POST-BUDGET MEMORANDUM - 2013
DIRECT TAXES
THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF INDIA
NEW DELHI
POST-BUDGET MEMORANDUM - 2013
INTRODUCTION
1.0 The Council of the Institute of Chartered Accountants of
India considers it a privilege to submit this Post-Budget
Memorandum to the Government.
1.1 In this memorandum, we have suggested certain amendments
to the proposals contained in the Finance Bill, 2013 which
would help the Government to achieve the desired objectives.
1.2 We have noted with great satisfaction that the suggestions
given by the Committee in the past have been considered very
positively. Certain representations made in the post-budget
memorandum of earlier years have formed the basis of
amendments proposed in the current Finance Bill. In
formulating our suggestions in regard to the Finance Bill
2013, the Direct Taxes Committee of the ICAI has considered
in a balanced way, the objectives and rationale of the
Government and the practical difficulties/hardships faced by
taxpayers and professionals in application of the Income-tax
Act, 1961. We are confident that the suggestions of the
Direct Taxes Committee of ICAI given in this Memorandum
shall receive positive consideration. The representations made
by the Direct Taxes Committee of the ICAI in the last few
years which have resulted in legislative changes are given
below to illustrate the positive outcome of such suggestions
Sl. In Relevant Issues
No. relation to Suggestions of ICAI Action taken
Finance
Bill
I. 2008 1. Computation of Book Considered in
Profit u/s 115JB Finance Act, 2008
exclusion of deferred tax
assets if credited to the
Profit & Loss Account
2
Sl. In Relevant Issues
No. relation to Suggestions of ICAI Action taken
Finance
Bill
2. Liability of AOPs and Considered in
BOIs for TDS u/s 194C Finance Act, 2008
only if the concerned
AOPS are liable to Tax
Audit u/s 44AB
3. Notice deemed to be Considered in
valid just because of the Finance Act, 2008
assessee's appearance or
co-operation u/s 292BB
if the assessee objects
as regards validity of the
Notice during the course
of assessment
proceedings, this section
should not be applied.
II. No.2 of 1. Treatment of Advance Through Notification
2009 FBT paid during the this has been
Financial Year 2009-10 implemented
in view of abolition of
FBT Advance FBT
should be treated as
Advance income-tax
paid .
2. Conversion of LLPs Considered in
should not be considered Finance Act, 2010
as "transfer" for capital
gains by inclusion in
section 47.
3. Computation of Considered in
deductible profit of SEZ Finance Act, 2010
unit u/s 10AA
amendment to be made
3
Sl. In Relevant Issues
No. relation to Suggestions of ICAI Action taken
Finance
Bill
retrospective.
4. Capital expenditure Considered in the
incurred in the years Finance (No.2) Act,
prior to the year in which 2009
specific business has
been commenced
u/s 35AD capital
expenditure incurred in
earlier years should be
considered for deduction
in the year of
commencement of
specific business
5. Deemed income u/s Considered in the
56(2)(vii) this should Finance (No.2) Act,
be included in the 2009
definition of income u/s
2(24)
6. Value considered for Considered in the
deemed income u/s Finance (No.2) Act,
56(2)(vii) such deemed 2009
value should be
considered as "cost of
acquisition" u/s 49 for
subsequently computing
capital gains from
transfer thereof
7. Valuation as regards Considered in
deemed income u/s Finance Act, 2010
56(2) if assessee
disputes the value the
Assessing Officer should
4
Sl. In Relevant Issues
No. relation to Suggestions of ICAI Action taken
Finance
Bill
be able to make
reference to Valuation
Officer
8. Deemed income u/s Considered in
56(2)(vii) trading Finance Act, 2010
assets should be for exclusion of the
excluded property of the
nature of trading
assets of the receiver
9. Interest on Considered in the
Compensation u/s Finance (No.2) Act,
56(2)(viii) wrong 2009
reference to section
145A(2) should be
rectified to section
145A(b)
10. Exclusion of anonymous By Finance(No.2)
donation from taxability Act, 2009, it has
u/s 115BBC instead of been made 5% of
5% of total income the total donations
relaxation should be of
5% of gross receipts
III. 2010 1 Exemption of capital Considered in the
gains in the hands of Finance Act, 2010
shareholders consequent
to conversion of a
company into a LLP -
Amendment in section
47(xiiib).
IV 2012 1. Provision for Considered in the
rectification u/s 154 and Finance Bill, 2012
5
Sl. In Relevant Issues
No. relation to Suggestions of ICAI Action taken
Finance
Bill
appeal u/s 246A in
respect of an intimation
under section 200A.
2. Extension of benefit of Considered in the
weighted deduction Finance Bill, 2012
under section 35(2AB)
for a further period of
five years.
3. "Book profit" under Considered in the
section 115JB to be Finance Bill, 2012
computed based on the
net profit as per the
accounts prepared under
the relevant statute for
banking, insurance,
electricity companies
etc.
4. Reference to Part III of Considered in the
Schedule VI to be Finance Bill, 2012
omitted in section 115JB
since Revised Schedule
VI does not contain Part
III
5. Removal of cascading Considered in the
effect of dividend Finance Bill, 2012
distribution tax in multi-
tier corporate structure
also.
6. Extension of due date of Considered in the
filing of return of Finance Bill, 2012
income to 30th
6
Sl. In Relevant Issues
No. relation to Suggestions of ICAI Action taken
Finance
Bill
November of the
assessment year for all
assessees who are
required to file a transfer
pricing report.
7. Alignment of "specified Proposal considered
date" in the Explanation in the Finance Bill,
to section 44AB with the 2012
"due date" of filing
return of income under
Explanation 2 to section
139(1).
8. Age of 60 years for Considered in the
additional benefit to a Finance Bill, 2012
senior citizen, to be
made applicable
uniformly in the Act.
9. Deduction of Considered in the
expenditure incurred by Finance Bill, 2012
way of investment in by way of provision
agricultural of weighted
infrastructure. deduction in respect
of notified
agricultural
extension projects.
10. Consequential Considered in the
amendment in proviso to Finance Bill, 2012
section 111A(1) on
account on increase in
rate of short-term capital
gains from 10% to 15%
w.e.f. 1.4.2009.
7
Sl. In Relevant Issues
No. relation to Suggestions of ICAI Action taken
Finance
Bill
V 2013 1. Adoption of stamp duty Considered in the
value as on the date of Finance Bill, 2013 in
agreement, where the proposed sections
date of agreement is 43CA & 56(2)(vii).
different from the date of
registration.
2. Scope of Annual Confirmed by the
Information Return to be Finance Minister in
increased. his Budget Speech of
Union Budget 2013-
14. Amendment to
be given effect to in
the Income-tax
Rules, 1962.
3. Levy of TCS@1% on This suggestion has
transfer of immovable been considered,
property. though tax is now
proposed to be
deducted@1%
instead of being
collected at source.
4. Suggestions made to These suggestions
Shome Committee on have been
GAAR considered in the
(i) GAAR to be invoked New Chapter X-A of
only if the main the Finance Bill,
purpose is to obtain a 2012.
tax benefit.
(ii) GAAR to be binding
both on the taxpayer
as well as the
department.
8
Sl. In Relevant Issues
No. relation to Suggestions of ICAI Action taken
Finance
Bill
(iii) Constitution of
Approving Panel to
include independent
professionals/
businessmen/experts
5. Threshold limit for The Finance Bill,
deduction under section 2012 has amended
80GGB & 80GGC in these sections to
respect of cash donations provide that no
to political parties and deduction would be
electoral trusts. allowed in respect
such of cash
donations.
1.3 The suggestions have been categorized into two parts :
a) Suggestions relating to Domestic taxation
b) Suggestions relating to International Taxation
1.4 In this memorandum, firstly an executive summary of our
suggestions on the specific clauses of the Finance Bill, 2013
relating to income-tax have been given. The detailed
suggestions are given thereafter.
1.5 In case any further clarifications or data is considered
necessary, we shall be pleased to furnish the same.
The contact details are:
Name and Contact Details
Designation Mobile Email Id
CA. Manoj Fadnis, 9302217716 manojfadnis@icai.org
Chairman, Direct Taxes
Committee
9
Name and Contact Details
Designation Mobile Email Id
CA. Dhinal A. Shah, 09825029950 Dhinal.Shah@in.ey.com
Chairman, Committee on
International Taxation
CA. Mukta K. Verma, 09350572177 dtc@icai.in
Secretary, Direct Taxes
Committee
CA. Ashish Bhansali, 09310532063 citax@icai.in
Secretary, Committee on
International Taxation
10
EXECUTIVE SUMMARY
DOEMSTIC TAXATION
1. Clause 3 - Section 2(1A) and section 2(14)(iii) Scope of
agricultural land forming part of the definition of ,,capital
assets"
(i) It is suggested that the requirement to measure distance
aerially should be dispensed with especially since there is no
standard basis of measuring which can lead to inconsistency
and consequent dispute and litigation. Further, in cases of
places which are not approachable since no approach roads
connecting to such places, measurement of distance "aerially"
will certainly not reflect the extent of urbanization. Instead,
the measurement of distance through approach road should
be considered, since the same would take into account the
extent of urbanization.
(ii) The proviso (ii)(A) to section 2(1A), section 2(14)(iii) of the
Income-tax Act, 1961 and Clause (b)(i) of Explanation 1 to
section 2(ea) of the Wealth-tax Act, 1957 may be suitably
amended to incorporate the constitutional amendment, by re-
designating the terms "notified area committee" and "town
area committee".
2. Clause 4 - Section 10(10D)-Amendment in definition of
"Keyman Insurance Policy"
(i) It is suggested that in cases where keyman insurance policy is
assigned to the employee, the employer should not be made
liable to deduct tax at source. The insurance company may be
vested with the obligation to deduct tax at source in respect of
such payments.
(ii) It is suggested that section 17(3)(ii) may be appropriately
amended to provide that tax would be levied only to the extent
of such difference, or in the alternative, deduction for
surrender value may be provided for under section 16. In such
a case, the employer can deduct tax at source on the
differential amount treated as "profit in lieu of salary" at the
time of assignment.
11
Further, in any case, the maturity proceeds received on death
of the assignee should be kept out of the tax net. This benefit
is similar to the exemption given in respect of life insurance
policies, where the annual premium paid exceeds 10% of
minimum sum assured.
(iii) Appropriate clarification may be issued with regard to the tax
treatment of keyman insurance policies assigned prior to
1.4.2013
3. Clause 4 - Section 10(23DA) Income-tax exemption for
securitization trusts, levy of distribution tax on income
distributed by such trusts
Instead of distribution tax model, a complete pass through
model identical to existing regime applicable to Venture
Capital Funds/Venture Capital Companies under section
10(23FB) read with section 115U, since the participation in
PTCs is largely restricted to well regulated financial
institutions.
4. Clause 4 Section 10(23FB) - Tax exemption for
Alternative Investment Funds Venture Capital Funds
(i) The pass-through status may be extended atleast, to cover all
sub-categories of Category I AIFs (i.e. not only to venture
capital funds but also to SME Funds, social venture funds,
infrastructure funds), in line with the assurance held out
explicitly by AIF Regulations.
(ii) From a long-term perspective, it is best to maintain an
alignment of the tax laws and the AIF Regulations to mitigate
the need to constantly update the tax law for changes in
Regulations so as to not artificially stifle the AIFs.
In fact, last year, the Finance Act, 2012 had removed the
sectoral restrictions imposed on VCUs by the Income-tax Act,
1961 on the ground that since SEBI regulates the working of
VCF, VCC & VCU, there is no necessity of having separate
conditions under the Income-tax Act, 1961 imposing sectoral
restrictions on the VCUs.
Therefore, multiplicity of conditions in different regulations in
respect of the same entities should be avoided. Hence,
additional conditions should not be imposed under the
Income-tax Act, 1961 to qualify for tax benefit.
12
(iii) As regards condition of disqualification on account of
investment in associate VCU, it is suggested that
disqualification from pass through status may be restricted to
income arising from associate VCU only. Further, to remove
any ambiguity, it may also be clarified that if breach of any
condition is subsequently rectified, the pass through status
may be restored.
5. Clause 5- Section 32AC- Additional allowance of 15% in
respect of investment in new asset
It is suggested:
a. The threshold limit may be fixed at a moderate level of say,
Rs.10 crore, so as to attract investment in plant and
machinery by small and medium enterprises, which are the
"drivers" or economic growth.
Also, the permissible period of investment may be increased to
atleast 5 years for proper planning and execution of medium
and large sized projects.
b. Further, for the purpose of encouraging investment in Plant
and Machinery, the benefit of deduction may be extended to
assessees other than companies as well.
c. On the lines of section 32(1)(iia), the benefit of investment
allowance under section 32AC may be extended to an assessee
engaged in the business of generation or generation and
distribution of power.
d. Clause (v) of proposed section 32AC(4) may be deleted so that
eligibility for 100% depreciation would not be a disqualification
for claiming investment allowance.
e. A suitable provision be incorporated enabling carry forward of
investment allowance for set-off against business income of
the succeeding years. In line with the provision for carry
forward of business loss, investment allowance may be allowed
to be carry forward for eight assessment years.
6. Clause 7 Section 40(a)(iib) - Disallowance of certain
payments made by State Government Undertaking (SGU)
In order to provide level playing field to different business
units in matter of computation of business income, the
13
proposals may be re-considered. The payments made by SGU
to the Government are likely to be subject to transfer pricing
regulation under section 92BA read with section 40A(2).
In fact, the provisions of section 40A(2) may be suitably
amended to ensure that the impugned expenditure is
subjected to transfer pricing scrutiny, rather than disallowing
the expenditure which may result in inequity between
undertakings which have more than 50% State Government
holding and those having less than 50% State Government
holding.
