PRE-BUDGET MEMORANDUM - 2019
DIRECT TAXES
AND
INTERNATIONAL TAXATION
THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA
NEW DELHI
The Institute of Chartered Accountants of India
INDEX
Sr. No. Suggestion Page No.
PART A Suggestions relating to the policy & provisions of Income-Tax Act, 1961
CHAPTER I PRELIMINARY
1. Section 2(42A) Reduction in holding period in case of immovable property, 3
being land or building or both, to qualify as long-term capital asset
Consequential amendments to be made in sections 54, 54B, 54D and 54F
CHAPTER III INCOMES WHICH DO NOT FORM PART OF
TOTAL INCOME
2. Section 10(12A) Extending the benefit of tax-free withdrawal from NPS to non- 5
employee subscribers under section 10(12A) Similar amendment may also be
made in section 10(12B)
3. Section 10(13) - Payment from approved superannuation fund 5
4. Section 10(23C) - Mandatory application of income by charitable trusts/ 6
institutions
5. Section 10(23C) - Annual Receipts 6
6. Section 10(23C) - Rationalisation of Provisions 7
7. Section 10(23FB) - Tax exemption for Alternative Investment Funds 8
Venture Capital Funds
8. Section 10(32) - Income of minors - to increase exemption limits 9
CHAPTER IV COMPUTATION OF TOTAL INCOME
9. Deduction to salaried assesses - Payment for notice period 11
PART D PROFIT AND GAINS OF BUSINESS AND PROFESSION
DETAILED SUGGESTIONS
10. Section 28(iiia) Sale of license 12
11. Section 28(iiid) Duty Entitlement Pass Book Scheme no more in 12
existence
12. Section 32 - Depreciation in case of slump sale 12
13. Section 32AC - Slump Sale and investment allowance 14
14. Section 35D - Amount paid for increase in authorized capital 16
15. Due date for crediting the contribution of employees to the respective 16
fund Section 36(1)(va) read with Section 2(24)(x)
16. Section 40(b)(v) Raise in allowable expenses in the form of 17
remuneration to working partner
17. Explanation 5 to Section 43(1) "building" to be replaced by "assets" 18
18. Section 43D - Taxability of interest on Non-Performing Asset 18
19. Section 44AD -Presumptive Income Some Issues 22
20. Benefit of presumptive taxation to LLP - Section 44AD 22
21. Section 44ADA - Special provision for computing profits and gains of profession on 23
presumptive basis Issues and concerns arising there from to be addressed
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a) Threshold limit of Rs 50 lakhs may be increased 23
b) Rate of estimated tax @ 50% too high 24
22. Section 44AE Clarification required w.r.t. `gross vehicle weight; or `unladen weight' 24
PART E CAPITAL GAINS
23. Limited Liability Partnership (LLP) - 26
(a) Merger and Amalgamation of Limited Liability Partnership to be Revenue Neutral
(b) Section 47 Insertion of clause (viab) to provide exemption in respect of transfer 26
of capital asset consequent to amalgamation of foreign companies - Consequent
exemption to be provided in respect of transfer of shares by resident shareholders
(c) Consequential amendment required in section 47(xiiib) 27
(d) Section 47(xiiib) - Conversion of company into LLP Clarification required 28
relating to additional condition
24. Business reorganizations - Section 47(x)/(xa) 29
25. Sections. 47(x) & (xa) and 49(2A) - Capital Gain on Conversion of Foreign Currency 29
Exchangeable Bonds (FCEB) and other Bonds & Debentures
26. Section 54EC - Time Limit for investment in specified bonds 30
27. Reference to the Valuation Officer - Section 55A 32
PART F INCOME FROM OTHER SOURCES
28. Definition of the term relative - Explanation to Section 56(2) (vii) 34
29. Section 56(2)(viii) reference to section 145A(b) be changed to 145B(1) 34
30. Section 56(2)(x) Certain exceptions to be provided w.r.t. conversion 35
31. Section 56(2)(x) read with sections 43CA, 50C, 50CA Issues to be addressed 35
CHAPTER VI AGGREGATION OF INCOME AND SET OFF OR CARRY FORWARD OF LOSS
32. Section 72A - Carry forward of losses in case of amalgamation or merger for service 38
industry
33. Section 78 Issue of carry forward and set off of losses of an LLP 38
34. Section 79 39
(a) Carry forward and set off of loss in case of eligible start-ups - Condition to be
further relaxed
(b) Insertion of third proviso in Section 79 - relief for change in shareholding of 40
subsidiaries pursuant to resolution plan
CHAPTER VIA DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME
PART B DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
35. Section 80C 44
36. Deduction in respect of interest on deposits in savings account - Section 80TTA 46
