.
b) Audit Opinion not to be construed as incorrect
information thereby increasing litigation
Auditors are required to follow Auditing and Assurance standards
issued by ICAI for the conduct of audit and issue the audit report
accordingly. It is pertinent to mention here that in normal
circumstances, an auditor is not required to be investigative. The
role of audit is derived from various assurance standards developed
by the ICAI on the basis of global standards. Therefore, whether a
member is responsible for the perceived incorrectness in the report
or not requires the matters to be examined from the points of view
of process of audit adopted by the Chartered Accountant and
whether due process is followed by him in providing the report
and/or certificate.
In a case where the accountant furnishes information on the basis
of his opinion in respect of a particular transaction based on a
court judgement, and the Assessing Officer is of a different view
based on a contrary judgement, the same would not tantamount to
furnishing of incorrect information. Different views taken on the
basis of judicial decisions and sound judicial principles cannot be
treated as non-compliance with the tax laws and auditors cannot
be penalised. Such aspects have been dealt with by the ICAI in
various guidance notes for e.g. Guidance Note in relation to tax
audits u/s.44AB.
Therefore, whether the auditor has functioned diligently or not,
whether he has provided incorrect information without a
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reasonable cause, etc. will have to be judged by taking into account
various pronouncements on the role of an auditor. The proposed
section 271J does not define "incorrect information", absence of
which may give unbridled powers to the Assessing Officer to
impose penalty thereunder. It is also pertinent to mention here
that such pronouncements are made by the ICAI from time to time
taking into consideration the provisions of related laws as also the
international standards on the subject.
The consequential amendment proposed in section 273B that no
penalty under section 271J would be imposable if it is proved that
there is reasonable cause for failure may not be of much practical
relevance.
c) No right of appeal against order imposing penalty :
It is possible that the income tax authority may find the chartered
accountant guilty of providing incorrect information and the
concerned chartered accountant may be aggrieved of such a
decision. Levy of penalty in a case where a chartered accountant's
opinion on any matter has been perceived as furnishing of
incorrect information may have an adverse impact on the
professional standing of the chartered accountant. Levy of penalty
may also form the basis of initiation of the disciplinary proceedings
against him, which may be unjust and also lead to endless
litigation. Order imposing penalty under section 271J is also not
appealable and hence there is no judicial remedy for unjust levy of
penalty.
d) Operational Issues:
Another issue which may arise is regarding the jurisdiction of the
Assessing Officer levying penalty under section 271J. There may be
cases where accountant is belonging to some other city and the
assessee is assessed in another city. If the Assessing Officer is of
the opinion that information certified by the accountant is
incorrect and he issues show cause notice to the accountant, then,
the accountant has to appear before that Assessing Officer to
prove reasonable cause for failure. This will create an unnecessary
hardship for the accountant, since it would necessitate that the
accountant travel to the other city for this purpose.
e) Multiple Adjudicating Authorities:
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Cases of gross professional misconduct/gross negligence, are in
the normal course reported by the Department to the ICAI, which
is the regulatory body governing Chartered Accountants. On the
basis of receipt of formal complaint from the Department, action is
taken by ICAI within the regulatory framework provided in the
Chartered Accountants Act and the Misconduct rules framed there
under.
ICAI has sufficient regulatory, supervisory, organisational and
budgetary independence as regards the audit profession although
it is both a standard setter and a regulator. It is duty bound to
continue to discharge its obligations to ensure the highest
standards of audit quality as well as to protect public interest.
The ICAI disciplinary mechanism consists of an independent
Discipline Directorate headed by Director Discipline. The Council
constitutes Board of Discipline and Disciplinary Committee in
terms of the provisions of the Chartered Accountants Act, 1949.
The Government nominated member is also one of the members of
Board of Discipline.
The Director Discipline initiates the disciplinary proceedings on
receipt of any information or complaint and places it for
adjudication before Board of Discipline and Disciplinary
Committee. The decisions of Board of Discipline and Disciplinary
Committee are subject to appeal before an Appellate Authority
which is presided by a person who is or has been a Judge of the
High Court.
