POST-BUDGET MEMORANDUM - 2016
DIRECT TAXES
THE INSTITUTE OF
CHARTERED
ACCOUNTANTS OF INDIA
NEW DELHI
The Institute of Chartered Accountants of India
POST-BUDGET MEMORANDUM 2016
A. INTRODUCTION
1.0 The Council of the Institute of Chartered Accountants of
India considers it a privilege to submit this Post-Budget
Memorandum to the Government.
1.1 In this memorandum, we have suggested certain
amendments to the proposals contained in the
Finance Bill, 2016 which would help the Government
to achieve the desired objectives.
1.2 We have noted with great satisfaction that the
suggestions given by the Committee in the past have
been considered very positively. In formulating our
suggestions in regard to the Finance Bill 2016, 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 provisions 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.
1.3 In this memorandum, firstly an executive summary of our
suggestions on the specific clauses of the Finance Bill,
2016 relating to income-tax have been given. The detailed
suggestions are given thereafter.
1.4 In case any further clarifications or data is considered
necessary, we shall be pleased to furnish the same.
Post-Budget Memorandum 2016 (Direct Taxes) Page 2
The Institute of Chartered Accountants of India
The contact details are:
Name and Designation Contact Details
CA. Naveen ND Gupta, Chairman, naveen@dassgupta.com
Direct Taxes Committee
CA. Nihar N. Jambusaria, nihar.jambusaria@ril.com
Chairman, Committee on
International Taxation
CA. Nidhi Singh, dtc@icai.in
Secretary, Direct Taxes
Committee
CA. Mukta K. Verma, citax@icai.in
Secretary, Committee on
International Taxation
Post-Budget Memorandum 2016 (Direct Taxes) Page 3
The Institute of Chartered Accountants of India
B. Executive Summary
S. No. Clause Section Particulars Suggestions Page
No No
1. - - Paragraph E of Part III It is suggested that the 28
to the First Schedule benefit of reduction of
Proposed reduction rate of tax to 29% of
of 1% in rate of total income for small
taxation in case of domestic companies
company assessees may also be extended
with total to firms and Limited
turnover/gross Liability Partnerships
receipts of upto Rs. 5 as well since most of
crore Reduction in the deductions and
rate may be made exemptions phased
applicable to Firms/ out as proposed by
Limited Liability sunset clause of
Partnerships also Finance Bill, 2016 are
applicable to both
companies as well as
firms/LLPs and so as
to provide a level
playing field amongst
these forms of
business.
Further, the limit of Rs
5 crore for
determining the
eligibility to avail the
reduced rate may be
with reference to
P.Y.2015-16, being the
previous year
immediately preceding
the current previous
year, namely,
P.Y.2016-17, relevant
to A.Y.2017-18.
2. - - No provision in the Appropriate provision 29
Finance Bill, 2016 to to reduce the period of
give effect to the holding from three to
proposal contained in two years for availing
para 127 of Hon'ble benefit of long-term
Finance Minister capital gains in case of
speech to reduce the unlisted companies
period of holding for may be incorporated
availing benefit of in line with the
long-term capital proposal contained in
gains in case of the Budget Speech.
unlisted companies
from three to two
years
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S. No. Clause Section Particulars Suggestions Page
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3. 7(a)(ii) 10(12A) Proposed 40% It is suggested that the 29
exemption for proposed clause (12A)
withdrawal from of section 10 providing
National Pension for exemption of 40%
System (NPS) by any of payment from the
employee Benefit to NPS Trust to "an
be extended to employee" on closure
withdrawals by any of account or opting
person and not out of pension
employees alone. scheme, may be
modified to allow such
exemption to payment
from the NPS Trust to
"an individual", since
exemption under the
said clause is available
in respect of
withdrawals from NPS
by self-employed
individuals also.
In effect, the
substitution of the
words "an employee"
in the said clause by
"an individual" would
help to bring within its
fold, exemption to self-
employed individuals
as well.
4. 14A Para 167 of Finance It is suggested that the 30
Minister's speech provisions of section
Amendment in Rule 14A may not be made
8D proposed Further applicable to dividend
amendment required income exempt under
in section 14A so that section 10(34) since it
the said section is not has already suffered
made applicable to an economic tax in the
dividend income form of dividend
exempt under section distribution tax.
10(34) since the same Likewise, section 14A
has been subject to may not be made
dividend distribution applicable to any other
tax in the hands of the income which has
company been subject to
economic tax like
dividend.
5. 15 35 Weighted Deduction Scientific research is 31
for contribution to the lifeline of business
Scientific Research in all countries of the
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and expenditure on world. Like make in
scientific research to India, ease of doing
be phased out business and
Weighted deductions encouragement to
to be continued for start up initiatives of
providing impetus to the government,
scientific research and innovation & scientific
development in India research initiative
should be given equal
weightage.
Withdrawal of
weighted deduction in
respect of scientific
research expenditure
will be a retrograde
step.
Therefore, it is
suggested that
weighted deductions
to various modes of
Scientific Research
expenditure allowed at
present to be
continued.
6. 17 35AC Deduction in respect The expenditure 32
of Expenditure on incurred on eligible
Eligible Projects to be projects or schemes
withdrawn are for the
Deduction to continue development of the
to provide impetus to backward and weaker
rural sector and sections thereby
weaker sections of the focusing on
economy development of rural
areas.
Further, all the
projects are approved
by the National
Committee which is
set up by the Central
Government to ensure
that the funds are
utilized for the said
purpose.
Therefore, this
deduction which is
serving the purpose
for which it was
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enacted so well,
should be continued
to be allowed.
7. 25,26 44AB Consequential It is therefore 33
amendments due to suggested that clause
amendment proposed (a) of section 44AB be
in section 44AD - appropriately modified
Clarification for to increase the
assessees with gross threshold limit
receipts exceeding one specified thereunder
crore rupees but less from rupees one crore
than two crore rupees to rupees two crore, so
regarding as to avoid any
maintenance of books ambiguity in
of account interpreting the true
intent of law regarding
maintenance of books
of account and audit
of the same where the
total turnover, gross
receipts exceed rupees
one crore but does not
exceed rupees two
crore.
8. 26 44AD Proposed deletion of For facilitating ease of 33
proviso to sub-section doing business by
(2) providing for small firms and
deduction of interest removing the genuine
and remuneration hardship of having to
paid to partners by pay higher taxes on
firm from the their presumptive
presumptive income income on account of
under section 44AD the proposed denial of
Proviso to remain to deduction in respect of
avoid genuine remuneration paid to
hardship to small and partners within the
medium firms limits set out in
section 40(b), the
proviso to section to
44AD(2) may be
retained. Similarly,
separate deduction
may be allowed for
professional firms as
well in respect of
remuneration paid to
partners under the
proposed new section
44ADA.
9. 27 44ADA Proposed section 34
44ADA providing for
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special provision for
computing profits and
gains of profession on
presumptive basis
Issues and concerns
arising therefrom to be
addressed
9.1 27 44ADA Threshold limit of Rs It is suggested that the 35
50 lakhs may be threshold limit of Rs
increased 50 lakh may be raised
appropriately so that a
sizable percentage of
professionals in the
small and medium
segment are covered
under the said
provisions; which
would ultimately lead
to the achievement of
stated objective of
introducing the new
provision.
9.2 27 44ADA Rate of estimated tax It is suggested that the 35
@ 50% too high estimated rate of
income @ 50% of the
total gross receipts
may be reduced
appropriately
considering the high
cost of providing the
services by specified
professionals specially
the small tax payers
having income from
profession.
10. 28 47(xiiib) Conversion of 1. The condition of 36
company into LLP asset base being less
Clarification required than Rs. 5 crores may
relating to additional be rationalised.
condition
2. Provision may apply
prospectively to
conversion proposals
initiated on or after 1
April 2016.
3. Also, the scope of
the term `value of total
assets as appearing in
the books of accounts'
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be clarified to provide
certainty and reduce
litigation .
11. 30 50C Option for adopting The amendment may 37
stamp duty value on be treated as
date of agreement clarificatory in nature.
Amendment to be Alternatively, a
treated as clarificatory circular may be issued
in nature to achieve the same
result in pending
assessments or
appeals.
12. 40 80-IAB Phasing out of Since the qualifying 37
incentive where period of deduction
development of SEZ starts from year of
begins on or after 1st notification of SEZ,
April, 2017 - Phasing the phase out may
out to be in respect of also be with respect to
SEZs notified on or SEZs notified on or
after 1st April, 2017 after 1 April 2017
instead of currently
proposed phase out
with respect to
commencement of
development on or
after 1 April 2017.
13. 42 80-IB Phasing out of The sunset clause may 38
incentive under be with reference to
section 80-IB in acquisition of new
respect of production blocks and for
of mineral oil and commencing discovery
natural gas, if the process in the block
specified activity already acquired. The
commences on or after sunset clause may not
1.4.2017 - Phasing be made applicable for
out may be with commencing
reference to commercial
acquisition of new production of mineral
blocks and oil or natural gas in
commencing discovery the eligible blocks in
process in respect of a which discovery has
block already acquired already commenced
before 1 April, 2017.
14. 41,49 80-IAC, Special incentives to 39
115BA start-ups Issues to
be addressed
14.1 41,49 80-IAC, Definition of "eligible Clause (ii) of 39
115BA start-up" to include Explanation to
Partnership Firm and proposed section
Limited Liability 80IAC be amended to
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Partnership define "eligible start-
up" in line with the
Start-up scheme
where, the term entity
includes Private
Limited Company
(under The Companies
Act, 2013) or a
Registered Partnership
Firm (under The
Indian Partnership
Act, 1932) or Limited
Liability Partnership
(under The Limited
Liability Partnership
Act, 2008) so as to
provide ease of
running of business to
startup firms and LLP
also.
14.2 41,49 80-IAC, Benefit of 100% It is suggested that 40
115BA deduction from the sub-section (2) of
year in which the proposed section
eligible start-up 80IAC be
commences its appropriately
business amended to give the
benefit of 100%
deduction from the
year in which the
eligible start-up
commences its
business as against
"year of incorporation"
to avoid creation of
paper/shell
companies.
14.3 41,49 80-IAC, Profit linked holiday I. In order to 41
115BA for start-ups encourage start-ups, it
is recommended that
no turnover limit be
prescribed.
II. Alternatively,
instead of profit linked
deduction, start-ups
may also be provided
concessions in other
aspects, illustratively,
longer period for carry
forward of loss,
removing restriction
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under section 79,
annual advance tax,
annual compliance of
TDS statements, etc.
15. 43 80-IBA Tax holiday to housing It is suggested that: 41
projects Issues to be
addressed (a) The definition of
built-up area in clause
(a) to sub-section (6)
be linked to clause (e)
of sub-section (2)
which specifies
maximum size of
residential unit;
(b) The words "and
interior door" in the
definition of
"residential unit" be
replaced with "an
interior door" to
convey the real intent
(c) The period
within which project
has to be completed
may be extended from
three years to five
years from the date of
approval by the
competent authority.
16. 48 112(1)(c) Long-term capital The following 43
gains on shares of a alternative modes
company, not being a have been suggested:
company in which
public are a) The amendment
substantially should be made
interested, to be retrospective from
eligible for April 1, 2013; or
concessional rate of
tax@10% - b) A clarificatory
Amendment to be circular may be
made effective issued by the
retrospectively Central Board of
Direct Taxes
clarifying that
since the
amendment is only
clarificatory in
nature it will take
effect from April 1,
2013; or
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c) An Explanation
may be added after
the said clause
clarifying that for
the purposes of
this clause unlisted
securities shall
include shares of a
company not being
a company in
which the public
are substantially
interested.
17. 50 115BBDA Dividend received by 44
resident individuals,
HUFs and firms
receiving dividend in
excess of Rs.10 lakh to
be subject to tax @
10% in their hands
Issues to be addressed
17.1 50 115BBDA Clarification required It is suggested that 44
in respect of amount section 115BBDA be
of dividend sought to amended to reflect the
be taxed under this true legislative intent
section stated in the
Explanatory
Memorandum. The
amendment may be
effected in the
following manner by
adding the words
"received in excess
of Rs.10 lakh" in
clause (a) of sub-
section (1) after the
words "income by way
of such dividends" and
before the words "at
the rate of ten per
cent"
17.2 50 115BBDA Consequence of the It is recommended 45
new levy- Triple that new levy
taxation amounting to third
level taxation on
profits may be done
away with.
Alternatively, the
earlier system of
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taxation of dividend,
prior to 1997, namely,
tax in the hands of the
shareholder can be re-
introduced and levy of
Dividend Distribution
Tax in the hands of
the company may be
removed.
18. 52 115BBF Concessional rate of 45
tax @ 10% on income
from patent Issues to
be addressed
18.1 52 115BBF Benefit may be It is suggested that the 46
extended to other benefit of concessional
intellectual property rate of tax @ 10% of
rights income by way of
royalty in respect of a
patent developed and
registered in India be
also extended to other
intellectual property
rights like know-how,
copyright, trade-mark
etc.
18.2 52 115BBF Benefit restricted to It is recommended 46
`true and first inventor that the condition of
of the invention': joint patentee also
Benefit may be being `true and first
extended to assignee inventor' be omitted. If
of the true and first the intent is to allow
inventor in respect of benefit only to first
the right to make an person to register
application for a patent, the phrase
patent `being the true and
first inventor of the
invention' used in
context of joint person
may be substituted
with the phrase `being
the assignee of the
true and first inventor
in respect of the right
to make an application
for a patent'.
