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Salient Features of the Finance Bill, 2013 (Direct Taxes) by Ved Jain
March, 06th 2013
 SALIENT FEATURES OF
THE FINANCE BILL, 2013

      DIRECT TAXES




      VED JAIN
                           Salient features of the Finance Bill, 2013 by Ved Jain




                     ABOUT THE AUTHOR

Mr. Ved Jain is a fellow member of the Institute of Chartered Accountants of
India. A science graduate, he passed the Chartered Accountancy examination
in the year 1976 and was in the merit list in both the Intermediate and Final
examinations of the Institute. He did BA (Economics) from Punjab University
and LL.B from University of Delhi in the year 1980.

On 5th February, 2007 he was elected by the Central Council of Institute of
Chartered Accountants of India (ICAI) as its Vice- President and was further
elevated to the post of the President on 5th February, 2008. During his tenure
as president, The ICAI has earned various credentials, which embark a new era
of professional development.

He was appointed as a member of the Income Tax Appellate Tribunal (in the
rank of Additional Secretary) by Ministry of Law, Justice and Company Affairs,
Govt. of India. He was appointed as Government Nominee Director on the
board of MAYTAS Infra Limited now renamed as IL&FS Engg. & Construction
Limited and MAYTAS Properties Limited post Satyam episode to rehabilitate
these companies, which he has been able to revive successfully.

He has been appointed independent director on the Board of National
Aluminum Company Limited, a Navaratna Public Sector Undertaking, PTC
India Limited and PTC Financial Services Limited.

He is Chairman, Committee on Direct Taxes of ASSOCHAM.

A prolific writer, having command in Hindi, English, French, Urdu and Punjabi.
Mr Jain specializes in taxation, and practising as advocate. He has authored
many books on Direct Taxes and regularly contributes articles in various
journals and newspapers.


He can be reached at jainved@gmail.com




2                                                      VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain



Salient Features of the Finance Bill, 2013
DIRECT TAXES
                                                                    VED JAIN
INTRODUCTION
Mr. P. Chidambaram, after reassuming the office of Finance Minister,
presented his first Budget and also the last Budget of the UPA-II
Government. This budget was keenly watched not only by people in India
but also by the foreign investors. The Finance Minister had the challenge
to revive growth without increasing fiscal deficit. He had a challenge to
increase revenues without raising taxes. He had a challenge of enough pre-
election populism without increasing expenditure.        He had a challenge to
revive investment and saving without more doles. He had a challenge to
rein in inflation without choking growth.


In this backdrop, the Finance Minister presented a cautious Budget seeking
support of all sections of the House as well as people of India to navigate
the Indian economy through a crisis that has enveloped the whole world
and spared none.      The Finance Minister has not tinkered with tax rate
structure both under direct and indirect taxes. He has not also levied any
new taxes as was being widely debated except commodity transaction tax
on non-agricultural commodities. Despite all the constraints, the Finance
Minister has been able to contain the fiscal deficit for the current year at
5.2 and has projected a fiscal deficit of 4.8% in the next year. The Finance
Minister in his Budget speech has promised to bring the Direct Taxes Code
(DTC) back to the house before the end of the Budget session. However,
on Goods and Service Tax (GST) he has not made a commitment about the
time. He has only hoped to take the consensus on GST forward in next few
months and bring a draft Bill on the constitutional amendment and a draft
Bill on GST.   The Finance Minister also made a statement to ensure clarity
in tax laws, a stable tax regime, non-adversarial tax administration, a fair



VED JAIN AND ASSOCIATES                                                          3
                           Salient features of the Finance Bill, 2013 by Ved Jain


mechanism for dispute resolution and an independent judiciary. To adopt
best global practices the Finance Minister has proposed to set up a Tax
Administration Reform Commission to review the application of tax policies
and tax laws and submit periodic reports that can be implemented to
strengthen the capacity of the tax system.


Coming to the amendments on direct taxes, the Finance Bill, 2013 has 53
clauses amending the various provisions on direct taxes.             The various
amendments proposed in the Finance Bill, 2013 are analyzed below.
Unless otherwise stated all these amendments are proposed to be effective
from April 1, 2014 i.e. assessment year 2014-15 relevant to the income
earned in the financial year 2013-14.


A.   TAX RATES

1.   No increase in threshold limit ­ credit of Rs.2000 for individual tax
     payer having income upto Rs.5 Lac

     The Finance Minister has proposed no changes in the current slabs of
     income tax. The existing threshold exemption accordingly continues to be
     the same for individual, HUF, association of persons, body of individual and
     every juridical person, as under:-


             Income                                  Tax Rate

             Upto Rs.2,00,000                        Nil

             Rs.2,00,001 - Rs.5,00,000               10%

             Rs.5,00,001 to Rs.10,00,000             20%

             Above Rs.10,00,000                      30%




     However, the Finance Minister has proposed to allow credit to an individual
     resident in India whose total income does not exceed Rs.5 Lac.       The tax
     credit shall be equal to the tax payable or Rs.2000 whichever is less. The
     implication of this will be that an individual resident having taxable income




4                                                          VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain

      up to Rs.2,20,000 shall not be required to pay any tax. This credit shall be
      available only to individual resident and as such HUF, AOP, etc. shall not be
      entitled for this deduction. Similarly non-resident individual will also not be
      entitled for this deduction.


      No change has been proposed in the threshold exemption for the senior
      citizens (of 60 years to 80 years of Rs.2,50,000) and for very senior citizen
      (above 80 years of age of Rs.5 Lac).       Since the proposed tax credit of
      Rs.2000 is for resident individual, senior citizen between 60 years to 80
      years of age shall get benefitted if the total income does not exceed Rs.5
      Lac. Such senior citizen will be required to pay tax over and above income
      of Rs.2,70,000.       However, in case of very senior citizen, threshold
      exemption being at Rs.5 Lac, they will not be entitled to take benefit of this
      tax credit.
      The ceiling of Rs.5 Lac is with reference to the total income after all other
      deductions such as deduction under Section 80-C in respect of long term
      savings like life insurance premium, provident fund, deduction under
      section 80D in respect of health insurance premium, etc.


2.    Surcharge of 10% on all non-corporate tax payers whose income
      exceeds Rs.1 crore

      The Finance Bill, 2013 proposes to levy surcharge across the board on all
      persons. In the case of individual, HUF, AOP, body of individual or every
      juridical person, the surcharge shall be payable at the rate of 10% of the
      tax where the total income exceeds Rs.1 crore.       This surcharge shall be
      levied on the total tax payable once the income has exceeded Rs.1 crore.
      However, marginal relief has been provided so as to ensure that the
      surcharge does not exceed the amount of the income which exceeds Rs.1
      crore.   Similarly co-operative society, firm, LLP, local body shall also be
      required to pay surcharge at the rate of 10% of the tax in case the income
      exceeds Rs.1 crore.


3.    Increase in rate of surcharge from 5% to 10% on companies where
      income exceeds Rs.10 crore

      The Finance Bill, 2013 proposes to increase the rate of surcharge both on
      domestic as well as foreign companies. Presently surcharge is payable at


VED JAIN AND ASSOCIATES                                                                 5
                            Salient features of the Finance Bill, 2013 by Ved Jain

     the rate of 5% by a domestic company in case its income exceeds Rs.1
     crore.   This is proposed to be revised to 10% where the total income
     exceeds Rs.10 crore.


     Thus there will be no surcharge in case the total income of the company
     does not exceed Rs.1 crore. Surcharge applicable shall be 5% where the
     income exceeds Rs.1 crore but does not exceed Rs.10 crore.                  The
     surcharge applicable shall be 10% where the income exceeds Rs.10 crore.


     In the case of a foreign company (a company other than a domestic
     company) the surcharge is being increased from 2% to 5% where the
     income exceeds Rs.10 crore.     The existing rate of surcharge of 2% shall
     continue to apply where the income of the foreign company exceeds Rs.1
     crore but does not exceed Rs.10 crore.


4.   Surcharge on dividend distribution tax increased from 5% to 10%

     The rate of surcharge on dividend distribution tax payable under Section
     115-O and Section 115-R is proposed to be increased from 5 % to 10%.
     The effective rate of dividend distribution tax (including education cess)
     which is at present 16.22% shall get increased to 16.99%.                   This
     amendment is being made from 1.4.2014 and accordingly dividend
     distributed on or after 1.4.2013 shall be liable for increased surcharge.