Whenever the Income Tax Department has referred the
matters to the ICAI for disciplinary actions, the ICAI has acted
upon such references and taken them to the logical
conclusion. The decisions of the ICAI in such cases are always
available to the Department.
As per the provisions of section 21B of the Chartered Accountants
Act, 1949, if disciplinary committee is of the opinion that a member
is guilty of a professional or other misconduct, it may thereafter
take any one or more of the following actions:
a) Reprimand the member;
b) Remove the name of the member from the register
permanently or for such period, as it thinks fit;
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c) Impose such fine as it may think fit, which may extend to Rs.
5 lakhs.
Therefore, the proposed provision will lead to a situation where
there would be Multiple Adjudicating Authorities, which may not
be appropriate.
Attention is hereby invited to the extracts of the Report no.32 of
2014 of C&AG reproduced below:
"The CAs are regarded as facilitators of the Income tax
Department (ITD) for administrating the provisions of the Act
correctly. The tax audit Reports(TARs)/ certificates issued by
them serve as valuable reference guide to the Assessing
Officers (AOs) while making assessments. The AO is expected
to make his independent judgement while finalizing the
assessment and can require the assessee to justify his claims
with reference to records and references. The Delhi High Court
has observed that the tax audit does not provide any
immunity from scrutiny and investigation by ITD.
Suggestions:
It is, thus, submitted that, as per the current practice, if it is
felt that a chartered accountant who has furnished incorrect
information in a report or certificate under any provision of the
Act or the Rules made thereunder, is guilty of professional
misconduct, the same be referred to the Institute of Chartered
Accountants of India by the Income-tax authority.
Considering the robust disciplinary mechanism of ICAI and to
avoid conflict of mandate with regard to the same, all the
Disciplinary Cases should come to Disciplinary Committee of
ICAI as constituted by Government which has two Government
Nominees and three ICAI Council members (one being
President ICAI and the other ICAI Council member) so that it
does not create two parallel mechanisms, governing the same
issue.
The need of the hour is to strengthen the system of exchange
of information between Income Tax Department (ITD) and ICAI
so as to enable timely action against the erring members by
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ICAI. It is, thus, suggested that instead of imposing an
additional penalty, the present relationship of ICAI and ITD be
strengthened with better exchange of data.
Therefore, the proposed levy of penalty under section 271J on
a chartered accountant may be withdrawn.
27. Other Suggestions
a) Relaxation from scrutiny provisions for assessees, having
taxable income upto Rs.5 lakhs other than business
income, filing return for the first time Scope of
relaxation to be extended
In the Budget Speech, the Hon'ble Finance Minister
mentioned that the assessees, having taxable income upto
Rs.5 lakhs other than business income, will not be subjected
to scrutiny unless there is specific information available with
the Department regarding his high value transaction:
"In order to expand tax net, I also plan to have a simple one-
page form to be filed as Income Tax Return for the category of
individuals having taxable income upto Rs.5 lakhs other than
business income. Also, a person of this category who files
income tax return for the first time would not be subjected to
any scrutiny in the first year unless there is specific
information available with the Department regarding his high
value transaction. I appeal to all citizens of India to contribute
to Nation Building by making a small payment of 5% tax if
their income is falling in the lowest slab of Rs.2.5 lakhs to
Rs.5 lakhs." (Para 176)
Suggestions:
It is a welcome move. However, in order to encourage more
people to file income tax returns, necessary provisions may be
introduced, such as:
Individuals having taxable income upto Rs.10 lakhs may
not be subjected to scrutiny for 3 Assessment Years unless
there is specific information available with the Department
regarding his high value transaction.
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The Institute of Chartered Accountants of India
Individuals who pay 30% more taxes as compared to
immediately preceding assessment year, may not be
subjected to scrutiny for such Assessment Year unless
there is specific information available with the Department
regarding his high value transaction.
b) Income Computation and Disclosure Standards
introduced under section 145 vide Finance Act (No.2),
2014 ICDSs may be withdrawn
Section 145 of the Income-tax Act, 1961 provides for the
method of accounting. Section 145(1) requires income
chargeable under the head "Profits and gains of business or
profession" or "Income from other sources" to be computed in
accordance with either the cash or mercantile system of
accounting regularly employed by the assessee, subject to
the provisions of section 145(2). Under section 145(2), the
Central Government is empowered to notify in the
Official Gazette from time to time, income computation
and disclosure standards (ICDSs) to be followed by any
class of assessees or in respect of any class of income.