18.3 52 115BBF Benefit may be It is recommended 47
extended to capital that, in line with BEPS
gains arising on sale of Action 5, in addition to
patented products royalty income, this
concessional regime
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should be extended to
income on sale of
patented products
also.
18.4 52 115BBF Extension of benefit to It is recommended 48
royalty income earned that the concessional
from inventions for tax regime be
which patents are extended to royalty
applied under Patents income earned from
Act 1970 but patents which are
registration is awaited applied for and
awaiting registration
as well.
18.5 52 115BBF Other Issues which To make the regime 48
need to be addressed truly meaningful and
comparable to the
regimes which exist in
other jurisdictions, its
scope will need to be
extended to cover or
clarify the following:
a. Clarify that
condition of developed
and registered in India
is fulfilled once the
qualifying taxpayer
gets the patent
developed under his
control and direction
while some part of
expenditure may be
incurred outside India
or some part of R&D
activity (say, not more
than a certain
percentage, like 20%)
may be outsourced to
any other agency
which works as per
the direction and
control of the
taxpayer.
b. Clarify that
consideration received
for settling
infringement disputes
is also an alternative
form of royalty which
qualifies for the
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benefit.
c. To provide an
option to the taxpayer
to opt out of the
regime if the
expenditure and
allowances admissible
in computation of
royalty income is likely
to result in net
taxation below the
regime prescribed
rate.
d. Since almost all
comparable
jurisdictions extend
benefit to non-resident
permanent
establishment which
develops IP under the
circumstances
comparable to those
under which IP is
developed by the
resident. The benefit
may be extended to
non-resident having
permanent
establishment in
India.
e. In case of a
business
reorganisation in the
form of merger,
demerger etc., the
successor entity and
in case of death of the
patent owner, its legal
heir/inheritor of the
patent may be
considered as eligible
to claim the benefit
provided such
successor/legal heir
satisfies the condition
of being a resident of
India.
19. 56 115QA Rules to be prescribed a. It is suggested 49
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for determining the that a cut-off date for
amount received by applicability of rules
the company for issue may be prescribed. It
of shares Rules to be is recommended that
applicable for buy- it should be explicitly
back effected on or provided that the
after 01.06.2016 rules, once notified,
shall be applicable
only for computing
consideration received
on issue of shares in
respect of buy back
which takes place on
or after 1 June 2016.
b. Further,
necessary provision
should be
incorporated so that
the cost paid for
intermediate transfers
between the
shareholders post
issue of share by the
company is reduced
for the purpose of
calculating the buy-
back tax.
20. 59 115TCA Tax on income from The new regime 50
Securitisation Trust should be made
Tax Treatment in applicable for
respect of distributions on or
distributions in April after 1 June 2016.
and May 2016 to be
clarified
21. 60 115TD, Special provisions a. The provisions 50
115TF relating to tax on of Chapter XII-EB be
accreted income of appropriately aligned
certain trusts and with the intent
institutions Issues to expressed in the
be addressed Explanatory
Memorandum i.e., to
levy exit tax only in
case of voluntary
wind-up of activities or
dissolution or merger
with charitable/non-
charitable institutions
or conversion of
charitable institution
into non-charitable
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institution.
b. Without
prejudice to generality
of the above
suggestion, it is
suggested that, in case
of cancellation of
registration under
section 12AA, the
payment of tax should
be stipulated within
fourteen days from the
disposal of the appeal,
if any filed against the
cancellation order.
c. The amount on
which tax has been
levied in an earlier
year due to non-
compliance of the
provisions of section
11 to 13 should not be
included once again
while computing
accreted income for
levy of exit tax, since
the same would result
in double taxation.
22. 65 139(4)/(5) Time limit for filing It is suggested that: 52
belated return reduced
and enabling (i) Reference to
provisions for revising sub-section (1) of
belated return section 142 may be
introduced - Reference reinstated in new
to return in response section 139(4) i.e.,
to section 142(1) to be enabling provision to
included in Sections be made for filing of
139(4) and 139(5) belated return in
response to notice
under section 142(1).
(ii) Section 139(5)
may be amended to
provide for revision of
return filed in
response to notice
under section 142(1),
in line with the intent
expressed in the
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Explanatory
Memorandum.
23. 66 143(1) Increase in scope of It is suggested that 53
"Incorrect claim sub-clause (iv) may be
apparent from any appropriately
information in the reworded to disallow
return" New sub- expenditure indicated
clause (iv) to be in the report of audit
redrafted to include to be furnished under
specific reference to section 44AB but not
report under section taken into account in
44AB computing total
income in the return.
24. 81 194LBB Tax to be deducted at Appropriate 54
rates in force where amendment may be
the payee is a non- made to exclude
resident - Relief from distribution of exempt
tax withholding income from scope of
obligation of AIF in section 194LBB.
respect of distribution
of exempt income may
be provided
25. 86 206C TCS on sale of motor It is suggested to 54
vehicles of value above introduce an enabling
Rs. 10 lakhs- Enabling provision for filing of
provision for filing of declaration by buyer
declaration by buyer for non-applicability of
for non-applicability of TCS in case of use of
TCS in case of use of motor vehicle for own
motor vehicle for own transportation
transportation business. To
business may be safeguard the interests
inserted. of Revenue, such
facility may be
provided only if buyer
furnishes his PAN.
26. 87,89 211,234C Advance tax to be paid It is suggested that 55
in one instalment on section 211(1) be
or before 15th March suitably amended so
by assessees opting as to include section
for presumptive 44ADA within its
taxation under section ambit in the manner
44AD- Similar benefit similar to section
may be extended to 44AD as proposed in
assessees opting for sub-section (1)(b) in
section 44ADA the Finance Bill, 2016.
Further, consequential
amendment may also
be made in section
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234C in line with
amendment proposed
ín clause (b) of sub-
section (1) regarding
assessees opting for
section 44AD.
27. 88 220(2A) Time limit for The time limit may be 56
disposing waiver redundant unless
applications provided - there is a specific
Consequence of not provision for
passing the order consequences in case
within the time limit to of failure to pass the
be spelt out waiver order within
prescribed time limit.
Hence, it may be
provided that, if the
Principal
Commissioner/
Commissioner fails to
pass the order within
the time limit, interest,
penalty etc. should be
deemed to be waived.
28. 96 270A New section 270A to 56
be inserted to provide
for levy of penalty in
case of under
reporting income and
misreporting of
income- Issues to be
addressed
28.1 96 270A Penalty order under It is suggested that 56
section 270A be made section 246A may be
an order appealable suitably amended so
before Commissioner as to provide that
(Appeals)under section penalty order under
246A section 270A passed
by Assessing Officer
below the rank of
Commissioner may be
made appealable
under section 246A
before Commissioner
(Appeals).
28.2 96 270A Insertion of reference It is suggested that 57
to section 270A(8) section 273A may be
under section 273AA amended to include
reference to Section
270A (8) i.e., mis-
reporting of income
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under its purview.
28.3 96 270A Penalty for under- Without prejudice 58
reporting of income thereto, with regard to
the newly introduced
methodology of levying
penalty, the following
suggestions may be
considered.
· By way of
express requirement,
the Assessing Officer
may be required to
initiate the
proceedings prior to or
concurrently with the
closure of assessment
proceedings. Unless
this is done, there may
be initiation of penalty
several years after the
assessment
proceedings are
completed. The time
limit under section
275(c) is,
unfortunately, linked
with the date of
initiation of
proceedings.
· Unlike
Explanation 3 of
section 271(1)(c), in
the proposed
provision, where
return of income is not
furnished, penalty will
be calculated with
reference to tax on
income assessed
without considering
the impact of tax
deducted or advance
tax paid by taxpayer.
For example, in case
of a person who is not
required to furnish
return of income
under section 115A(5),
tax may have been
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paid, but, as per new
methodology, the
whole of the income,
as assessed, may be
considered as
unreported income.
Such would also be
the case in a situation
where there is no
revenue loss since the
whole of the tax was
already paid up and
yet, the return may
not have been
furnished.
· There may be
some concern on
resolution of the
formula specified in
the section if,
intimation under
section 143(1)(a) is not
available. It may be
good to clarify that, in
such a case, returned
income will be the
substituted basis.
· If immunity is
granted u/s. 270A, the
immunity holds valid
against initiation of
prosecution u/s.
276C. The reference
may also be made to
section 276CC which
can be invoked in a
case where there is
failure to furnish
return of income.
· As per proposed
section 270A(10), the
tax payable on under-
reported income shall
be amount of tax
calculated (a) in the
case of company, firm
or local authority, on
under-reported income
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The Institute of Chartered Accountants of India
S. No. Clause Section Particulars Suggestions Page
No No
as if the under-
reported income were
the total income and
(b) in case of any other
assessee, at the rate of
30% on under-
reported income. This
provides iniquitous
results when under-
reporting is of income
chargeable at lower
rate (say, long term
capital gains). In case
of company, firm or
local authority, the
penalty shall be
computed @ 20% of
under-reported LTCG
whereas in case of
other taxpayers, the
penalty shall be
computed @ 30% of
under-reported LTCG.
Further, benefit of
slab rate shall also not
be available to
individual/HUF
taxpayers.
Hence, to ensure
parity between
company/firm / local
authority and other
taxpayers, it is
recommended that the
tax should be
computed on slab rate
and/or lower rates as
applicable to nature of
under-reported
income.
28.4 96 270A Order to specify the It is suggested that 59
specific clause of suitable amendments
under-reported or be introduced or
misreported income alternatively
for levy of penalty administrative
under section 270A instructions may be
issued so that each
order contains the
specific fact of either
misreported income or
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The Institute of Chartered Accountants of India
S. No. Clause Section Particulars Suggestions Page
No No
under-reported income
or both along with the
mention of specific
clause of section
270A(2)/(9) against
each
disallowance/addition.
Such measures would
act as a suitable
control mechanism in
the absence of
recording of
satisfaction to initiate
penalty proceedings
and would also enable
assessee to opt for
proposed section
270AA providing for
immunity from penalty
and prosecution in
case income is not
misreported.
28.5 96 270A Clarification when tax It is suggested that 60
increases due to re- suitable clarification
characterisation of may be issued
income under a regarding the situation
different head of when tax amount is
income but assessed increased due to rate
income equals the increase (on account
returned income of, say, change of head
of income from long
term capital gain
income to profits and
gains of business or
profession or income
from other sources)
although the returned
income and assessed
income are exactly
same.
28.6 96 270A Mere making of a It is suggested that 61
claim which is not proposed section 270A
sustainable in law may be suitably
would not tantamount amended so that
to furnishing penalty is not
inaccurate particulars automatically
for attracting levy of attracted for merely
penalty making of a claim
which is not
sustainable in law.
29. 108 281B Provisional Need for clarification 61
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S. No. Clause Section Particulars Suggestions Page
No No
attachment of regarding reasons for
property- Treatment of depositing the amount
amount realized by in the personal deposit
invoking bank account of authority
guarantee- and not to refund the
Clarification required same to the taxpayer.
30. 193 Chapter The Income 62
IX Declaration Scheme,
2016- Issues to be
addressed
30.1 193 Chapter Clarity on definition of It is recommended to 62
IX the term `declarant' clarify whether non-
[Clause 179(a) of the residents who fulfil the
Finance Bill, 2016] other stated
conditions in clause
180(1) are also allowed
to avail opportunity
under the scheme.
30.2 193 Chapter Impact of receipt of As per the proposed 62
IX notice, which bears no scheme, the
reference to the declaration cannot be
undisclosed income made by a person who
sought to be declared, has received a notice
on availment of this under section 142 or
scheme 143(2) or 148, etc. It is
possible that the
notice bears no
reference to the
undisclosed income
which is sought to be
declared. It may be
considered whether
eligibility should be
extended to a case
where the declared
income does not bear
any nexus with the
notice.
30.3 193 Chapter Immunity from other Immunity may be 63
IX Acts granted under other
laws, such as SEBI,
IPC etc.
30.4 193 Chapter No scrutiny or enquiry It is recommended 63
IX in relation to that suitable
declarations filed by clarification be made
the taxpayer in the scheme itself to
avoid any ambiguity.
30.5 193 Chapter Non-applicability of Under clause 193(e)(i), 63
IX scheme in cases where notice issued under
notice under section section 142 or sub-
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S. No. Clause Section Particulars Suggestions Page
No No
142 or section 143(2) section (2) of section
is issued 143 may be deleted as
no prior satisfaction is
recorded and mere
issue of notice cannot
be taken as non-
declaration of income
as held by judicial fora
in the past.
31. 198 Chapter The Direct Tax 65
X Dispute Resolution
scheme(DRS), 2016 -
Issues to be addressed
31.1 199 Chapter Clarification in case Clarification is needed 65
X where appeal is with regard to the
pending as on 29th availment of the Direct
February, 2016 but Tax Dispute
decided/adjudicated Resolution Scheme,
upon before the date 2016 in cases where
of filing of declaration appeal is pending as
on 29th February,
2016 but
decided/adjudicated
upon before the date
of filing of declaration
under the said scheme
by the assessee.