37. Section 80TTB Deduction in respect of interest on deposits in case of senior 46
citizens Request to extend the benefit by including interest on National Savings
Certificate within the ambit of section 80TTB
38. Section 80U Consequential amendments required due to the enactment of `The 47
Rights of Persons with Disabilities Act, 2016' w.e.f. 28.12.2016
CHAPTER VIII REBATES AND RELIEFS
39. Section 89 Interest u/s 234B/C to be charged after relief computed 49
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CHAPTER X SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX
40. Domestic Transfer Pricing [DTP] Sections 92, 92BA, 92C, 92CA, 92D & 92E 51
a) Arm's Length Price vs Ordinary Profits
b) Advance Pricing Agreements 51
c) Documentation Requirements 51
CHAPTER XII-A DETERMINATION OF TAX IN SPECIAL CASES
41. Section 115BBDA 53
(a) 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
Consequence of the new levy- Triple taxation
(b) Tax on certain dividends received from domestic companies 53
42. Section 115BBE Need to reconsider the high rate of tax 53
43. Section 115BBG - Income from transfer of carbon credits to be taxed @ 10% - 54
Inclusion in definition of income under section 2(24) and clarification regarding
tax treatment for prior assessment years
CHAPTER XII-B SPECIAL PROVISIONS RELATING TO CERTAIN COMPANIES
44. Rationalization of MAT rates Section 115JB 56
45. Section 115JB - Insertion of clause (iih) in Explanation 1 to section 115JB - 56
Downward adjustment of aggregate brought forward losses and depreciation u/s
115JB
46. Section 115JB -Minimum Alternate tax 58
47. Rationalization of provisions of MAT for short term capital gains 59
48. Section 115JB MAT implications for Ind AS compliant companies 59
CHAPTER XII-D SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED PROFITS OF
DOMESTIC COMPANIES
49. Section 115-O - DDT on deemed dividend u/s 2(22)(e) 61
50. Section 115-O - Grossing up of rate of dividend distribution tax 63
CHAPTER XII-DA SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED INCOME OF
DOMESTIC COMPANY FOR BUY-BACK OF SHARES
51. Section 115QA Effect on foreign investments 66
CHAPTER XII-EB SPECIAL PROVISIONS RELATING TO TAX ON ACCREDITED INCOME OF
CERTAIN TRUSTS AND INSTITUTIONS
52. a) Recovery provisions on trustees etc Section 115TD(5) 69
b) Section 115TD(5) - Period of 14 days insufficient 69
CHAPTER XIV- PROCEDURE FOR ASSESSMENT
53. Section 139(4) and 139(5) Time limit for filing belated return reduced - Reference 72
to return in response to section 142(1) may be included in Sections 139(4) and
139(5)
54. Section 139A Amendment / surrender of PAN 73
55. Section 139A need for certain persons to mandatorily have PAN 73
56. Section 142A- Estimation of value of asset by Valuation Officer 73
57. Section 271AAB - Need to simplify penal provisions 75
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58. Credit of Tax Collected at Source relating to earlier years (for which Assessments 75
are already over & time period mentioned in Section 155(14) has elapsed)
demanded by the Government authorities at a later date
CHAPTER-XVII COLLECTION AND RECOVERY OF TAX
PART B DEDUCTION AT SOURCE
59. Section 194A - Interest payments to NBFC 78
60. Section 193 - No tax withholding on `interest on securities' earned by a business 79
trust defined as per section 10(23FC)
61. Section 194H Request to increase TDS exemption limit to Rs 40,000 80
62. Section 194-IA- Issues 82
63. Section 194J - Fees for professional or technical services 82
64. Section 197A - Rationalizing TDS applicability on Merchant Discount Rate (`MDR') 83
65. Section 201 Limitation period for Non-resident 84
66. TDS on Recharge Vouchers 85
PART C ADVANCE PAYMENT OF TAX
67. Section 208 -Revision of Limit of advance tax 87
PART G LEVY OF FEE IN CERTAIN CASES
68. Section 234E Day wise slab 88
CHAPTER XX APPEALS & REVISION
69. Section 246A Necessary amendment required enabling filing of Appeal against 90
penalty imposed by Assessing Officer under section 271J
CHAPTER XX-B REQUIREMENT AS TO MODE OF ACCEPTANCE, PAYMENT OR REPAYMENT
IN CERTAIN CASES TO COUNTERACT EVASION OF TAX
70. Section 269ST - Issues 92
CHAPTER XXI PENALTIES IMPOSABLE
71. Section 270A inserted to provide for levy of penalty in case of under reporting of 94
income and misreporting of income - Issues to be addressed
a) Penalty order under section 270A be made an order appealable before
Commissioner (Appeals) under section 246A
b) Penalty for under-reporting of income 94