7. Clause 8- Section 43CA - Special provision for full value of
consideration for transfer of assets other than capital
assets in certain cases.
a) The proposal in its present form may not be desirable and may
lead to structuring of transactions. Thus, the validity of this
proposal needs to be reconsidered.
b) Suitable provisions may be incorporated in the statute so that
the same income is not subject to tax twice.
c) It may be clarified as to whether the term "otherwise than by
way of cash" would include transfer by book entries, transfer
by Hundi, promissory notes etc. and transfer by exchange
agreement.
d) It may be clarified as to whether the tax liability would arise
in the year of agreement or year of registration or the year in
which possession is obtained.
e) It is suggested that agricultural land be specifically excluded
from the ambit of this provision.
f) It is suggested that the term "transfer" be specifically defined
for the purposes of section 43CA.
g) A specific clause may be included in Form No. 3CD in respect
of such transactions.
h) A similar provision for adopting stamp duty value on the date
of agreement for transfer instead of the date of registration be
inserted in section 50C also.
14
8. Clauses 9 Section 56(2)(vii) Immovable property received
for inadequate consideration
It is suggested that immovable property transferred for
inadequate consideration be kept outside the scope of section
56(2)(vii).
9. Clause 11 Section 80CCG- Rajiv Gandhi Equity Linked
Savings Scheme
i) It is suggested that the language of the section may be
suitably modified to reflect the correct intent of law.
ii) Considering that this amendment, may create inequity
between the persons who had made investment prior to
1.4.2013 and those who had made investment on or after that
date under the same scheme, it is suggested that the
amendment may be given effect to from A.Y.2013-14.
iii) Appropriate amendments may be made to clarify the real
intent of the proposed amendment i.e. whether Long term
capital gains taxable under section 112 and Short term capital
gains taxable under section 111A needs to be excluded for
determining the limit of Rs.12 Lakhs.
10. Clause 13 Section 80EE - Deduction in respect of
interest on loan taken for residential house property
Ideally, the proposed benefit may be extended to interest on
the loan taken for the first house property acquired or
constructed, irrespective of the whether the housing loan is
sanctioned before or after 1.4.2013. In any case, the
deduction of Rs.1,50,000 in respect of self-occupied property
was introduced fifteen years back and keeping in mind the
inflationary conditions, the additional deduction of
Rs.1,00,000 should be extended in respect of all loans, albeit
for the first house property. Further, instead of providing the
same as a deduction under Chapter VIA only for A.Y.2014-15
and A.Y.2015-16, the same may be provided by way of
insertion of another proviso to section 24(b) for the sake of
consistency.
11. Clause 17 Extension of sunset clause under section 80-
IA
In order to ensure clarity and certainty as regards the period
within which the undertaking should be set-up or within
15
which it should start transmission etc. the terminal date may
be extended till such time the country has acquired self-
sufficiency in the supply of power i.e. the terminal date may be
kept open-ended.
12. Clause 18- Section 80JJAA Deduction in respect of
employment of new workmen
i) It is suggested that the existing provisions be continued so
that the benefit is available for blue collared employees in the
manufacturing sector.
ii) Further, it is suggested that a suitable clause be added in
Form 3CD requiring the tax auditor to certify the particulars of
new regular workmen employed and the additional wages paid
to them to ensure the correctness of claim under section
80JJAA.
13. Clause 33 Amendment of section 142(2A)
It is suggested that no change is required in the existing
section, since it adequately takes care of all cases of
complexities, including doubts about the correctness of
accounts and multiplicity of transactions.
14. Clauses 42 Insertion of new section 194-IA
It is suggested that a simple challan for one-time remittance of
tax by the transferee/payee be prescribed and such remittance
may be made within a prescribed time after payment of the
last installment. Such a remiitance may be made a pre-
condition for registration of property in the name of the
transferee. This would dispense with the need for obtaining
TAN and at the same time, ensure garnering of revenue at an
early point of time. The PAN of the transferor and transferee
should be required to be quoted on the challan so that the
transferor can take credit of tax deducted and remitted.
In order to overcome the difficulties in cases where remittance
and taxability arises in different years, a system of pass book
be introduced in Form No.26AS wherein the balance of
unutilized credit be allowed to be carried forward.
15. Chapter VII Commodities Transaction Tax (CTT)
Appropriate amendments may be made in section 43(5) to
exclude an eligible transaction in respect of commodity
derivatives from the definition of "speculative transaction".
16
16. First Schedule Surcharge
There should be a parity in the rates of individual and
corporate surcharge as well the threshold above which they
are attracted. The rates of surcharge may be accordingly
modified to maintain parity.
17. Amendment by the Finance Act, 2012 in Section 40 and
Section 201
The provisions of section 40(a)(ia) and section 201(1) may be
amended retrospectively with effect from 1.4.2005 in order to
clarify the real intent of law and to remove hardship, thereby
reducing further litigations.
The later part of the second proviso may be suitably amended
to provide that it shall be deemed that the assessee has
deducted tax in the relevant previous year and paid the tax on
such sum on or before the due date of furnishing the return of
income.
18. Section 43A - Exchange fluctuation loss due to sharp fall
in Rupee value
It is suggested that Section 43A be amended to allow
Capitalization of such foreign exchange loss even for
domestically acquired asset.
INTERNATIONAL TAXATION
19. Section 9(1)(i) -Indirect transfer of assets
It is suggested that the Government may consider
incorporating the recommendations of Shome Committee at
the stage of enactment without conceding to retrospective
effect or without committing itself to aspects which need
deeper examination.
20. Clause 25 Amendment in section 115A -Tax Rate of 25%:
Tax on Royalty and FTS
(i) Considering the broad coverage under FTS and Royalty
definitions in Indian law in particular, the definition of FTS,
it is recommended that the existing tax rate of 10% be further
reduced (say to 5% as in case of Sri Lanka for management
services) or at least be retained at the present levels.
17
Enhancing the current rate to the proposed 25% would
adversely impact wide range of cross border transactions
transacting with India as already pointed out above. Further a
lower rate would also align with the approach which India has
adopted so far, will match with India treaties and will also
match with rate of taxes applicable in other jurisdictions.
(ii) The prohibitory rate of 25% may be restricted in its application
only to transactions with persons located in notified
jurisdiction area [as per Section 94A of the Act] similar to the
treatment considered by some countries like Brazil.
(iii) Additionally, an option should be provided to a Non Resident
taxpayer to enable it to offer to tax its income on a net basis of
taxation (i.e. income less expenses being permitted to be taxed
at the normal corporate tax rate , example 40 percent plus
surcharge and cess in case of foreign companies).
(iv) Concurrently, the definition of "FTS" may be modified and may
be brought in line with predominant International practice.
(v) The least, the amendment may be made prospective to be
applied to agreements which are entered into on or after 31st
May 2013 so as to grandfather and protect those cases
including cases of net of tax contracts, which may have been
negotiated by parties in good faith based on the applicable rate
of tax being 10%.
21. Clause 24 - Chapter X-A-General Anti-Avoidance Rules
(i) Grandfathering of investments
(ii) Need for statutory recognition of decisions already
announced by the Government
(iii) Need for Positive announcement on some recommendations of
Shome Committee where Government is silent
(iv) GAAR v SAAR
(v) Onus of proof
22. Clause 22- Section 90(5)-Tax Residency Certificate (TRC)
We recommend that the clarification issued by way of Press release
dated 1-03-2013 may, in fact, be part of the statute. The
Explanation may state that TRC will be regarded as necessary and
18
sufficient evidence for the purpose of evidencing residency and
beneficial ownership.
Alternatively, with regard to test of beneficial ownership,
reasonable inquiry, if considered necessary, in the facts of the case,
may be permitted. Further, in such cases, to ensure that roving
inquiries are best avoided, reasonable objective tests for
determination of beneficial ownership may be evolved for guidance
of officers.
It is possible that the TRC issued also indicates beneficial
ownership (example, Italy). Where a TRC incorporates this
requirement, TRC should be considered as sufficient for the
purpose of meeting the test of beneficial ownership as well.
In order to boost the confidence of the investors and to augment
the investment climate of the country, the following may be
clarified to allay doubts and apprehensions:
It is not necessary to furnish TRC for each and every
remittance. A single TRC which is valid for a specified
period should be sufficient enough for all reliefs, etc as
are claimed under a tax treaty.
Even if the recipient of income does not possess a TRC at
the time of remittance, the same should not result in
denial of treaty residence provided he obtains TRC within
a reasonable period of time (say, by the end of accounting
year or before the due date of filing return of income).
If the taxpayer, despite his best efforts, is not able to
obtain a TRC from the Government of his home country in
prescribed form, then, by itself this should not be a
ground to deny treaty relief claimed by him and a fair
opportunity of being heard must be given.
Merely because some of the columns of TRC are left blank
by the Government of foreign country, the same by itself
should not be a ground to deny treaty benefits.
23. Clause 28 Chapter XII-DA- Section 115QA and Section
10(34A) - Buyback of unlisted shares by a domestic
company
(a) There is a need for serious reconsideration of the proposal.
The proposal may be perceived as India attempt to override
19
certain tax treaties unilaterally. It is inconsistent with the tax
norms which India has adopted so far in the formulation of its
domestic law of treating buy back to be a transaction which
has capital gains implications.
(b) Considering that the intent is to curb tax avoidance the
provision may be worded in such a way that it captures only
transactions which are entered into with an intent to avoid tax
and should not be made applicable to all transactions of buy
back of unlisted shares.
(c) The proposal is very unfriendly to those companies which do
undertake buy back driven purely by commercial reasons.
Proposal is Investor unfriendly for those where the
Shareholders are, in an indirect manner, denied the benefit of
lower capital gains tax levy related provisions in the domestic
law as also the benefit of lower dividend tax provisions in tax
treaties. In case of partial buy back, the cost of tax liability of
the company will be borne by shareholders other than those
who may have exited. While, there is no reason for such
across the board provision, still, if for any reason, it is
proposed to retain any such provision, a more logical
alternative is to legislate it in form of SAAR (Specific Anti
Avoidance Rule) as part of section 2(22) of the Act which will
be applied in certain abusive conditions to be restricted to
payments to non-residents. It should involve tax in the form of
lower WHT of 10% and the quantum of chargeable amount
should be limited to accumulated profits of the company.
(d) Even internationally, as would be clear from the following
table, in cases of dividend repatriation, the rate of WHT on
dividend repatriation in majority of the treaties is 10%. Even in
case where rate is marginally higher at 15%, the lower rate of
10% applies if holding of capital exceeds 10% or 25%. The
proposed rate should not be allowed to exceed such rate. The
next best alternative may be to consider buy back at par with
a transaction of capital reduction to be subjected to tax as
dividend as part of section 2(22) of the Act.
(e) Instead of a levy on the company, the tax if at all, should be
levied as a withholding tax on dividends. This would enable
Non Resident shareholders to apply treaty rates and claim
credit in its home jurisdiction. One may like to follow the
South African experience where an erstwhile STC (comparable
20
to our DDT) has now been replaced with a withholding tax
regime on dividends at 10%.
(f) Adequate safeguards may be incorporated to provide for cost
step up in case of shares purchased from secondary market.
Further the provisions should provide for proper
computational mechanism in cases where there is conversion
of debentures into equity, issue of bonus shares etc
24. Clause 27- Section 115-O r.w Section 115BBD- Removal of
cascading effect of DDT on dividend from foreign
subsidiary
(i) If it is the desire that the Indian companies are effectively
persuaded to bring in the accumulated surplus from overseas
companies during Financial Year 2013-14, the condition that
foreign dividend should be distributed in the same year to
avail DDT relief may be liberalized. It is possible that an Indian
company which is keen to avail DDT relief may still find it
commercially unwise to distribute the funds to the
shareholders. The company is likely to be keen to retain the
funds for its own internal growth. Also, if dividends are
received in the month of March 2014, the Indian company will
not be able to redistribute them in March itself.
(ii) To make the relief more meaningful, a longer period of time
say 3 years should be provided for distribution to
shareholders. The condition that the same amount of dividend
shall not be taken into account for reduction more than once
will ensure that there is no abuse of elongated time period.
(iii) Further, to ensure that concession provided by Section
115BBD is not diluted by MAT provisions, it should be
provided that the dividends on which tax is payable under
section 115BBD will be excluded from book profit.
25. Clause 43 Section 194LC-Concessional rate of tax on
interest payable to non-residents
(a) While extension of the provision to rupee denominated IB is
certainly beneficial to taxpayers and the provision is a healthy
and welcome provision, it would be better that deeming fiction
is further supplemented by clarifying and presuming that the
borrowing will be deemed not only to be a borrowing in foreign
currency, but, also a borrowing from a source outside India,
there could be scope for litigation. To remove any ambiguity in
21
this regard, it should be provided that subscription made from
designated bank account will be deemed to be from a source
outside India.
(b) Also, the designated bank account requirement should be
made applicable to the Indian borrower and not the Non
Residentlender.
(c) In addition to IB, the provision should also be expanded to
rupee denominated loans which are permitted to be borrowed
under FEMA regulations.
(d) Payment of interest under section 194LC should be excluded
from the scope of Section 206AA and Non Residentlenders
should not be required to obtain PAN in India to avail lower
rate of tax under section 194LC. Alternatively or concurrently,
in case of foreign intermediary appointed for servicing IBs, it
should be clarified that PAN of such intermediary shall suffice
for Section 206AA purposes.
X-O-X-O-X
22
POST BUDGET MEMORANDA-2013
DOMESTIC TAXATION
Detailed Suggestions
1. Clause 3 - Section 2(1A) and section 2(14)(iii) Scope of
agricultural land forming part of the definition of ,,capital
assets"
The definition of agricultural income excludes income derived
from land situated within specified urban limits. These
specified urban limits are proposed to be re-defined, and for
this purpose the area within the distance is required to be
measured aerially.