31.2 199 Chapter Declaration of tax The provision for levy 66
X payable of 25% penalty in case
where disputed tax is
more than rupees ten
lakh should be
dropped from clause
199 of the Bill.
31.3 199 Chapter Benefit of this scheme The proposed scheme 67
X should not be should cover appellate
restricted to CIT(A) forums [Commissioner
(Appeals), Tribunal,
HC, SC], either at the
instance of taxpayer or
at the behest of tax
authority. If this
provision is extended
to all such appeals,
pending litigation
before all such judicial
authorities will get
reduced.
31.4 199 Chapter Clarification is Clarification is needed 67
X required with regard with regard to this
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S. No. Clause Section Particulars Suggestions Page
No No
to applicability of this scheme's applicability
scheme in all in all retrospective
retrospective cases cases pending before
any authority
31.5 199 Chapter Issues pertaining to In order to encourage 68
X `Tax Arrears' and taxpayers to avail
`Specified Tax' and DRS, there is a need
issue to common to for clarity in respect of
`Tax Arrears' and certain issues which
`Specified Tax'. have been dealt with
in some detail in this
memorandum.
32. Income Computation It is suggested that 71
and Disclosure applicability of ICDS
Standards (ICDSs)- be postponed until the
Need for concerns of taxpayers
postponement of date are suitably
of application addressed.
Suggestions On International Taxation
33. 53 115JB Applicability of It is suggested that: 74
Minimum Alternate
Tax (MAT) on foreign (a) a suitable
companies Benefit amendment may be
may be extended to made providing that
foreign companies foreign companies
having permanent having permanent
establishment and establishment in India
covered under the and covered under the
presumptive tax presumptive tax
regime in India regime may be kept
outside the purview of
MAT.
(b) in order to
avoid any controversy,
it may be clarified that
in case of foreign
companies having PE
/ Place of Business in
India, the computation
of book profits should
be based on India
profits and not global
profits.
34. 85 206AA Exemption from It is suggested that 75
requirement of this amendment be
furnishing PAN under treated as
section 206AA to clarificatory.
certain non-residents
Request to treat the
amendment as
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The Institute of Chartered Accountants of India
S. No. Clause Section Particulars Suggestions Page
No No
clarificatory
35. New Chapter VIII of The proposal to 75
the Finance Bill, 2016 introduce levy in the
- Equalisation Levy- present form may be
Issues to be addressed reconsidered.
Particularly, after 1
April 2017, GAAR will
ensure that artificial
avoidance of taxable
presence is not likely
to remain tax
protected for the non-
residents.
36. Country By Country It is suggested that the 76
Transfer Pricing: applicability of the
Deferral of application said provisions be
for facilitating better postponed by one
understanding and year.
implementation
Post-Budget Memorandum 2016 (Direct Taxes) Page 27
The Institute of Chartered Accountants of India
POST BUDGET MEMORANDUM 2016
C. Detailed Suggestions
1. Paragraph E of Part III to the First Schedule Proposed
reduction of 1% in rate of taxation in case of company
assessees with total turnover/gross receipts of upto Rs. 5
crore Reduction in rate may be made applicable to
Firms/ Limited Liability Partnerships also
The Finance Bill, 2016 has proposed a tax rate of 29% of total
income to (domestic) company assessees provided its total turnover
or the gross receipts in the previous year 2014-15 does not exceed
five crore rupees. This proposed reduction in corporate tax rate is a
step in the direction of implementing the proposal in Finance
Minister's Budget Speech during the Union Budget 2014-15 on
10th July, 2014 wherein he had indicated reduction in rate of
corporate tax along with gradual phasing out of deductions &
exemptions.
It may be noted that the rate of tax applicable to firms including
limited liability partnerships is 30%. Most of the deductions and
exemptions where phasing out has been proposed by provision of
sunset clause as per the Finance Bill, 2016 are applicable to both
companies as well as firms/LLPs. Therefore, the benefit of
reduction of 1% in rate of tax may be passed on to such assessees
as well. Further, if the proposed rate of 29% is also made
applicable to firms and LLPs, it would facilitate ease of doing
business in any form and not particularly restrict such facility to
the small corporates.
Further, it may be noted that firms and LLPs are also incorporated
under a statute and are subject to certain compliance
requirements as provided in the Partnership Act, 1932 and Limited
Liability Partnership Act, 2008, respectively.
It is also suggested that the prescribed turnover of Rs 5 crore may
be considered for previous year 2015-16, being the previous year
immediately preceding the P.Y.2016-17, relevant to A.Y.2017-18.
Suggestion
It is suggested that the benefit of reduction of rate of tax to
29% of total income for small domestic companies may also be
Post-Budget Memorandum 2016 (Direct Taxes) Page 28
The Institute of Chartered Accountants of India
extended to firms and Limited Liability Partnerships as well
since most of the deductions and exemptions phased out as
proposed by sunset clause of Finance Bill, 2016 are applicable
to both companies as well as firms/LLPs and so as to provide
a level playing field amongst these forms of business.
Further, the limit of Rs 5 crore for determining the eligibility to
avail the reduced rate may be with reference to P.Y.2015-16,
being the previous year immediately preceding the current
previous year, namely, P.Y.2016-17, relevant to A.Y.2017-18.
2. No provision in the Finance Bill, 2016 to give effect to
the proposal contained in para 127 of Hon'ble Finance
Minister speech to reduce the period of holding for
availing benefit of long-term capital gains in case of
unlisted companies from three to two years
The Honorable Finance Minister, in para 127 of his Budget Speech
[Union Budget 2016-17] proposed that the period for getting benefit
of long term capital gain regime in case of unlisted companies is
proposed to be reduced from three to two years.
However, there is no proposal in the Finance Bill, 2016 to give
effect to the reduction in the period of holding. This appears to be
only an inadvertent omission. An appropriate provision may be
incorporated to give effect to the said proposal before passing the
Finance Bill, 2016.
Suggestion
Appropriate provision to reduce the period of holding from
three to two years for availing benefit of long-term capital
gains in case of unlisted companies may be incorporated in
line with the proposal contained in the Budget Speech.
3. Clause 7(a)(ii) New clause (12A) of section 10 Proposed
40% exemption for withdrawal from National Pension
System (NPS) by any employee Benefit to be extended
to withdrawals by any person and not employees alone
The Finance Bill, 2016 has proposed to insert new clause (12A) in
section 10 which provides that any payment from National Pension
System (NPS) Trust to an employee on account of closure or his
Post-Budget Memorandum 2016 (Direct Taxes) Page 29
The Institute of Chartered Accountants of India
opting out of the pension scheme referred to in section 80CCD, to
the extent it does not exceed forty percent of the total amount
payable to him at the time of closure or his opting out of the
scheme, shall be exempt from tax. This is a very welcome proposal.
In this context, it is noteworthy that contribution to NPS can be
made by self-employed tax payers too. It is not restricted only to
salaried employees. However, the new clause providing for
exemption refers to withdrawals from NPS by an employee only.
Therefore, the language of the proposed clause may be amended to
provide for exemption in respect of withdrawals from NPS by an
individual, who may be a salaried employee or a self-employed
person.
Suggestion
It is suggested that the proposed clause (12A) of section 10
providing for exemption of 40% of payment from the NPS Trust
to "an employee" on closure of account or opting out of
pension scheme, may be modified to allow such exemption to
payment from the NPS Trust to "an individual", since
exemption under the said clause is available in respect of
withdrawals from NPS by self-employed individuals also.
In effect, the substitution of the words "an employee" in the
said clause by "an individual" would help to bring within its
fold, exemption to self-employed individuals as well.
4. Para 167 of Finance Minister's speech Section 14A
Amendment in Rule 8D proposed Further amendment
required in section 14A so that the said section is not
made applicable to dividend income exempt under
section 10(34) since the same has been subject to
dividend distribution tax in the hands of the company
An important issue on section 14A which needs to be addressed, is
the applicability of the said section to dividend income which is
exempt under section 10(34). The said issue is also raised in the
Report of the Income Tax Simplification Committee headed by
Justice R V Easwar where it is acknowledged that dividend under
the prevailing scheme suffers economic taxation on account of levy
of DDT on the company.
Post-Budget Memorandum 2016 (Direct Taxes) Page 30
The Institute of Chartered Accountants of India
The report clearly conveys that the dividend income which suffers
economic taxation in the form dividend distribution tax should be
kept out of the purview of section 14A.
Suggestion
It is suggested that the provisions of section 14A may not be
made applicable to dividend income exempt under section
10(34) since it has already suffered an economic tax in the
form of dividend distribution tax. Likewise, section 14A may
not be made applicable to any other income which has been
subject to economic tax like dividend. The said change may
be brought by insertion of a suitable proviso in this regard.
5. Clause 15 Section 35 Weighted Deduction for
contribution to Scientific Research and expenditure on
scientific research to be phased out Weighted
deductions to be continued for providing impetus to
scientific research and development in India
In respect of contribution to approved scientific research
association, approved university, college or other institution,
contribution to an approved scientific research company,
contribution to an approved research association or university or
college or other institution to be used for research in social science
or statistical research, any sum paid to a National Laboratory or a
specified person for the purpose of approved scientific research
programme, expenditure incurred by a company, engaged in the
business of Bio-technology or in the business of manufacture or
production of any article or things on in-house research and
development facility as specified in the above section, weighted
deduction ranging from 125% to 200% is allowed.
It is proposed in the Bill that in cases where the weighted
deduction is currently more than 150%, the same is proposed to be
reduced to 150% with effect from P.Y.2017-18 and 100% with
effect from P.Y.2020-21. Further, in cases where the weighted
deduction is less than 150%, it is proposed to be reduced to 100%
from P.Y.2017-18.
Suggestion
Scientific research is the lifeline of business in all countries of
the world. Indian residents are paying huge sums by way of
technical services, fees to foreign technicians to upgrade their
Post-Budget Memorandum 2016 (Direct Taxes) Page 31
The Institute of Chartered Accountants of India
products and give the customers what latest technology gives
globally. Like make in India, ease of doing business and
encouragement to start up initiatives of the government,
innovation & scientific research initiative should be given
equal weightage.
If In-house research is encouraged, outgo on account of FTS
will reduce and this will help indigenous businesses to grow.
Withdrawal of weighted deduction in respect of scientific
research expenditure will be a retrograde step.
Therefore, it is suggested that weighted deductions to various
modes of Scientific Research expenditure allowed at present to
be continued.
6. Clause 17 - Section 35AC- Deduction in respect of
Expenditure on Eligible Projects to be withdrawn
Deduction to continue to provide impetus to rural sector
and weaker sections of the economy
Any expenditure incurred on any project or scheme for promoting
the social and economic welfare of the society or for the upliftment
of the public, shall be allowed 100% deduction on such
expenditure. Rule 11K of the Income-tax Rules, 1962 provides the
list of projects which are eligible for deduction under section 35AC
of the Act.
The projects as mentioned in Rule 11K are for the development of
the economically and socially weaker section of the society.
It is proposed in the Bill that no deduction shall be available on
any expenditure incurred on certain eligible social development
project or scheme from AY 2018-19 and onwards.
Corporates contribute huge sums for this cause under the CSR
schemes. The whole initiative for the rural development and the
upliftment of the poor may take a backseat, if no deduction is
allowable in computing the income.
Suggestion
The expenditure incurred on eligible projects or schemes are
for the development of the backward and weaker sections
thereby focusing on development of rural areas.
Post-Budget Memorandum 2016 (Direct Taxes) Page 32
The Institute of Chartered Accountants of India
Further, all the projects are approved by the National
Committee which is set up by the Central Government to
ensure that the funds are utilized for the said purpose.
Therefore, this deduction which is serving the purpose for
which it was enacted so well, should be continued to be
allowed.
7. Clause 25 and 26 Section 44AB Consequential
amendments due to amendment proposed in section
44AD - Clarification for assessees with gross receipts
exceeding one crore rupees but less than two crore
rupees regarding maintenance of books of account
The Finance Bill, 2016 has proposed an amendment to section
44AD, by increasing the threshold limit there under from "one
crore rupees" to "two crore rupees", thereby providing relaxation
from the requirement of maintaining books of accounts for eligible
businesses with total turnover or gross receipts in the previous
year not exceeding an amount of two crore rupees.
Correspondingly, clause (a) of section 44AB requires every person
carrying on business to get his accounts of such previous year
audited by an accountant if his total sales, turnover or gross
receipts as the case may be in business exceed or exceeds one
crore rupees. There is no amendment proposed in the said clause
(a) of section 44AB. Resultantly, there appears to be some
inconsistency between the provisions of section 44AD.
Suggestion
It is therefore suggested that clause (a) of section 44AB be
appropriately modified to increase the threshold limit
specified thereunder from rupees one crore to rupees two
crore, so as to avoid any ambiguity in interpreting the true
intent of law regarding maintenance of books of account and
audit of the same where the total turnover, gross receipts
exceed rupees one crore but does not exceed rupees two
crore.
8. Clause 26 Section 44AD Proposed deletion of proviso
to sub-section (2) providing for deduction of interest and
Post-Budget Memorandum 2016 (Direct Taxes) Page 33
The Institute of Chartered Accountants of India
remuneration paid to partners by firm from the
presumptive income under section 44AD Proviso to
remain to avoid genuine hardship to small and medium
firms
The amendment proposes to disallow deduction of expenditure in
the nature of salary, remuneration, interest paid to the partner as
per section 40(b) out of presumptive income. This amendment
would hit small and medium firms, especially running family
businesses. Taxing the entire income of the firm, without
deduction for partner's salary/interest paid within the permissible
limits set out in section 40(b), at flat rate of tax at 30% may hit the
small and medium firms badly and adversely affect their business.