c) Order to specify the specific clause of under -reported or misreported income for 96
levy of penalty under section 270A
d) Mere making of a claim which is not sustainable in law would not tantamount to 97
furnishing inaccurate particulars for attracting levy of penalty
72. Section 270AA - Immunity from Imposition of penalty 97
73. Section 271AAB -Penalty where search has been initiated 98
74. Rationalization of Section 271D & 271E 99
75. Section 271FA Clarity required regarding appealability of penalty order 99
76. Section 271H - Penalty for failure to furnish TDS/TCS statements 101
77. Genuine hardship faced by tax deductors on account of provisions of section 276B 103
of the Income-tax Act, 1961 attracting prosecution proceedings for delay in
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remittance of tax to the credit of the Central Government
CHAPTER XXIII MISCELLANEOUS
78. Request to consider amendment in Explanation to section 288(2) pertaining to 107
definition of `Accountant'
79. (a) Waiver of liabilities by companies undergoing Corporate Insolvency Resolution 112
Process (CIRP)
(b) Computation of MAT profit in case of companies undergoing Corporate 112
Insolvency Resolution Process under the Insolvency Code, 2016
80. Conversion of convertible notes into shares 112
81. Regarding - Co - Operative Housing Societies 113
82. Harmonize all those disclosure requirements 113
83. Section 43CA, 50C and 56 Allowance of variation of 5% between stamp duty 114
value and the sale consideration Increasing the permissible variation and need for
retrospective amendment
84. Exemptions Skill Development 115
OTHERS
85. Increase in the rate of surcharge increases cost of doing business for domestic 117
companies
86. Issues arising from applicability of Companies Act, 2013 - Amalgamation 118
PART B SUGGESTIONS FOR IMPROVING TAX ADMINISTRATION AND CITIZEN
SERVICES
87. Section 154 - Mistake apparent from record 121
88. Section 200 -Furnishing of TDS returns 121
PART C SUGGESTIONS PERTAINING TO INTERNATIONAL TAXATION
89. Place of Effective Management (POEM) 124
90. Provisions regarding indirect transfer of capital asset situated in India - Section 9 124
91. Section 9(1)(i) - Benefit of non-applicability of indirect transfer provisions in case of 127
Category I and II FPIs - Provisions for avoidance of double taxation in case of such
indirect transfer provisions, where direct transfer has already been subject to tax
92. Scope of Royalty Income - Section 9(1)(vi) 128
93. Explanation 5 to Section 9(1)(vi) e commerce services 131
94. Tax withholding on transponder hire charges - Section 9(1)(vi) Explanation 6 132
95. Section 9(1)(i) Explanation 6(b) 134
96. Definition of Significant Economic Presence (SEP) for the purpose of business 135
connection
97. Introducing safeguards while applying Principal Purpose Test under the tax treaty 136
98. Grandfathering of Principal Purpose Test application 136
99. Carry forward of excess foreign tax credit 137
100. Tax Sparing Credits 137
101. Disallowance for TDS defaults on payments to non-resident Section 40(a)(i) 138
102. Cross-border merger 138
103. Master File Regulations 141
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104. Reporting of issuance of Share Capital Transaction in Form 3CEB 143
105. Advertising Marketing & Promotion Expenses (AMP) 143
106. Permissible variation available in case of Single comparable used determining the 144
arm's length price
107. Section 92C(2) and Rule 10 CA - Range concept 144
108. Tolerance Band Second proviso to section 92C(2) 145
109. Mutual Agreement Procedures (MAP) 145
110. Section 92CE - Introduction of secondary adjustment 146
111. Advance Pricing Agreements (`APA') 153
112. Rollback of APA 153
113. Dispute resolution 154
114. Section 94A -Special measures in respect of 155
transactions with persons located in notified jurisdictional area
115. Section 94B - Limitation of interest benefit provisions introduced certain concerns 155
to be addressed
116. Section 95 Applicability of GAAR to be effective from A.Y.2018-19 - Protection 164
from applicability of GAAR should not be restricted to only investments, but may
extend to all transactions upto 31.03.2017
117. Section 95 - General Anti-Avoidance Rule 165
118. Section 115JAA(2A) - Restriction on carry forward of MAT/AMT credit and claim of 168
FTC in relation to taxes under dispute - Restriction to be removed
119. Section 139(5) Reduction in time limit for filing revised return Request to bring 169