(i) The requirement of measuring distances aerially would
have the effect of ignoring the aspect of urbanization,
especially in cases where such distances are to be
measured in a hilly area. This amendment may have
the effect of bringing all the plantations in the hilly
areas within the scope of "urban land". Therefore,
income derived from such plantations may go outside
the scope of "agricultural income".
In CIT v. Satinder Pal Singh (2010) 33 DTR 281, it was
observed that if principle of measurement of distance
is considered as per crow's flight then it would have no
relationship with the statutory requirement of keeping
in view the extent of urbanization. Such a course
would be illusory. It is in pursuance of the aforesaid
provision that Notification No. 9447 dt. 6th Jan., 1994
had been issued by the Central Government. In respect
of the State of Punjab, at item No. 18 the sub-division
Khanna has been listed at serial No. 19. It has inter
alia been specified that area upto 2 kms. from the
municipal limits in all directions has to be regarded
other than agricultural land. Once the statutory
guidance of taking into account the extent and scope
of urbanization of the area has to be reckoned while
issuing any such notification then it would be
incongruous to the argument of the Revenue that the
23
distance of land should be measured by the method of
straight line on horizontal plane or as per crow's flight
because any measurement by crow's flight is bound
to ignore the urbanization which has taken place.
Suggestion
It is, therefore, suggested that the requirement to
measure distance aerially should be dispensed
with especially since there is no standard basis of
measuring which can lead to inconsistency and
consequent dispute and litigation. Further, in
cases of places which are not approachable since
no approach roads connecting to such places,
measurement of distance "aerially" will certainly
not reflect the extent of urbanization. Instead, the
measurement of distance through approach road
should be considered, since the same would take
into account the extent of urbanization.
(ii) The proviso (ii)(A) to section 2(1A)(c) defining
"agricultural income" excludes income from land not
situated in any area which is comprised within the
jurisdiction of a municipality (whether known
municipality, municipal corporation, notified area
committee, town area committee, town committee
or by any other name) and which has population not
less than ten thousand.
As per the 74th Amendment to the Constitution of
India, in the year 1992, the areas which were classified
as notified area committees and town area committees
were re-designated as municipalities or nagar
panchayats.
Suggestion
The proviso (ii)(A) to section 2(1A), section 2(14)(iii)
of the Income-tax Act, 1961 and Clause (b)(i) of
Explanation 1 to section 2(ea) of the Wealth-tax
Act, 1957 may be suitably amended to incorporate
the constitutional amendment, by re-designating
the terms "notified area committee" and "town
area committee".
24
2. Clause 4 - Section 10(10D)-Amendment in definition of
"Keyman Insurance Policy"
Any sum received under a Keyman insurance policy is not
exempt under section 10(10D). The meaning of "Keyman
Insurance Policy" given in Explanation 1 to section 10(10D)
is proposed to be amended to include such policy which has
been assigned to a person at any time during the term of the
policy, with or without consideration". This amendment is
proposed to be made effective w.e.f. 1.4.2014 (i.e. A.Y.2014-
15).
The effect of this proposed amendment is to deny the benefit
of exemption in respect of maturity proceeds of keyman
insurance policy which has been assigned to a person during
the term of the policy, whether with or without consideration,
by including the assigned policy within the definition of
"Keyman insurance policy".
The issues under consideration and suggestions thereof in
this regard are as follows
(i) Consequent to this amendment in the definition of "Keyman
insurance policy", the maturity proceeds received by the
person to whom the policy is assigned would become taxable
as "Profits in lieu of salary" under section 17(3)(ii). Since any
salary due from an employer or a former employer to an
assessee in the previous year, is chargeable under section 15
and the definition of salary under section 17(1) includes
"profits in lieu of salary", it appears that the employer or the
former employer, as the case may be, would be required to
deduct to tax at source under section 192 at the time of
payment.
It would be practically difficult for the employer or former
employer to deduct tax at source on payment received by the
employee directly from the insurance company.
Suggestions
It is, therefore, suggested that in cases where keyman
insurance policy is assigned to the employee, the
employer should not be made liable to deduct tax at
source. The insurance company may be vested with the
25
obligation to deduct tax at source in respect of such
payments.
(ii) Further, as per the said amendment, the entire proceeds
would be subject to tax under section 17(3)(ii) in the hands
of the person to whom the policy is assigned, whereas only
the premium paid by the employer on which deduction has
been claimed less the surrender value paid by the employee
to the employer at the time of assignment should be subject
to tax, since the same represents the actual benefit availed
by the assignee.
Suggestion:
It is, therefore, suggested that section 17(3)(ii) may be
appropriately amended to provide that tax would be
levied only to the extent of such difference, or in the
alternative, deduction for surrender value may be
provided for under section 16. In such a case, the
employer can deduct tax at source on the differential
amount treated as "profit in lieu of salary" at the time
of assignment.
Further, in any case, the maturity proceeds received on
death of the assignee should be kept out of the tax net.
This benefit is similar to the exemption given in respect
of life insurance policies, where the annual premium
paid exceeds 10% of minimum sum assured.
(iii) Since the amendment is proposed to be made effective from
A.Y.2014-15, the tax treatment in respect of keyman
insurance policies which are assigned prior to 1.4.2013 may
be clarified.
Suggestion:
Appropriate clarification may be issued with regard to
the tax treatment of keyman insurance policies
assigned prior to 1.4.2013
3. Clause 4 - Section 10(23DA) Income-tax exemption for
securitisation trusts, levy of distribution tax on income
distributed by such trusts
The securitization trust has so far been treated as a pass
through vehicle for tax purposes i.e. all the income of the
26
securitization trust has been offered to tax by its investors
(unless the investor is tax exempt viz., a mutual fund). This
is consistent with the tax rules that apply to trusts under the
tax law which prescribes a single level tax on a trusts
income (i.e. tax is levied either on the trustee or on the
beneficiaries). The interest income arising to such trusts
from securitized debts is taxed directly in the hands of the
contributories.
The tax implications may be summarized as follows:-
If contributory is a Mutual Fund, it will be entitled to
exemption under s. 10(23D).
Any other contributory can claim deduction for
corresponding expenses against such income (eg.
interest and overheads)
Contributories can claim credit of TDS, if any, made by
the borrower
However due to disputes regarding the person on whom tax
incidence lies, tax demands were raised on the securitization
trusts rather than the investors, by treating such trusts as
AOPs. In order to set at rest such controversies, the Finance
Bill 2013 proposes to:
Exempt the securitization trust from tax on income
earned.
Impose a distribution tax on income distributions by
the securitization trust @ 25% in case of distributions
to individuals and HUFs and @ 30% in other cases.
Distribution tax will not be payable on income
distributed by the securitization trust to a person in
whose case income, irrespective of its nature and
source, is not chargeable to tax under the Act (viz.
mutual funds).
Exempt the investors in the securitization trust from
taxation on income distributions received.
The proposed provisions may, however, create certain
problems or securitized structures in vogue on account of the
following reasons:
(a) The exemption to the investors in the securitization trust
will mean that investors (other than exempt investors
such as mutual funds) in pass through certificates (PTCs)
27
will now earn exempt income instead of taxable income as
was the case hitherto. This implies that the investors
would not be able to set-off expenditure/ losses against
income earned from PTCs in view of provisions of section
14A which prohibits deduction of any expenditure
incurred in relation to exempt income. This may result in
the entire transaction becoming unviable for investors,
which is illustrated below.
If the investor is a bank investing Rs.100 crores in a
Securitized debt yielding interest @ 10% p.a. Assuming,
that the banks own cost of borrowing is say 8% p.a., its
tax liability on interest income from securitized debt pre
and post amendment and profit after tax will be as follows
:-
Particulars Pre Post
amendment amendment
Interest income @ 10% (A) 10.00 Cr 10.00 Cr
on Rs. 100 Cr
distributed by
Securitised Trust
Less: Distribution tax N.A. 3.00 cr
paid by the trust@30%
on gross income
Net income distributed 10.00 Cr 7.00 Cr
Less :- Interest (B) 8.00 Cr 8.00 Cr
expenditure @ 8% on
Rs. 100 Cr
Net income C= (A-B) 2.00 Cr (1.00) Cr
Tax payable
By Investor @ 30%1 on (D) 0.60 Cr2 -
net income
1
Surcharge and cess ignored for the sake of simplicity
2
30% of Rs. 2.00 Cr
28
Particulars Pre Post
amendment amendment
Profit/(Loss) after tax (C-D) 1.40 Cr (1.00) Cr
Not allowed
to be set-off
on account of
section 14A.
The above illustration highlights that a structure which was
commercially viable prior to amendment may have the effect of
becoming unviable solely due to change in the basis of incidence of
taxation.
It may be noted that the financial sector works on spread between
yield from investments and own cost of borrowing. Tax on gross
income at a rate ordinarily applicable to net income may severely
impact the spread and make securitization structures
commercially unviable defeating the object of SEBI and RBI
guidelines for orderly development of securitization market.
(a) The trading of PTCs (most PTCs are tradable instruments)
may also create dual points of taxation (i.e. at the time of
distribution of income by the securitization trusts and at
the time of realization of gain when the PTC itself is sold
for a profit) which seems to be unintended.
(b) Ambiguity may also arise for the borrower while
evaluating withholding obligation at the time of payment
of interest. Since the securitization trust will be
assessable as a separate tax entity and not a mutual fund
or bank exempt from withholding, the borrower will be
required to withhold tax unless the trust provides NIL
withholding certificates. The securitization trust will be
required to file return to claim refund of such TDS. The
securitization trust will not be able to set off TDS credit
against distribution tax payable by it.
(c) There is no grandfathering provided for existing
securitized trusts. Hence, any income distributed by
existing securitized trusts on or after 1 June 2013 will
also be subject to the new tax regime.
29
Suggestions
Instead of distribution tax model, a complete pass through
model identical to existing regime be made applicable to
Venture Capital Funds/Venture Capital Companies under
section 10(23FB) read with section 115U, since the
participation in PTCs is largely restricted to well regulated
financial institutions.
4. Clause 4 Section 10(23FB) - Tax exemption for
Alternative Investment Funds Venture Capital Funds
The Finance Act 2012 provided an exemption to venture capital
funds (VCFs) with a corresponding direct tax charge on the
investors on the income earned by the fund from its investments.
The VCF Regulations were repealed on 21 May 2012 with the
simultaneous introduction of the SEBI (Alternative Investment
Funds) Regulations 2012 (AIF Regulations). Funds raised under
the VCF Regulations were resultantly grandfathered.
AIF Regulations now regulate all privately pooled investment
vehicles which collect funds from investors for investments in
accordance with a predefined investment policy for the benefit of its
investors. AIF Regulations cover a much broader ambit of funds
and categorize them into broadly three categories:
Category I AIF these are funds which invest in start-up or early
stage ventures or social ventures or SMEs or infrastructure or
other sectors or areas which the government or regulators consider
as socially or economically desirable.
Category I AIF presently has 4 sub-categories, namely, venture
capital funds, SME Funds, social venture funds and infrastructure
funds. Investment norms have been prescribed for each of the sub-
categories to ensure that the fund allocates substantial majority of
its capital to the target focus. The stated intent of Category I AIF is
to cover AIFs that are generally perceived to have positive spillover
effects on economy and for which the SEBI/ Government/ other
regulators might consider providing incentives or concessions. The
Explanation to Regulation 3(4)(a) of AIF Regulations which clarified
this aspect also clarified that such funds which are formed as
trusts or companies shall be construed as VCF/VCC as specified
under section 10(23FB) of the Act. The said Explanation is
reproduced below :
"Explanation. For the purpose of this clause, Alternative Investment
Funds which are generally perceived to have positive spillover
30
effects on economy and for which the Board or Government of India
or other regulators in India might consider providing incentives or
concessions shall be included and such funds which are formed as
trusts or companies shall be construed as venture capital company
or venture capital fund as specified under sub-section (23FB) of
Section 10 of the Income-tax Act, 1961"
Category II AIF is a residual category and covers AIFs for which
no specific incentives or concessions are given by the Government/
other regulators. Category II AIF will cover classic private equity
funds and debt funds.
Category III AIFs are AIFs which employ diverse or complex
trading strategies and may employ leverage including through
investment in listed or unlisted derivatives. Category III AIF will
cover hedge funds or funds which trade with a view to make short
term returns. Similar to Category II AIF, no specific incentives or
concessions are given by the Government/ other regulators.
The AIF Regulations provide that Category I AIF which are formed
as trust/ company shall be construed as venture capital company/
venture capital fund under s. 10(23FB) of the Act (and will hence
be eligible for the basis of taxation described above ie direct tax
charge on the investors).
The Finance Bill, 2013 proposes to grant tax exemption and
corresponding direct tax charge on the investors to only the
Venture Capital Fund sub-category of Category I AIFs. Further,
there are three conditions being imposed on AIFs in order to be
covered within the ambit of section 10(23FB), namely:
1. The units/shares of the AIF should not be listed on a
recognised stock exchange.
2. The AIF should not have invested in associated companies as
defined.
3. The AIF should have invested not less than 2/3rd of its
investible funds in unlisted equity shares/equity linked
instruments of domestic unlisted companies.
The first two of the above conditions are imposed only in the tax
law (listing of AIFs is permitted under the AIF Regulations after the
final close of the fund subject to conditions and investment in
associated companies is permitted subject to obtaining a majority
investor consent).
31
The tax implications on account of the proposed amendments are
as follows -
(a) VCCs/VCFs registered prior to 21st May 2012 under VCF
regulations will not be impacted by the proposed
amendment. They will continue to be eligible for pass
through taxation under section 115U.