This would be against the government's objective of facilitating ease
of doing business.
It is pertinent to mention here that the same issue had crept in the
past as well. While introducing presumptive income for firms in the
Finance Bill 1994, initially there was no provision providing for
deduction of interest and remuneration to firm assessees. However,
the said proviso was introduced vide Finance Act 1997, thereby
giving effect to the true intent of the law, and that too with
retrospective effect from 01-04-1994.
Suggestion:
For facilitating ease of doing business by small firms and
removing the genuine hardship of having to pay higher taxes
on their presumptive income on account of the proposed
denial of deduction in respect of remuneration paid to
partners within the limits set out in section 40(b), the proviso
to section to 44AD(2) may be retained. Similarly, separate
deduction may be allowed for professional firms as well in
respect of remuneration paid to partners under the proposed
new section 44ADA.
9. Clause 27 Proposed section 44ADA providing for special
provision for computing profits and gains of profession
on presumptive basis Issues and concerns arising there
from to be addressed
The Finance Bill, 2016 has proposed insertion of a new section
44ADA providing for special provision for computing profits and
gains of profession on presumptive basis. This measure would
Post-Budget Memorandum 2016 (Direct Taxes) Page 34
The Institute of Chartered Accountants of India
definitely help the specified professionals in payment as well as
compliances under the income-tax law.
9.1 Threshold limit of Rs 50 lakhs may be increased
The sub-section (1) of the proposed provision provides that:
"Notwithstanding anything contained in sections 28 to 43C, in
the case of an assessee, being a resident in India, who is
engaged in a profession referred to in sub-section (1) of section
44AA and whose total gross receipts do not exceed fifty
lakh rupees in a previous year, a sum equal to fifty per
cent. of the total gross receipts of the assessee in the
previous year on account of such profession or, as the case may
be, a sum higher than the aforesaid sum claimed to have been
earned by the assessee, shall be deemed to be the profits and
gains of such profession chargeable to tax under the head
"Profits and gains of business or profession".
The threshold limit of Rs 50 lakhs appears to be low.
Consequently, this provision may not achieve the intended
objective of providing relief to professionals in the small and
medium segment. Even the Income Tax Simplification Committee
headed by Justice R V Easwar recommended a threshold limit of
Rs 1 crore. This appears to be a more justifiable limit considering
the present economic conditions prevailing in the country.
Suggestion
It is suggested that the threshold limit of Rs 50 lakh may be
raised appropriately so that a sizable percentage of
professionals in the small and medium segment are covered
under the said provisions; which would ultimately lead to the
achievement of stated objective of introducing the new
provision.
9.2 Rate of estimated tax @ 50% too high
The rate of 50% appears to be on the higher side and may cause
very high tax incidence on such professionals particularly since the
scheme is intended to cover professionals with low gross
receipts/total turnover resulting in low margins due to nature of
work and high competition. This high rate may cause a lot of
Post-Budget Memorandum 2016 (Direct Taxes) Page 35
The Institute of Chartered Accountants of India
professionals not to opt for this proposed scheme thereby defeating
the ultimate objective of introducing this provision.
Considering the above reasons, the profit @ 50% is difficult to
achieve specially for intended professionals with low gross
receipts/total turnover. Also, the Income Tax Simplification
Committee headed by Justice R V Easwarji has recommended the
rate of 33.33% of the receipts as the income from profession.
Suggestion
It is suggested that the estimated rate of income @ 50% of the
total gross receipts may be reduced appropriately considering
the high cost of providing the services by specified
professionals specially the small tax payers having income
from profession.
10. Clause 28 Section 47(xiiib) - Conversion of company
into LLP Clarification required relating to additional
condition
LLP is a preferred form of organisation for smooth conduct of
business. Accordingly, section 47(xiiib) provides for an exemption
enabling smooth conversion, subject to compliance with the
conditions. There was a case for making the exemption more liberal
by relaxing the turnover limit which is one of the present
conditions. However, conversion will become all the more difficult
as a result of an additional condition which will deny exemption in
a case where the company was possessed of total assets worth Rs.
5 crores in any of the 3 years.
Without prejudice to the above, provision be made prospective to
apply to conversions initiated on or after 1st April 2016 so as to
protect cases of conversion which have already been initiated
before 31st March 2016 but accomplished post March 2016.
The expression "value of total assets appearing in the books of
accounts" is not defined and may create certain interpretational
issues such as whether status of assets is to be seen on balance
sheet date or even one day's presence during the year will be
considered if asset no longer exists with the assessee as on balance
sheet date. Also, whether `Miscellaneous Expense' as an item
reflected on balance sheet will constitute an asset, treatment of
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The Institute of Chartered Accountants of India
advance tax paid shown on asset side (with corresponding
provisions for tax on liability side), etc. are the other issues which
need to be addressed.
Suggestion
1. In view of the above, it is recommended that the condition of
asset base being less than Rs. 5 crores be rationalised.
2. Provision may apply prospectively to conversion proposals
initiated on or after 1 April 2016.
3. Also, the scope of the term `value of total assets as
appearing in the books of accounts' be clarified to provide
certainty and reduce litigation .
11. Clause 30 Section 50C - Option for adopting stamp
duty value on date of agreement Amendment to be
treated as clarificatory in nature
In relation to computing capital gains tax liability on transfer of
land or building, proposed amendment gives an option for
considering the stamp duty value as on date of agreement instead
of stamp duty value on date of registration, subject to part or whole
of the consideration being received by way of account payee cheque
or bank draft or ECS through bank account on or before the date
of agreement. The proposed amendment in section 50C is in line
with the similar provision already existing in section 43CA. This
provision was, therefore, long due to be incorporated in section
50C. The incorporation of similar provision in section 50C would
alleviate the genuine hardship faced by the taxpayers. It is
suggested that the amendment may be treated as clarificatory in
nature since it conveys the real intent of law to ensure equity in tax
treatment vis-à-vis section 43CA.
Suggestion
The amendment may be treated as clarificatory in nature.
Alternatively, a circular may be issued to achieve the same
result in pending assessments or appeals.
12. Clause 40 Section 80-IAB Phasing out of incentive
where development of SEZ begins on or after 1st April,
Post-Budget Memorandum 2016 (Direct Taxes) Page 37
The Institute of Chartered Accountants of India
2017 - Phasing out to be in respect of SEZs notified on
or after 1st April, 2017
In relation to section 80-IAB, providing for profit-linked incentive
for development of SEZ, proposed plan for phase out of incentives/
deduction prescribes a sunset date of 1 April 2017 (FY 2017-18)
w.r.t commencement of development. Determination of when
development has commenced could become extremely subjective
and litigation prone.
Suggestion
Since the qualifying period of deduction starts from year of
notification of SEZ, the phase out may also be with respect to
SEZs notified on or after 1 April 2017 instead of currently
proposed phase out with respect to commencement of
development on or after 1 April 2017.
13. Clause 42 Phasing out of incentive under section 80-IB
in respect of production of mineral oil and natural gas, if
the specified activity commences on or after 1.4.2017 -
Phasing out may be with reference to acquisition of new
blocks and commencing discovery process in respect of a
block already acquired
Sub-section (9) of section 80-IB, provides, inter alia, deduction of
100% of the profits for a period of seven consecutive assessment
years to an undertaking if it begins commercial production of
mineral oil on or after 1 April, 1997 and the provision applies to
blocks licensed under a contract awarded up to 31st March, 2011
or if it is engaged in commercial production of natural gas blocks
licensed under NELP VIII and begins commercial production of
natural gas on or after 1 April, 2009.
The Finance Bill, 2016 proposes not to allow the deduction to an
undertaking which begins commercial production of mineral oil or
natural gas on or after 1st April, 2017.
In this regard, it is noteworthy that many companies have acquired
blocks under the scheme eligible under section 80IB(9) by the
dates specified in the section. It is well known that the discoveries
in the blocks acquired take a very long time and the explorers have
to conduct discovery exercises for many years before they are
Post-Budget Memorandum 2016 (Direct Taxes) Page 38
The Institute of Chartered Accountants of India
successful in obtaining commercial production. Those who invested
in the blocks rightly believed that the deduction will be allowed if
the blocks were acquired under the eligible scheme and the
Government intends to allow the deduction for seven years from
the year in which commercial production begins.
The announcement of withdrawal of deduction for the assessees
commencing commercial production on or after 1 April, 2017 will
put the investors of the blocks to a disadvantage.
Suggestion
The sunset clause may be with reference to
acquisition of new blocks and for commencing discovery
process in the block already acquired. The sunset clause may
not be made applicable for commencing commercial
production of mineral oil or natural gas in the eligible blocks
in which discovery has already commenced before 1 April,
2017.
14. Clause 41 and 49 Section 80-IAC and 115BA Special
incentives to start-ups Issues to be addressed
14.1 Definition of "eligible start-up" to include
Partnership Firm and Limited Liability Partnership
The Finance Minister vide his Budget Speech, 2016 had made the
following statement about incentivizing start-ups in line with the
Make in India scheme:
"124. Startups generate employment, bring innovation and are
expected to be key partners in Make in India programme. I propose
to assist their propagation through 100% deduction of profits for 3
out of 5 years for startups set up during April 2016 to March 2019."
In this regard, clause (ii) of Explanation to proposed section 80-IAC
provides that "eligible start-up" means a company engaged in
eligible business which fulfills certain conditions.
The Finance Bill, 2016 has thus, extended the beneficial provisions
of start-ups only to Companies whereas the Start-up scheme of
Department of Industry Policy & Promotion for Ministry of
Commerce & Industry defines the term Start up as follows:
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"Startup means an Entity, incorporated or registered in India not
prior to five years, with annual turnover not exceeding INR 25 crore
...."
Where, the term Entity means Private Limited Company (under
The Companies Act, 2013) or a Registered Partnership Firm (under
The Indian Partnership Act, 1932) or Limited Liability Partnership
(under The Limited Liability Partnership Act, 2008)"
Suggestion
In light of above observations it is suggested that clause (ii) of
Explanation to proposed section 80IAC be amended to define
"eligible start-up" in line with the Start-up scheme where, the
term entity includes Private Limited Company (under The
Companies Act, 2013) or a Registered Partnership Firm (under
The Indian Partnership Act, 1932) or Limited Liability
Partnership (under The Limited Liability Partnership Act, 2008)
so as to provide ease of running of business to startup firms
and LLP also..
14.2 Benefit of 100% deduction from the year in which
the eligible start-up commences its business
Sub-section (2) of proposed section 80-IAC reads as follows:
"(2) The deduction specified in sub-section (1) may, at the option of
the assessee, be claimed by him for any three consecutive
assessment years out of five years beginning from the year in which
the eligible start-up is incorporated."
If the benefit of deduction is provided from the year in which the
eligible start-up is incorporated it would result in much avoidable
creation of new companies and encourage the formation of various
paper/shell companies. To avoid such mis-ultilisation of the
incentive, the benefit may be made available from the year of
"commencement of business".
Suggestion
It is suggested that sub-section (2) of proposed section 80IAC
be appropriately amended to give the benefit of 100%
deduction from the year in which the eligible start-up
commences its business as against "year of incorporation" to
avoid creation of paper/shell companies.
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14.3 Profit linked holiday for start-ups
Profit linked holiday for start-ups will not provide any meaningful
benefit to start ups since most of them do not make profits in
initial years.
Also, the condition that turnover of such start up should not
exceed Rs. 25 Crores till 2020-21 is prone to different
interpretations. The intention seems to be to convey that a start-up
which had lesser turnover in any one or more year may be
considered as an eligible start-up. This may, however, be wrongly
interpreted to mean that the exemption will be denied to a start-up
which is able to secure the turnover limit in any of the years. This
may discourage the start-ups from expanding itself. There is also
uncertainty whether the exemption secured in the earlier year will
be forfeited if the turnover of the start-up reaches 25 crores in a
later year.
Most start-ups may not have meaningful income in the initial
period. There could be loss incurred in the initial period.
Suggestions
I. In order to encourage start-ups, it is recommended that
no turnover limit be prescribed.
II. Alternatively, instead of profit linked deduction, start-
ups may also be provided concessions in other aspects,
illustratively, longer period for carry forward of loss, removing
restriction under section 79, annual advance tax, annual
compliance of TDS statements, etc.
15. Clause 43 - New Section 80-IBA - Tax holiday to housing
projects Issues to be addressed
Section 80-IBA provides for 100% deduction of the profits of an
assessee developing and building affordable housing projects if the
housing project is approved by the competent authority before 31st
March, 2019 subject to certain conditions. The concerns arising
from these conditions are as follows:
Built-up area definition to be linked to clause (e) of sub-
section (2) which specifies maximum size of residential unit: To
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qualify for deduction, as per sub-section (2), size of residential unit
in metro cities should not exceed 30 sq. m. and in other than
metro cities should not exceed 60 sq. m. However, sub-section (2)
does not draw reference to definition of "built-up area" given in
sub-section (6), which provides the manner of measuring size of
residential unit. In absence of a specific reference to "built-up
area", ambiguity arises on the manner in which size of residential
unit should be measured to decide eligibility.