back erstwhile time limit for filing of revised tax return at least in cases of claim of
foreign tax credit
120. Application for Permanent Account Number (PAN) in certain cases 169
121. Section 155(14A) - Claim of FTC pertaining to taxes which are under dispute in the 170
foreign country Clarification required on certain issues relating to period of
limitation and documents which shall constitute evidence of settlement
122. Section 194LC - Income by way of interest from Indian Company 172
123. Section 194LC and Section 206AA - Scope of concessional rate of tax on overseas 173
borrowings
124. Section 194LD - Income by way of interest on certain bonds and Government 175
securities
125. Section 195 176
a) Scope and applicability
b) Time limit for Issuance of "general or special order 177
c) Withholding tax on reimbursements - Section 195 177
d) Consequential amendment required in section 204 177
e) Section 195 - Clarification required 178
f) Applicability of Rule 37BB read with Section 195 for making remittances outside 180
India
g) Penalty for failure to furnish information or furnishing inaccurate information under 180
Section 195
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126. Section 201 Limitation period for Non-resident 181
127. Consequences of failure of deduct or pay withholding tax - Section 201 Extension 181
of benefit in respect of payments made to non-residents
128. a) Relieve return filing obligation if royalty/ FTS/ capital gains has suffered TDS and 181
also clarify that s.206AA(7)(ii) read with Rule 37BC has retrospective effect
b) PAN for foreign parties i.e. non-residents 182
129. TDS on interest on NRO account 183
130. Equalization levy 183
131. Chapter VIII of the Finance Act, 2016 - Equalisation Levy - Issues to be addressed 184
132. Tax consolidation Scheme 185
133. Deputation of employees - [Taxability as fees for technical services/ Permanent 188
Establishment issues]
134. TDS on payment made to non-residents 189
135. Time limit for TDS assessments of payments made to non-residents 190
136. Provision for the employer to provide tax treaty benefits while calculating TDS 190
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PRE-BUDGET MEMORANDUM 2019
DIRECT TAXES AND INTERNATIONAL TAX
1.1 The Council of the Institute of Chartered Accountants of India considers it a privilege to
submit this Pre-Budget Memorandum - 2019 on Direct Taxes and International Tax to the
Government. The memorandum contains suggestions for the consideration of the
Government while formulating the tax proposals for the year 2019-20.
1.2 The suggestions have been broadly categorized under the following heads:
Part A : Suggestions relating to the policy & provisions of Income-tax Act, 1961
Part B : Suggestions for improving Tax Administration and Citizen Services
Part C : Suggestions pertaining to International Taxation
1.3 The suggestions are given Chapter wise and are intended to serve the following purpose:
I. Improve tax collection.
II. Reduce/minimize litigations
III. Rationalization of the provisions of direct tax laws.
IV. Removal of administrative and procedural difficulties relating to Direct Taxes
V. Check tax avoidance
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PART A
SUGGESTIONS RELATING TO THE POLICY &
PROVISIONS OF INCOME-TAX ACT, 1961
The Institute of Chartered Accountants of India
CHAPTER I
PRELIMINARY
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
1. Section 2(42A) The Finance Act, 2017 amended section It is suggested that consequential
Reduction in holding 2(42A) so as to reduce the period of amendments may be made in
period in case of holding from the existing 36 months to 24 sections 54, 54B, 54D & 54F so
immovable property, months in case of immovable property, as to enable the holding period
being land or being land or building or both, to qualify as of the new asset purchased to
building or both, to long-term capital asset. The same is done be reduced to 2 years from 3
qualify as long-term to promote the real estate sector and to years in case of land and/or
capital asset make it more attractive for investment. building.
Consequential Issue
amendments to be
Consequential amendments for reducing (SUGGESTION FOR
made in sections 54,
the holding period of immovable property IMPROVING TAX
54B, 54D and 54F
from 3 to 2 years is required to be made in COLLECTION)
sections 54, 54B, 54D and 54F in line with
the amendment in section 2(42A). At
present, these sections restrict transfer of
new assets purchased for 3 years.