Accordingly, the Central Government had, vide Notification
No.S.O.892(E) dated 31.3.2015, in exercise of the powers
conferred by section 145(2), notified ten income computation
and disclosure standards (ICDSs) to be followed by all
assessees, following the mercantile system of accounting, for
the purposes of computation of income chargeable to
income-tax under the head "Profit and gains of business or
profession" or "Income from other sources". This notification
was to come into force with effect from 1st April, 2015, to be
applicable from A.Y. 2016-17.
However, the Central Government has, vide Notification
No.S.O.3078(E) dated 29.9.2016, rescinded Notification
No.S.O.892(E) dated 31.3.2015. Simultaneously, vide
Notification No.S.O.3079(E) dated 29.9.2016, the Central
Government has notified ten new ICDSs to be applicable
from A.Y.2017-18.
The newly notified ICDSs have to be followed by all assessees
(other than an individual or a Hindu undivided family who is
not required to get his accounts of the previous year audited
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in accordance with the provisions of section 44AB) following
the mercantile system of accounting, for the purposes of
computation of income chargeable to income-tax under the
head "Profits and gains of business or profession" or "Income
from other sources", from A.Y.2017-18.
The Income Tax Simplification Committee has recommended
deferral of ICDS considering that taxpayers are already
grappling with regulatory changes like Companies Act, Ind-
AS and GST; there is scope for litigation on many aspects of
ICDS; ICDS merely results in multiplicity of accounting
methods, increased compliance burden of multiple records,
etc. which outweigh the benefits to be gained by application
of ICDS. The Committee has also recognized that ICDS at
best brings timing difference between accounting and taxable
income.
Further, there is no international precedent on ICDS. The
dual set of new standards for accounting under Ind-AS and
tax computation under ICDS increases complexity, tax
uncertainty and compliance burden for Ind-AS companies.
Suggestion:
It is suggested that the Income Computation Disclosure
Standards may be withdrawn and necessary amendments be
proposed under the Income Tax Act, 1961 itself.
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Suggestions relating to International Taxation
28. Clause 4- Section 9(1)(i)- Benefit of non-applicability of indirect
transfer provisions in case of Category I and II FPIs - Benefit
to be extended to Category III FPIs and provisions for
avoidance of double taxation in case of such indirect transfer
provisions, where direct transfer has already been subject to
tax
The Finance Act, 2012 amended Section 9(1)(i) of the Act with
retrospective effect from 1st April 1962 to provide that any share or
interest in an entity incorporated outside India shall be deemed to
be situated in India if such share or interest derives, directly or
indirectly, its value substantially from assets located in India.
The Finance Bill, 2017 proposes that the aforesaid deeming
provisions shall not apply to an asset or capital asset mentioned in
Explanation 5 of section 9(1)(i), which is held by a non-resident by
way of investment, directly or indirectly, in a Foreign Institutional
Investor as referred to in clause (a) of the Explanation to section
115AD and registered as Category-I or Category-II foreign portfolio
investor under the Securities and Exchange Board of India (Foreign
Portfolio Investors) Regulations, 2014 made under the Securities
and Exchange Board of India Act, 1992.
The Finance Bill, 2017 proposes to exempt investors (direct /
indirect) in category I (sovereign funds) and category II (broad-
based funds) FPIs from the application of indirect transfer tax
provisions.
Suggestions:
It is suggested that:
a. This exemption may be extended to Category III (other than
broad-based) FPIs as well as private equity funds too.
b. Further, while it is a welcome amendment for FPIs
registered as Category -I or Category -II, in many other
situations the indirect transfer provisions may lead to
double taxation first when the investments in India are
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The Institute of Chartered Accountants of India
sold by the offshore company or entity (by way of direct
transfer) and second when such offshore company or entity
passes on the consideration arising from such disposal to
its investors either by way of redemption, buy-back, re-
purchase, etc.