(b) The impact on AIFs registered on or after 21st May 2012
under AIF Regulations may be summarized as follows :-
Category Sub-categories which Tax status in an event
qualify for pass AIF is registered on or
through status today after 21 May 2012
I VCF being trust or Will qualify as
company VCC/VCF under
s.10(23FB) but, subject
to compliance of 3
additional conditions
viz.,
1. VCC/VCF should
remain unlisted
2. Should invest >
2/3rd investible
funds in unlisted
equity
shares/equity
linked
instruments of
VCUs
3. Should not invest
in associate VCU
I SME Fund Will not qualify as
Social Venture (and, will cease to
Fund be) VCC/VCF
under s.10(23FB)
Infrastructure and consequently
Fund will not be eligible
for pass through
taxation despite
being identified as
32
Category Sub-categories which Tax status in an event
qualify for pass AIF is registered on or
through status today after 21 May 2012
socially desirable
having positive
spillover effects
on the economy
and eligible for
other concessions
from
Government/SEB
I
Will be governed
by normal rules of
taxation as
applicable to
relevant nature of
entity
II Generally includes Will not qualify
Private equity and debt as VCC/VCF
funds under s.10(23FB)
III Generally includes
hedge funds
(c) Even for new VCCs/VCFs which are registered under AIF
Regulations, compliance with three additional tax conditions
referred earlier is necessary to be eligible for pass through
taxation. In case of breach of any of the conditions,
VCC/VCF will be governed normal rules of taxation as
applicable for ordinary company or trust. A clarification is
required as to whether tax status of VCC/VCF will be
restored if the breach is subsequently rectified.
(d) Another concern on account of the proposed provisions is
that if a VCC/VCF makes an investment in one associate
VCU, would it lose its pass-through status despite the fact
that all other VCUs in which it has invested are not its
associates.
33
(e) When normal rules of taxation are applied as a consequence
of disqualification from pass through taxation, issues such
as double taxation and/or levy of DDT and/or applicability of
withholding may arise due to interposition of VCC/VCF
between VCU and investor.
Suggestions
i. The pass-through status may be extended atleast, to
cover all sub-categories of Category I AIFs (i.e. not only
to venture capital funds but also to SME Funds, social
venture funds, infrastructure funds), in line with the
assurance held out explicitly by AIF Regulations.
ii. From a long-term perspective, it is best to maintain an
alignment of the tax laws and the AIF Regulations to
mitigate the need to constantly update the tax law for
changes in Regulations so as to not artificially stifle
the AIFs.
In fact, last year, the Finance Act, 2012 had removed
the sectoral restrictions imposed on VCUs by the
Income-tax Act, 1961 on the ground that since SEBI
regulates the working of VCF, VCC & VCU, there is no
necessity of having separate conditions under the
Income-tax Act, 1961 imposing sectoral restrictions on
the VCUs.
Therefore, multiplicity of conditions in different
regulations in respect of the same entities should be
avoided. Hence, additional conditions should not be
imposed under the Income-tax Act, 1961 to qualify for
tax benefit.
iii. As regards condition of disqualification on account of
investment in associate VCU, it is suggested that
disqualification from pass through status may be
restricted to income arising from associate VCU only.
Further, to remove any ambiguity, it may also be
clarified that if breach of any condition is
subsequently rectified, the pass through status may be
restored.
5. Clause 5- Section 32AC- Additional allowance of 15% in
respect of investment in new asset
In order to attract substantial investment in plant and
machinery, an investment allowance of 15% is proposed to
34
be allowed to an assessee, being a company engaged in
manufacture of an article or thing, if it acquires or installs
new plant and machinery during the period between
1.4.2013 to 31.3.2015, by investing a sum of more than
Rs.100 crore.
The issues arising out the said proposal and our suggestions
regarding the same are briefed hereunder -
(a) Since there are a large number of small and medium
enterprises in India, the requirement of minimum
investment of Rs.100 crore and the time limit of 2
years to make such investment to claim the benefit of
investment allowance appears to be very stringent.
(b) Further, non-extension of the benefit of this clause to
non corporate assessees seems to be unjustifiable.
(c) It may be noted that last year, vide the Finance Act,
2012, the benefit of additional depreciation under
section 32(1)(iia) was extended to an assessee engaged
in the business of generation or generation and
distribution of power. However, section 32AC does not
extend the benefit of investment allowance to this
sector.
(d) It is proposed to deny the benefit of investment
allowance in case the asset qualifies for 100%
depreciation in any previous year. However, investment
allowance is intended to be an additional benefit and
therefore eligibility for 100% depreciation should not
be a factor to deny the proposed additional benefit of
investment allowance. Further, by doing so, assets
eligible for 60% depreciation would stand on a better
footing than assets eligible for 100% depreciation. Not
only would 80% cost of assets be allowed by way of
depreciation (60%) and additional depreciation (20%),
but such assets would be entitled to an investment
allowance (15%) as well, leading to writing off 95% of
the total cost in the first year itself. Also, such assets
would also be eligible for further depreciation@60% in
the succeeding years on the written down value.
(e) Further, no provision for carry forward and set-off of
investment allowance has been provided in the
Finance Bill, 2013. In case the assessee does not have
35
sufficient profits to set-off investment allowance, it
cannot avail the benefit of investment allowance
inspite of having made the required investment in new
plant and machinery. Therefore, a provision should be
incorporated permitting carry forward of investment
allowance. It may be noted that the erstwhile section
32A contained a provision for carry forward and set-off
of investment allowance.
Suggestions:
It is suggested:
a. The threshold limit may be fixed at a moderate level of
say, Rs.10 crore, so as to attract investment in plant
and machinery by small and medium enterprises, which
are the "drivers" or economic growth.
Also, the permissible period of investment may be
increased to atleast 5 years for proper planning and
execution of medium and large sized projects.
b. Further, for the purpose of encouraging investment in
Plant and Machinery, the benefit of deduction may be
extended to assessees other than companies as well.
c. On the lines of section 32(1)(iia), the benefit of
investment allowance under section 32AC may be
extended to an assessee engaged in the business of
generation or generation and distribution of power.
d. Clause (v) of proposed section 32AC(4) may be deleted so
that eligibility for 100% depreciation would not be a
disqualification for claiming investment allowance.
e. A suitable provision be incorporated enabling carry
forward of investment allowance for set-off against
business income of the succeeding years. In line with
the provision for carry forward of business loss,
investment allowance may be allowed to be carry
forward for eight assessment years.
36
6. Clause 7 Section 40(a)(iib) - Disallowance of certain
payments made by State Government Undertaking (SGU)
Section 40(a)(iib) has been inserted to provide that SGU will
not be entitled to deduction of certain payments in the
nature of royalty, licence fee, service fee, privilege fee, service
charge or any other fee or charge made to State Government
in computing income from business or profession.
Section 40(a)(iib) also defines the class of entities that will be
considered as SGU. One of the classes covered within the
definition of SGU is a company in which State Government
holds more than 50% equity.
Denial of deduction to such SGU, which has private
participation, may create discriminatory treatment between
two enterprises one of which has 49% as compared to 51%
private participation. While disallowance will be made only in
the case of the SGU, though both the entities may make
identical pay-outs to the State Government.
Suggestions
In order to provide level playing field to different
business units in matter of computation of business
income, the proposals may be re-considered. The
payments made by SGU to the Government are likely to
be subject to transfer pricing regulation under section
92BA read with section 40A(2).
In fact, the provisions of section 40A(2) may be suitably
amended to ensure that the impugned expenditure is
subjected to transfer pricing scrutiny, rather than
disallowing the expenditure which may result in
inequity between undertakings which have more than
50% State Government holding and those having less
than 50% State Government holding.
7. Clause 8- Section 43CA - Special provision for full value
of consideration for transfer of assets other than capital
assets in certain cases.
This section is proposed to be inserted to provide for
adoption of stamp duty value in case of transfer of land or
building or both held as stock-in-trade. Several issues that
37
may crop up due to implementation of this section in its
present form and suggestions thereof are as under:
a) This proposal may encourage structuring of real estate
transactions in such a manner to circumvent increased tax
liability arising on account of adoption of stamp duty value.
For example- Having agreed to sell the property at Rs. 80
Lakhs, as against the value of Rs. 100 Lakhs considered for
stamp duty purposes, the transaction may be structured
to record the transaction value at Rs.100 Lakhs with a
rebate of Rs. 20 Lakhs.
Suggestion
The proposal in its present form may not be desirable
and may lead to structuring of transactions. Thus, the
validity of the proposal needs to be reconsidered.
b) This provision would result in double taxation of income
since, the difference between the stamp duty value and
actual consideration would be taxable in the hands of the
seller. However, the buyer can claim only the actual cost as
deduction while computing his business income or capital
gains arising at a later point of time when he sells the asset.
Suggestion
Suitable provisions may be incorporated in the statute
so that the same income is not subject to tax twice.
c) This section provides for adoption of stamp duty value on the
date of agreement, where the date of agreement is different
from the date of registration, provided at least a part of the
consideration has been received on or before the date of
agreement by any mode otherwise than by way of cash. In
this context, it may be clarified whether "otherwise than by
way of cash" would include transfer by book entries, transfer
by Hundi, promissory notes etc. and transfer by exchange
agreement.
Suggestion
It may be clarified as to whether the term "otherwise
than by way of cash" would include transfer by book
38
entries, transfer by Hundi, promissory notes etc. and
transfer by exchange agreement.
d) Further, in a case where the year of agreement and the year
of registration are different, a clarification is required as to
whether the tax liability would arise in the year of agreement
or year of registration or the year in which possession is
obtained.
Suggestion
It may be clarified as to whether the tax liability would
arise in the year of agreement or year of registration or
the year in which possession is obtained.
e) Since only capital assets are excluded from the applicability
of this section, agricultural land which is not included in the
definition of capital asset, may fall within the scope of this
section. Therefore, specific exclusion of agricultural land
from the ambit of this provision may be provided for.
Suggestion
It is suggested that agricultural land be specifically
excluded from the ambit of this provision.
f) This section provides for adoption of stamp duty value in
case of "transfer" of land or building or both held as stock-in-
trade. It may be noted that the definition of term "transfer"
in section 2(47) is in relation to a capital asset only. The
intended scope of coverage of the term "transfer" for the
purpose of section 43CA needs to be defined.
Suggestion
It is suggested that the term "transfer" be specifically
defined for the purposes of section 43CA.
g) Para 12A of the Form No.3CD i.e. Statement of particulars
required to be furnished under section 44AB of the Income-
tax Act, 1961 requires reporting of particulars of capital
assets converted into stock-in-trade. A similar clause to
report the particulars of transfer of land or building or both
39
held as stock-in-trade for a consideration less than the
stamp value may also be included in Form No.3CD.
Suggestion
A specific clause may be included in Form No. 3CD in
respect of such transactions.
h) It is further proposed to provide that the stamp duty value
may be taken as on the date of the agreement for transfer
instead of the date of registration, provided at least a part of
the consideration for transfer has been received by any mode
other than cash on or before the date of agreement.
Suggestion
A similar provision for adopting stamp duty value on
the date of agreement for transfer instead of the date of
registration be inserted in section 50C also.
8. Clauses 9 Section 56(2)(vii) Immovable property
received for inadequate consideration
This section is proposed to be amended to bring within its
scope immovable property received for inadequate
consideration, where the difference between the stamp duty
value of land or building or both and the actual
consideration exceeds Rs.50,000.
This proposal would lead to double taxation of the
differential amount i.e. the difference between the stamp
duty value and the actual consideration would be taxable in
the hands of the buyer as "Income from other sources"
under section 56(2)(vii) and "Capital Gains" in the hands of
the seller on account of adoption of stamp duty value as full
value of consideration for transfer of property as per section
50C.
Suggestion:
It is, therefore, suggested that immovable property
transferred for inadequate consideration be kept
outside the scope of section 56(2)(vii).
40
9. Clause 11 Section 80CCG- Rajiv Gandhi Equity Linked
Savings Scheme
The deduction available in the first year for investment by a
new equity investor, having gross total income of up to Rs.10
lakh, in listed equity shares under the Rajiv Gandhi Equity
Scheme, is now proposed to be extended to a new retail
investor having gross total income of up to Rs.12 lakh, for a
period of three consecutive assessment years beginning with
the assessment year relevant to the previous year in which
the listed equity shares or listed units of equity oriented fund
were first acquired
Certain issues arising from the proposed amendments are
given below:
i. The proposed amendment does not clearly bring out that
fresh investment of an amount of up to Rs.50,000 has to
be made in each of the years to claim the maximum
deduction of Rs.25,000 each year.
Accordingly, it needs to be clarified that it is not possible
to claim deduction of Rs.25,000 in each of the three years
on the basis of initial investment of Rs.50,000 in the first
year alone. Further, it also does not imply that the
maximum aggregate deduction for all three years is only
Rs.25,000, which can be claimed over three years by
investing the amount of Rs.50,000 over a period of three
years.
Also, it may be clarified as to whether the gross total
income cap of Rs.12 lakh is only for the first year or for
each of the three consecutive years. In such a case, if the
gross total income for the second year exceeds Rs.12 lakh,
the assessee would be able to avail the benefit only for
one year, even if his gross total income for the third
year does not exceed Rs.12 lakh.
Suggestion
41
It is, therefore, suggested that the language of the
section may be suitably modified to reflect the
correct intent of law.
ii. Since this amendment is proposed to be made effective
only from 1.4.2014 i.e. A.Y.2014-15, the new retail
investors who had availed the benefit under section
80CCG for one year by making the investment in
P.Y.2012-13 are not eligible to avail the benefit of
deduction in the next two years. This amendment,
therefore, may create inequity between the persons who
had made investment prior to 1.4.2013 and those who
had made investment on or after that date under the
same scheme.