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Chapter III
INCOMES WHICH DO NOT FORM PART OF
TOTAL INCOME
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
2. Section 10(12A) For A.Y. 2018-19, section 10(12A) provides It is suggested that the
Extending the for an exemption of upto 40% of the total amendment as made in
benefit of tax- amount payable to an employee contributing section 10(12A) may also be
free withdrawal to the NPS on closure of his account or on his made in section 10(12B)
from NPS to opting out the scheme. Further, in cases of thereby extending the benefit
non-employee partial withdrawal from NPS, section 10(12B) of exemption in case of
subscribers provides for exemption of upto 25% of partial withdrawal to non-
under section contributions made by an employee. These employee subscribers as
10(12A) exemptions were, however, not available to well. The said amendment
Similar non-employee assessee contributing to NPS. would also be in line with the
amendment intention of the legislature to
may also be provide a level playing field
The Finance Act, 2018 has extended the
made in section to both types of subscribers
benefit of exemption under section 10(12A) to
10(12B) to NPS.
all assessees, in order to provide a level
playing field to both employee and non- (SUGGESTION FOR
employee assessee subscribers. RATIONALIZATION OF THE
However, the Finance Act, 2018 does not PROVISIONS OF DIRECT
contain a similar amendment in respect of TAX LAWS)
benefit of exemption under section 10(12B),
consequent to which such benefit of
exemption in case of partial withdrawal
continues to be restricted to employees alone.
To provide equity between the employee and
non-employee subscriber, similar amendment
may be made in section 10(12B) to extend
the benefit available thereunder to non-
employee subscribers.
3. Section 10(13) - Section 10(10AA) provides for exemption for Section 10(13) may be
Payment from payment received as cash equivalent of leave amended to exempt
approved salary in respect of earned leave period at commuted value received by
superannuation the time of retirement whether an employee from the
fund superannuation or otherwise . superannuation corpus
standing to his credit at the
Section 10(13) provides for exemption with time of voluntary retirement,
regard to payment from an approved by including the words "or
superannuation fund. Section 10(13)(ii) of the otherwise" in line with
Act provides for exemption in the hands of section 10(10AA) of the
the employee in respect of the amount Income tax Act, 1961.
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Sr. Section Issue/Justification Suggestion
No
received on commutation of the annuity in (SUGGESTIONS FOR
case of retirement at or after a specified age RATIONALIZATION OF THE
or becoming incapacitated prior to such PROVISIONS OF DIRECT TAX
retirement. This provision however, does not LAWS)
cover commutation of an annuity paid on
voluntary retirement of the employee.
Section 10(10AA), as mentioned above, has
taken care of such case by using the
terminology "or otherwise". Since th e
intention of the law makers is clear by the
wordings of section 10(10AA), section
10(13)(ii) may be appropriately amended to
include the words "or otherwise". This will
provide relief to genuine taxpayers who are
taking voluntary retirement.
4. Section 10(23C) - Application of income is mandatory by Section 10(23C) should be
Mandatory charitable trusts/institutions including those amended to specifically
application of enjoying benefits under section 10(23C) to its exclude 'corpus donations'
income by objects, subject to accumulation of not more from the requirement of
charitable trusts/ than 15% of its income including income from mandatory application of
institutions voluntary contributions. Similar provisions income by such trusts /
under section 11(1) read with section 12(1) institutions.
exclude 'corpus donations' (voluntary (SUGGESTIONS FOR
contributions made with a specific direction RATIONALIZATION OF THE
that they shall form part of the corpus of the PROVISIONS OF DIRECT TAX
trust or institution) from the mandatory LAWS)
requirement of application of the income. No
such provision has been made in section
10(23C). This will compel the Institutions
coming within the scope of section 10(23C) to
apply even their corpus donations to the day
to-day activities for getting the exemption.
This will be prejudicial to them because they
cannot build up the corpus fund.
5. Section 10(23C) - Under section 10(23C)(iiiad) and (iiiae) of It is suggested that "Annual
Annual Receipts Income-tax Act, it is provided that the income Receipts" be clearly defined
of University/Educational as income of the hospitals/
institutions/hospitals/ other institutions educational institutions
specified therein will be exempt provided they arising regularly/every year
comply with the conditions stipulated therein. but excluding value of
Also, it is provided that "aggregate annual donation received in kind by
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Sr. Section Issue/Justification Suggestion
No
receipts" of such institutions shall not exceed way movable assets, land,
the amount of annual receipts as may be hospitals/educational
prescribed. Though annual receipts have equipment, sale
been prescribed as Rs.1 crore vide Rule 2BC consideration received on
of Income-tax Rules, the word "annual disposal of land, shares or
receipts" have not been defined in the other movable property,
Income-tax Act. hospital/educational
It is not clear as to whether: equipment etc.