Therefore, a suitable amendment should be brought in to the
effect that once a transfer is taxable in India, the same shall
not be taxed again pursuant to applicability of indirect transfer
provisions.
29. Clauses 39 and 40 Sections 90 & 90A Clarification with
regard to interpretation of 'terms' used in tax treaties under
Section 90/90A but not defined in such treaties - Concern to
be addressed
Under the existing provisions of Section 90 of the Act, power has
been conferred upon the Central Government to enter into a tax
treaty with the Government of any country outside India for
granting relief in respect of income on which income-tax has been
paid both under the said Act and Income-tax Act in that foreign
country, avoidance of double taxation of income, exchange of
information for the prevention of evasion or avoidance of income-
tax or recovery of income-tax. Similar provisions are provided in
section 90A of the Act in the case of a treaty entered into by any
specified association in India with any specified association in the
specified territory outside India.
It is further provided in section 90 and 90A of the Act that any
'term' used but not defined in this Act or in the tax treaty referred
to in sub-section (1) of respective sections shall have the meaning
assigned to it in the notification issued by the Central Government
in the Official Gazette in this behalf, unless the context otherwise
requires, provided the same is not inconsistent with the provisions
of this Act or the agreement.
The Finance Bill 2017 proposes to amend sections 90 and 90A of
the Act, to provide that where any 'term' used in an agreement
entered into under sub-section (1) of Section 90 and 90A of the Act,
is defined under the said agreement, the said term shall be
assigned the meaning as provided in the said agreement and where
the term is not defined in the agreement, but is defined in the Act,
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it shall be assigned the meaning as per definition in the Act or any
explanation issued by the Central Government.
A tax treaty is a bilateral agreement entered between two countries
based on mutual negotiations by executives of respective countries.
As per Article 31 of the Vienna Convention, a treaty shall be
interpreted in good faith in accordance with the ordinary meaning
given to the terms of the treaty in their context and in the light of
its object and purpose.
In view of above, the Government cannot unilaterally introduce an
amendment in the Act which would override a bilateral tax treaty.
In several cases1, the courts have also held the same.
Article 3(2) of the Indian tax treaties provides that if any term
which has not been defined under the tax treaty, unless the
context otherwise requires, the meaning defined under the Act
shall apply. Therefore, the tax treaties already provide a
mechanism in such a situation.
Suggestion:
It may therefore be suggested to withdraw the proposed
amendments to Section 90 and 90A of the Act.
Without prejudice to the above suggestion, the proposed
amendment should be restricted to the terms defined under
the Act and should not apply to `Explanation to be issued by
the Government'. In other words, reference to the `Explanation
to be issued by the Government' should be removed.
30. Clause 42- Section 92CE- Introduction of secondary
adjustment
The Finance Bill, 2017 has introduced the concept of
secondary adjustment on Transfer Pricing (TP) adjustments.
A taxpayer is required to make a secondary adjustment,
where the primary adjustment to transfer price has been
made in the following situations:-
CIT v. Aktiongesellschaft Siemens [2009] 310 ITR 320 (Bom);
1
Sanofi Pasteur Holding SA v Department of Revenue Minstry of
Finance [2013] 30 taxmann.com 222 (AP), DIT v. Shin Satellite
Public Co Ltd (Del) [ITA 500/2012]
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Suo moto by the taxpayer in the return of income;
By the AO during assessment proceedings, and has been
accepted by the taxpayer;
Adjustment determined by an Advance Pricing Agreement
(APA) entered into by the taxpayer;
Adjustment made as per the safe harbour rules under
section 92CB; or
Adjustment arising as a result of resolution of an
assessment by way of the mutual agreement procedure
(MAP) under an agreement entered into under section 90 or
section 90A for avoidance of double taxation.
Further, the proposed section 92CE(3)(v) defines `Secondary
adjustment' as an adjustment in the books of account of the
assessee and its associated enterprise to reflect that the
actual allocation of profits between the assessee and its
associated enterprise are consistent with the transfer price
determined as a result of primary adjustment, thereby
removing the imbalance between cash account and
actual profit of the assessee.