     The Finance Minister in his Budget speech has stated that the surcharge
     being levied in this budget is only for one assessment year. However, past
     experience shows that surcharge once levied is extended year after year.


5.   Tax on Distribution of Income of Debt Mutual Fund increased from
     12.5% to 25%

     The tax rate on distribution of income by Debt Mutual Fund (other than a
     Money Market Mutual Fund or Liquid Fund) to an individual and HUF is
     being increased from 12.5% to 25%.        Presently under Section 115-R no
     tax is payable on distribution of income of an equity oriented fund.
     However, in respect of debt fund there are two classifications. For money
     market mutual fund or a liquid fund, the tax rate on distribution of income
     to an individual or HUF is 25% and in respect of other debt fund the tax



6                                                        VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain

      rate prescribed is 12.5%. Accordingly investors could park their funds in
      debt mutual fund other than money market mutual fund or liquid fund
      instead of putting the money in deposit with the bank, etc. so as to get the
      benefit of reduced rate of tax of 12.5%.      This has affected the flow of
      deposits into banks. To address this anomaly, the Finance Bill, 2013 has
      proposed to increase the tax rate to 25%.          Accordingly the tax rate
      applicable on distribution of income to an individual or HUF by all debt
      mutual funds will be 25%. The tax rate on distribution of income to any
      person other than an individual or HUF i.e. a firm, or a company continues
      to be 30%.


      This new rate will be applicable on income distributed on or after 1st June,
      2013 and as such income distributed before 1st June, 2013 will be liable for
      tax @ 12.5% only.


      With this amendment Monthly Income Plan (MIPs) of Mutual Funds where a
      large number of retired people used to invest so as to receive monthly
      dividend will get seriously affected. These investors now need to move to a
      Systematic Withdrawal Plan.      If they do so they would have to pay long
      term capital gains tax which is 20% if indexation benefits are availed and
      10% if indexation benefits are not availed. Systematic Withdrawal Plan in
      substance is not different from the Monthly Income Dividend Plan. In the
      Monthly Income Plan one receives income earned on units by way of
      dividend and in the Systematic Withdrawal Plan the value of the value of
      the Units appreciates by the income earned during the month and a part of
      the Units equivalent to such appreciation in the value of the units are
      encashed.


6.    Security     Transaction   Tax    (STT)   being    reduced   on   future   in
securities
      The Finance Bill, 2013 proposes to reduce the security transaction tax rate.
      There will be no STT payable on the delivery based purchases of units of an
      equity oriented Fund. On delivery based sale of units of an equity oriented

      Fund ­ STT payable has been reduced from 0.1% to 0.001%. The STT rate

      on sale of futures in securities has been reduced from 0.017% to 0.01%



VED JAIN AND ASSOCIATES                                                               7
                           Salient features of the Finance Bill, 2013 by Ved Jain

     and on sale of a unit of equity oriented fund to the Mutual Fund the rate
     has been reduced from 0.25% to 0.001%. These changes in STT rate shall
     be effective only from 1st June, 2013.


7.   Commodity Transaction Tax (CTT) introduced                  on   Commodity
     Derivatives other than agricultural commodities

     The Finance Bill, 2013 proposes to levy commodity transaction tax on
     commodity derivatives at the rate of 0.01%. This tax shall be payable by
     the seller at the time of sale of commodity derivatives in respect of
     commodities other than agricultural commodities traded in recognized

     associations (exchange). The commodity derivatives shall mean ­


           i.     A contract for delivery of goods which is not a ready delivery
                  contract; or

           ii.    A contract for differences which derives its value from prices ­


                  A)    of such underlying goods;

                  B)    of related services and rights, such as warehousing and
                        freight; or

                  C)    with reference to weather and similar events and
                        activities.

                  having a bearing on the commodity sector.

     The value of taxable commodity transaction shall be the price at which the
     commodity derivative is traded.          This tax is to be collected by the
     recognized associations (exchange) from the seller and is to be paid within
     7 days of the month following the month in which the same is collected. All
     the provisions applicable regarding security transaction tax in this regard
     shall be applicable. It is to be noted that this commodity transaction tax
     shall be applicable only on commodity other than agricultural commodity
     and shall be applicable from the date as the Central Government shall
     notify in the official gazette which in any case will be after the Finance Act
     2013 is notified. A corresponding amendment is being made by inserting



8                                                        VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain

      clause (xvi) in section 36(1) to allow deduction of the commodity
      transaction tax so paid in the course of the business while computing profit
      and gains of business or profession if income from such commodity
      transaction is included in the income. It may also be relevant to note that
      the Finance Bill 2008 had also proposed to levy commodity transaction tax
      but the same was not implemented.


      Levy of Commodity Transaction Tax (CTT) on non-agricultural commodities
      will increase cost substantially and accordingly the investors and punters in

      commodities may shift to agricultural commodities' futures.             It is

      interesting to note that the Security Transaction Tax on equity futures has
      been reduced from Rs.1700 per crore to Rs.1000 per crore whereas a new
      CTT of Rs.1000 per crore has been levied on commodity futures.           The
      currency futures, of which the market is also quite big, there is no such
      transaction tax at present.


B.    EXEMPTIONS/DEDUCTIONS
1.    One time benefit of interest of Rs.100,000 on acquiring first home
      by an individual

      The Finance Bill, 2013 proposes to introduce a new Section 80EE to provide
      deduction in respect of the interest payable on loan taken by an individual
      from a bank or a housing finance company for the purpose of acquisition of
      a residential house property. This deduction is restricted to only Rs.1 Lac
      and that too for one assessment year i.e. assessment year 2014-15 in
      respect of the housing loan sanctioned from 1st April, 2013 to 31st March,
      2014. It is to be noted that it is a one time exemption available for one
      assessment year of Rs.1 Lac only. However, in case one is not able to take
      full deduction of Rs.1 Lac in the assessment year 2014-15, then the
      deduction of the balance amount of Rs.1 Lac can be claimed in the
      subsequent assessment year i.e. 2015-16.      One should not get confused
      with the yearly deduction of interest of Rs.1.5 Lac which is available under
      Section 24(a) in respect of self occupied property. Thus deduction in the
      first year i.e. assessment year 2014-15 can be up to Rs.2.5 Lac in respect
      of interest on housing loan. However, in the subsequent year despite the
      interest on housing loan being more than Rs.1.5 Lac the deduction


VED JAIN AND ASSOCIATES                                                               9
                           Salient features of the Finance Bill, 2013 by Ved Jain

     available will be only of Rs.1.5 Lac under section 24(a) and no deduction
     shall be available under this new Section 80-EE. It is to be further noted
     that for claiming this new deduction of Rs 1,00,0000 the value of the
     residential house property should not exceed Rs.40 Lac. Further the
     assessee should not have any residential house property on the date of the
     sanction of the loan. The amount of the loan sanctioned should not exceed
     Rs.25 Lac.   It is to be further noted that the date of sanction of loan is
     sacrosanct for this deduction. The benefit is available only in respect of the
     loan sanctioned between 1st April, 2013 to 31st March, 2014.        Any loan
     sanctioned before 1st April, 2013 will not be eligible loan. However, loan
     sanctioned before 1st April, 2014 will be eligible though the house may be
     acquired after 1st April, 2014.      This deduction shall be available to an
     individual only and not to an HUF.


2.   Deduction for investment in Rajiv Gandhi Equity Saving Scheme to
     be for 3 years

     The Finance Act, 2012 has introduced a new Section 80CCG to allow
     deduction of 50% of the amount invested in equity shares to the extent of
     Rs.25000.    This deduction was available to a new retail investor only for
     one assessment year and whose gross total income does not exceed Rs.10
     Lac.


     The Finance Bill, 2013 proposes to extend the benefit of this scheme from
     one year to three consecutive assessment years with the result that a new
     retail investor can make investment of Rs.50000 in each of the three years
     and claim 50% deduction of such investment in each of the three
     assessment years. Further the restriction of gross total income to not to
     exceed Rs.10 Lac is being increased to Rs.12 Lac. The scope of investment
     which was limited to listed equity shares is also being expanded so as to
     include listed units of an equity oriented fund. Now the new retail investor
     can also make the investment in the equity oriented fund of the mutual
     fund and claim benefit of this scheme.