(a) for computing "annual receipts" only the Further, it may be specifically
receipts of such institutions from provided that donations
educational/hospital activities alone are received towards corpus by
to be considered each year; way of land, movable assets
(b) Certain receipts of such institutions that are excluded from
are not received on annual basis e.g. computation of "Annual
receipts from sale of property, equity Receipts" as prescribed
shares and other proceeds on divestment under Rule 2BC of Income-tax
are to be excluded from the computation Rules.
of "annual receipts"; (SUGGESTIONS TO REDUCE /
(c) In certain cases where such charitable MINIMIZE LITIGATIONS)
institutions receive donations in kind in
the form of land, movable assets etc.
whether "annual receipts" would exclude
such receipts since they are not received
annually.
6. Section 10(23C) - The 15th Proviso to Section 10(23C) states It is suggested that:
Rationalisation that application for obtaining approval under Such application should
of Provisions this section shall be made on or before 30 th be allowed to be made at
September of the relevant assessment year any time during the
from which the exemption is sought. For financial year for which
example, if an institution seeks approval for exemption is sought even
Financial year 2017-18, it will have to apply if the annual receipts
up to 30 th September 2018. have not exceeded or is
Further, the 9 th proviso to Section 10(23C) not expected to exceed
states that order granting approval or the limit of Rs 1 crore.
rejection shall be passed within 12 months Time limit for granting
from the end of month in which such approval may be reduced
application was received. from 12 months to "within
In view of this proviso, in respect of 4 months from the end of
applications received on 30 th September the month in which
2018, the order has to be passed on or before application has been
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Sr. Section Issue/Justification Suggestion
No
30th September, 2019. So the status of the filed", so that any
application is not known till next 12 months institution should be well
i.e. for 2 financial years. aware of its status before
If such institution is not granted approval as due date of filing its
on 30th September 2019 then it will have to income tax return.
pay income tax for Financial year 2017-18 (SUGGESTION FOR
and 2018-19. Resultantly, the charitable RATIONALIZATION OF THE
institution will have to face heavy tax burden. PROVISIONS OF DIRECT
At the same time, it is to be noted that ITD TAX LAWS)
doesn't accept such application before close
of financial year i.e. application for F.Y. 2017-
18 cannot be made on or before 31 st March
2018, though there is no such restriction
under the Act.
7. Section 10(23FB) - Earlier under Section 10(23FB) of Income-tax It is suggested that section
Tax exemption for Act, any income of a Venture Capital 10(23FB) be reworded as
Alternative Company (VCC) or Venture Capital Fund follows:
Investment Funds (VCF) set up to raise funds for investment "Any income of a venture
Venture Capital was exempt from taxation. However, in 2007, capital company or
Funds this was amended and the scope of VCC /
venture capital fund from
VCF was narrowed down to select sectors
investment set up to raise
and the exemption from income tax was
funds for investment in a
limited to "any income of a VC company or
VC fund from investment in a venture capital venture capital
undertaking". undertaking."
The sectoral restriction stands removed in (SUGGESTIONS FOR
Union Budget, 2012 which was a welcome RATIONALIZATION OF THE
move. However, the tax exemption still PROVISIONS OF DIRECT TAX
remains limited to "any income of a VC LAWS)
company or VC fund from investment in a
venture capital undertaking". Keeping in mind
the growing importance of VC funds in
infrastructure and also in other important
sectors of our economy, the previous wording
of "set up to raise funds for investment" needs
to be restored in place of "from investment"
under Section 10(23FB).
A change in the wording from "any income of
a VC company or VC fund from investment" to
"any income of a VC company or VC fund set
up to raise funds for investment" will enable
the VCC / VCF to undertake analysis / study
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Sr. Section Issue/Justification Suggestion
No
necessary to evaluate the project viability as
well as to render other services for the
projects in which investments are made.
Restricting the wording to "any income of a
VC company or VC fund from investment"
severely restricts the tax exemption thus
affecting the commercial viability of the VCC /
VCF.