Suggestion
Considering that this amendment, may create
inequity between the persons who had made
investment prior to 1.4.2013 and those who had
made investment on or after that date under the
same scheme, it is suggested that the amendment
may be given effect to from A.Y.2013-14.
iii. Further, as per section 112(2), where the gross total
income of an assessee includes any income arising
from the transfer of a long-term capital asset, the gross
total income shall be reduced by the amount of such
income and the deduction under Chapter VI-A shall be
allowed as if the gross total income as so reduced
were the gross total income of the assessee. Similar
provision is contained in section 111A as well.
According to these provisions, the "gross total income" as
reduced by such capital gains would be the "gross total
income" for the purpose of all deductions under Chapter
VIA. Since deduction under section 80CCG falls under
Chapter VIA, this provision would also imply that for
determining the threshold limit of Rs.12 lakh for availing
the benefit under this section, the capital gains taxable
under section 112 & 111A are to be excluded.
Suggestion
42
Appropriate amendments may be made to clarify the
real intent of the proposed amendment i.e. whether
Long term capital gains taxable under section 112
and Short term capital gains taxable under section
111A needs to be excluded for determining the limit
of Rs.12 Lakhs.
10. Clause 13 Section 80EE - Deduction in respect of
interest on loan taken for residential house property
A new section 80EE is proposed to be inserted to provide for
additional deduction of up to Rs. 1 lakh under Chapter VIA
in respect of interest on housing loan sanctioned by a bank
or housing finance company during the period between
1.4.2013 and 31.3.2014 for acquisition of residential house
property.
The issues emerging from the proposed provision are as
follows-
It may be clarified that interest on loan taken for
construction of residential house property also
qualifies for the additional deduction i.e. the term
"acquisition" includes "construction" as well.
As per sub-section (2) of proposed section 80EE, in
case interest payable for the P.Y.2013-14 is less than
one lakh rupees, the balance amount shall be allowed
in A.Y.2015-16.
It may be noted that deduction under section 80EE is
an additional deduction, over and above the deduction
allowable under section 24. Therefore, only if the total
interest exceeds Rs.1,50,000, the benefit under section
80EE itself would be available. If the interest payable
is less than Rs.1,00,000, as required in this sub-
section, no benefit under section 80EE would be
available even during the P.Y.2013-14. Since the
entire interest would be deductible under section 24
itself.
Therefore, sub-section (2) of section 80EE may be
reworded to provide that in case "the deduction
43
allowable under this section" for the P.Y.2013-14 is
less than one lakh rupees, the balance amount
shall be allowed in the A.Y.2014-15.
Further, in case of extension of benefit to interest on
loan taken for construction, whether interest on a
new loan sanctioned during the said period to repay
an earlier loan in respect of a house property under
construction would be eligible for deduction is another
issue requiring clarification.
The proposal, in its present form, does not extend the
benefit to interest on housing loans taken from
employer, unless the employer happens to be a bank
or financial institution.
The restriction of eligibility for deduction under this
section to housing loans sanctioned on or after
1.4.2013 may result in inequity vis-à-vis persons
whose home loans were sanctioned before 1.4.2013 in
respect of the first house property. It is possible that
in many cases where loan is sanctioned prior to
1.4.2013 in respect of the first house property, the
amount is yet to be disbursed or even if the amount is
disbursed, the person is yet to receive possession of
the property.
Considering the high cost of acquisition of house
properties in metro cities, the threshold limit of Rs.40
lakhs and Rs.25 lakhs, respectively, for the cost of
property and loan sanctioned, for availing the benefit
of section 80EE may be impracticable and non-
workable. Further, since the banks generally give loan
upto 85%-90% of the cost of property, the threshold
for loan should be appropriately increased to at least
Rs. 35 Lakhs.
Further, the threshold limit of Rs.25 lakhs is in
relation to loan sanctioned. Loan disbursed would be
a more realistic criterion for fixing a threshold, since
the entire loan sanctioned may not be disbursed in all
cases.
44
Suggestions
Therefore, ideally, the proposed benefit may be
extended to interest on the loan taken for the first
house property acquired or constructed, irrespective of
the whether the housing loan is sanctioned before or
after 1.4.2013. In any case, the deduction of
Rs.1,50,000 in respect of self-occupied property was
introduced fifteen years back and keeping in mind the
inflationary conditions, the additional deduction of
Rs.1,00,000 should be extended in respect of all loans,
albeit for the first house property. Further, instead of
providing the same as a deduction under Chapter VIA
only for A.Y.2014-15 and A.Y.2015-16, the same may be
provided by way of insertion of another proviso to
section 24(b) for the sake of consistency.
11. Clause 17 Extension of sunset clause under section 80-
IA
The terminal date for power sector undertakings to set up,
start transmission or distribution or undertake substantial
renovation is proposed to be extended by one year i.e. from
31.3.2013 to 31.3.2014. In fact, the terminal date has been
extended several times in the last few years.
Suggestion
In order to ensure clarity and certainty as regards the
period within which the undertaking should be set-up or
within which it should start transmission etc. the
terminal date may be extended till such time the
country has acquired self-sufficiency in the supply of
power i.e. the terminal date may be kept open-ended.
12. Clause 18- Section 80JJAA Deduction in respect of
employment of new workmen
Section 80JJAA presently grants deduction of an amount
equal to 30% of wages paid to new regular workmen
employed in industrial undertaking which is engaged in
"manufacture or production of article or thing".
45
As per the Explanatory Memorandum, the existing provision
of section 80JJAA was intended for employment of blue
collared employees in the manufacturing sector whereas in
practice, it is being claimed for employees employed in other
sectors as well. The Finance Bill 2013, thus, proposes to
amend section 80JJAA by providing that deduction shall be
allowed to an Indian company which is engaged in
"manufacture of goods in a factory" and where new regular
workmen are employed by the taxpayer in such factory.
Consequent to the proposed amendment, the blue collared
employees who support the organization while being outside
the factory premises may not be considered as "employed in
such factory". The taxpayers who are not registered under
the Factories Act, 1948 may also not be eligible for
deduction. It may be noted that inspite of the amendment
imposing further restrictions, it is still possible that the
benefit of deduction may continue to be misused.
Suggestions
It is suggested that the existing provisions be
continued so that the benefit is available for blue
collared employees in the manufacturing sector.
Further, it is suggested that a suitable clause be
added in Form 3CD requiring the tax auditor to
certify the particulars of new regular workmen
employed and the additional wages paid to them
to ensure the correctness of claim under section
80JJAA.
13. Clause 33 Amendment of section 142(2A)
Section 142(2A) has been amended apparently to amplify the
scope of special audit i.e. the Assessing Officer would now
have the power to direct a special audit, having regard to
volume of transactions, doubts about the correctness of the
accounts, multiplicity of transactions in the accounts or
specialized nature of business activity of the assessee. So
far, the "nature and complexity of the accounts" was the
necessary and sufficient criterion for directing special audit.
The proposed amendment appears to have the effect of
enlarging the scope of special audit considerably. The scope
46
of reasons for invoking the powers under section 142(2A) to
direct the assessee to get the accounts audited by an
accountant have been substantially increased.
Empowering the Assessing Officer to invoke tax audit under
section 142(2A) merely due to the "volume of accounts" or
"multiplicity of transactions" may have the effect of bringing
each and every case within the ambit of special audit. Each
and every gas station, share broker, retailer, agency business
and the like may fall within the purview of this section solely
on account of the "volume of accounts" or "multiplicity of
transactions". Also, as these expressions are highly
subjective, they are prone to adoption of very low threshold
to trigger the application of this provision. This may cause
undue hardship to even those assessees who genuinely
ensure compliance with the provisions of law. Further, the
specialized nature of business activity of the assessee, like
say electricity or insurance business, in our opinion, cannot
be a standalone reason for directing special audit.
Special audit, as the name suggests, should be invoked only
in exceptional circumstances, which is the reason why the
existing section aptly confines that it is the nature and
complexity of accounts which has to be considered while
directing such audit. There should be a distinction between
regular audit and special audit. The scope of special audit
cannot be increased to such an extent that majority of the
assessees, whose accounts have already been audited, are
once again subject to a special audit merely due to, say,
volume of accounts being more in case of large enterprises.
The special audit is more in the nature of investigation or
due diligence, and therefore, needs to be directed only in
exceptional cases having regard to the nature and complexity
of accounts.
Further, this may increase the possibility of some Assessing
Officers resorting to special audit since it gives them an
extended time for completing their assessment.
Suggestion
It is suggested that no change is required in the existing
section, since it adequately takes care of all cases of
47
complexities, including doubts about the correctness of
accounts and multiplicity of transactions.
14. Clauses 42 Insertion of new section 194-IA
Tax is to be deducted@1% on consideration for transfer of
immovable property, other than agricultural land. However,
no tax is to be deducted if the consideration for transfer of
immovable property is less than Rs.50 lakhs.
The issues emerging from the proposed amendment are as
under:
a) In a large number of cases, loan is taken by the transferee
from a bank or financial institution, employer etc. for
purchase of immovable property. In such cases, the
payment is not made directly by the transferee to the
transferor, except for the down payment. The major part of
the consideration is paid by the bank, financial institution
etc. to the transferor, either in instalments or lump sum.
Suggestion
Therefore, the section may be appropriately modified to
require the transferee or the payee, as the case may be,
to deduct tax at source from the consideration paid or
credited to the transferor.
b) Further, the proposed provisions for tax deduction may
cause hardship to those sellers who claim full capital gains
exemption by investing the capital gains or the net
consideration, as the case may be, in the manner provided in
section 54, 54F, 54EC etc., since in such cases, there would
be no tax liability on account of capital gains. Further, for
the purposes of section 54F and 54GB, the entire net
consideration is required to be invested, which would pose a
difficulty, since tax would already have been deducted from
the net consideration.
Suggestion
It is, therefore, suggested that section 197 may be
amended to permit the assessee to make an application
48
to the Assessing Officer for issuing a certificate for no
deduction of tax or deduction of tax at a lower rate. In
the alternative, the seller may be permitted to give a
declaration to the Assessing Officer and furnish a copy
of the same to the buyer
c) Since this provision requires deduction of tax by the
transferee, it presupposes that the transferee should have a
TAN. This may cause genuine hardship to those transferees
who do not possess a TAN. Further, it would be an additional
burden to require such persons to apply for and obtain TAN
for a single transaction.
d) Also, the assessees may face practical hardship in applying
the proposed TDS provision, in case where the consideration
is in kind (which is common practice in real-estate sector).
For e.g., a land-owner transfers development rights to a
developer for agreed built-up area in consideration.
e) Dual TDS implications on the same transaction in such
cases may lead to practical difficulties as in the said case,
both the land-owner as well as the developer would be liable
for TDS on the same transaction.
f) Hardship is also likely to be faced in cases where the
property is purchased jointly, as it is not clear whether the
threshold limit of Rs. 50 lakhs is to be applied to each owner
or to the total consideration for the property.
g) If the payment is being made in installments, like in the case
of construction linked payments, then the point of time when
tax deduction and tax remittance should be made requires
clarification. In such cases, there may be several installment
payments based on the stage of completion. Consequently, if
tax is required to be deducted in respect of each payment,
whether a single remittance can be made at the stage of tax
deduction in respect of the last payment or multiple
remittances are required at each stage is an issue which
needs to be addressed. Multiple remittances may pose a
problem, especially in a case, where the deductor does not
possess a TAN.
49
h) In case of non-compliance due to non-furnishing of PAN, the
provisions of section 206AA would be attracted. At present,
credit for tax deducted under section 206AA is not being
reflected in Form No. 26AS, even if deductee submits his PAN
subsequently. This issue needs to be addressed so that credit
of tax deducted and remitted is not denied to genuine
assessees.
i) The tax department may face the difficulty of relating
different challans to the year of reporting of income by the
transferor. For instance, the capital gains may be chargeable
to tax in the year of transfer whereas deduction of tax at
source may have taken place in a different year.
Suggestion
It is, therefore, suggested that a simple challan for one-
time remittance of tax by the transferee/payee be
prescribed and such remittance may be made within a
prescribed time after payment of the last installment.
Such a remiitance may be made a pre-condition for
registration of property in the name of the transferee.
This would dispense with the need for obtaining TAN
and at the same time, ensure garnering of revenue at an
early point of time. The PAN of the transferor and
transferee should be required to be quoted on the
challan so that the transferor can take credit of tax
deducted and remitted.
In order to overcome the difficulties in cases where
remittance and taxability arises in different years, a
system of pass book be introduced in Form No.26AS
wherein the balance of unutilized credit be allowed to
be carried forward.
15. Chapter VII Commodities Transaction Tax (CTT)
The CTT is proposed to be introduced in a limited way by
insertion of Chapter VII in the Finance Bill, 2013. The
Finance Minister, in his budget speech, has clarified that
trading in commodity derivatives will not be considered as a
speculative transaction. However, no amendment has been
50
proposed to this effect in section 43(5) defining a speculative
transaction.
Consequently, in the absence of specific exclusion provision
in section 43(5), characterisation of commodity derivative
transactions (including those which are subject to CTT)
would be governed by the existing provisions and they run
the risk of being treated as speculative transactions, unless
established by the taxpayer to be for hedging purpose.
Suggestion
Appropriate amendments may be made in section 43(5)
to exclude an eligible transaction in respect of
commodity derivatives from the definition of
"speculative transaction".
16. First Schedule Surcharge
A surcharge@10% to be attracted in the hands of an
individual with total income exceeding Rs.1 crore whereas for
corporate (domestic companies), surcharge@10% is attracted
only if, the total income exceeds Rs.10 crores. For the total
income level between Rs.1 crore to Rs.10 crore, the corporate
surcharge is only 5%.
Suggestion
There should be a parity in the rates of individual and
corporate surcharge as well the threshold above which
they are attracted. The rates of surcharge may be
accordingly modified to maintain parity.