3.   Scope of section 80-D in respect of Health Insurance Premium
     expanded to include other schemes




10                                                       VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain

      As per the provision of Section 80-D a deduction of Rs.15000 is allowed in
      respect of the amount paid to effect or keep in force an insurance on the
      health of the assessee or his family or any contribution made to Central
      Government Health Scheme (CGHS).          The Finance Bill, 2013 proposes to
      widen the scope so as to include such other schemes as may be notified by
      the Central Government from time to time.         This is being done to cover
      contribution being made under other Health Schemes which are similar to
      the CGHS.


4.    Person with disability or disease may contribute higher percentage
      of insurance premium

      The Finance Bill, 2013 proposes to amend the provision of Section 10(10D)
      so as to allow higher contribution up to 15% of the actual capital sum
      assured under a life insurance policy to a person with disability or severe
      disability or to persons suffering from disease or ailment as may be
      specified in Rule 11DD. The Finance Act, 2003 has introduced a condition
      under Section 10(10D) to the effect that the amount received on maturity
      of an insurance policy shall be exempt only when the premium paid for
      such policy does not exceed 20% of the actual capital sum assured in any
      year.   This condition was inserted to discourage one time life insurance
      premium policies whereby to take benefit of Section 10(10D) the entire
      premium was being paid in one year and later on the maturity amount with
      bonus was being claimed as exempt under Section 10(10D). The Finance
      Act, 2012 has further reduced this amount from 20% to 10% of the capital
      sum assured in any year so as to be eligible for exemption. This Finance
      Bill, 2013, considering the fact that the premium paid in respect of persons
      who suffers from severe disability or disease or ailment is higher has
      proposed to relax this condition so as to allow contribution up to 15% of
      the capital sum assured in any one year.           It may be noted that this
      increase in ceiling from 10% to 15% of the capital sum assured shall be
      applicable only for the policies issued on or after the 1st day of April, 2013.


      Corresponding amendment has been proposed in section 80-C to allow
      deduction in the case of a person with disability or suffering from disease or
      ailment as is not in excess of 15% of the actual capital sum assured.



VED JAIN AND ASSOCIATES                                                                 11
                            Salient features of the Finance Bill, 2013 by Ved Jain



5.   Donation to political parties not to be exempt when paid in cash
     Presently under Section 80-GGB of the Income Tax Act, deduction is
     allowed to an Indian company in respect of the sum contributed to any
     political party, while computing its total income.    Similarly under Section
     80-GGC deduction is allowed to an individual, HUF, partnership firm, LLP in
     respect of contribution to any political party.


     The Finance Bill, 2013 proposes to insert a condition that no deduction
     under these sections shall be allowed in respect of any sum contributed by
     way of cash. Thus the contribution to political parties has to be by way of
     cheque or draft.     It is interesting to note that the restriction is with
     reference to payment in cash as against provisions of section 40A(3),
     section 269SS and section 269T where there is a requirement not to make
     any payment otherwise than by way of an account payee cheque or an
     account payee draft.


6.   Special provision regarding taxation of Securitization Trust
     The Finance Bill, 2013 proposes to give a special status to the trust formed
     to undertake securitization activities which are regulated by SEBI or RBI.
     The income of such trust shall be exempt under section 10(23DA) of the
     Income Tax Act. However, such trust will be liable to pay additional income
     tax on the income distributed to its investors on the line of dividend
     distribution tax. The tax rate shall be 25% in the case of distribution being
     made to the individual and HUF and 30% in other cases. These rates are
     the same as proposed under section 115-R in respect of debt mutual fund.
     The distributed income received by the investor will be exempt from tax.


     This provision shall be effective from 1st June, 2013.


7.   Deduction under section 80JJAA for additional wages for workmen
     employed for manufacture of goods in factory as against industrial
     undertaking

     The existing provisions of Section 80JJAA which provides deduction of an
     amount equal to 30% of additional wages paid to the new regular workmen
     employed by the assessee for three years is being substituted so as to
     restrict the Indian company deriving profit from manufacture of goods in its


12                                                        VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain

      factory as against existing provision which allows deduction to any
      industrial undertaking engaged in the manufacture or production of an
      article or thing. Thus the deduction is being limited to a factory as against
      industrial undertaking at present. This amendment has been proposed on
      the ground that the incentive under this provision was intended for
      employment of blue collar employees in the manufacturing sector and not
      for other employees in other sectors.


C.    BUSINESS INCOME
1.    Investment Allowance of 15% on investment of more than Rs.100
      crore in Plant and Machinery

      The Finance Bill, 2013 proposes to allow a deduction of 15% as investment
      allowance on the aggregate amount of the actual cost of the new plant and
      machinery acquired and installed during the period beginning 1st April, 2013
      and ending on 31st March, 2015 under a new Section 32AC. This benefit
      shall be available to a company only which is engaged in the business of
      manufacture of an article or thing and which invests more than Rs.100
      crore in the new plant and machinery. As per the proposed amendment if
      a company, in the assessment year 2014-15 i.e. during the period from 1st
      April, 2013 to 31st March, 2014, invests more than Rs.100 crore in the
      plant and machinery, it can claim the benefit of 15% investment allowance
      in assessment year 2014-15.     Such company if further invests in plant and
      machinery in the assessment year 2015-16 i.e. during the period from 1st
      April, 2014 to 31st March, 2015, it can claim the 15% investment allowance
      in respect of the further additions it has made during the financial year
      2014-15 in assessment year 2015-16. In case the company has invested
      less than Rs.100 crore in the financial year 2013-14, it shall not be eligible
      to claim investment allowance in assessment year 2014-15. However, in
      case in the financial year 2014-15, it makes further investment so that the
      total investment including the investment made in the financial year 2013-
      14 is more than Rs.100 crore, then it shall be entitled to claim investment
      allowance of 15% on the total investment in plant and machinery including
      that of the financial year 2013-14.     It is to be noted that this benefit is
      available only to a company and not to an individual, HUF, partnership firm,
      LLP, etc. Further this benefit shall be available only when the company is


VED JAIN AND ASSOCIATES                                                            13
                            Salient features of the Finance Bill, 2013 by Ved Jain

     engaged in the business of manufacture of an article or thing.          Hence
     service industry, traders are outside this ambit. Power companies will also
     have a dispute on the issue whether power is an article or a thing and
     accordingly whether it can be said that power companies are engaged in
     the business of manufacture of an article or a thing. The minimum amount
     of investment of Rs.100 crore to claim this benefit is too high and only a
     few large companies will be in a position to claim this benefit. Further the
     investment allowance will not reduce the book profit and as such the
     liability to pay Minimum Alternate Tax will still be there.


     The Finance Minister in his Budget speech has stated that no large
     economy can be truly developed without a robust manufacturing sector.
     Accordingly this proposal is being introduced to attract new investment and
     to quicken the implementation of projects. He has also hoped that there
     will be enormous spill over benefits to small and medium enterprises.


     The objective, as stated by the Finance Minister, is to promote the
     manufacturing sector which has lagged behind as is evident from the
     figures of the GDP of manufacturing sector. Accordingly it will be ideal that
     this minimum requirement of Rs.100 crore is reduced, if not less, to Rs.10
     crore so that a large number of enterprises become eligible. Further there
     is no need to restrict the benefit to corporate entities only.


     There is a further condition attached that the new plant and machinery so
     acquired and installed shall not be sold or transferred otherwise than on
     amalgamation or demerger for a period of five years and in case of such
     transfer the amount of deduction allowed in respect of such plant and
     machinery shall be deemed to be the income of the year in which such sale
     or transfer is effected. The condition of not transferring the new plant and
     machinery of more than Rs.100 crore for a period of five years is too
     impractical. If plant and machinery of more than Rs.100 crore is installed
     or acquired there is bound to be some replacement over a period of five
     years of some of the machinery. Accordingly it may not be advisable to put
     a condition to not to transfer even a small part of the plant and machinery.
     A leverage to transfer or replace 10% to 25% of the total cost of plant and
     machinery may be provided so as to avoid practical difficulties on this


14                                                        VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain

      aspect. Further the period of five years is too long given the fact that these
      days technology changes very fast and plant and machinery get outdated
      and becomes obsolete within a short span. Ideally this period should not
      be more than three years.
      Further to give a boost to the manufacturing sector, it will be better that
      the depreciation rate for plant and machinery, which were reduced in the
      year 2005 from 33.33% to 15%, be again increased to 33.33% across the
      board for all plant and machinery used in manufacture or production of an
      article or thing.   This will really encourage more investment in the plant
      and machinery and will not also effect the revenue as depreciation over a
      period cannot exceed the actual cost.