Grammatical error in definition of "residential unit": The
definition reads as: `"residential unit" means an independent
housing unit with separate facilities for living, cooking and sanitary
requirements, distinctly separated from other residential units
within the building, which is directly accessible from an outer door
or through and interior door in a shared hallway and not by
walking through the living space of another household.' The
reference to "and interior door" appears to be grammatically
incorrect and may be rectified to read as "an interior door". This
makes the definition unambiguous and clear.
Completion period of 3 years: To qualify for deduction, as per
sub-section (2), the project should be completed within a period of
3 years from the date of approval by competent authority. The
period of 3 years is too short and may be unachievable for large-
scale projects. Considering the time lag involved in obtaining
regulatory approvals or due to factors beyond control of the
developer, the period may be extended to 5 years consistent with
proposed amendment enhancing time period in construction of
self-occupied property to 5 years to claim interest under Section
24(b).
Suggestion
It is suggested that -
(a) The definition of built-up area in clause (a) to sub-
section (6) be linked to clause (e) of sub-section (2)
which specifies maximum size of residential unit;
(b) The words "and interior door" in the definition of
"residential unit" be replaced with "an interior door"
to convey the real intent
(c) The period within which project has to be completed
may be extended from three years to five years from
the date of approval by the competent authority.
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16. Clause 48 Section 112(1)(c) - Long-term capital gains
on shares of a company, not being a company in which
public are substantially interested, to be eligible for
concessional rate of tax @10% - Amendment to be
made effective retrospectively
Section 112(1)(c)(iii) was introduced in the year 2012 to extend the
beneficial rate of tax at the rate of 10 percent, on long-term capital
gains (which was earlier only available to Foreign Institutional
Investors) to other non-resident investors including Private
Equity Investors.
It is now proposed to amend Section 112(1)(c)(iii) of the Act to
replace the word `unlisted securities' with `unlisted securities or
shares of a company not being a company in which the public are
substantially interested' with effect from FY 2016-17.
While proposing the amendment, it has been stated in the
Memorandum explaining the Finance Bill, 2016 that under the
existing provisions of Section 112(1)(c)(iii) of the Act, a view was
taken by some of the Courts that shares of a Private Company do
not constitute `Securities' under SCRA.
The amendment has been proposed to clarify that the section was
introduced with an intention to extend the benefit to LTCG arising
on shares of a company, being a company in which the public are
not substantially interested (i.e. private company) as well.
However the amendment is proposed to be applicable from AY
2017-18 onwards.
Although this amendment is proposed as a clarificatory
amendment to the existing section 112(1)(c)(iii) of the Act, to clarify
that the benefit of the section extends to private company as
well, the language of the proposed section purports as if the
amendment has been brought prospectively, with effect from AY
2017-18.
In case this amendment (though clarificatory in nature), would
apply prospectively, with effect from AY 2017-18, it would tend to
jeopardise the tax position adopted by the non-resident assessee
prior to April 1, 2016 i.e. who have been paying tax at the rate of
10 percent on long term capital gains on transfer of shares in a
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Private Company with effect from April 1, 2013 in conformity with
the intention of the law, when it was originally enacted.
As the intention of legislature is clearly to clarify the existing law,
amendment to the section with prospective effect would adversely
impact the non-residents, who have already undertaken the
transactions of sale of shares in a private company in the last few
years, with an understanding that this section applies to them.
Suggestion
In the light of the aforesaid, following alternative modes have
been suggested:
a) The amendment to section 112(1)(c)(iii) as proposed in
Finance Bill 2016 should be made retrospective with effect
from the year in which the amendment in this section was
introduced i.e. with retrospective effect from April 1, 2013;
or
b) A clarificatory circular may be issued by the Central Board
of Direct Taxes clarifying that since the amendment is only
clarificatory in nature it will take effect from April 1, 2013
i.e. AY 2013-14 and not AY 2017-18 as proposed in the
Finance Bill, 2016; or
c) Alternatively, rather than inserting phrases to carry out
requisite amendment within the sub-clause (c)(iii) to section
112(1), an Explanation may be added after the said clause
clarifying that for the purposes of this clause unlisted
securities shall include shares of a company not being a
company in which the public are substantially interested.
17. Clause 50 New Section 115BBDA Dividend received
by resident individuals, HUFs and firms receiving
dividend in excess of Rs.10 lakh to be subject to tax @
10% in their hands Issues to be addressed
17.1 Clarification required in respect of amount of
dividend sought to be taxed under this section
The Finance Bill, 2016 has proposed to insert new section
115BBDA providing for taxation of dividends received from
domestic companies in the hands of the specified resident
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assessees being an individual, Hindu undivided family or a firm, at
the rate of 10%. The proposed section would be applicable in case
the specified assessee's total income includes any income
exceeding ten lakh rupees, by way of dividends declared,
distributed or paid by a domestic company.
However, there appears to be an ambiguity regarding the amount
on which proposed tax would be levied, i.e. on the dividend amount
in excess of ten lakh rupees or the whole of dividend amount
received.
The confusion has arisen due to difference in language used in
Memorandum explaining the Provisions of Finance Bill, 2016 and
the Budget Speech as well as the language used in section
115BBDA in the Finance Bill, 2016.
Suggestion
It is suggested that section 115BBDA be amended to reflect
the true legislative intent stated in the Explanatory
Memorandum. The amendment may be effected in the
following manner by adding the words "received in excess
of Rs.10 lakh" in clause (a) of sub-section (1) after the words
"income by way of such dividends" and before the words "at
the rate of ten per cent"
17.2 Consequence of the new levy- Triple taxation
The proposal to tax dividend in the hands of the recipient results in
economic triple taxation viz. once as corporate tax on profits,
secondly as DDT in hands of the company and thirdly as tax on
dividends. The economic tax ultimately borne by resident
shareholders may be as high as 54%.
Suggestion:
It is recommended that new levy amounting to third level
taxation on profits may be done away with. Alternatively, the
earlier system of taxation of dividend, prior to 1997, namely,
tax in the hands of the shareholder can be re-introduced and
levy of Dividend Distribution Tax in the hands of the company
may be removed.
18. Clause 52 New Section 115BBF Concessional rate of
tax @ 10% on income from patent Issues to be
addressed
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18.1 Benefit may be extended to other intellectual
property rights
The Finance Bill, 2016 has proposed a new section 115BBF to tax
royalty income derived from worldwide exploitation of patents
developed and registered in India@ 10%.
It is a welcome proposal and would greatly boost the research and
innovation environment in the country. However, the proposed
provision provides the benefit of reduced rate of tax to only royalty
income derived from patents subject to specified conditions. This
may partly achieve the intended objective of the government behind
introduction of this proposal i.e. to encourage indigenous research
& development activities and to make India a global R & D hub,
research is the driver of innovation and innovation provides a
thrust to economic growth.
The current income tax law treats the other intellectual rights like
any know-how, copyright, trade-mark, license, franchise or any
other business or commercial right of similar nature or information
or technique likely to assist in the manufacture or processing of
goods or provision for services in the same vein as patent. Hence,
there appears to be no reason not to extend the benefit of proposed
section 115BBF to income from other intellectual property rights.
In particular, it needs mention that jurisdictions like Ireland,
Luxemburg extend benefit by specifically covering software within
the list of qualifying assets though; commercially it enjoys
protection under Copyright Act and not under Patent Act.
Suggestion
It is suggested that the benefit of concessional rate of tax @
10% of income by way of royalty in respect of a patent
developed and registered in India be also extended to other
intellectual property rights like know-how, copyright, trade-
mark etc.
18.2 Benefit restricted to `true and first inventor of the
invention': Benefit may be extended to assignee of the
true and first inventor in respect of the right to make an
application for a patent
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The benefit of proposed provision is restricted to `true and first
inventor of the invention'. As per proposed provision, even a person
who is jointly registered with `true and first inventor' should be
`true and first inventor'.
In view of following features under the Patent law, the benefit of the
provision may be denied to firms/LLPs/companies who register the
patents jointly with true and first inventor who may be an
employee even though they may have incurred significant
expenditure for development of the patent and they are first
economic owners of such patent.
Under the Patents Act, following persons can apply for patent (a) a
person claiming to be true and first inventor of the invention (b) an
assignee of the true and first inventor in respect of right to make
an application and (c) legal representative of a deceased person
who immediately before his death was entitled to apply.
It is also settled under the Patent Act that a company or firm
cannot claim to be `true and first inventor'. They can only apply as
assignee of true and first inventor.
Similarly, whether an invention made by employee should belong
to employer depends upon contractual relations, express or
implied. It is possible that, absent any contractual obligation, an
employee may apply for an invention in his own name even though
he developed the invention in the course of employment and by
using employer's resources.
Suggestion
It is, hence, recommended that the condition of joint patentee
also being `true and first inventor' be omitted. If the intent is to
allow benefit only to first person to register patent, the phrase
`being the true and first inventor of the invention' used in
context of joint person may be substituted with the phrase
`being the assignee of the true and first inventor in respect of
the right to make an application for a patent'.
18.3 Benefit may be extended to capital gains arising on
sale of patented products
The taxpayer may exploit its Intellectual Property by outright
transfer which has no differential impact merely because for one
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assessee the amount is assessable as business income whereas for
other it is assessable as capital gains income. There is no reason to
exclude amount which is chargeable as capital gains in the hands
of the taxpayer.
Suggestion
It is recommended that, in line with BEPS Action 5, in addition
to royalty income, this concessional regime should be
extended to income on sale of patented products also.
18.4 Extension of benefit to royalty income earned from
inventions for which patents are applied under Patents
Act 1970 but registration is awaited
The commercial exploitation of invention starts even before it is
formally registered as a `patent' under the Patents Act. The Patents
Act recognises that even the right to apply for patent can be
assigned. As per the proposed provision, royalty from a patent
which is `registered' alone will qualify for the new regime. If royalty
income is earned when patent application is filed but registration is
awaited, there may be denial of the benefit.
Suggestion
It is recommended that the concessional tax regime be
extended to royalty income earned from patents which are
applied for and awaiting registration as well.
18.5 Other Issues which need to be addressed
Some of the conditions for availing the benefit of concessional tax
regime is that the patent should be developed and registered in
India, the patentee should be a resident and income should be in
the nature of royalty.
Suggestions
To make the regime truly meaningful and comparable to the
regimes which exist in other jurisdictions, its scope will need
to be extended to cover or clarify the following:
a. Clarify that condition of developed and registered in India is
fulfilled once the qualifying taxpayer gets the patent developed
under his control and direction while some part of expenditure
may be incurred outside India or some part of R&D activity
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(say, not more than a certain percentage, like 20%) may be
outsourced to any other agency which works as per the
direction and control of the taxpayer.
b. Clarify that consideration received for settling infringement
disputes is also an alternative form of royalty which qualifies
for the benefit.
c. To provide an option to the taxpayer to opt out of the regime if
the expenditure and allowances admissible in computation of
royalty income is likely to result in net taxation below the
regime prescribed rate.
d. Since almost all comparable jurisdictions extend benefit to
non-resident permanent establishment which develops IP
under the circumstances comparable to those under which IP
is developed by the resident. The benefit may be extended to
non-resident having permanent establishment in India.
e. In case of a business reorganisation in the form of merger,
demerger etc., the successor entity and in case of death of the
patent owner, its legal heir/inheritor of the patent may be
considered as eligible to claim the benefit provided such
successor/legal heir satisfies the condition of being a resident
of India.
19. Clause 56 Section 115QA - Rules to be prescribed for
determining the amount received by the company for
issue of shares Rules to be applicable for buy-back
effected on or after 01.06.2016
As per the proposed amendment to Explanation (ii) to section
115QA(1), (to be effective from 1st June 2016), consideration
received by company on issue of shares to be bought back is to be
determined as per the Rules to be prescribed. There is lack of
clarity as to cut-off date for applicability of these rules. An issue
arises as to whether these rules can be applied only for buy- back
of shares taking place after 1st June 2016, or whether the same
can be applied even for buy-back of shares prior to 1st June 2016.
Suggestion
a. It is suggested that a cut-off date for applicability of rules may
be prescribed. It is recommended that it should be explicitly
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provided that the rules, once notified, shall be applicable only
for computing consideration received on issue of shares in
respect of buy back which takes place on or after 1 June
2016.
b. Further, necessary provision should be incorporated so that
the cost paid for intermediate transfers between the
shareholders post issue of share by the company is reduced
for the purpose of calculating the buy-back tax.
20. Clause 59-Section 115TCA- Tax on income from
Securitisation Trust Tax Treatment in respect of
distributions in April and May 2016 to be clarified
The Finance Bill, 2016 proposes to transition securitisation trusts
from distribution tax regime to complete pass through regime (with
TDS on distributions). However, the cut-off date between old and
new regime is not clear. Distribution Tax applies for distributions
upto 31 May 2016 whereas new regime for complete-pass through
(with TDS) applies from A.Y. 2017-18. This raises ambiguity on
whether distributions made between April, 2016 to May, 2016 are
covered under old regime or new regime.
Suggestion
The new regime should be made applicable for distributions
on or after 1 June 2016
21. Clause 60 Proposed Sections 115TD to 115TF Special
provisions relating to tax on accreted income of certain
trusts and institutions Issues to be addressed
As per the intent expressed in Explanatory Memorandum, new
Chapter XII-EB is proposed to be inserted to provide for levy of
additional income tax in case of conversion into, or merger with,
any non-charitable form or on transfer of assets of a charitable
organisation on its dissolution to a non-charitable institution.