17. Amendment by the Finance Act, 2012 in Section 40 and
Section 201
The Finance Act, 2012 had amended section 40(a)(ia) to
provide that disallowance under that section would not be
attracted where the tax deductible at source has been paid
by the resident payee and he has furnished his return of
income disclosing such payment within the prescribed time.
This amendment is proposed to be made effective only from
A.Y.2013-14.
51
Section 201 was amended with effect from 1st July, 2012 to
provide that in such a case, the payer would not be treated
as an assessee-in-default.
It is suggested that since this a genuine difficulty being faced
by the payer since the introduction of section 40(a)(ia) w.e.f.
1.4.2005, therefore, this provision should be given effect to
retrospectively with effect from that date of introduction of
the provision, so that in cases where the tax was paid
directly by the payee, there should be no disallowance of the
expenditure in the hands of the payer. Further, above all,
since the amendment clarifies the real intent of law, it should
be given effect to retrospectively.
Also, since disallowance under section 40(a)(ia) would be
attracted when tax is not deducted at source during the
relevant previous year, therefore, a provision needs to be
incorporated to provide that in such cases where tax is paid
by the resident payee, the payer is deemed to have deducted
at source at the time when it was so deductible.
Suggestion:
The provisions of section 40(a)(ia) and section 201(1)
may be amended retrospectively with effect from
1.4.2005 in order to clarify the real intent of law and to
remove hardship, thereby reducing further litigations.
The later part of the second proviso may be suitably
amended to provide that it shall be deemed that the
assessee has deducted tax in the relevant previous year
and paid the tax on such sum on or before the due date
of furnishing the return of income.
18. Section 43A - Exchange fluctuation loss due to sharp fall
in Rupee value
Section 43A was inserted in the Income-tax Act, 1961 by
Finance Act of 1967, which permitted Capitalization of Foreign
Exchange Fluctuation Loss in the borrowing used for
acquisition of assets outside India.
52
The exchange fluctuation loss on borrowings used for
domestically acquired assets is not permitted to be capitalized
for tax purposes.
The current financial year saw Rupee depreciate significantly
against the US $ severely impacting the industry particularly
those who have exposure to External Commercial Borrowings
(ECBs) and Foreign Currency Convertible Bonds (FCCBs).
The provisions of Section 43A are similar to the provision
contained in Schedule VI to the Companies Act, 1956. As per
,,instructions in accordance with assets should be made out as
contained in Schedule VI, vide notification No. GSR 129 dated
3-1-1968, the following instructions were inserted:-
"Where the original cost aforesaid and additions and
deductions thereto, relate to any fixed asset which has been
acquired from a country outside India, and in consequence of
a change in the rate of exchange at any time after the
acquisition of such asset, there has been an increase or
reduction in the liability of the company, as expressed in
Indian currency, for making payment towards the whole or a
part of the cost of the asset or for repayment of the whole or a
part of moneys borrowed by the company from any person,
directly or indirectly in any foreign currency specifically for the
purpose of acquiring the asset (being in either case the liability
existing immediately before the date on which the change in
the rate of exchange takes effect), the amount by which the
liability is so increased or reduced during the year, shall be
added to, or, as the case may be deducted from the cost, and
the amount arrived at after such addition or deduction shall be
taken to be the cost of the fixed asset."
The above provisions were deleted vide notification no. GSR
226(E), dated 31-03-2009 w.e.f. 31-03-2009.
The Schedule VI has been amended vide Notification No. SO
447(E) dt. 28-2-2011 w.e.f. 1-4-2011. In the revised Schedule
VI, under the heading "General Instruction" Sr. No. 1 it is
stated as under:
"Where compliance with the requirements of the Act
including Accounting Standards as applicable to the
companies require any change in treatment or
53
disclosure including addition, amendment, substitution
or deletion in the head/sub-head or any changes inter
se, in the financial statements or statements forming
part thereof, the same shall be made and the
requirements of the Schedule VI shall stand modified
accordingly."
The Accounting Standards have been notified vide notification
GSR 739(E) dt. 7-12-2006. For the above purpose the relevant
Accounting Standard is AS-11 ,,The Effects of Changes in
Foreign Exchange Rates
Para 46 and Para 46A of AS-11 were inserted vide notification
no G.S.R. 225(E) dated 31st March, 2009 and G.S.R. 914(E)
dated 29th December, 2011 respectively. The effect of these
notifications is that foreign exchange difference on foreign
loans can be capitalized to the cost of the depreciable assets
even if the assets are acquired in India. No distinction is made
whether the assets are imported or are purchased within
India.
Suggestion
It is suggested that Section 43A be amended to allow
Capitalization of such foreign exchange loss even for
domestically acquired asset.
54
INTERNATIONAL TAXATION
19. Section 9(1)(i) -Indirect transfer of assets
Certain unintended hardships and consequences of
provisions relating to Indirect transfer of Shares introduced
by the Finance Act, 2012 are as under:
Vide Finance Act 2012, a number of amendments
dealing with Indirect transfer of shares of a Foreign
company, resulting in change in the control over
Indian business, were introduced with retrospective
effect. These amendments have substantial
implication for Non Resident.
We appreciate that the Government is not yet decided
on withdrawing retrospective impact of the
amendments introduced last year and that the matter
is under consideration. We appreciate that the
decision on some sensitive aspects of the scope and
width of amendments may need deeper examination.
There are, certain impacts or effects of the amendment
which, we believe, are clearly unintended, but, they do
still work as impediment to decision making in capital
investment proposals or, create uncertainties in the
minds of Investors.
Shome Committee has already provided
recommendations on some of the clauses which create
uncertainty or unintended hardship. The Government
may consider incorporating those recommendations at
the stage of enactment without conceding to
retrospective effect or without committing itself to
aspects which need deeper examination. For example,
acceptance of the following recommendations of Shome
Committee may go a long way in reassuring certainty
and fairness to Investors and may restore wave of
confidence:
Provisions relating to indirect transfer may be
invoked only when India assets constitute 50%
or more of the value of transaction
Taxability may be limited to the gains which
relate to India assets
55
The application may be limited to cases where
there is change in stipulated threshold of
interest or equity interest in the Indian assets or
Indian business
Transactions such as transactions on the Stock
Exchange, Intra-group Reorganizations, Mergers,
Demergers, Portfolio / Institutional investments
etc may be exempted
It needs to be clarified that dividend distributed
by one foreign company to an upper tier
company is not chargeable to tax in India merely
because underlying income may have been
sourced in India.
20. Clause 25 Amendment in section 115A -Tax Rate of
25%: Tax on Royalty and FTS
Section 15A of the Act provides for special rate of tax in case
of Non Resident taxpayer where the total income includes
any income by way of Royalty and Fees for technical services
(FTS) received from Government or an Indian concern under
an agreement entered into after 31 March 1976 and which
are not effectively connected with permanent establishment,
if any, of the Non Resident in India.
The tax is payable on the gross amount of income at the rate
of:
30% if income is received pursuant to agreement
before 1st June 1997
20% if income is received pursuant to agreement
before 1st June 2005
10% if income is received pursuant to agreement after
31st May 2005
The Finance Bill, 2013 has, by amending section115A,
proposed that a rate of 25% plus surcharge and cess on
gross basis shall be applicable to any income in the nature of
royalty and FTS received by a Non Resident, under an
agreement entered after 31 March 1976, which is taxable
under section115A.
56
The intention for increase in the tax rate is stated to be
twofold. Honble Finance Minister observed that the majority
of tax treaties allow India to levy tax on gross amount of
royalty at rates ranging from 10% to 25%, whereas the tax
rate as per section 115A is 10% and in some cases, has
resulted in taxation at a lower rate of 10% even if the treaty
allows the income to be taxed at a higher rate. Honble
Finance Minister also observed that the lower rate of 10% is
being abused for distribution of profit by subsidiary to a
foreign parent company in the form of Royalty. This
amendment is effective from AY 2014-15.
Presently, the profit element pre-supposed in the transaction
is approximately 25% resulting in a prescribed tax rate of
10% on gross basis, given that a foreign company pays tax @
40% + surcharge and cess. Recovering tax of 25% +
surcharge and cess on gross amount increases the
supposedly profit element contained in the transaction to
approximately 63%. This does not appear to be a fair rate,
but rather a prohibitory one which perhaps may be a reality
in cases of exception in commercial life in particular, in
relation to FTS. .
In a case where tax is required to be borne by Indian
company, the effective rate of tax will be close to 33% on the
shoulder of the Indian company. The tax rates under the Act
were originally as high as 30% and were gradually reduced to
10% taking cognizance of the fact that higher tax rates are a
hindrance to the inflow of technology into India. This
underlying rationale appears to have been entirely
overlooked while proposing the higher tax rate of 25% on the
gross amount of royalty / FTS income of a Non Resident in
cases where such income is not effectively connected to a
Permanent Establishment in India.
If the proposed hike in tax rate is enacted, in due course
Indian companies may find it difficult to implement new
technology, avail technical expertise, etc. owing to the
associated tax burden (if the tax liability is to be borne by
them) or reluctance on the part of multinational companies
that are discouraged to deal with a complicated and
uncertain tax scenario in India.
57
The following taxpayers would be impacted adversely due to
increase in rate:
A resident of non treaty jurisdiction
A taxpayer who has been denied treaty benefits.
A taxpayer who negotiated his pricing in a net of tax
contract in anticipation of expected tax rate of 10%
A resident of a treaty jurisdiction, which provides for a
rate higher when compared to the existing rate of tax
under the Act, i.e., 10%
The Honble Finance Minister in his budget speech stated as
below:
"Another case is the distribution of profits by a
subsidiary to a foreign parent company in the form of
royalty. Besides, the rate of tax on royalty in the
Income-tax Act is lower than the rates provided in a
number of Double Tax Avoidance Agreements. This is an
anomaly that must be corrected. Hence, I propose to
increase the rate of tax on payments by way of royalty
and fees for technical services to non-residents from 10
percent to 25 percent. However, the applicable rate will
be the rate of tax stipulated in the DTAA."
The reasons provided by the Honble Finance Minister for
increasing the tax rate are:
In a number of tax treaties with India have a high rate
of taxation
Low rate of 10% is being misused by companies to
repatriate dividend in the form of royalty or FTS
One may note that the reasoning provided for increase in tax
rate cannot be stated to be correct due to the following
reasons:
With introduction of transfer pricing regime, it may be
not correct to assume that dividend is repatriated in
the form of royalty or FTS; any such attempt will be
captured in TP disallowance in the assessment of
Indian company.
58
Without prejudice, in commercial world, the statement
may be true only in relation payment by a wholly
owned subsidiary to its 100% parent company at
best, Intra group transactions. That still cannot
explain the amendment which applies to dealings
between unrelated parties. The amendment may,
therefore, discourage spread of technology beyond
group companies.
On a broad analysis of various tax treaties which India
has entered into it is pertinent to note that around
60% to 70% of them have the rate of 10%, the rate
matches with the proposed rate of 25% very sparingly.
The Treaties are obviously negotiated based on fair
estimates of profit comprised in the transaction.
Ironically, the tax payers who lose treaty shelter due to
inability to procure TRC despite best efforts will not
only be subjected to high tax withholding obligations,
but, will also have the difficulty of expense being
disallowed. These could be cases of substantial or
terminal blow to certain Industries.
International experience with regard to taxation of
Royalty:
On an illustrative analysis of domestic law provisions
with regard to taxation of royalty it is noticed that:
Where the domestic law definition of royalty is
very broad, typically a lower withholding tax rate
applies (example, China, South Africa, Brazil,
Malaysia). The WHT is generally lower in the
range of 10 to 12%.
It is only where the royalty definition is
restricted to IP use rights (very narrow), a higher
withholding tax rate applies (eg. Canada, UK,
Indonesia). Typically a rate of 20% applies.
In some cases, a separate and much higher rate
(a prohibitory rate) is prescribed on payments to
tax havens/non-cooperative jurisdictions (eg,
Brazil where a 25% rate applies)
59
Since the definition of royalty in the Indian Act is very
broad, it is logical that India should go for a lower rate
or maintain status quo with a 10% withholding tax
rate. Where this suggestion is not accepted, India
should reduce the scope of royalty payment under the
Act to restrict it to only Intellectual Property (IP) use
rights.
International experience with regard to taxation of Fees
for Technical Services (FTS) :
On an illustrative analysis of domestic law provisions with
regard to taxation of FTS it is noticed that:
Many countries do not have any WHT
requirement with regard to payments for cross
border services. In many jurisdictions, levy of
tax is restricted to services which are performed
within the territory.
In some instances the concept of services is
linked to the definition of royalties. Tax
withholding is restricted to IP related services
(i.e. services rendered in relation to services
making available the technology) The tax rate
on such IP related services is the same as the
rate for royalty and ranges around 15% to 25%
(example, Germany, Canada)
Where the definition of services is a little
broader, one notices a drop in the WHT to 10%
(China, Sri Lanka). Further, the scope of
obligation is restricted to technical services,
significantly, the definition of services do not
include managerial services. They are only
restricted to technical services. Sri Lanka has a
separate rate for management fees where is a
much lower rate of 5%.
In some cases, a separate and higher rate is
prescribed on payments to tax havens/non-
cooperative jurisdictions (eg, Brazil where a 25%
rate applies in such specific cases though, the
general rate is still 15%)
60
It is possible that these countries may allow a
deduction of expenses in performing the service,
in which case the effective tax rate would work
out much lower.
The rate of 25% provided is far in excess of the penal
rate provided under section206AA for withholding in
case PAN is not been furnished by the payee.
In the Indian context, difficulty may be more
pronounced considering that FTS (that includes
managerial services) and Royalty is very widely defined
(example, payment for shrink wrapped software, use of
equipment, transmission by cable, optic fibre etc is
also considered as a royalty payment). A number of
commercial services which are in the competitive
segment and where the spread of margin is known to
be very small may also be captured by the amendment.