The additional amount receivable from the AE as a result of
the primary adjustment should be repatriated by the
taxpayer into India within a prescribed time limit. If the same
is not received by the taxpayer within the time-limit, then the
primary adjustment will be deemed as an advance extended
to the overseas AE and a secondary adjustment in the form
of notional interest on the outstanding amount should also
be offered to tax as an income of the taxpayer.
The above requirements for repatriating the adjustment
amount into India and imputing a notional interest are
triggered if the TP or primary adjustment exceeds rupees one
crore. The manner of computation of interest on the amount
deemed as advance made by the taxpayer to the AE would be
prescribed.
The situation of excess payment treated as loan given to AE
on which notional interest in computed and added to the
income of the assessee till the excess amount is repatriated
by AE.
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It would be difficult for AE to repatriate the money to India
on account of secondary adjustment as the income-tax laws
and any other relevant laws pertaining to such country may
not allow to repatriate money. Further the AE would have
paid tax on such amount in its home country. This would
lead to double taxation. This would lead to double taxation.
Further, the same cannot be treated as advance in the books
of account maintained in India as the books of account are
prepared as per the provisions of Companies Act, 2013 read
with Indian Accounting Standards.
Sub-section (1) of the proposed section 92CE provides for
secondary adjustments to be made in respect of primary
adjustments in certain situations. The phrase "secondary
adjustment" has been defined in Clause (v) of Sub-section (3) to
mean an adjustment in the books of account of the assesse and
its associated enterprise to reflect that the actual allocation of
profits between the assessee and its associated enterprise are
consistent with the transfer price as determined as a result of
primary adjustment, thereby removing the imbalance between
cash account and actual profit of the assessee. Sub-section (2)
lays down the requirement for excess monies to be repatriated
to India and for interest to be levied thereon, if not repatriated
within the prescribed time. However, Sub-section (2) does not
refer to `secondary adjustment' as envisaged under Sub-section
(1) and defined in Clause (v) of Sub-section (3). The absence of
references to Sub-section (1) and/or `secondary adjustment' in
Sub-section (2) results in an apparent disconnect between Sub-
sections (1) and (2) which may have unintended consequences.
Suggestion
Sub-sections (1), (2) and (3) need to be revisited to streamline
and appropriately link up the three sub-sections to provide
adequate clarity as to the specific requirements from the
taxpayers on this front.
The section is unclear as to whether the interest levy is a one-
time levy or will apply on a year to year basis until the amount
related to the "primary adjustment" is brought into India.
Further, in case any interest imputed is not paid in the year of
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imputation, it is unclear whether or not it will itself take the
colour of a "primary adjustment" and interest will be levied on
such unpaid interest of last year (treating it as an advance).
This will lead to a cascading effect and unnecessary burden on
the assessee.
Suggestion
The computation mechanism for levy of interest under Sub
Section (2) should be clearly prescribed with detailed
examples to obviate uncertainty including the trigger for such
secondary adjustment or interest levy and the start date for
levy of interest. Appropriate safeguards by way of clarificatory
provisions / Rules should be brought in to obviate an interest
on interest situation and cascading effect.
In the case of Bilateral APAs or MAPs (relating to transfer
pricing, the two Competent Authorities may agree on the
amounts to be brought into India and may also agree on the
cash remission schedule for the taxpayer. In absence of the
requisite cash brought into the recipient country, the double tax
relief may not be granted by the recipient country as per the
Bilateral APA / MAP. Hence, including Bilateral APAs and MAPs
under the provisions of the above section may not be
appropriate since the terms of bringing money into India would
already have been decided by the two countries and such terms
should prevail over a domestic law.
Suggestion
It is suggested that Bilateral APAs and MAPs may be excluded
from the purview of section 92CE.
In respect of Unilateral APAs that have been entered till date,
there was no provision relating to secondary adjustments in the
statute. As a result, APAs have been concluded wherein terms
that are not consistent with the proposed Section 92CE have
been imposed on taxpayers. In view of a specific provision
having been introduced, taxpayers should be entitled to follow
the mandate of Section 92CE in respect of APAs signed till date.