2.    Sale of property held as stock in trade to be valued at Circle rate for
      business income also

      The Finance Bill, 2013 proposes to introduce a new Section 43CA on the
      line of Section 50C so as to compute income of the person engaged in the
      business of real estate in respect of the property sold on the basis of the
      value adopted for the payment of the stamp duty based on the circle rate
      notified by the State Government. The Finance Act, 2002 has introduced
      Section 50C to provide that in case of transfer of land or building or both, if
      the consideration received is less than the value adopted or assessed by
      any State Government for the purpose of levy of stamp duty, the value
      adopted for stamp duty shall be deemed to be the full value of the
      consideration received for computing capital gain under Section 48 of the
      Income Tax Act. This provision was limited to computing capital gain under
      section 45 of the Income Tax Act and was not applicable where the land
      and building was being sold in business like builder, developer. The Finance
      Bill, 2013 now is expanding the scope and accordingly in the case of a
      builder or a developer also if the sale consideration stated is less than the
      value adopted for the purpose of payment of stamp duty, then the value so
      adopted will be taken as full value of consideration while computing
      business income.


      As is the case under Section 50C, an option is being given to the assessee
      that in case he claims that the value adopted for the purpose of stamp duty



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                             Salient features of the Finance Bill, 2013 by Ved Jain

     exceeds the fair market value as on the date of transfer of the property,
     the Assessing Officer may refer the valuation of the property to the
     valuation officer.   If the fair market value determined by the valuation
     officer is less than the value adopted for stamp duty purposes, the
     Assessing Officer may take such fair market value to be the full value of the
     consideration received.       However, if the fair market value determined by
     the valuation officer is more than the value adopted for stamp duty
     purposes, the Assessing Officer shall not adopt the fair market value
     determined by the valuation officer but will take the value adopted for
     stamp duty purposes as the consideration.        Thus in case the property is
     referred for valuation, the Assessing Officer cannot increase the value but if
     the valuation is less than the stamp duty value the same will get reduced.


     Further in order to address the issue of change in circle rate consequent to
     the time gap between the date when the agreement to sell is entered into
     and the date when the registration is effected it has been provided that the
     value to be adopted for the purpose of computing profit and gains of
     business or profession shall be the stamp duty value on the date of the
     agreement to sell. However, in order to avoid any manipulation it has been
     provided that this benefit of agreement to sell shall be available only when
     the consideration or part of the consideration has been received by any
     mode other than cash on or before the date of the agreement for transfer
     of the property. Thus the agreement to sell where consideration has been
     received in cash only will not be valid for determination of the date
     applicable for circle rate.


     It is to be noted that under this section 43CA, in the case of a person
     selling immovable property as stock-in-trade the circle rate applicable as on
     the date of agreement to sell will be applicable.      However, for a person
     selling immovable property as a capital asset, the capital gain would be
     computed on the basis of the circle rate applicable on the date of
     registration, not on the date of entering into agreement to sell. No
     corresponding amendment has been proposed to this effect in existing
     section 50C. While selling property as a capital asset also there is every
     possibility that the circle rate may get changed between the times when



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      the agreement to sell is entered with the prospective buyer and the date
      when the property is registered in the name of the buyer. Thus there is a
      need to add corresponding provision under Section 50C also.


3.    Clarificatory amendment regarding provision for bad debt in case of
      banks

      The Finance Bill, 2013 proposes to introduce a clarificatory amendment
      regarding bad debts written off and the provision for bad debts. Presently
      under section 36(1)(vii) deduction is allowed in respect of bad debts
      actually written off. Further under section 36(1)(viia) deduction is allowed
      to the banks in respect of provision for bad and doubtful debts which
      include rural advances and other advances. As per section 36(2)(v) it has
      been provided that actual bad debts allowable under section 36(1)(vii) first
      needs to be debited to the provision made under section 36(1)(viia) and
      any amount of the actual debt over and above the provision under section
      36(1)(viia) shall only be eligible for deduction. However, considering some
      judicial interpretations whereby it has been held that the actual bad debt is
      to be debited to the provisions which is limited to rural advances and not
      the total provision for bad debts this amendment is being made.
      Accordingly while claiming any deduction under section 36(1)(vii) first the
      amount available in the provision under section 36(1)(viia) needs to be
      adjusted and any bad debt actually written off in excess thereof shall only
      be eligible for deduction under section 36(1)(vii).


4.    License Fee, Royalty, etc. levied by State Government on State
      Government Undertakings not eligible for deduction

      The Finance Bill, 2013 proposes to make a very interesting amendment by
      inserting a new clause (iia) under Section 40(a) to provide that any amount
      paid by way of royalty, license fee, services fee, privilege fee, service
      charge or any other charge by whatever name called, levied exclusively on
      or which is appropriated directly or indirectly from a State Undertaking by
      the State Government will not be eligible expenditure while computing its
      income.   The memorandum explaining the provisions in the Finance Bill,
      2013 states that this is being done to protect the tax base since disputes




VED JAIN AND ASSOCIATES                                                           17
                             Salient features of the Finance Bill, 2013 by Ved Jain

     have arisen about deductibility of such expenditure while computing income
     of such undertakings.


     It has also been stated that the undertakings are separate legal entities
     than the State and as such are liable to income tax.         This amendment
     shows the difference in the thought process of the Central Government and
     the State Governments and also ignores the fact that these State
     Government undertakings have been created to carry out the State
     responsibility in a more professional and efficient manner. The scope and
     the area of these undertakings by and large is the State function.           The
     State Government in order to have a better administration has created
     these undertakings and has provided them with statutory functions and
     also the State assets by way of land and other infrastructure. The income
     arising to these undertakings cannot be considered to be business income
     in the sense on which tax can be levied.       Accordingly the denial of the
     deduction in respect of an amount which is statutorily required to be paid
     may not be justified. The State Government having delegated a sovereign
     function to these undertakings for better management and recovering a fee
     or royalty for the function delegated to such undertakings are entitled to
     the same and should not be assumed to be a tax avoidance device.


5.   Further extension for setting up power generation, transfer or
     distribution undertaking by one year

     The power industry continues to get extension year after year. The Finance
     Bill, 2013, on the line of the Finance Act, 2012, proposes to extend the
     terminal date by another one year for claiming exemption under Section
     80-IA(4) in respect of undertakings engaged in generation and distribution
     of power; or which starts transmission or distribution; or which undertakes
     substantial   renovation    and   modernization    of   existing   network    of
     transmission or distribution upto 31st March, 2014.       Accordingly all such
     undertakings which become operational by 31st March, 2014 will be eligible
     to claim exemption for 10 consecutive assessment years out of the 15
     assessment years from the year of its operation.


6.   Dividend distribution tax of 20 per cent on buy back of share of
     unlisted companies



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      The Finance Bill, 2013 proposes to introduce a new section 115-QA to levy
      dividend distribution tax on an Indian company on buy back of its shares
      not listed in any recognized stock exchange. The tax payable shall be at
      the rate of 20% on the distributed income i.e. the consideration paid by the
      company on buy back of shares as reduced by the amount which was
      received by the company for issue of such shares. Corresponding
      amendment is being made in Section 10 by inserting clause (34A) to
      exempt income arising to a shareholder of buy back of shares of unlisted
      companies on which distribution tax has been paid under the above section
      115-QA. This amendment is being proposed considering the fact that the
      consideration received by a shareholder on buy back of shares by the
      company at present is taxable as capital gain under section 46A of the Act.
      In view of this, many companies instead of paying dividend on which
      dividend distribution tax is payable,        buyback the shares and the
      shareholder in    turn either claim exemption of the capital gain under
      various provisions of the Income Tax Act or such capital gain is taxed at a
      lower rate. To address this issue it has been proposed that company on
      such buyback of shares shall pay distribution tax. It is to be noted that this
      tax is payable on the difference between the consideration paid by the
      company for buy back of shares and the amount received by the company
      for issue of such shares irrespective of the fact whether the company has
      accumulated profit or not or the amount of accumulated profit. Thus this
      proposed provision goes even beyond section 2(22)(e) of the Act whereby
      amount advanced is considered to be deemed dividend only to the extent
      of accumulated profit.