There also is ambiguity on interpretation of taxability
of certain services. There is greater likelihood of
bonafide cases being captured as default cases.
Suggestions
(i) Considering the broad coverage under FTS and
Royalty definitions in Indian law in particular,
the definition of FTS, it is recommended that the
existing tax rate of 10% be further reduced (say to
5% as in case of Sri Lanka for management
services) or at least be retained at the present
levels. Enhancing the current rate to the proposed
25% would adversely impact wide range of cross
border transactions transacting with India as
already pointed out above. Further a lower rate
would also align with the approach which India
has adopted so far, will match with India treaties
and will also match with rate of taxes applicable
in other jurisdictions.
(ii) The prohibitory rate of 25% may be restricted in
its application only to transactions with persons
located in notified jurisdiction area [as per
Section 94A of the Act] similar to the treatment
considered by some countries like Brazil.
61
(iii) Additionally, an option should be provided to a
Non Resident taxpayer to enable it to offer to tax
its income on a net basis of taxation (i.e. income
less expenses being permitted to be taxed at the
normal corporate tax rate , example 40 percent
plus surcharge and cess in case of foreign
companies).
(iv) Concurrently, the definition of "FTS" may be
modified and may be brought in line with
predominant International practice.
(v) The least, the amendment may be made
prospective to be applied to agreements which are
entered into on or after 31st May 2013 so as to
grandfather and protect those cases including
cases of net of tax contracts, which may have been
negotiated by parties in good faith based on the
applicable rate of tax being 10%.
21. Clause 24 - Chapter X-A-General Anti-Avoidance Rules
Finance Act 2012 included a proposal to fast forward GAAR
from Direct Taxes Code through which there was proposal to
introduce GAAR. During DTC regime itself, CBDT
constituted a Committee (Shome Committee) to provide
recommendations for formulating guidelines to implement
the provisions. Based on the representations received from
the stakeholders, Shome Committee submitted its final
report to the Government.
There has also been a Press Release containing a statement
from the Honble Finance Minister on decisions taken by the
Government so far, after considering recommendations of
Shome Committee. However, there are a number of
recommendations in the report of Shome Committee where
the Honble Finance Minister has not yet offered any
clarification even in the Finance Bill, 2013.
GAAR provisions are introduced in the Act to act as a
deterrent against aggressive tax planning. GAAR provisions
will undoubtedly have far reaching implications and to
ensure that, the extra ordinary powers are not exercised by
revenue officers arbitrarily or de hors the key objects behind
62
introduction of GAAR, it is very important that the
apprehensions of the taxpayers are addressed at the earliest.
Understandably, this will need further deliberation and
consultations before the law/ Guidelines are enacted;
however, keeping the above limitations in mind, certain
recommendations which have immediate relevance have
been made.
Suggestions
(i) Grandfathering of investments:
There has already been a salutary announcement from
the Honble Finance Minister that investments made
up to 30th August 2010 (being the date of introduction
of DTC) are proposed to be grandfathered. However,
omission of that proposal in Finance Bill, 2013 has
raised some uncertainty
We submit that there is a case for grandfathering all
investments upto 31st March 2012 (or, February 2012)
considering the following:
The validity and legality of a prior arrangement
ought to be tested with reference to the norms of
jurisprudence and norms of tax avoidance as
prevalent as on the date of arrangement.
Evaluating validity of a prior structure based on
a norm of tax avoidance which was not then in
existence is nothing but retroactive application
of the Chapter.
Retroactive application to past transactions will
impact credibility of the Government and could
also be alleged to be back door treaty override on
unilateral basis
As per recommendation of Shome Committee, all
Investments made upto the date of introduction of
GAAR may be grandfathered. As per this
recommendation, all investments upto 31st March
2015 would have been grandfathered.
63
The Standing Committee Recommendation was to
apply GAAR provision prospectively so as not to make
applicable to existing arrangements/transactions. The
alternative Recommendation was to protect the interest
of the taxpayers who have entered into
structures/arrangements under the existing laws.
An investment which was then law compliant may not
treated as impermissible merely because there is
change in thinking at a later date considering that,
for the investor, it became an irreversible step.
(ii) Need for statutory recognition of decisions already
announced by the Government:
We humbly recommend that there is a need for statutory
recognition of decisions which are already announced by the
Honble Finance Minister vide press release dated 14
January 2013. The same are illustratively listed as under:
GAAR will not apply to FII which does not avail
treaty benefit
GAAR will not apply to Non Resident investors
in FIIs
There will be monetary threshold of Rs 3 crore of
tax benefit in a year for invocation of GAAR
GAAR to be restricted to only that "part" of
arrangement which is impermissible and not to
the whole arrangement
Statutory recognition of these decisions either in the statute
itself or by way of a Circular will go a long way in restoring
investor confidence.
(iii) Need for Positive announcement on some
recommendations of Shome Committee where
Government is silent:
We wish to submit that the following clarifications /
conclusions provided in the Shome Committee report are
truly salutary and exemplary:
64
As an overarching principle, GAAR to apply to
abusive or highly aggressive / contrived
arrangements
GAAR provisions codify the substance over form
doctrine.
Tax mitigation by taking advantage of a fiscal
incentive and after complying with conditions of
the section is not covered by GAAR.
Onus of proving each of the requirements of
declaring the arrangement to be impermissible is
on the tax authority.
These have been illustrated through different
examples.
We humbly submit that adoption of these principles
will provide substantial fairness in law and will
substantially reduce unwanted litigation and hardship.
Announcement to the effect that the Government is
agreeable, in principle, to these suggestions will allay
the apprehensions of the investors without
compromising the spirit behind the GAAR provisions.
(iv) GAAR v SAAR:
It was the recommendation of Shome Committee that
under normal circumstances, where specific SAAR is
applicable, GAAR will not be invoked. It has also
recommended that GAAR will not apply to a treaty
which has a specific Limitation of Benefit clause
It has been stated by the Honble Finance Minister that
in a case where GAAR and SAAR are both in force, only
one of them will apply to a given case and guidelines
will be made regarding the applicability of one or the
other.
We submit that there is a need for re-consideration of
the above statement of Honble Finance Minister.
GAAR should be considered as a last resort. It should
not be invoked in a case where there is compliance
with SAAR and the subject matter is dealt with a
65
SAAR. It is only in cases of exceptionally abusive
behavior that GAAR can be invoked in such a case.
(v) Onus of proof
Shome Committee, in its report, favored discharge of
onus by tax authority
As per Finance Bill, 2012, the onus was cast on
taxpayer3. As a consequence, at the stage of
enactment, Section 96(2) as proposed was dropped. In
Parliamentary debate, Honble Finance Minister
explained the change as having been made pursuant
to recommendation of Standing Committee so as "to
remove the onus of proof entirely from the taxpayer to
the revenue department before initiating any action".
Thus, Section 96(3) as proposed in Finance Bill, 2012
was enacted as Section 96(2) of Finance Act 2012.
However, vide Finance Bill, 2013 the words "unless it
is proved to the contrary by the assessee" are proposed
to be inserted in Section 96(2) as enacted by Finance
Act 2012.
Section 96(2) stops at rebuttable presumption that an
arrangement shall be presumed (unless proved to
contrary by the taxpayer) to have been entered into, or
carried out, for the main purpose of obtaining a tax
benefit, if the main purpose of a step in, or a part of,
the arrangement is to obtain a tax benefit.
In light of the above and to remove any avoidable
uncertainty, we recommend that an express
clarification should be made in simple and lucid
language that onus of establishing satisfaction
with ingredient of main purpose as also the onus
of establishing compliance with additional
ingredients will be on the tax department.
22. Clause 22- Section 90(5)-Tax Residency Certificate (TRC)
Section 90A(4) provides that treaty benefit will not be
available to any Non Resident unless he furnishes TRC from
3
Refer S.96(2) and S.96(3) as they formed part of Finance Bill, 2012
66
the Government of his country of residence containing such
particulars as may be prescribed.
Finance Bill, 2013 proposes to insert section 90(5) in the Act
which provides that TRC shall be a necessary but not a
sufficient condition for claiming any relief under a DTAA.
The provision that a TRC is "necessary but not sufficient"
has led to uncertainty amongst investors. There are
apprehensions of roving enquiries from Tax Authority which
can hamper confidence of taxpayers and can mar investment
climate of the country.
The proposed amendment contradicts CBDT Circular no 789
dated 13 April 2000 which clarifies 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 existing provision of obtaining TRC is itself burdensome
for a Non Resident taxpayer. Every Non Resident needs to
undertake additional compliance as the present provision
does not provide for any threshold limit beyond which TRC
may be made compulsory.
The hardship compounds further as the said TRC needs to
be obtained in the form and manner prescribed by the Indian
income-tax authorities. Such a request may or may not be
entertained by the Foreign Government.
Further, there is apprehension that the Non Resident
taxpayer is compelled to obtain TRC before the stage of
payment itself, but for which DTAA benefit may be denied.
In this background, incorporating the condition of TRC being
"necessary, but not sufficient" would make the payer more
hesitant than ever.
Suggestions
We welcome the clarification issued by the Finance
Ministry on 1 March 2013 that TRC will be accepted as
an evidence of tax residency and that the tax
authorities cannot go behind the TRC to question
67
residential status. We would also welcome such
categorical clarification through another CBDT Circular
that reiterates contents of Circular no 789.
A step further, we recommend that the above
clarification may, in fact, be part of the statute. The
Explanation may state that TRC will be regarded as
necessary and sufficient evidence for the purpose of
evidencing residency and beneficial ownership.
Alternatively, with regard to test of beneficial
ownership, reasonable inquiry, if considered necessary,
in the facts of the case, may be permitted. Further, in
such cases, to ensure that roving inquiries are best
avoided, reasonable objective tests for determination of
beneficial ownership may be evolved for guidance of
officers.
It is possible that the TRC issued also indicates
beneficial ownership (example, Italy). Where a TRC
incorporates this requirement, TRC should be
considered as sufficient for the purpose of meeting the
test of beneficial ownership as well.
In order to boost the confidence of the investors and to
augment the investment climate of the country, the
following may be clarified to allay doubts and
apprehensions:
It is not necessary to furnish TRC for each and
every remittance. A single TRC which is valid for a
specified period should be sufficient enough for all
reliefs, etc as are claimed under a tax treaty.
Even if the recipient of income does not possess a
TRC at the time of remittance, the same should
not result in denial of treaty residence provided he
obtains TRC within a reasonable period of time
(say, by the end of accounting year or before the
due date of filing return of income).
If the taxpayer, despite his best efforts, is not able
to obtain a TRC from the Government of his home
country in prescribed form, then, by itself this
should not be a ground to deny treaty relief
68
claimed by him and a fair opportunity of being
heard must be given.
Merely because some of the columns of TRC are
left blank by the Government of foreign country,
the same by itself should not be a ground to deny
treaty benefits.
23. Clause 28 Chapter XII-DA- Section 115QA and Section
10(34A) Buyback of unlisted shares by a domestic
company
Currently under the Act, income arising from buy back, as
per section 77A of the Companies Act, is taxed as capital
gains in the hands of the shareholder under section 46A of
the Act. Further buy back is specifically excluded from the
deemed dividend provisions. This has proved to be beneficial
in certain cases where shareholder who participates in a buy
back is a resident of tax favourable jurisdiction.
In order to curb the alleged tax avoidance, Finance Bill, 2013
has proposed that consideration paid by the company for
buy back of its own unlisted shares which is in excess of the
sum received by the company at the time of issue of such
shares (called as distributed income) will be charged to tax at
the rate of 20% plus applicable surcharge and cess in the
hands of the company. The additional income-tax payable by
the company shall be the final tax on similar lines as DDT
and the same would be exempt in the hands of the
shareholder. Further, it is also provided that no credit or
deduction or allowance of such additional tax will be
provided. The provision is effective from 1 June 2013.
Buy back of shares under section 77A of the Companies Act
is specifically excluded from the deemed dividend provisions
under the Act. However, the proposed amendment indirectly
takes away the exclusion provided under the deemed
dividend provisions by bringing in taxation in the hands of
company on purchase of its own unlisted shares.
The distributed income which is proposed to be taxed in the
hands of the company is not "income" in real sense. The
computation mechanism for distributed income does not
consider cost incurred by the shareholder in purchasing the
69
shares and takes into account only the amount received by
the company on issue of shares.
The provision has been proposed on the supposition and
assumption that all buy back schemes, regardless of
composition of shareholding are always planned for the
purpose of tax avoidance. It is a case of legislation and
regulation based on suspicion in complete disregard of
business needs and realities.
The Final report of Expert Committee on GAAR cast doubt
only in those cases where the buy-back was in favour of
foreign parent which is in a tax favourable jurisdiction.
However the proposed amendment tries to capture all Indian
companies, regardless of residential status and composition
of shareholders. In effect, the proposed amendment fast
forwards GAAR provisions in disguise, which has been made
effective only from AY 2016-17.
The intention of introducing this provision is to curb tax
avoidance by companies which otherwise would be liable to
DDT on dividends distributed. The Memorandum to Finance
Bill, 2013 provides that share buy-back is resorted to in a
case where the shareholders of the company are either not
taxable on such an arrangement or taxable at a lower rate of
tax when compared to tax payable on dividends distributed
by a company. However, the proposed provision has led to
various unintended consequences such as:
Genuine buy back which has commercial reasons
attached to it are also hit by the proposed amendment
Provisions are applicable to all shareholders whether
resident or Non Resident. The intention with which the
proposed amendment has been introduced is to levy
taxes on transaction with Non Resident shareholders
who otherwise would get out of the tax net in India due
to favorable treaty provisions.
If the buy back is by a wholly owned subsidiary, the
same may be protected by section 47(iv)/(v) of the Act.