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Suggestion
A specific clarification should be issued under the APA Rules
as well as in Section 92CE that the consequences for a delay
in bringing money into India pursuant to a unilateral APA
would be only under Section 92CE(2) and the APA would not
be disqualified merely on this account.
For better clarity and in order to avoid any confusion regarding
the assessment year from which the secondary adjustment
provisions would be applicable, it may be clarified that the
section will be applicable from AY 2018-19, in relation to
primary adjustments for fiscal years 2016-17 and thereafter.
Suggestion
The Government may issue a clarification that section 92CE
will be applicable from A.Y.2018-19, in relation to primary
adjustments for fiscal years 2016-17 and thereafter.
Clause (ii) to sub-section (1) of the proposed section 92CE
provides that a taxpayer is required to make a secondary
adjustment where primary adjustment to transfer price has
been made by the AO during assessment proceedings, and has
been accepted by the taxpayer. There is lack of clarity on what
exactly the term `has been accepted by the taxpayer' means.
Suggestion
Government should clarify the term `has been accepted by the
taxpayer' in order to provide certainty on the applicability of
these provisions in such situations. For e.g. if the taxpayer is
in appeal against the assessment order to Tribunal, in such
cases, will secondary adjustment provisions be applicable
only after the Tribunal proceedings are completed or the same
will be applicable after Court proceedings are completed i.e. if
the taxpayer further appeals to High Court/ Supreme Court.
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Since a secondary adjustment is already an additional burden
on a taxpayer, a high interest rate will exemplify that burden
and put pressure on business of the assessee.
Suggestion
Considering the secondary and additional nature of the
adjustment, a reasonable rate of interest may be notified.
Since adjustments are made subsequently when returns are
taken up for scrutiny, any requirement to make secondary
adjustment would depend upon whether the Associated
Enterprise is willing to accept the secondary adjustments to be
made in its books abroad. Non-acceptance of the same will lead
to inter-company issues during consolidation. It could also
require restatement of financial statements of an Indian entity if
adjustments are material. This in turn might lead to filing of
revised returns. Implication on shareholders value and lenders
agreement (where there are borrowings) would need to be
evaluated besides implications under the Companies Act, 2013.
Further, FEMA requires money to be remitted within 6 months
from the end of the accounting year. Also, if the Associated
Enterprise (AE) located abroad does not pass entries in the
books, inter-company adjustments/eliminations could be a
challenge if the AE is a holding company.
Suggestion:
The said issues may be considered and appropriate remedial
measures may be incorporated to avoid genuine hardship.
The proviso to the proposed section 92CE(1) states that nothing
contained in this section shall apply, if;-
(i) the amount of primary adjustment made in any previous
year does not exceed one crore rupees; and
(ii) the primary adjustment is made in respect of an
assessment year commencing on or before the 1st day of
April, 2016.
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From a bare reading of the proposed amendment, it appears
that both conditions i.e. primary adjustment made before
1.4.2016 and it being less than 1 crore need to be complied,
because the word "AND" is written between two conditions. It
ought to be "OR". Else, in future years, there will be no
threshold limit for secondary adjustment.
Suggestion:
It is suggested that the proviso may be restated as under:
(i) the amount of primary adjustment made in any previous
year does not exceed one crore rupees; and OR
(ii) the primary adjustment is made in respect of an
assessment year commencing on or before the 1st day
of April, 2016.
Applicability of section 92CE has to be restricted only to cases
satisfying the base erosion test. The provisions, as presently
worded, may give rise to an interpretation that even where the
primary adjustment is made in the hands of non-resident,
secondary adjustment follows. As a consequence, it may be
interpreted as allowing repatriation of funds outside India,
which may not be permitted even in terms of FEMA/ RBI
regulations.
Suggestion
In order to remove this anomaly it is recommended that
section 92CE(2) be amended to clarify that the section applies
only in case where the primary adjustment is made in the
hands of the Indian AE.
Section 92CE provides for secondary adjustment in case where
excess money (difference between transaction price and arm's
length price), which remains outside India, due to the primary
adjustment under TP is not repatriated to India.