However, sub section (3) deems such conversion to have taken
place if registration granted to a trust under section 12AA is
cancelled. The process of `conversion' includes a case where
registration of charitable trust is cancelled under section 12AA.
There may be host of grounds including inadvertent defaults of
non-compliance with section 13(1) which can be a ground for
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invoking cancellation under section 12AA. This neither indicates
intent to convert property into a non-charity nor a case where the
charitable objects are abandoned. In fact, the order cancelling
registration under section 12AA is appealable and there is a
possibility of reversal of such order at the appellate stage.
Further, sub section (5) requires payment of tax within fourteen
days of the cancellation of registration under section 12AA, which
may cause hardship in genuine cases. There are a number of
judgements where the orders of cancellation of registration have
been struck down subsequently in appellate proceedings. In such
circumstances, requiring the trust to pay the tax and interest,
when an appeal is pending, may not be justifiable.
The levy of exit tax may result in double taxation in cases where a
whole or part of the amount, may have been assessed to tax in
earlier years. For instance, trust may have suffered tax on account
of non-compliance of provisions of section 11 or section 13.
Accordingly, the amount on which tax has been levied in an earlier
year should not be included once again while computing accreted
income for levy of exit tax.
Suggestions
a. The provisions of Chapter XII-EB be appropriately aligned with
the intent expressed in the Explanatory Memorandum i.e., to
levy exit tax only in case of voluntary wind-up of activities
or dissolution or merger with charitable/non-charitable
institutions or conversion of charitable institution into
non-charitable institution.
b. Without prejudice to generality of the above suggestion, it is
suggested that, in case of cancellation of registration under
section 12AA, the payment of tax should be stipulated within
fourteen days from the disposal of the appeal, if any filed
against the cancellation order. Accordingly, the proposed
section 115TD (5) be reframed to include the following:
"The principal officer or the trustee of the trust or the
institution, as the case may be, and the trust or the institution
shall also be liable to pay the tax on accreted income to the
credit of the Central Government within fourteen days from,--
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(i) the date the order for disposing of appeal is
received by the assessee in case where the
relevant cancellation order is the subject matter of
an appeal to the Appellate Tribunal under section
253."
c. The amount on which tax has been levied in an earlier year
due to non-compliance of the provisions of section 11 to 13
should not be included once again while computing accreted
income for levy of exit tax, since the same would result in
double taxation.
22. Clause 65 - Section 139(4) and 139(5) Time limit for
filing belated return reduced and enabling provisions for
revising belated return introduced - Reference to return
in response to section 142(1) to be included in Sections
139(4) and 139(5)
Section 139(4) provides that a person who has not furnished a
return within the time allowed to him under sub-section (1), or
within the time allowed under a notice issued under sub-section
(1) of section 142, may furnish the return for any previous year at
any time before the expiry of one year from the end of the relevant
assessment year or before the completion of the assessment,
whichever is earlier.
Section 139(5) provides that if any person, having furnished the
return under sub-section (1), or in pursuance of a notice issued
under sub-section (1) of section 142 discovers any omission or
any wrong statement therein, he may furnish a revised return at
any time before one year from the end of the relevant assessment
year or completion of assessment, whichever is earlier.
Clause 65 of the Finance Bill, 2016 has proposed to substitute
section 139(4) & 139(5) as follows:
"(4) Any person who has not furnished a return within the time
allowed to him under sub-section (1), may furnish the return
for any previous year at any time before the end of the
relevant assessment year or before the completion of the
assessment, whichever is earlier.";
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"(5) If any person, having furnished a return under sub-section
(1) or sub-section (4), discovers any omission or any wrong
statement therein, he may furnish a revised return at any time
before the expiry of one year from the end of the relevant
assessment year or before the completion of the assessment,
whichever is earlier.";
Reference to return filed in response to section 142(1) is
missing in new sub-section (4) and sub-section (5) of section
139.
As per the Explanatory Memorandum to the Finance Bill,
2016, the return which can be revised under section 139(5)
also includes a return furnished in response to notice issued
under sub-section (1) of section 142. However, reference to
notice under section 142(1) does not find place in the new
sub-section (5) in the Finance Bill, 2016.
Suggestion
It is suggested that-
(i) Reference to sub-section (1) of section 142 may be
reinstated in new section 139(4) i.e., enabling provision to
be made for filing of belated return in response to notice
under section 142(1).
(ii) Section 139(5) may be amended to provide for revision of
return filed in response to notice under section 142(1), in
line with the intent expressed in the Explanatory
Memorandum.
23. Clause 66Section 143(1) Increase in scope of
"Incorrect claim apparent from any information in the
return" New sub-clause (iv) to be redrafted to include
specific reference to report under section 44AB
The Finance Bill, 2016 has proposed to bring amendment by
inserting sub-clause (iv) to sub-section (1) of section 143 for
disallowing expenditure indicated in the "audit report" but not
taken into account in computing the total income in the return.
Since disallowance of expenditure is expressly and exhaustively
covered in the format of report under section 44AB, sub-clause (iv)
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needs to be appropriately redrafted to include specific reference to
the report under section 44AB.
Suggestion
It is suggested that sub-clause (iv) may be appropriately
reworded to disallow expenditure indicated in the report of
audit to be furnished under section 44AB but not taken into
account in computing total income in the return.
24. Clause 81 Section 194LBB Tax to be deducted at rates
in force where the payee is a non-resident - Relief from
tax withholding obligation of AIF in respect of
distribution of exempt income may be provided
Section 194LBB which provides for TDS on distributions by
category I and II AIFs, now requires deduction of tax at rates in
force where the payee is a non-resident. There is no exemption
from requirement to deduct tax even in respect of distribution of
exempt income like dividend or exempt LTCG. This leads to cash
trap for both residents and non-residents on exempt income.
Suggestion
Appropriate amendment may be made to exclude distribution
of exempt income from scope of section 194LBB.
25. Clause 86 Section 206C - TCS on sale of motor vehicles
of value above Rs. 10 lakhs- Enabling provision for filing
of declaration by buyer for non-applicability of TCS in
case of use of motor vehicle for own transportation
business may be inserted
TCS levy may have cascading impact in terms of compliance.
Compliance may be needed by each seller, including the
manufacturer, distributor and the dealer. The definition of `buyer'
excludes a buyer in retail sale of motor vehicle purchased by him
for `personal consumption'. However, the scope of such `personal
consumption' is not clear whether it includes use for business
purpose like transport, leasing or provision to employees as car
perquisite for official & personal use.
It is true that section 206C(1A) provides opportunity to buyer (who
is not a buyer in retail sale of motor vehicle for `personal
consumption') to furnish declaration for avoiding TCS but such
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declaration can be given only if the motor vehicle is to be used for
the purposes of manufacturing, processing or producing any article
or thing or for the purpose of generation of power and not for
trading purpose. On a plain reading of the provision, the
declaration cannot be given if the motor vehicle is to be used in
transport business or for transport purpose and/or leasing and/or
provision to employees.
Suggestion
It is suggested to introduce an enabling provision for filing of
declaration by buyer for non-applicability of TCS in case of use
of motor vehicle for own transportation business. To safeguard
the interests of Revenue, such facility may be provided only if
buyer furnishes his PAN.
26. Clause 87 and 89 Section 211 and 234C Advance tax
to be paid in one instalment on or before 15th March by
assessees opting for presumptive taxation under section
44AD- Similar benefit may be extended to assessees
opting for section 44ADA
The Finance Bill, 2016 has proposed to amend section 211 by
substituting sub-section (1) and providing, inter alia, that an
eligible assessee in respect of eligible business referred to in section
44AD opting for computation of profits or gains of business on
presumptive basis, shall be required to pay advance tax of the
whole amount in one installment on or before 15th March of the
financial year.
The said benefit is not proposed in the newly introduced section
44ADA providing for presumptive taxation scheme for
professionals. Extension of onetime payment of advance tax on or
before 15th March of the Previous Year would further incentivize the
professionals to opt for the presumptive taxation. It would also
bring the assessees opting for section 44AD and 44ADA on the
same footing as regards the payment of advance tax is concerned.
The extension of the said benefit would also require consequential
amendment in section 234C in line with amendment proposed in
clause (b) of sub-section (1) there under regarding assessees opting
for section 44AD.
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Suggestion
It is suggested that section 211(1) be suitably amended so as
to include section 44ADA within its ambit in the manner
similar to section 44AD as proposed in sub-section (1)(b) in the
Finance Bill, 2016.
Further, consequential amendment may also be made in
section 234C in line with amendment proposed in clause (b) of
sub-section (1) regarding assessees opting for section 44AD.
27. Clause 88 Section 220(2A), 273A, 273AA Time limit
for disposing waiver applications provided - Consequence
of not passing the order within the time limit to be spelt
out
Provision incorporated in sections 220, 273A and 273AA requiring
disposal of wavier applications within twelve months of receipt of
application. However, there is no specific provision to address the
consequences, if authority does not pass waiver order within
stipulated period.
Suggestion
The time limit may be redundant unless there is a specific
provision for consequences in case of failure to pass the
waiver order within prescribed time limit. Hence, it may be
provided that, if the Principal Commissioner/ Commissioner
fails to pass the order within the time limit, interest, penalty
etc. should be deemed to be waived.
28. Clause 96- New section 270A to be inserted to provide for
levy of penalty in case of under reporting income and
misreporting of income- Issues to be addressed
28.1 Penalty order under section 270A be made an order
appealable before Commissioner (Appeals) under section
246A
The Finance Bill, 2016 has proposed new section 270A providing
for penalty in case of under-reporting and misreporting of income.
As per the proposed provisions in the Finance Bill, 2016, the said
penalty order under section 270A has not been made appealable
under section 246A i.e., no appeal would lie against the penalty
order under section 270A before the first appellate authority i.e.,
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Commissioner (Appeals). Although an amendment has been
proposed in section 253 providing for appeal to Tribunal against
such penalty order, no such amendment has been proposed in
section 246A.
In a case where the said penalty order is imposed by an Assessing
Officer below the rank of Commissioner, it is desirable that an
appeal may be filed against the same to Commissioner (Appeals). It
may be noted that the penalty order under the existing section 271
is an appealable order under section 246A. There appears to be an
inadvertent omission in not including an order under section 270A
as an order appealable before Commissioner (Appeals) under
section 246A.
Suggestion
It is suggested that section 246A may be suitably amended so
as to provide that penalty order under section 270A passed by
Assessing Officer below the rank of Commissioner may be
made appealable under section 246A before Commissioner
(Appeals).
28.2 Insertion of reference to section 270A(8) under
section 273AA
Section 270A(8) provides for levy of penalty of 200% in cases of
misreporting of income. It is pertinent to note that Section 273A of
the Income-tax Act, 1961 provides for reduction/ waiver of penalty
involving cases falling under clause (c) of sub-section (1) of
section 271 where penalty upto 300% of tax ought to be
evaded. However, there is no provision in section 273A for wavier
of penalty imposed under section 270A. This appears to be an
unintended omission.
It may also be noted that the proposed section 270AA has enabled
an assessee to make an application for immunity from penalty &
prosecution for cases involving under reported income under
section 270A. Similar remedy is not available for cases of
misreporting of income.
Suggestion
It is suggested that section 273A may be amended to include
reference to Section 270A (8) i.e., mis-reporting of income under
its purview.
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28.3 Penalty for under-reporting of income
There are certain concerns arising out of the provisions of new
section 270A, due to which it is likely that the implementation may
not yield the desired result and fresh litigation is likely to arise
while interpreting the new provision.
Suggestion
Without prejudice thereto, with regard to the newly introduced
methodology of levying penalty, the following suggestions
may be considered.
By way of express requirement, the Assessing
Officer may be required to initiate the proceedings
prior to or concurrently with the closure of
assessment proceedings. Unless this is done, there
may be initiation of penalty several years after the
assessment proceedings are completed. The time
limit under section 275(c) is, unfortunately, linked
with the date of initiation of proceedings.
Unlike Explanation 3 of section 271(1)(c), in the
proposed provision, where return of income is not
furnished, penalty will be calculated with reference
to tax on income assessed without considering the
impact of tax deducted or advance tax paid by
taxpayer. For example, in case of a person who is not
required to furnish return of income under section
115A(5), tax may have been paid, but, as per new
methodology, the whole of the income, as assessed,
may be considered as unreported income. Such
would also be the case in a situation where there is
no revenue loss since the whole of the tax was
already paid up and yet, the return may not have
been furnished.
There may be some concern on resolution of the
formula specified in the section if, intimation under
section 143(1)(a) is not available. It may be good to
clarify that, in such a case, returned income will be
the substituted basis.
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If immunity is granted u/s. 270A, the immunity
holds valid against initiation of prosecution u/s.
276C. The reference may also be made to section
276CC which can be invoked in a case where there
is failure to furnish return of income.