      This amendment shall be effective from 1st June, 2013 and accordingly any
      buy back of unlisted shares by such companies, before 1st June, 2013 shall
      not be liable for this new additional income tax.


7.    Key Man Insurance Policy
      The Finance Bill, 2013 proposes to plug another loophole in respect of key
      man insurance policies so as to provide that the benefit of exemption under
      Section 10(10D) shall also not be available in respect of a Key Man
      insurance policy which has been assigned to any person during its term


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                            Salient features of the Finance Bill, 2013 by Ved Jain

     with or without consideration and such policies shall continue to be treated
     as a key man insurance policy. This amendment is being made considering
     the fact that key man insurance policy is assigned before its maturity to the
     key man and it is claimed that after such assignment            the policy is no
     longer a key man insurance policy and accordingly not excluded from the
     exemption provided under section 10(10D).


8.   Trading in Commodity Derivatives not to be speculated


     The Finance Minister, while proposing to levy CTT on non-agricultural
     commodities futures contract have also proposed that trading in commodity
     derivatives will not be considered as a speculative transaction. However,
     no corresponding amendment has been proposed in Section 43(5) by the
     Finance Bill, 2013. It appears that while debating the issue later to levy
     CTT, it was thought fit to give a concession by treating trading in
     commodity derivatives as non- speculative transactions.              Accordingly
     suitable amendment will be proposed in Section 43(5) at the time of
     passage of the Finance Bill so as also to exclude eligible transactions in
     respect of trading in commodity derivatives on the line on which trading in
     derivatives or securities have been excluded. It is to be further noted that
     though the CTT will be levied on non-agricultural commodity derivatives,
     the benefit of not treating the transaction in commodity derivatives as
     speculative by implementation will get extended to trading in agricultural
     commodity derivatives also.     It is to be further noted that this benefit of
     treating the commodity derivatives as non-speculative will be effective from
     the date the same is notified by the Central Government. Losses, if any,
     before such notification in such commodity derivatives will be considered to
     be speculative losses and as such will not be eligible to be set off against
     the profit arising from such transactions after the notification date.


D.   CAPITAL GAIN

1.   Agricultural land outside municipal limit for the purpose of capital
     gain and agricultural income re-defined

     At present, under the Income Tax Act, capital gain arising on transfer of
     agricultural land in India is not taxable as it does not fall in the definition of



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      the capital asset under Section 2(14)(iii) of the Income Tax Act. Similarly
      any rent or revenue derived from agricultural land (farm house) which is
      situated in India is considered to be agricultural income and not taxed in
      view of the provisions of Section 2(1A) of the Income Tax Act.       For the
      purpose of claiming this exemption, as on date, in both these sections it
      has been provided that such agricultural land should not be situated in any
      area within the jurisdiction of the municipality or a cantonment board and
      which has a population of not less than ten thousand or in an area which is
      not more than 8 KMs from the local limit of any municipality or a
      cantonment board as may be notified by the Central Government having
      regard to the extent of urbanization of that area.        Thus for claiming
      exemption under this provision, as on date, the land must fall outside the
      area notified by the Central Government. The Finance Bill 2013 proposes
      to define the area in the Act itself rather than making a reference to the
      notification. Accordingly it has been proposed that the said land should not
      be situated in the case of a municipality or a cantonment board which has a
      population of more than 10000 but not exceeding one lac within a distance
      of 2 KMs.    In the case where the population of the municipality or a
      cantonment board is more than one lac but not exceeding ten lac such land
      should not be situated within a distance of 6 KMs.        In the case of a
      municipality or a cantonment board which has a population of more than
      ten lac such land should not be situated within a distance of 8 KMs. All
      distances have to be measured from the local           (outer) limit of the
      municipality or a cantonment board and are to be measured aerially. It has
      also been clarified that the population shall mean the population according
      to the last preceding census of which the relevant figures have been
      published before the 1st day of the previous year i.e. the taxable year, not
      the assessment year. This provision shall come into force from assessment
      year 2014-15 for which the previous year will start from 1st April, 2013.
      Accordingly the persons having land which are covered within the meaning
      of agricultural land under the existing provisions and may not be covered
      within the meaning of agricultural land under the proposed amendment, if
      they sell the said agricultural land by 31st March, 2013 they can still claim
      exemption.




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                            Salient features of the Finance Bill, 2013 by Ved Jain


E.   INCOME FROM OTHER SOURCES

1.   Property purchased for inadequate consideration to be taxed as
     income from other sources

     The Finance Bill, 2013 proposes to reintroduce an amendment by
     substituting existing clause (vii)(b) of Section 56(2) with a new clause so as
     to tax the difference in the stamp duty value of the property purchased and
     the actual consideration paid, if such difference exceed Rs.50000, as
     income from other sources of the buyer being individual or HUF. It is to be
     noted that a similar provision was introduced by the Finance (No.2) Act,
     2009 effective from 1st October, 2009.         However this provision was
     withdrawn retrospectively by the Finance Act, 2010. Under section 50C, the
     seller is already required to compute capital gain on the basis of stamp
     duty value if the actual consideration is less than stamp duty value. As is
     the case under Section 50C for the seller, the buyer in case he disputes
     that the stamp duty valuation is higher than the fair market value on the
     date of the transfer, the Assessing Officer may refer the matter to the
     valuation officer.   If the fair market value determined by the valuation
     officer is less than the value adopted for stamp duty purposes then such
     fair market value shall be adopted for this purpose.     However, if the fair
     market value determined by the valuation officer is more than the stamp
     duty value then the Assessing Officer shall not be able to adopt such fair
     market value and will take the stamp duty value for this purpose in view of
     the provisions of Section 50C(3) which are applicable to this proposed
     section also.    This amendment by implication may address all those
     disputes which are recently arising on acquisition of immovable property
     where by the Assessing Officer makes addition merely on the basis of the
     higher valuation made by the valuation officer without there being any
     material or evidence of any consideration being paid over and above the
     value stated in the sale deed.


     The proposed amendment shall also address the issue which may arise
     consequent to the revision of the circle rate between the date on which the
     agreement to sell is entered and the date on which the sale deed is
     entered. It is being provided that in such a case the stamp duty value on
     the date of the agreement to sell shall be taken provided the consideration


22                                                       VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain

      or a part thereof has been paid on or before the date of the agreement by a
      mode other than cash.      This condition of payment at the time of the
      agreement to sell other than by cash is being introduced to avoid any doubt
      about the date of the agreement to sell.        It is to be noted that this
      amendment does not make a distinction of acquisition of property for
      personal purposes or in the course of business. Accordingly it can have far
      reaching implications in respect of persons engaged in the business of real
      estate if the purchases have been made at a value less than the stamp
      duty value. However, it is also to be noted that this provision is applicable
      only in the case of an individual and HUF and accordingly this provision will
      not be applicable where the property is purchased by a partnership firm or
      an LLP or a company.


F.    ASSESSMENT

1.    Return to be defective if tax with interest is not paid before filing of
      return

      The Finance Bill, 2013 proposes to insert a new clause (aa) in explanation
      below section 139(9) so as to provide that if tax together with interest
      payable in accordance with the provisions of section 140A has not been
      paid on or before the date of furnishing of the return, the same will be
      treated as a defective return.
      As per the provisions of section 139(9) the Assessing Officer in such a
      situation will intimate the defect to the assessee and give him an
      opportunity to rectify the defect within a period of 15 days from the date of
      such intimation or within such further period on an application the
      Assessing Officer may in his discretion allow. In case the defect is not so
      rectified within the period so allowed, the return shall be treated as invalid
      return and it shall be considered that assessee has failed to furnish the
      return.   However, the proviso to this section also states that where
      assessee rectifies the defect after the expiry of the period allowed to him
      but before the assessment is made, the assessing officer can condone the
      delay and treat the return as a valid return.
      With this amendment it will not be possible to file return without paying full
      taxes with interest.