8. Section 10(32) - At present income of minors included in the It is suggested that this
Income of minors hands of parents is exempt to the extent of should be raised to at least
- to increase Rs.1,500/- for each minor. The average Rs. 5,000/- for each minor
exemption limits expenditure to meet cost of a minor's child.
education/health/living expenses which has (SUGGESTIONS FOR
gone up considerably in recent years, limit of RATIONALIZATION OF THE
Rs.1,500/- fixed is woefully inadequate. PROVISIONS OF DIRECT TAX
LAWS)
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CHAPTER IV
COMPUTATION OF TOTAL INCOME
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PART A-SALARIES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
9. Deduction to As per the prevalent norm, the employees are It is suggested that said
salaried required to serve notice within the stipulated anomaly may be resolved and
assesses - time before leaving the organisation. The notice appropriate provisions be
Payment for period, however, varies from organisation to inserted so that income from
notice period organisation. For example, in an organisation notice period pay is
the notice period may be 90 days, or an chargeable in the hands of ex-
employee has to pay 90 days salary amount to employer and deduction of
the organisation as an employee may get a the amount of notice period
better job opportunity in another organisation pay paid be made available to
wherein he is required to join within 30 days. the employee as he has not
Accordingly, the employee has to give 30 days' effectively received that
notice in old organisation and pay for short income (unless reimbursed
notice of 60 days. by the new employer).
Generally, the contract of service also provides (SUGGESTIONS FOR
that in case the employer is not satisfied with the RATIONALIZATION OF THE
performance of the employee he may terminate PROVISIONS OF DIRECT TAX
his services by giving a notice of 30 days or 30 LAWS)
days salary. In case the employer suspends the
employee with immediate effect he pays an
amount equivalent to 30 days salary and claims
deduction thereof. Such amount becomes
taxable in the hands of the employee. However,
in case the employee is required to pay notice
period salary, no deduction of such amount paid
is allowed to him. If the new employer agrees to
bear the brunt of notice period pay, say of 60
days in above example, the said amount will be
included in the total income of the employee and
tax will be deducted thereon even if such income
belonged to the ex-employer and is taxable in
his hands. Thus, in effect the assessee will be
liable to pay tax on 14 months' salary i.e. salary
for more than 12 months without any deduction
available to him.
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 11
The Institute of Chartered Accountants of India
PART D-PROFIT AND GAINS OF BUSINESS AND PROFESSION
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
10. Section 28(iiia) Section 28 provides for income that is Since the Import and
Sale of chargeable to income tax under the head exports Control Act,
license "profit and gains from business or 1947 has been
profession". As per sub -section (iiia) of repealed and advance
section 28, profit on sale of license granted Authorization issued
under the Imports (Control) Order, 1955, in place of erstwhile
made under the Imports and Exports advance licenses are
(Control) Act, 1947 is chargeable to tax not transferable as per
under the head "profit and gains from the Foreign Trade
business or profession". Policy issued under
It is pertinent to mention that "The Import Foreign Trade
and Exports Control Act, 1947" as (Development and
mentioned in section 28(iiia) has been Regulation) Act, 1992,
repealed. Further, advance Authorization sub-section (iiia) to
issued in place of erstwhile advance section 28 be omitted.
licenses are not transferable as per the (SUGGESTION FOR
Foreign Trade Policy issued under Foreign IMPROVING TAX
Trade (Development and Regulation) Act, COLLECTION)
1992.
11. Section 28(iiid) Section 28(iiid) provides that any profit on It is suggested that
Duty transfer of the Duty Entitlement Pass Book sub section (iiid) to
Entitlement Scheme, being the Duty Remission section 28 be omitted
Pass Book Scheme under the export and import since the Duty
Scheme no policy formulated and announced under Entitlement Pass Book
more in section 5 of the Foreign Trade Scheme was abolished
existence (Development and Regulation) Act, 1992 w.e.f. 1.10.2011 vide
(22 of 1992) shall be chargeable to Notification No.
income-tax under the head "Profits and 51/2011 Customs,
gains of business or profession". However, dated 22.06.2011.
the aforementioned DEPB scheme was (SUGGESTION FOR
abolished w.e.f 1.10.2011 vide Notification IMPROVING TAX
No. 51/2011 Customs, dated COLLECTION)
22.06.2011.