As per proposed section 270A(10), the tax payable
on under-reported income shall be amount of tax
calculated (a) in the case of company, firm or local
authority, on under-reported income as if the under-
reported income were the total income and (b) in case
of any other assessee, at the rate of 30% on under-
reported income. This provides iniquitous results
when under-reporting is of income chargeable at
lower rate (say, long term capital gains). In case of
company, firm or local authority, the penalty shall be
computed @ 20% of under-reported LTCG whereas in
case of other taxpayers, the penalty shall be
computed @ 30% of under-reported LTCG. Further,
benefit of slab rate shall also not be available to
individual/HUF taxpayers.
Hence, to ensure parity between company/firm /
local authority and other taxpayers, it is
recommended that the tax should be computed on
slab rate and/or lower rates as applicable to nature
of under-reported income.
28.4 Order to specify the specific clause of under-
reported or misreported income for levy of penalty under
section 270A
The newly proposed section 270A has done away with the undue
discretion in the hands of Assessing Officer by imposing penalty at
the rate of either 50% or 200% depending on whether the income is
under reported or misreported. Certain controls may be required in
the effective implementation of the proposed section.
In order to reduce the practice of Assessing Officers treating every
concealed income as misreported as well as the fact that the new
section does not require recording of satisfaction before imposition
of penalty proceedings (as was required under the erstwhile section
271), it is desirable that a suitable control mechanism may be put
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in place. Certain measures like making it mandatory for the
Assessing Officers to mention in the Order that every disallowance
or addition be specified as either under-reported or misreported.
Further, measures like specifying the exact clause from sub-
section (2) or (9) of section 270A ,in case of under-reporting or
misreporting of income respectively in the order would go a long
way in reducing disputes and litigation. The said measures would
also make it clear to the assessee in time whether he could opt for
immunity from penalty and prosecution under the proposed
section 270AA in case order specifies that he has not misreported
the income.
Suggestion
It is suggested that suitable amendments be introduced or
alternatively administrative instructions may be issued so that
each order contains the specific fact of either misreported
income or under-reported income or both along with the
mention of specific clause of section 270A(2)/(9) against each
disallowance/addition. Such measures would act as a
suitable control mechanism in the absence of recording of
satisfaction to initiate penalty proceedings and would also
enable assessee to opt for proposed section 270AA providing
for immunity from penalty and prosecution in case income is
not misreported.
28.5 Clarification when tax increases due to re-
characterisation of income under a different head of
income but assessed income equals the returned income
Another issue in this regard is that proposed section 270A is not
providing clarity in a situation when assessed income is
determined to be equal to returned income during the assessment
proceedings but tax amount increased due to change/increase in
tax rate. This may happen when a certain income returned by an
assessee as a long term capital gain but the said income is
assessed as income from other sources thereby leading to increase
in tax amount. At present, the different clauses under the sub-
section (2) and (9) of proposed section 270A does not cover the said
situation. It is not clear whether the said increase in tax amount
would be treated as under-reported income or misreported income.
Suggestion
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It is suggested that suitable clarification may be issued
regarding the situation when tax amount is increased due to
rate increase (on account of, say, change of head of income
from long term capital gain income to profits and gains of
business or profession or income from other sources) although
the returned income and assessed income are exactly same.
28.6 Mere making of a claim which is not sustainable in
law would not tantamount to furnishing inaccurate
particulars for attracting levy of penalty
Scope of penalty under proposed section 270A has been widened
and it would now include within its scope, claims made by the
assessee but disallowed by the Assessing Officer. Where no
information given in the return is found to be incorrect or
inaccurate, and the assessee has disclosed all material facts
relevant for assessment, he cannot be held guilty of furnishing
inaccurate particulars. This principle of law has been settled by
the Apex Court ruling in Reliance Petro Products' case. Therefore,
mere making of a claim which is not sustainable in law would not
tantamount to furnishing inaccurate particulars for attracting levy
of penalty. However, such cases are now proposed to be included
within the ambit of under reported income under the new section
270A and penalty would be attracted@50%.
Suggestion
It is suggested that proposed section 270A may be suitably
amended so that penalty is not automatically attracted for
merely making of a claim which is not sustainable in law.
29. Clause 108 Section 281B - Provisional attachment of
property- Treatment of amount realized by invoking bank
guarantee- Clarification required.
Section 281B empowers Assessing Officer to invoke bank
guarantee wholly or in part if demand raised on the assessee is not
paid within time limit provided in the demand notice served. Very
wide powers are conferred upon Assessing Officer. Mere non-
payment within notice period will empower Assessing Officer to
invoke bank guarantee. There is no clarity on the situation where
the application for stay of demand is pending before Assessing
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Officer or any higher authority or in case of automatic stay on
payment of 15% demand.
The section provides that the amount collected by invoking bank
guarantee is to be adjusted against demand payable and surplus, if
any, to be deposited in personal deposit account of the
Commissioner or Principal Commissioner in the branch of
prescribed banks. Given that section 281B(2) provides for
maximum period of attachment to be 2 years from the date of
attachment or 60 days from the date of assessment order,
whichever is later, reasons for depositing the amount in the
personal deposit account of authority and not to refund the same
to the taxpayer is not clear.
Suggestion
It is recommended to clarify the aforementioned issues
through appropriate amendments/circulars.
30. Chapter IX of the Finance Bill 2016 - The Income
Declaration Scheme, 2016- Issues to be addressed
30.1 Clarity on definition of the term `declarant' [Clause
179(a) of the Finance Bill, 2016]:
As per clause 179(1), declarant means a person making declaration
under clause 180(1). Clause 180(1) provides that any person can
make a declaration in respect of income chargeable to tax under
the Act subject to fulfilment of some conditions. However, Finance
Minister in Budget Speech stated that the scheme will be open to
domestic taxpayers.
Suggestion:
It is recommended to clarify whether non-residents who fulfil
the other stated conditions in clause 180(1) are also allowed to
avail opportunity under the scheme.
30.2 Impact of receipt of notice, which bears no
reference to the undisclosed income sought to be
declared, on availment of this scheme:
Clause 193(e)(i) provides that the Income Declaration Scheme
shall not apply in relation to any undisclosed income chargeable to
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tax under the Act where notice under sections 142/ 143(2)/ 148/
153A/ 153C has been issued in respect of an assessment year.
Suggestion:
As per the proposed scheme, the declaration cannot be made
by a person who has received a notice under section 142 or
143(2) or 148, etc. It is possible that the notice bears no
reference to the undisclosed income which is sought to be
declared. It may be considered whether eligibility should be
extended to a case where the declared income does not bear
any nexus with the notice.
30.3 Immunity from other Acts:
Clause 189 provides that declaration under Income Declaration
Scheme will not be used as evidence against the declarant for any
proceeding under the Act and Wealth tax Act. Clause 187 provides
immunity from Benami Transactions Prohibition Act, subject to
conditions.
Suggestion
Immunity may be granted under other laws, such as SEBI, IPC
etc.
30.4 No scrutiny or enquiry in relation to declarations
filed by the taxpayer:
The Finance Minister has, in his Budget Speech, stated that no
scrutiny or enquiry will be made in respect of the declarations.
However, no such provision has been made in Finance Bill 2016. A
notable concern is whether taxpayer will be called upon to explain
source of income / assets forming part of the declaration.
Suggestion:
It is recommended that suitable clarification be made in the
scheme itself to avoid any ambiguity.
30.5 Non-applicability of scheme in cases where notice
under section 142 or section 143(2) is issued
Para 160 of the Budget Speech 2016 reads as follows:
"160. I propose a limited period Compliance Window for
domestic taxpayers to declare undisclosed income or income
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represented in the form of any asset and clear up their past
tax transgressions by paying tax at 30%, and surcharge at
7.5% and penalty at 7.5%, which is a total of 45% of the
undisclosed income. There will be no scrutiny or enquiry
regarding income declared in these declarations under the
Income Tax Act or the Wealth Tax Act and the declarants will
have immunity from prosecution. Immunity from Benami
Transaction (Prohibition) Act, 1988 is also proposed subject to
certain conditions. The surcharge levied at 7.5% of
undisclosed income will be called Krishi Kalyan surcharge to
be used for agriculture and rural economy. We plan to open
the window under this Income Disclosure Scheme from 1st
June to 30th September, 2016 with an option to pay amount
due within two months of declaration."
As per sub-clause (e) of clause 193 of the Finance Bill 2016, the
provisions of this scheme shall not apply in relation to any
undisclosed income chargeable to tax under the Income-tax Act
for any previous year relevant to an assessment year prior to the
assessment year beginning on the 1st day of April, 2017--
(i) where a notice under section 142 or sub-section (2) of
section 143 or section 148 or section153A or section 153C
of the Income-tax Act has been issued in respect of such
assessment year and the proceeding is pending before the
Assessing Officer; or
(ii) where a search has been conducted under section 132 or
requisition has been made under section 132A or a survey
has been carried out under section 133A of the Income-tax
Act in a previous year and a notice under sub-section (2) of
section 143 for the assessment year relevant to such
previous year or a notice under section 153A or under
section 153C of the said Act for an assessment year relevant
to any previous year prior to such previous year has not been
issued and the time for issuance of such notice has not
expired; or
(iii) where any information has been received by the competent
authority under an agreement entered into by the Central
Government under section 90 or section 90A of the Income-
tax Act in respect of such undisclosed asset.
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Non-applicability of the scheme in cases where notice under
section 142 or section 143(2) has been issued does not seem
to be justified as there is no requirement to record prior
satisfaction before issuance of notice in such cases.
Suggestion
Under clause 193(e)(i), notice issued under section 142 or
sub-section (2) of section 143 may be deleted as no prior
satisfaction is recorded and mere issue of notice cannot be
taken as non-declaration of income as held by judicial fora in
the past.
31. Clause 198 New Chapter X of the Finance Bill 2016-The
Direct Tax Dispute Resolution scheme, 2016 - Issues to
be addressed
31.1 Clarification in case where appeal is pending as on
29th February, 2016 but decided/adjudicated upon
before the date of filing of declaration
The Hon'ble Finance Minister, vide his Budget Speech, Union
Budget 2016 had said the following about proposed Direct Tax
Dispute Resolution Scheme, 2016. The extract of his Speech is
given below:
"162.Litigation is a scourge for a tax friendly regime and
creates an environment of distrust in addition to increasing the
compliance cost of the tax payers and administrative cost for
the Government. There are about 3 lakh tax cases pending
with the 1st Appellate Authority with disputed amount being
5.5 lakh crores. In order to reduce this number, I propose a
new Dispute Resolution Scheme (DRS)
The said scheme would be applicable to "tax arrear" in respect of
appeal(s) pending before the Commissioner of Income-tax (Appeals)
or the Commissioner of Wealth-tax (Appeals) as on 29.02.2016.
"Tax Arrear" has been defined as the amount of tax, interest or
penalty determined under the Income-tax Act or the Wealth-tax
Act, 1957 in respect of such appeal(s). The pending appeal could be
against an assessment order or a penalty order.
As per clause 198 of the Finance Bill 2016, ``specified tax'' means a
tax--
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(i) the determination of which is in consequence of or validated
by any amendment made to the Income-tax Act or the
Wealth-tax Act with retrospective effect and relates to a
period prior to the date on which the Act amending the
Income-tax Act or the Wealth-tax Act, as the case may be,
received the assent of the President; and
(ii) a dispute in respect of such tax is pending as on the 29th
day of February, 2016;
This scheme is a welcome step however a clarification is needed
with regard to the availment of the Direct Tax Dispute Resolution
Scheme, 2016 in cases where appeal is pending as on 29th
February, 2016 but decided/adjudicated upon before the date
of filing of declaration under the said scheme by the
assessee.
Suggestion
It is suggested that clarification is needed with regard to the
availment of the Direct Tax Dispute Resolution Scheme, 2016
in cases where appeal is pending as on 29th February, 2016
but decided/adjudicated upon before the date of filing of
declaration under the said scheme by the assessee.
31.2 Clause 199 Declaration of tax payable
As per clause 199 of the Finance Bill 2016, the declarant under the
scheme would be required to pay-
(a) tax and interest,--
(i) in a case where the disputed tax does not exceed ten
lakh rupees, the whole of the disputed tax and the
interest on disputed tax till the date of assessment or
reassessment, as the case may be; or
(ii) in any other case, the whole of disputed tax, twenty-
five per cent of the minimum penalty leviable and
the interest on disputed tax till the date of
assessment or reassessment, as the case may be;
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(b) penalty, twenty-five per cent of the minimum penalty leviable
and the tax and interest payable on the total income finally
determined.
The issue is with regard to levy of penalty when the disputed tax
is more than rupees ten lakh. There is no logic in levying such
a penalty as cases above rupees ten lakh involves question of
law so automatic penalty shall not be leviable in such cases.
Suggestion
The provision for levy of 25% penalty in case where disputed
tax is more than rupees ten lakh should be dropped from
clause 199 of the Bill.
31.3 Benefit of this scheme should not be restricted to
CIT(A)
Clause 199 read with clause 198(h) of the Finance Bill 2016
provides that declaration can be filed for settlement of disputed
taxes only in respect of an appeal pending before CIT(A). There
is no reason for restricting this benefit to appeal pending
before the first appellate authority.
Suggestion
The proposed scheme should cover appellate forums
[Commissioner (Appeals), Tribunal, HC, SC], either at the
instance of taxpayer or at the behest of tax authority. If this
provision is extended to all such appeals, pending litigation
before all such judicial authorities will get reduced.