However, the proposed amendment is notwithstanding
any other provisions and hence would override the
exemption provided under section 47 of the Act.
70
The proposed amendment would trigger taxation even
in cases where the company suffers losses. This would
mean that the even in cases where the company is
unable to distribute dividends, it would be liable to tax
on buy back.
Company is presumed to have distributed income even
if the repayment is out of capital and not out of
accumulated profits.
Computation related inconsistencies:
In case of a shareholder who has the benefit of
computing capital gains based on indexed cost/foreign
exchange fluctuation protection, there could be
scenarios where the computation leads to capital loss
in the hands of shareholder. However, the loss would
be lost as it is not considered in order to determine the
distributed income and the company would have to
pay taxes on an artificially calculated higher amount
than the actual gains which accrue in the hands of the
shareholder.
The computation mechanism provided for determining
the distributed income does not take into account the
amount paid to acquire shares from secondary
sources, which may adversely impact the person
buying the shares at a higher rate from secondary
sources.
The proposed amendment provides that amount
received by the company at the time of issuance of
shares shall be reduced from the consideration paid on
buy back to shareholders. However the method of
computation of distributed income could be a
challenge in certain cases such as conversion of
debentures into equity, shares issued by way of bonus,
consideration received by predecessor entity pre-
merger whereas buy back is by successor etc.
The proposed amendment is applicable to a company
irrespective of whether the shares are held as a capital
asset or stock in trade by the shareholder.
71
Company (and, thereby, indirectly, the shareholders) would
be subjected to steep rate of tax of 20% even if the
shareholders may have incurred capital loss or business loss
in their personal hands. Rate of tax of 20% is higher than
rate of DDT in section 115-O at 15%.
International experience:
Most countries recognize that profit distributions have
already suffered a corporate tax levy in the hands of
the company distributing dividends. Hence to ease the
burden on the shareholder (also to avoid economic
double taxation), it is not once again taxed on either
distribution in the hands of the distributing company
or by way of a withholding tax on dividend payments
on distributions to shareholders (eg. United Kingdom,
Brazil).
Avoid economic double taxation : Conscious reversal of
policy by South Africa
South Africa had until 31 March 2012 levied a
tax on a company distributing dividends, but
since 1 April 2012 has moved to a withholding
tax regime at a 10% withholding. It is interesting
to note the reason for South Africa to move to a
withholding tax regime.
In the case of Volkswagen of South Africa (Pty)
Ltd (case No. 24201/2007, judgement dated 14
April 2008), the issue before its High Court was
whether secondary tax on companies (STC)
levied as per the South African domestic tax law
can be regarded as a tax covered within the
ambit of South Africa-Germany DTAA for which
a withholding tax rate of 7.5% under the
dividends article of the DTAA applied. The case
was decided against the taxpayer on account of
various differences such as STC is imposed on
the company distributing dividends (not on the
shareholder), etc.
However, the South African authorities decided
to move to a withholding tax regime to enable
foreign investors/taxpayers avail of the DTAA
72
benefit. This demonstrates a conscious taxpayer
friendly steps being undertaken by the South
African Government to have the new tax covered
within the ambit of their DTAAs such that Non
Resident investors can take the benefit of a
DTAA. This was a pragmatic approach adopted
by the South African authorities and it would
help if India can learn from the South African
experience.
In India, where the tax is sought to be levied on the
company undertaking the buy back, it may not be
possible for the shareholder (a different taxpayer) to
avail of the DTAA rate. To this extent, the levy
proposed by India is unfair as regards fair play in
respect of DTAAs it has negotiated.
Avoidance of economic double taxation by providing
participation exemption an incentive to strategic
Investment
In the European Union Region (EU), under the
EU Parent-Subsidiary Directive, dividends
distributed by EU subsidiaries to EU parent
companies are exempt from withholding tax, if,
among other conditions, the recipient holds 10%
or more of the shares of the subsidiary for at
least two years. Accordingly, double economic
taxation is avoided.
A scheme comparable to the EU Parent-
Subsidiary Directive is often extended to third
country participation as well, but requiring a
higher threshold for participation (example
Germany that requires a participation of at least
15%). These schemes are largely in place to
invite foreign equity and avoid economic double
taxation (taxation on profits once by the
corporate entity earning the income and again in
the hands of shareholders on distribution of
such profits as dividends).
More often than not, these jurisdictions also
have a participation exemption regime that does
73
not tax capital gains and dividend income where
there is a participation beyond a prescribed
limit. This extends beyond the EU region as well
(example, Germany, Netherlands). Hence, the
issue of re classification of dividends to capital
gains does not arise since both income streams
are not taxed when there is a prescribed level of
participation (in some cases as low as 5%, as in
France).
Buy back treated at par with Dividend:
Some jurisdictions consider buy back as dividends (Eg
countries like Australia, Poland, Belgium, South
Africa, Singapore, Japan etc). However, such treatment
may not necessarily be unfavorable to the taxpayer,
because it is taxed at a lower rate as dividends (South
Africa, Japan), is eligible for participation exemption
(EU countries), or credit for taxes paid by the company
is made available to the shareholder (under a franked
dividend payout concept) [Singapore, Australia].
Suggestions
(a) There is a need for serious reconsideration of the
proposal. The proposal may be perceived as India
attempt to override certain tax treaties
unilaterally. It is inconsistent with the tax norms
which India has adopted so far in the formulation
of its domestic law of treating buy back to be a
transaction which has capital gains implications.
(b) Considering that the intent is to curb tax
avoidance the provision may be worded in such a
way that it captures only transactions which are
entered into with an intent to avoid tax and
should not be made applicable to all transactions
of buy back of unlisted shares.
(c) The proposal is very unfriendly to those
companies which do undertake buy back driven
purely by commercial reasons. Proposal is
Investor unfriendly for those where the
Shareholders are, in an indirect manner, denied
74
the benefit of lower capital gains tax levy related
provisions in the domestic law as also the benefit
of lower dividend tax provisions in tax treaties. In
case of partial buy back, the cost of tax liability of
the company will be borne by shareholders other
than those who may have exited. While, there is
no reason for such across the board provision,
still, if for any reason, it is proposed to retain any
such provision, a more logical alternative is to
legislate it in form of SAAR (Specific Anti
Avoidance Rule) as part of section 2(22) of the Act
which will be applied in certain abusive
conditions to be restricted to payments to non-
residents. It should involve tax in the form of
lower WHT of 10% and the quantum of chargeable
amount should be limited to accumulated profits
of the company.
(d) Even internationally, as would be clear from the
following table, in cases of dividend repatriation,
the rate of WHT on dividend repatriation in
majority of the treaties is 10%. Even in case where
rate is marginally higher at 15%, the lower rate of
10% applies if holding of capital exceeds 10% or
25%. The proposed rate should not be allowed to
exceed such rate. The next best alternative may be
to consider buy back at par with a transaction of
capital reduction to be subjected to tax as
dividend as part of section 2(22) of the Act.
(e) Instead of a levy on the company, the tax if at all,
should be levied as a withholding tax on
dividends. This would enable Non Resident
shareholders to apply treaty rates and claim
credit in its home jurisdiction. One may like to
follow the South African experience where an
erstwhile STC (comparable to our DDT) has now
been replaced with a withholding tax regime on
dividends at 10%.
(f) Adequate safeguards may be incorporated to
provide for cost step up in case of shares
purchased from secondary market. Further the
provisions should provide for proper
75
computational mechanism in cases where there is
conversion of debentures into equity, issue of
bonus shares etc
24. Clause 27- Section 115-O r.w Section 115BBD- Removal
of cascading effect of DDT on dividend from foreign
subsidiary
Section 115-O (1A) provides relief from cascading effect of
DDT in a multi-layered structure in respect of dividends
received from domestic subsidiary4 where such domestic
subsidiary has paid the DDT which is payable under
section 115-O.
No such relief is available in respect of dividend received
from foreign subsidiary which is taxable at 15%5 on gross
basis under section 115BBD. There is no specific relief or
mitigation from levy of MAT. The Indian company may have
MAT exposure where tax payable on book profit at 18.5% is
higher than tax payable under normal provisions, thus
diluting the concessional rate of tax and DDT relief.
Special rate of tax at 15%6 on gross basis under section
115BBD for dividends received from foreign companies in
which Indian companies hold more than 26% of equity share
capital which was to expire on 31 March 2013 is proposed to
extended by one more year to 31 March 2014
Further, relief for cascading effect of DDT is proposed to be
extended to dividends received from foreign subsidiary on
which tax is payable under section 115BBD. The relief will be
available for dividends which are distributed in the same
financial year in which dividends are received from foreign
subsidiary.
To avail DDT relief, it is necessary that dividends should be
distributed by the Indian holding company in the same
financial year in which dividends are received from foreign
subsidiary.
4
i.e where equity share capital holding is more than 50%
5
Plus applicable surcharge and cess
6
Plus applicable surcharge and cess
76
Suggestions
(i) If it is the desire that the Indian companies are
effectively persuaded to bring in the accumulated
surplus from overseas companies during Financial Year
2013-14, the condition that foreign dividend should be
distributed in the same year to avail DDT relief may be
liberalized. It is possible that an Indian company which
is keen to avail DDT relief may still find it commercially
unwise to distribute the funds to the shareholders. The
company is likely to be keen to retain the funds for its
own internal growth. Also, if dividends are received in
the month of March 2014, the Indian company will not
be able to redistribute them in March itself.
(ii) To make the relief more meaningful, a longer period
of time say 3 years should be provided for distribution
to shareholders. The condition that the same amount of
dividend shall not be taken into account for reduction
more than once will ensure that there is no abuse of
elongated time period.
(iii) Further, to ensure that concession provided by
Section 115BBD is not diluted by MAT provisions, it
should be provided that the dividends on which tax is
payable under section 115BBD will be excluded from
book profit.
25. Clause 43 Section 194LC-Concessional rate of tax on
interest payable to non-residents
Section194LC provides for concessional rate of withholding
tax @ 5%1 on payments to non-residents in a case where an
Indian Company borrows money in foreign currency (FC)
from a source outside India either
under a loan agreement; or
by way of issue of long-term infrastructure bonds (IB)
The loan agreement/infrastructure bonds and rate of interest
thereon should be approved by Government. CBDT vide
Circular no.7 of 2012 dated 21 September 2012 enlisted
conditions which need to be fulfilled for automatic approval.
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Briefly, loans/bonds which comply with External
Commercial Borrowings (ECB) norms under Foreign
Exchange Management Act, 1999 (FEMA) and regulations
there under are granted automatic approval for the purposes
of section 194LC provided they also comply with certain
additional conditions laid down in the said Circular.
The scope of Section 194LC has been expanded by including
,,rupee denominated IB subject to compliance of following
conditions :-
The Non Resident should deposit foreign currency in a
designated bank account
Such sum as converted in rupees should be utilized to
subscribe to IB in India.
The above referred borrowing shall be deemed to have
been made in foreign currency.
The designated bank account has been defined to mean
account of a person in a bank which has been opened solely
for the purpose of deposit of money in foreign currency and
utilization of such money for payment to the Indian company
for subscription to IB issued by it.
The concessional rate of tax has been extended only to rupee
denominated IB and not to rupee denominated loans. FEMA
regulations permit borrowing of rupee denominated loans in
certain circumstances. However, it is ambiguous whether
such loans will be eligible for concessional rate of tax.
The provision requires borrowing from a source outside
India. If the designated bank account is opened in India and
used for subscribing to rupee denominated IB in India, issue
may arise whether the requirement of borrowing from source
outside India is complied with. Though there is a deeming
fiction that such borrowing shall be deemed to have been
made in foreign currency, there is no deeming fiction that
such borrowing shall be deemed to have been made from a
source outside India.
Ambiguity exists in the currently proposed provision whether
the designated bank account should be that of the borrower
or Non Resident lender. Non Resident lenders may face
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difficulty in complying with this condition if they are not
permitted under FEMA to open a separate bank account
exclusively for subscription to Section194LC qualifying IB.
Though the provision provides for concessional rate of tax @
5%, in absence of PAN of the Non Resident lender, section
206AA mandates withholding at higher rate of 20%. This is
perceived to be onerous considering that section 115A
envisages exemption from filing return for the Non Resident
where tax is deducted by the borrower and paid to the
Government. Hence, obtaining PAN for the sole purpose of
avoiding adverse impact of section 206AA results in an
empty formality. Also, where the loan agreement envisages
net of tax payment of interest, higher withholding rate
results in higher cost for the Indian borrowing company.
Furthermore, where IBs are raised outside India through an
intermediary acting as custodian for the Non Resident
investors and payment of interest as also repayment of
bonds is serviced through such intermediary, there is an
ambiguity on whether PAN of such intermediary will suffice
for Section 206AA purposes.
Suggestions
(a) While extension of the provision to rupee
denominated IB is certainly beneficial to taxpayers
and the provision is a healthy and welcome
provision, it would be better that deeming fiction is
further supplemented by clarifying and presuming
that the borrowing will be deemed not only to be a
borrowing in foreign currency, but, also a borrowing
from a source outside India, there could be scope for
litigation. To remove any ambiguity in this regard, it
should be provided that subscription made from
designated bank account will be deemed to be from a
source outside India.
(b) Also, the designated bank account requirement
should be made applicable to the Indian borrower
and not the Non Resident lender.
(c) In addition to IB, the provision should also be
expanded to rupee denominated loans which are
permitted to be borrowed under FEMA regulations.
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(d) Payment of interest under section 194LC should be
excluded from the scope of Section 206AA and Non
Resident lenders should not be required to obtain
PAN in India to avail lower rate of tax under section
194LC. Alternatively or concurrently, in case of
foreign intermediary appointed for servicing IBs, it
should be clarified that PAN of such intermediary
shall suffice for Section 206AA purposes.
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