Taxable funds may remain outside India only in case where a
foreign party is involved. In other words, there may be possible
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base erosion only in case where one of the parties to the
transaction is foreign AE. A transaction between two domestic
entities, will not lead to profits allocable to India, remaining
outside India.
Suggestion
In order to avoid any unwarranted litigation, it may be
clarified that section 92CE applies only to international
transaction and not domestic transactions as covered under
section 92BA.
Section 92CE deems the difference between the transaction
price and arm's length price as an advance (which is to be
recorded in the books) and provides for imputation of interest
on such advances.
However, there is no specific provision to reverse the advances
appearing in the books even in case where the AE relationship
ceases to exist or in case where the excess money is repatriated.
Suggestion:
It may be specifically provided that the advances appearing in
the books of the parties be reversed in following cases where
AE relationship ceases to exist or excess money is repatriated.
31. Clause 43- Section 94B- Limitation of interest benefit
provisions introduced certain concerns to be addressed
The Finance Bill, 2017 proposes limitation of interest benefit
(deduction) where an Indian company, or a permanent establishment
of a foreign company in India, being the borrower, pays interest
exceeding rupees one crore in respect of any debt issued/guaranteed
(implicitly or explicitly) by a non-resident AE. The interest shall not be
deductible in computing income chargeable under the head `Profits
and gains of business or profession' to the extent, it qualifies as
excess interest.
Excess interest shall mean total interest paid/payable by the taxpayer
in excess of thirty per cent of cash profits or earnings before interest,
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taxes, depreciation and amortisation (EBITDA) or interest paid or
payable to AEs for that previous year, whichever is less.
There will be restriction on the deductibility of the interest in the
hands of the taxpayer in a particular financial year to the extent it is
excess as explained above. However, the same shall be allowed to be
carried forward for a period of eight years and allowed as deduction in
subsequent years. The above restrictions shall not be applicable to the
taxpayer engaged in the business of banking or insurance. These
provisions will be applicable for FY 2017-18 and subsequent years.
a. India is a developing country with a need for foreign investment to
fund various initiatives, in particular, the development of India's
infrastructure. The Government has given its support at a policy
level, inter-alia, consistently reducing tax withholding rates on
ECBs by Indian entities from non-residents, which indicates
encouragement by the Government towards debt obtained by
Indian entities by overseas parties. However, the restrictions
imposed under the proposed Section 94B above in respect of
interest of overseas loans is giving mixed signals to foreign as well
as Indian parties at a policy level on overseas borrowings. This
inconsistency may lead to further policy level uncertainty in the
minds of the business community in India and may undermine
the attempts at enhancing the "ease of doing business" by the
Government. Under existing ECB guidelines, there is already a
mechanism in place to limit the Borrower's Debt/Equity ratio,
which effectively safeguards India's interests with regard to
excessive debt. As such, there is no need for any additional
measure to protect India's interests in this regard.
Suggestion:
In view of the above policy level issues, it is suggested that the
restrictions proposed to be imposed on the interest benefits on
overseas borrowings may be done away with entirely or at
least deferred for 5-10 years to give India a chance to achieve
high growth and achieve significant infrastructural
development and maturity.
b. Without prejudice to the aforesaid, if at all it is considered
necessary to have provisions to limit the deductibility of interest,
the exclusions granted to banking and insurance companies may
be extended to other sectors such as Infrastructure and Non-
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Banking Finance Companies. Large capital intensive companies
with long gestation periods, Non-Banking Finance Companies,
companies in the real estate sector and companies in the
infrastructure sector (requiring significant foreign capital which
may not always come in the form of equity) are typically highly
leveraged on account of the business requirements (either by way
of external or related party debt) and might be negatively impacted
by the interest restriction.
Suggestion:
It is recommended to carve out exceptions for inherently highly
leveraged industries from the aforesaid restrictions. The
Government may also consider allowing carry forward of
excess interest for a longer period, say 15 years, instead of
the prescribed 8 years to cushion the long gestation periods
for such industries.
c. The proviso to sub-section (1) provides that where debt is issued by
a non-associated lender but an AE either provides implicit or
explicit guarantee to such lender, such debt shall be deemed to
have been issued by an AE.