31.4 Clarification is required with regard to applicability
of this scheme in all retrospective cases
Clause 199 of the Bill relates to settlement of disputed taxes levied
due to retrospective amendment in the Income-tax Act, 1961 and
Wealth-tax Act, 1947. In such cases only tax is payable and no
interest or penalty is payable.
It appears that this provision is made with a view to settle the
disputed taxes levied due to retrospective amendment made in
section 9 by the Finance Act, 2012.
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Suggestion
Clarification is needed with regard to this scheme's
applicability in all retrospective cases pending before any
authority
31.5 Issues common to `Tax Arrears' and `Specified Tax'
a) Adjustment of past refunds due to declarant - If any
refunds are pending for the prior assessment years, DRS
should enable adjustment of past refunds due against the
amount determined payable under DRS instead of requiring
the taxpayer to pay afresh.
b) Refund of penalty or interest already paid earlier - DRS
empowers designated authority to waive penalty or interest
in certain circumstances. Taxpayer may have paid penalty or
interest in the past due to coercive measures to recover
outstanding demand. If immunity or waiver is granted for
penalty or interest due to resolution of underlying tax
dispute under DRS, DRS should provide for refund of any
penalty or interest which taxpayer may have already paid in
the past.
c) Adjustment of past dues against tax or interest A
suitable clarification is required on whether the amounts
already paid against outstanding demand up to date of
declaration should be first adjusted towards outstanding tax
or interest.
d) Instalment facility - Taxpayer may be granted facility to pay
the arrears in instalments in genuine cases at the discretion
of designated authority. If there is failure to pay as per
schedule, Taxpayer may claim benefit of scheme to the extent
of arrears discharged by him. Alternatively, the benefit may
be rolled back in full and refund may be granted; giving him
the opportunity to pursue matter in appeal.
e) Where scheme to be availed only for part of the issues:
It is quite possible that, by way of a compromise,
the taxpayer may also have to give up, amongst
the issues of some controversial nature, the
additions on which he may be very strong on
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merits. Requiring such an assessee to
necessarily deposit and bear and admit penalty
@25% of minimum penalty is not considered to
be fair. The provision is based on a pre-
judgement of the issue against the taxpayer. We
suggest that the collection may be restricted to
disputed tax and interest levy, as specified in the
provision.
In cases where a number of issues are disputed
in a single appeal pending before CIT(A) (or
ITAT/HC/SC, in case of `specified tax'),
clarification is needed as to whether the taxpayer
can opt for partial compromise by resolving some
of the issues under DRS while continuing to
litigate on the other issues.
If penalty or interest has been levied on multiple
issues and Taxpayer has filed a declaration only
in respect of some of the issues in appeal, a
clarification is required as to whether or not the
benefit of immunity or waiver, as the case may
be, would extend to all the issues in appeal. If
the immunity is available only on part of the
issues which are resolved consequent to
payment of taxes under DRS, the Taxpayer
should be allowed to keep the appeal alive and
agitate the other grounds in appeal.
f) Resolution of dispute between Designated Authority and
declarant Clarification is required as to the remedy
available in case the Designated Authority determines
amount payable by the declarant at a figure different from
amount worked out by declarant.
g) Rejection of declaration - DRS should mandate Designated
Authority to provide declarant sufficient opportunity of being
heard before rejecting the declaration.
h) Amendment of order Clarification is required as to
whether the Designated Authority can amend or rectify the
order certifying the amount payable under DRS, without
giving an opportunity of being heard.
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i) Vicarious liability - In case of a declarant who is a
company, it may be clarified that immunity extends to
persons having vicarious liability (for e.g. directors).
Issues pertaining to `Tax Arrears'
a) Coverage of penalty disputes An issue which needs to be
addressed is whether settlement of dispute for penalty is
restricted only to cases of concealment penalty or whether the
same extends to other penalties as well. Another issue pertains
to the quantum of amount payable under DRS, in the latter
case. These issues have to be suitably addressed.
b) Coverage of TDS disputes: Clarification is needed as to
whether appeal against an order under section 201 can be
settled under DRS as well as the manner in which the amount
payable under scheme in such a case is to be determined.
c) Impact on quantum appeal if penalty dispute is settled: In
case of standalone settlement of penalty appeal, taxpayer is
liable to pay tax and interest payable on total income finally
determined in addition to pay 25% of minimum penalty leviable.
The issue under consideration is whether quantum appeal
pending before Tribunal will become academic and be liable to
be withdrawn. If not, the position as regards refund of taxes in
case Tribunal decides quantum appeal in favour of Taxpayer
needs to be clarified.
Further, the status of department appeal filed to Tribunal
against CIT(A) order in quantum matter which is pending on the
date of settling penalty matter is another issue which needs to
be addressed. Consequent issue is whether payment of tax and
interest would be with respect to amount determined in order
giving effect to order of CIT(A).
Issues pertaining to `Specified Tax'
a) Expanding scope to department appeal - If taxpayer succeeds
at lower appellate level and gets refund; department appeal
pending before higher appellate authority as of 29 February
2016 cannot be settled by Taxpayer under DRS. Taxpayer may
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be interested in such cases because chances of succeeding at
higher appellate level are low (due to retrospective amendment)
and there is immunity from interest and penalty under DRS.
b) Waiver of interest - In the context of `specified tax' which
grants waiver of interest, a clarification is required as to the
kind of `interest' which can be waived. Interest may have been
levied under sections 234B and 220(2). As Taxpayers should be
insulated from all effects of retroactive amendments, ideally, the
scheme should empower designated authority to waive interest
levied under section 234B as well as 220(2).
c) Consequential effect - If dispute on `specified tax' is settled
under DRS, DRS may provide clarity on whether consequential
relief would be available by granting deduction of expenditure
under section 40(a)(i) or 40(a)(ia). The consequential relief may
extend to interest and penalty to the extent relating to
disallowance of expenditure.
Suggestion
In order to encourage taxpayers to avail DRS, there is a need
for clarity in respect of these issues.
32. Income Computation and Disclosure Standards (ICDSs)-
Need for postponement of date of application
Last year, the Income Computation and Disclosure Standards
(ICDSs) were notified via Notification No. 32/2015, dated
31.03.2015. The said Notification has come into force with effect
from 1st April, 2015, and hence is applicable to the assessment
year 2016-17 and subsequent assessment years. These standards
are applicable to the computation of income under the heads
"Profits and gains of business or profession" and "Income from
other sources". The preamble states that if there is any conflict
between the provisions of the Act and the ICDS, the latter will
prevail.
The standards contradict with the provisions of the Act and also
the decisions of High Courts and Supreme Court on the basis of
interpretation of provisions.
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ICDSs does not recognize the universally-accepted accounting
principle such as `prudence', materiality etc. Many settled positions
have undergone a change.
The concept of "prudence" as per Accounting Standard is that
anticipated profits are not recognized but known losses & liabilities
are provided on best estimate basis. However, as per ICDSs, any
expected loss shall not be recognized unless specifically required by
any other provisions of ICDSs (viz. marked to market losses on
foreign exchange fluctuations).
ICDSs leads to accelerated recognition of income and, as a result,
front-loaded tax payouts. For example, taxpayers earning income
by way of bank interest, interest on securities/bonds/deposits etc.
may have to recognize income on a "time basis" under the
provisions of ICDS IV. Earlier, income was recognized only when it
became due.
ICDS introduces new concepts which have been left undefined, for
instance, `reasonable cause' for change in accounting policy or
`reasonable certainty' for recognition of provisions and contingent
assets. These are highly subjective and hence prone to different
interpretations.
Taxpayers are already grappling with regulatory changes of the
Companies Act, 2013, Ind-AS and the proposed GST. The
Assessees and Industry should be allowed more time to deal with
another change of this nature. Even Income Tax Simplification
Committee headed by Justice R V Easwar felt that many of the
provisions of the ICDSs are capable of generating a legal debate
about which at present there is no clarity.
Although it has been clarified that ICDS are only for computation
of income and not for maintenance of books of accounts, the
deviations between ICDSs and Accounting Standards are such that
they require detailed computation and reconciliation which may, in
effect necessitate maintenance of separate records for tax
purposes.
ICAI feels that maintenance of separate records for tax purposes,
creates confusion, interpretation issues, multiplicity of records and
additional compliance burden which may outweigh the gains to be
obtained by the application of ICDSs. It has also been felt by the
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Income Tax Simplification committee that ICDSs deal only with the
method of accounting and at best, it brings timing difference on
recognition of expenditure or income as compared to the books of
account. Therefore, a detailed study of the implications of the
ICDSs is necessary before it is implemented. Further, the Income
Tax Simplification Committee also recommended that the
implementation of the ICDS be deferred by making a suitable
amendment under section 145(2).
Suggestion
It is suggested that applicability of ICDS be postponed until
the concerns of taxpayers are suitably addressed.
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Suggestions relating to International Taxation
33. Clause 53 Section 115JB - Applicability of Minimum
Alternate Tax (MAT) on foreign companies Benefit may
be extended to foreign companies having permanent
establishment and covered under the presumptive tax
regime in India
The Ministry of Finance has clarified that foreign company not
having a permanent establishment in India will be exempt from
MAT. An appropriate amendment has been proposed to be made in
the Act in section 115JB in this regard.
The Income-tax Act, 1961 contains various provisions which
provides for presumptive tax regime for non-residents (for example
Section 44BB).
Under the presumptive tax regime, foreign companies pay tax at
lower rate. Such foreign companies do form permanent
establishment in India even when their activities are confined to
the areas specified in the presumptive tax provisions. If such
foreign companies are subjected to MAT, the purpose for which the
beneficial concessional tax rate regime has been introduced is
specified in the relevant sections would be defeated.
MAT levy may be restricted to India profits
Companies not having PE or Place of Business in India are
proposed to be eligible for absolute exclusion from MAT levy.
However, in relation to foreign companies with presence in India,
who may or may not have separate India specific accounts, issue
may arise whether book profits should be computed based on
global profits or only with regard to India profits.
Suggestion
It is suggested that
(a) a suitable amendment may be made providing that
foreign companies having permanent establishment in
India and covered under the presumptive tax regime
may be kept outside the purview of MAT.
(b) in order to avoid any controversy, it may be clarified
that in case of foreign companies having PE / Place of
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Business in India, the computation of book profits
should be based on India profits and not global profits.
34. Clause 85 Section 206AA - Exemption from
requirement of furnishing PAN under section 206AA to
certain non-residents Request to treat the amendment
as clarificatory
The Hon'ble Finance Minister has, in para 176 of his Budget
Speech [Union Budget 2016-17] stated that non-residents without
PAN are currently subjected to a higher rate of TDS. Hence, he
proposed to amend the relevant provision to provide that on
furnishing of alternative documents, the higher rate will not apply.
The said beneficial provision appears to be clarificatory in nature
and hence, may be given effect to since the inception of section
206AA.
Suggestion
It is suggested that this amendment be treated as
clarificatory.
35. New Chapter VIII of the Finance Bill, 2016 - Equalisation
Levy-Issues to be addressed
The Finance Bill, 2016 has proposed to insert a new Chapter VIII
titled "Equalisation Levy" in the Finance Bill, 2016 to provide for an
equalisation levy of 6% of the amount of consideration for specified
services received or receivable by a non-resident not having
permanent establishment ('PE') in India, from a resident in India
who carries out business or profession, or from a non-resident
having permanent establishment in India. In other words, the
finance Bill, 2016 proposes a levy of 6% on consideration paid or
payable by an Indian resident carrying on business or profession,
or by an Indian permanent establishment of a non-resident to a
non-resident not having a permanent establishment in India, for
providing specified online advertisement services.
Certain issues arising from the same are as below:
The responsibility for payment is cast on resident payer to
deduct and deposit the levy. Interest and penalty have been
proposed for delay or failure of compliance. This would
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The Institute of Chartered Accountants of India
involve additional cost of compliance to Indian businesses. It
is an indirect levy.
The equalization levy is proposed to be a separate levy under
the Finance Bill, 2016 and will not be part of the Income-tax
Act, 1961. This results in defeating the option available to a
non-resident of choosing the more beneficial option between
the Treaty and the Income-tax Act, 1961.
Also, the non-resident may not be able to claim tax credit of
this levy in his country of residence, if the DTAA allows
foreign tax credit in respect of tax paid under the Act and not
in respect of similar taxes paid which are outside the ambit
of the Income-tax Act, 1961. It is recommended that the
provision be withdrawn or be enacted under Act.
Suggestion
In view of the issues detailed above, it is suggested that the
proposal to introduce levy in the present form may be
reconsidered. Particularly, after 1 April 2017, GAAR will
ensure that artificial avoidance of taxable presence is not
likely to remain tax protected for the non-residents.
36. Country By Country Transfer Pricing: Deferral of
application for facilitating better understanding and
implementation
The Finance Bill, 2016 has proposed to provide a specific reporting
regime in respect of CbC reporting and also the master file. It is
also proposed to include essential elements in the Act while
remaining aspects can be detailed in rules. The elements relating to
CbC reporting requirement and matters related to it are proposed
to be included through amendment of the Act in various relevant
sections.
Understanding the implications of these provisions and effective
implementation of the same will require a lot of efforts on the part
of the tax payers as well as Transfer Pricing Officer/Assessing
Officers. Also, the CBDT will be required to come out with detailed
rules and format to implement these provisions.
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Suggestion
It is suggested that the applicability of the said provisions be
postponed by one year.
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