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
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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
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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
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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
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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
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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%
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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
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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
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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
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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.
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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
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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
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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
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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
18 VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain
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
VED JAIN AND ASSOCIATES 19
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
20 VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain
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
26 VED JAIN AND ASSOCIATES
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
VED JAIN AND ASSOCIATES 27
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.
28 VED JAIN AND ASSOCIATES
Salient features of the Finance Bill, 2013 by Ved Jain
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.
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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
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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
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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
New Delhi Chandigarh
33, First Floor, Babar Road SCO 345-346
Bengali Market, Sector 35-B
New Delhi Chandigarh
+91 11-23354546 +91 172 2605553
36 VED JAIN AND ASSOCIATES
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