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                           Salient features of the Finance Bill, 2013 by Ved Jain



     This provision shall be applicable from 1st June, 2013.


2.   Scope of directing special audit under section 142(2A) being
     widened

     At present under section 142(2A) of the Income Tax Act, the Assessing
     Officer can direct the assessee to get the accounts audited if he is of the
     opinion having regard to the nature and complexity of the accounts and the
     interest of the revenue, it is necessary so to do. The Finance Bill, 2013,
     proposes to widen the ambit so as to provide that the assessing officer can
     direct special audit not only having regard to the nature and complexity of
     the accounts but also having regard to the volume of the accounts, doubts
     about the correctness of the accounts, multiplicity of transactions in the
     accounts or specialized nature of business activity of the assessee.


     This amendment shall be applicable from 1st June, 2013.


3.   Extension of period of limitation where reference for exchange of
     information is made abroad or where order of special audit is
     quashed by the court.

     The Finance Bill, 2013 proposes to clarify the existing provision in section
     153 regarding extension of time period for completion of assessment in
     case where reference for exchange of information is made abroad by a
     competent authority under Double Taxation Avoidance Agreement referred
     to in Section 90 or under Section 90A. It is being clarified that where more
     than one reference for exchange of information is made the period to be
     excluded shall be the period from the date on which a reference or first of
     the references for exchange of information is made to the date on which
     the information requested is last received by the Commissioner or a period
     one year whichever is less while computing the period of limitation under
     section 153 of the Income Tax Act. Thus the maximum extension in case
     of exchange of information is limited to a period of one year.


     Further it is being proposed that the period of limitation for completion of
     assessment and reassessment shall stand extended in case the direction of
     the assessing officer for special audit under section 142(2A) is set asided
     by the Court. The extension shall be for the period commencing from the


24                                                       VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain

      date on which the assessing officer directs the assessee for special audit
      and ending with a date on which orders setting aside such direction is
      received by the Commissioner while computing the period of limitation for
      the purpose of Section 153.       A corresponding amendment has been
      proposed in section 153B of the Income Tax Act regarding reassessment
      consequent to the search.


      This amendment shall be effective from 1st June, 2013.


4.    Tax due to include interest and penalty for recovery from directors
      and partners of LLP

      Provisions of section 179 whereby tax due from a private company can be
      recovered from the director is being amended to clarify that the tax due
      shall also include interest and penalty thereon as well as any other sum
      payable under the Act.    Similar amendment is being made under section
      167C of the Income Tax Act for recovery of tax from partners in respect of
      liability of LLP.
      This amendment shall be effective from 1st June, 2013.
5.    Existing liability under section 132B not to include advance tax
      payable

      A clarificatory amendment is proposed to be introduced by inserting
      Explanation 2 in section 132B to clarify that existing liability stated in
      section 132B does not include advance tax payable in accordance with the
      provisions of Chapter XVIIC. This is being done to ensure the recovery of
      not only outstanding tax, interest and penalty but also to provide for
      recovery of taxes/interest/penalty which may arise subsequent to the
      assessment pursuant to search.


      This amendment shall be effective from 1st June, 2013.


6.    Penalty for non-furnishing of AIR information on requisition by the
      assessing officer increased from Rs.100 to Rs.500 per day

      Presently under section 285BA there is an obligation to furnish annual
      information return in respect of certain transactions stated therein. Further
      in terms of section 285-BA(5), the income tax authority has power to call
      for such information where a person has not furnished the AIR information.



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                              Salient features of the Finance Bill, 2013 by Ved Jain

     In case of failure to furnish the information, presently penalty at the rate of
     Rs.100 per day is leviable under section 271FA.          The Finance Bill, 2013
     proposes to raise the penalty, in cases where the income tax authority has
     called for the information under sub-section (5) of section 285BA and the
     same is not furnished, from Rs.100 per day to Rs.500 per day.


7.   Electronic filing of annexure-less Wealth Tax Return:
     Provisions of Wealth Tax Act are being amended to facilitate electronic filing
     of annexure-less return of net wealth. The amendment proposed is on the
     line similar to the amendment made earlier to facilitate electronic filing in
     Income Tax Act under Section 139C and 139D.


     This amendment is being made with effect from 1st June, 2013, and
     accordingly return of wealth tax for assessment year 2013-14 now can be
     filed electronically.


G.   TAX DEDUCTION AT SOURCE
1.   Tax to be deducted at source by buyer on purchase of immovable
     properties

     The Finance Bill, 2013 proposes to reintroduce provision making it
     obligatory to deduct tax at source under a new Section 194-IA so as to
     provide that every buyer at the time of making payment or crediting of any
     sum as consideration for transfer of immovable property other than
     agricultural land shall deduct tax at source at the rate of 1% of such sum
     where the total amount of the consideration for the transfer of the
     immovable property is Rs.50 Lac or more.               This provision is being
     introduced    on   the   reasoning   that   despite   there   being   a   statutory
     requirement of furnishing Permanent Account Number in the documents
     relating to the sale of the property, in majority of the cases, such PAN is
     not being furnished. A similar provision was introduced by the Finance Bill,
     2012 whereby an obligation was also cast on the registering officer to not
     to register any document unless the buyer furnishes the proof of deduction
     of income tax.     However, in the new provision introduced in this Finance
     Bill, 2013 there is no such obligation on the registering officer. Under the
     proposed provision there is an obligation on every buyer irrespective of the



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Salient features of the Finance Bill, 2013 by Ved Jain

      status i.e. individual, HUF, partnership firm, company, to deduct tax at
      source at the rate of 1%. This deduction has to be made at the time of
      making payment or credit whichever is earlier. Thus even at the time of
      giving earnest money or an advance money or an installment, tax will be
      required to be deducted and deposited in accordance with the provisions of
      the Act. Further it will be also important that the seller has a Permanent
      Account Number as otherwise in view of the provisions of Section 206AA of
      the Act the tax will be required to be deducted at the rate of 20% instead
      of 1%. The only exclusion is where the consideration is less than Rs.50 Lac
      or agricultural land as defined under Section 2(14)(iii) the definition of
      which is also proposed to be changed in this Finance Bill, 2013.


      This provision may have a lot of practical difficulties in view of the fact that,
      this will be applicable to an individual buying property but may not be
      having TAN. Further tax need to be deducted from each payment. In the
      case of a developer, each customer will be deducting tax and it will be a
      very voluminous task to collect tax certificates. Further the issue of
      reconciliation will also be cumbersome considering the fact that the tax will
      get deducted even on advance payment and income consequent to the sale
      may accrue in subsequent year or years..


      This provision will be applicable from 1st June, 2013 and accordingly all
      transactions on or after 1st June, 2013, where the consideration is not less
      than Rs.50 Lac, shall be covered under this provision.


H.    INTERNATIONAL TAXATION

1.    Tax Residency Certificate necessary but not sufficient ­ GAAR being
      revived from back door

      The Finance Bill, 2013 proposes to insert a new sub-section (5) in section
      90 and section 90A to the effect that for claiming any relief under the
      Double Taxation Avoidance Agreement, the tax residency certificate as
      referred to in sub-section (4) of section 90 and 90A shall be necessary but
      not a sufficient condition.   It has been stated that in the memorandum
      explaining the provisions in the Finance Bill 2013, that this position that tax
      residency certificate is necessary but not sufficient condition was earlier