In respect of explicit guarantees, the transaction relating to
associated enterprises is only towards a guarantee commission (in
case charged by the overseas guarantor). The interest towards the
borrowing is paid in this case only to a third party wherein the rate
and terms are decided purely through negotiation. Hence,
restriction of benefit in relation to guarantees ought to be only to the
extent of the guarantee commission (if any) claimed as a deduction
by the Indian entity and not interest paid to the third party len der.
Further, including implicit guarantees under the above restrictions
would lead to significant hardship for the taxpayers and may result
in protracted litigation in the coming years. It is pertinent to note
that there is no clear definition of implicit guarantee and it would
be an onerous task for the taxpayers and tax authorities to
determine existence of an implicit guarantee. E.g. when a letter of
comfort or simply an undertaking is provided by one AE to a lender
or a bank, the tax authorities may contest that guarantee exists,
without going into details whether the same has benefited the
borrower and whether the AE has actually rendered any service or
assumed any liability.
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Suggestion:
The proposed section should be amended to specify limitation
of benefits in guarantee cases only to the extent of the
guarantee commission (if any) paid by the Indian entity to the
overseas guarantor (being its AE) and not the interest. Further,
the word implicit guarantee may be dropped from the
provisions. The term `explicit guarantee' may also be
appropriately defined to obviate future litigation on this front.
d. Based on the definition of the term `debt' as provided in clause (ii)
of sub-section (5) of proposed section 94B, interest may include
many other payments made on various kinds of financial
arrangements and instruments. There may be an issue as to what
payments made by the taxpayer needs to be included in the term
interest e.g. which payments on account of finance lease and
financial derivatives should be included in the term `interest or
similar consideration' etc. which may again lead to litigation.
Suggestion:
Appropriate guidelines may be issued to clarify what the term
`interest or similar consideration' should include or exclude as
the definition provided in the existing Section 2(28A) of the Act
may not be adequate for the purposes of thin-capitalisation
rules based on the definition of the term `debt'.
e. There is lack of clarity on the mechanism to calculate EBITDA i.e.
say, on the basis of book profits calculated on the basis of
accounting standards, Ind-AS or otherwise. This may result in
unnecessary litigation.
Suggestion:
It is suggested that the mechanism to calculate EBITDA be
clearly laid down.
f. The BEPS Action Plan 4 provides for a Group Ratio Rule wherein
the Group's overall third party interest as a proportion of the
Group's EBITDA is computed and that ratio is applied to the
individual company's EBITDA to determine the interest restriction.
Post-Budget Memorandum 2017 (Direct Taxes and International Tax) Page67
The Institute of Chartered Accountants of India
This would take into account the actual third party debt and
leverage at global level vis-à-vis third parties. This also addresses
the issue relating to inherently highly leveraged industries since
the global leverage ratio would take into account the significant
debt and would be commensurate to the leverage ratio required at
individual country level. Given this, a relatively fair leverage
requirement at India level would emerge.
Suggestion:
It is suggested in place of a fixed 30 per cent EBITDA
restriction, a Group Ratio could be considered in order to apply
the interest deduction restriction under the above provision.
g. Sub-section (1) of Section 94B specifically requires the lending to
be from a non-resident AE for the section to trigger. However,
branches or permanent establishments of foreign banks are also
"non-residents" for the purposes of the Income-tax Act. Whilst
branches or permanent establishments of foreign banks operate
essentially as Indian companies and compete directly with Indian
banks, debt by related Indian branches of banks or guarantees
given by AEs towards borrowings by Indian companies from
branches or permanent establishments of foreign banks would
qualify for disallowance under the above provision. This places the
Indian branches of foreign banks at a disadvantageous position vis-
à-vis competing Indian banks.
Suggestion:
It is suggested that borrowings by Indian companies from
Indian branches or permanent establishments of foreign
banks may be wholly excluded from the purview of the
aforesaid proposed Sec 94B (either by way of direct borrowing
from or by way of guarantee by AE to such branches or
permanent establishments of foreign banks).
Post-Budget Memorandum 2017 (Direct Taxes and International Tax) Page68
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