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                             Salient features of the Finance Bill, 2013 by Ved Jain

     mentioned in the memorandum explaining the provisions in the Finance
     Bill, 2012 while inserting sub-section (4) regarding the requirement of the
     tax residency certificate.
     This amendment, however, has a far reaching implication as the Mauritius
     tax route will again come under threat because of this provision.          This
     amendment will also dilute the most quoted circular No. 789 dt. 13th April,
     2000 of Central Board of Direct Taxes which was quashed by the Delhi High
     Court but in an appeal filed by the Union of India, the Supreme Court
     upheld the validity of the circular in the famous case of        Azadi Bachao
     Andolan 263 ITR 706 (SC). With this proposed amendment the tax officer
     will now be able to raise the same dispute which was raised in the year
     2000.    The officer may ask a Foreign Institutional Investor (FII), besides
     submitting tax residency certificate, to establish that it has actual residence
     in Mauritius.   It is to be noted that the whole controversy of GAAR has
     arisen mainly because GAAR was intended to challenge the issue of
     residency and consequently withdraw the benefit available under the
     Mauritius Treaty. Despite India having tax treaties with 84 countries, the
     most important treaties are that of Mauritius and Singapore as it affects the
     major foreign investment inflow in India since capital gains realized by the
     residents of these jurisdictions are exempt under this treaty. The proposed
     amendment in fact is a back door entry of the controversial GAAR provision
     which otherwise, in view of the hue and cry and serious outflow of FII
     investment during the year, are proposed in this Finance Bill, 2013 to be
     postponed by another two years. This amendment will also water down the
     Supreme Court judgment in the case of Azadi Bachao Andolan and CBDT
     Circular No.789 dt. 13th April, 2000 by which it has been clarified as under:-


             "The provisions of the Indo-Mauritius DTAC of 1983 apply to
             'residents' of both India and Mauritius . Article 4 of the DTAC defines
             a resident of one State to mean any person who, under the laws of
             that State is liable to taxation therein by reason of his domicile,
             residence, place of management or any other criterion of a similar
             nature. Foreign Institutional Investors and other investment funds
             etc. which are operating from Mauritius are invariably incorporated in
             that country. These entities are 'liable to tax' under the Mauritius Tax
             law and are therefore to be considered as residents of Mauritius in
             accordance with the DTAC.




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             Prior to 1st June, 1997, dividends distributed by domestic companies
             were taxable in the hands of the shareholder and tax was deductible
             at source under the Income-tax Act, 1961. Under the DTAC, tax was
             deductible at source on the gross dividend paid out at the rate of 5%
             or 15% depending upon the extent of shareholding of the Mauritius
             resident. Under the Income-tax Act, 1961, tax was deductible at
             source at the rates specified under section 115A etc. Doubts have
             been raised regarding the taxation of dividends in the hands of
             investors from Mauritius. It is hereby clarified that wherever a
             Certificate of Residence is issued by the Mauritian Authorities, such
             Certificate will constitute sufficient evidence for accepting the status
             of residence as well as beneficial ownership for applying the DTAC
             accordingly.

             The test of residence mentioned above would also apply in respect of
             income from capital gains on sale of shares. Accordingly, FIIs etc.,
             which are resident in Mauritius would not be taxable in India on
             income from capital gains arising in India on sale of shares as per
             paragraph 4 of article 13."

      It may be interesting to note that in this Finance Bill, 2013, this
      amendment is the only amendment which is being proposed
      retrospectively i.e. from assessment year 2013-14.


2.    General Anti Avoidance Rules (GAAR) ­being postponed by 2 years

      The Finance Bill, 2013 proposes to postpone the GAAR by another 2 years
      and to substitute the existing provision of Chapter XA and section 144BA
      regarding General Anti Avoidance Rules (GAAR). The amended provisions

      are on the line of the expert committee's recommendations, of which the

      announcement was made on 14th January, 2013.          The salient features of
      this amendment are as under:-


      "(A)   The provisions of Chapter X-A and section 144BA will come into force
             with effect from April 1, 2016 as against the current date of April 1,
             2014. The provisions shall apply from the assessment year 2016-17
             instead of assessment year 2014-15.

      (B)    An arrangement, the main purpose of which is to obtain a tax
             benefit, would be considered as an impermissible avoidance
             arrangement. The current provision of section 96 providing that it
             should be "the main purpose or one of the main purposes" has been
             proposed to be amended accordingly.




VED JAIN AND ASSOCIATES                                                             29
                          Salient features of the Finance Bill, 2013 by Ved Jain

     (C)   The factors like, period or time for which the arrangement had
           existed; the fact of payment of taxes by the assessee; and the fact
           that an exit route was provided by the arrangement, would be
           relevant but not sufficient to determine whether the arrangement is
           an impermissible avoidance arrangement. The current provisions of
           section 97 which provided that these factors would not be relevant
           has been proposed to be amended accordingly.

     (D)   An arrangement shall also be deemed to be lacking commercial
           substance, if it does not have a significant effect upon the business
           risks, or net cash flows of any party to the arrangement apart from
           any effect attributable to the tax benefit that would be obtained but
           for the application of Chapter X-A. The current provisions as
           contained in section 97 are proposed to be amended to provide that
           an arrangement shall also be deemed to lack commercial substance
           if the condition provided above is satisfied.

     (E)   The Approving Panel shall consist of a Chairperson who is or has
           been a Judge of a High Court; one Member of the Indian Revenue
           Service not below the rank of Chief Commissioner of Income-tax;
           and one Member who shall be an academic or scholar having special
           knowledge of matters such as direct taxes, business accounts and
           international trade practices. The current provision of section 144BA
           ,that the Approving Panel shall consist of not less than three
           members being income-tax authorities and an officer of the Indian
           Legal Service has been proposed to be amended accordingly.

     (F)   The directions issued by the Approving Panel shall be binding on the
           assessee as well as the income-tax authorities and no appeal against
           such directions can be made under the provisions of the Act. The
           current provisions of section 144BA providing that the direction of
           the Approving Panel will be binding only on the Assessing Officer
           have been proposed to be amended accordingly.

     (G)   The Central Government may constitute one or more Approving
           Panels as may be necessary and the term of the Approving Panel
           shall be ordinarily for one year and may be extended from time to
           time up to a period of three years. The provisions of section 144BA
           have been proposed to be amended accordingly.

     (H)   The two separate definitions in the current provisions of section 102,
           namely, "associated person" and "connected person" will be combined
           and there will be only one inclusive provision defining a `connected
           person'. The provisions of section 102 have been proposed to be
           amended accordingly.

           This amendment will be effective from 1st April, 2016 and
           accordingly shall be applicable from assessment year 2016-17.




30                                                     VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain

            It is to be noted that the Finance Minister in his Budget speech has
            stated that the recommendation of the Shome Committee have been
            accepted but following major recommendations of the Shome
            Committee have not been incorporated in the amendment proposed
            in the Finance Bill, 2013:-
            i)     The monetary threshold limit of Rs.3 crore for invoking GAAR;
            ii)    Grand-fathering provision in respect of investment made on or
                   before 30th August, 2010;
            iii)   The applicability of the GAAR where a part of the arrangement
                   is an impermissible avoidance agreement to be restricted to
                   that part only and not to the whole arrangement;
            iv)    The provisions of GAAR to ensure that same income is not
                   taxed twice in the hands of the same tax payer in the same
                   year or in different assessment years.


3.    Dividend received from foreign companies to continue to be taxed
      at concessional rate of 15% for one more year

      The Finance Bill, 2013 proposes to extend the benefit of Section 115BBD by
      another one year the concessional rate of tax of 15% on the dividend
      income received by an Indian company from a foreign company in which it
      has shareholding of 26% or more.      This provision was introduced by the
      Finance Act, 2011 to attract more repatriation of income earned by a
      subsidiary of Indian companies for a period of one year. The Finance Act,
      2012 has extended the period to another one year.           With this further
      extension by the Finance Bill, 2013 this benefit will continue to be available
      for dividend received in the financial year 2013-14 i.e. assessment year
      2014-15.


4.    Dividend received by Indian company from foreign subsidiary to be
      exempt from dividend distribution tax

      Presently under the Income Tax provisions every Indian company in
      addition to paying tax at the rate of 30% on its income is required to pay
      dividend distribution tax at the rate of 15% on the amount of dividend
      distributed, at the time of distribution of dividend.   However, there is an
      exemption in respect of the dividend distributed to the extent of the



VED JAIN AND ASSOCIATES                                                            31
                           Salient features of the Finance Bill, 2013 by Ved Jain

     dividend received from an Indian subsidiary company which has paid the
     dividend distribution tax on such dividend. Similar exemption is proposed
     to be extended by this Finance Bill, 2013 in respect of the dividend received
     from a foreign subsidiary company on which tax has been paid under
     Section 115-BBD of the Income Tax Act.              This amendment is being
     introduced to remove the cascading effect in respect of the dividend
     received by an Indian company from a similarly placed foreign company.
     This exemption can be subject matter of tax planning so as to take benefit
     of tax at the rate of 15% as against normal tax of 30%. Presently if a
     resident individual receives an income from abroad say UAE, the same will
     get taxed at the rate of 30%. But if this income is received by an Indian
     company by way of dividend from its subsidiary in UAE, then such dividend
     income will get taxed at the rate of 15%. The Indian company in turn can
     pay dividend to its individual shareholders out of such dividend received
     without   paying   dividend   distribution   tax   in   view   of   the   proposed
     amendment. Thus the income from UAE will reach in the hands of the
     individuals by paying tax at the rate of 15% as against normal tax rate of
     30%.


     It is to be noted that the existing provisions and the proposed amendment
     allows deduction only in respect of the dividend received from a subsidiary
     company on which dividend distribution tax has been paid. The dividend
     received from a company which is not a subsidiary company continues to
     bear the cascading effect as the company is required again to pay dividend
     distribution tax on the income distributed despite the fact that such income
     comprised of the dividend received from another company on which
     dividend distribution tax has been paid. It is being realized that subjecting
     again dividend distribution tax has a cascading effect there is no reason
     why there should be a distinction of the dividend received from a subsidiary
     company or a non-subsidiary company.         Further the contention that only
     such company shall be considered as a subsidiary company if such other
     company holds more than 50% of the equity share capital of the company
     also is not in line with the exemption provided under Section 115BBD in
     respect of dividend received from a foreign company whereby holding 26%
     or more equity is considered to be eligible for concessional rate of 15% tax.



32                                                           VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain



      This amendment shall be effective from 1st June, 2013 and accordingly if
      any Indian company distributes dividend on or after 1st June, 2013 it shall
      be eligible to deduct the amount of the dividend received by it from a
      foreign subsidiary company while computing its liability of paying dividend
      distribution tax.


5.    Tax on Royalty or Fee for Technical Services increased to 25%
      Presently under Section 115-A of the Income Tax Act, the tax rate
      applicable in the case of a non-resident on income by way of royalty or fee
      for technical services is 10% if the agreement for such royalty or fee for
      technical services is entered on or after 1st June, 2005. The Finance Bill,
      2013 proposes to increase this from 10% to 25%. This is being done on
      the ground that as per the Double Taxation Avoidance Agreement (DTAA)
      entered into by India with other countries, the tax rate provided in these
      DTAA is more than the tax rate of 10% under this normal provision of the
      Act.   Accordingly there is no justification to keep the tax rate under the
      normal tax provision lower than the tax rate applicable as per the Treaty.
      However, this justification for enhancement of tax rate does not take into
      account the fact that India has reduced the tax rate on royalty and fee for
      technical services from 30% to 20% in the year 1997 and from 20% to
      10% in the year 2005 to attract more investment and technology despite
      the fact that the tax rate applicable on royalty or fee for technical services
      under DTAA at that time were also more than the 10%. It is not that post
      1997 or post-2005, the tax rates under DTAA on royalty or fee for technical
      services has been increased necessitating increase in the normal provision
      of the Income Tax Act.


6.    Concessional rate of 5% on interest on ECB borrowing being
      extended to Rupee denominated Long Term Infrastructure Bond:

      The Finance Bill, 2013 proposes to extend the scope of section 194-LC in
      respect of a borrowing by an Indian company in foreign currency from a
      source outside India by issue of Long Term Infrastructure Bond whereby
      concessional rate of tax of 5% is applicable on the interest payment to a
      non-resident person. As per the proposal the concessional rate of 5% shall
      be applicable in respect of the Long Term Infrastructure Bonds issued by an


VED JAIN AND ASSOCIATES                                                            33
                           Salient features of the Finance Bill, 2013 by Ved Jain

     Indian company which are denominated in Rupee. However, for claiming
     this concessional rate of 5%, the non-resident is required to deposit foreign
     currency in designated bank account and such money converted into Rupee
     is utilized for subscribing to the Long Term Infrastructure Bond issue of an
     Indian company.    The interest income arising thereon shall be taxable at
     the rate of 5%.


     This provision shall be applicable from 1st June, 2013.


7.   No clarity on retrospective amendment relating to Indirect Transfer
     Last year, the Finance Act, 2012 has made far reaching retrospective
     amendment to Section 2 and Section 9 in relation to indirect transfers to
     undo the judgment of the Supreme Court in the case of Vodafone.           Post
     enactment of the amendment in view of the adverse impact on FII and FDI,
     Shome Committee was asked to revisit the same. The Shome Committee
     has made recommendation to not to make retrospective amendment. The
     Finance Bill, 2013 is silent on this issue.   The Vodafone case controversy
     still continues to be a major issue with the foreign investors in view of the
     retrospective amount which led to uncertainty in the law.       The Finance
     Minister in his Budget speech though has stated that he will improve
     communication of policies to remove any apprehension or distrust in the
     minds of investors but in the absence of any categorical statement about
     the retrospective amendment in the law, fears about undue regulatory
     burden and application of tax law continues with the foreign investors.


I.   MISCELLANEOUS

1.   Pass through status to Alternative Investment Fund on the line of
     Venture Capital Fund

     Venture Capital Fund/Venture Capital Company registered with SEBI as

     Category-I ­ Alternative Investment Fund under the Alternative Investment

     Fund regulations have been granted pass through status on the line of pass
     through status granted under Section 10(23FB) to Venture Capital
     Company and Venture Capital Fund from investment in a Venture Capital
     Undertaking. However the income arising or received by a person out of



34                                                       VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain

      the investment made in such Fund shall be taxable in his hands under
      Section 115-U of the Income Tax Act.        Under this Section 115-U, the
      income paid by a special fund is deemed to be of the same nature and in
      the same proportion in the hands of the person receiving such income as it
      has been received by, or had accrued or arisen to the Company or Fund
      during the previous year as the case may be.


2.    Income of Investor Protection Fund of depository to be exempt


      The Finance Bill, 2013 proposes to introduce a new sub-section (23ED) in
      Section 10 to exempt income of the Investor Protection Fund of depository
      similar to the exemption provided under Section 10(23EA) of income
      received by an Investor Protection Fund set up by the recognized Stock
      Exchange.    The exemption will be available to such Investor Protection
      Fund which is set up by the depository in accordance with the regulations
      prescribed by SEBI. Further it has been provided that any amount standing
      to the credit of the Fund if it is shared wholly or partly with a depository
      then exemption will not be available in respect of the amount so shared
      and the same will be deemed to be the income in which such amount is
      shared.   Thus the Investor Fund so created by the depository has to be
      maintained exclusively and is not to be shared with the depository.


3.    Income of National Financial Holding Company Ltd. to be exempt


      The Finance Bill, 2013 has proposed to insert a new sub-section (49) in
      Section 10 to provide that the income of National Financial Holding
      Company Ltd. which is a company set up by the Central Government shall
      be exempt commencing from the assessment year 2014-15.                 This
      exemption is continuation of the exemption provided to the Specified
      Undertaking of the Unit Trust of India which has been wound up and is
      succeeded by this new company called National Financial Holding Company
      Ltd.


4.    Time period for recognized Fund to obtain               exemption     from
      Provident Fund Commission being extended




VED JAIN AND ASSOCIATES                                                          35
                              Salient features of the Finance Bill, 2013 by Ved Jain

     As per the existing provisions, for a Provident Fund to obtain recognition
     under the Income Tax Act, such Provident Fund should be notified by the
     Central Provident Fund Commissioner under Section 1(4) of the Employees
     Provident Fund and Miscellaneous Provisions Act, 1952 and such Fund
     should have exemption under Section 17 of the said Act. The Finance Act,
     2006 had inserted that this notification and the approval should be
     obtained by 31st March, 2007 by the existing Provident Fund otherwise
     recognition of such Fund shall be withdrawn. Considering the fact that such
     notification and approval has not been granted so far by the Provident Fund
     Commissioner to a large number of Funds, year after year this deadline is
     being extended. The Finance Bill, 2013 proposes to extend this deadline of
     notification   and     obtaining       exemption   from    the       Provident   Fund
     Commissioner from 31st March, 2013 to 31st March, 2014.




                        VED JAIN AND ASSOCIATES
                              Tax, Audit and Advisory
                          http://www.vedjainassociates.com
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