12. Section 32 - The proviso to section 32 provides that the a) Section 32 may be
Depreciation in aggregate deduction, in respect of amended to clarify
case of slump depreciation of buildings, machinery, plant the legal position
sale or furniture, being tangible assets or know- as to whether
how, patents, copyrights, trademarks, depreciation can
licenses, franchises or any other business be claimed on the
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Sr. No Section Issue/Justification Suggestion
or commercial rights of similar nature, basis of
being intangible assets allowable to the proportionate
predecessor and the successor in the case number of days by
of succession referred to in clause (xiii) the transferor and
and clause (xiv) of section 47 or section the transferee
170 or to the amalgamating company and company in case
the amalgamated company in the case of of slump sale also
amalgamation, or to the de-merged considering the
company and the resulting company in the proviso to section
case of de-merger, as the case may be, 32 read with
shall not exceed in any previous year the section 170 of the
deduction calculated at the prescribed Act.
rates as if the succession or the b) Due to practical
amalgamation or the de-merger, as the and administrative
case may be, had not taken place, and difficulties, there
such deduction shall be apportioned may be a time gap
between the predecessor and the between holding
successor, or the amalgamating company of the asset and
and the amalgamated company, or the de- using the asset so
merged company and the resulting transferred. To
company, as the case may be, in the ratio avoid genuine
of the number of days for which the assets difficulties in such
were used by them . cases, instead of
The following issues may be considered the words, "used
for appropriate amendment in the law : by them", the
(a) An issue arises whether depreciation words "held by
can be claimed on the basis of them" may be
proportionate number of days by the substituted in the
transferor and the transferee company in proviso to section
case of slump sale considering the proviso 32.
to section 32 read with section 170 of the (SUGGESTIONS TO
Act. REDUCE / MINIMIZE
(b) As per the current provisions of proviso LITIGATIONS)
to section 32 the depreciation can be
claimed on the basis of proportionate
number of days for which the assets were
used by the predecessor and the
successor, or the amalgamating company
and the amalgamated company, or the de-
merged company and the resulting
company, as the case may be.
Due to practical and administrative
difficulties, there may be a time gap
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
between holding of the asset and using the
asset so transferred. To avoid genuine
difficulties in such cases, instead of the
words, "used by them", the words "held by
them" may be substit uted in the proviso to
section 32.
13. Section 32AC - In order to attract capital investment in To facilitate genuine
Slump Sale private sector, the Government of India internal group
and introduced a tax incentive by way of restructuring, it is
investment inserting a new section 32AC in the suggested that the
allowance Income-tax Act, 1961 vide Finance Act, CBDT may issue
2013. Section 32AC provides for an clarification or
additional deduction (over and above consider
100% deduction by way of depreciation) of recommending
15% of investments in new plant and amendments in the law
machinery by a company engaged in the to the effect that
business of manufacturing of goods. provisions of section
32AC(2) are not
applicable to any
Section 32AC(2) provides that if the new
transfer of assets
asset (on which investment allowance
including slump sale
benefit is availed) is sold or transferred
between a parent and
within a period of five years, the amount of
a wholly owned
deduction claimed in past shall deemed to
subsidiary which is
be income of the tax payer in the year of
exempt under section
transfer. Only exception to this is where
47.
the asset is transferred in connection with
amalgamation or demerger. (SUGGESTION FOR
RATIONALIZATION
OF THE PROVISIONS
A number of companies have availed the OF DIRECT TAX
incentive by way of enhancing their capex
LAWS)
(Capital expenditure). Such companies
may need to re-organize internally for
reasons such as improving efficiency by
combining similar business activities or
separating unrelated business activities,
simplification of the group structure,
compliance with regulatory requirements,
strategic objectives such as mergers/
acquisition, post-merger integration,
expansion, capital raising etc.
In certain situations, internal re-
organisation by way of merger / demerger
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
may be time consuming, whereas a slump
sale of the business undertaking within the
group would be more efficient and
economical. However, non-exclusion of
slump sale transactions from the impact of
anti-abuse provisions contained in section
32AC(2) could cause undue hardship to
the tax payers and impacting genuine
internal re-organization.
It is to be noted that section 47(iv) does
not treat transfer of assets between
subsidiary to parent and vice-versa, as
transfer subject to meeting certain
conditions. Accordingly, if a company
transfer its manufacturing undertaking to
its wholly owned subsidiary company, it is
not treated as a transfer under section 47.
Similarly, Section 56(2)(x) exempts
transactions covered under clause (iv) and
(v) of Section 47 (i.e. transfer of assets
between holding-subsidiary companies)
from being taxed under section 56(2)(x).
The rationale for the amendment as stated
in the Memorandum to Finance Bill, 2018
is as under:
"Section 47 provides for certain tax neutral
transfers. Section 56 also excludes income
arising out of certain tax neutral transfers
from its ambit. However, the transfers
referred to in clause (iv) and clause (v) of
section 47 have not been excluded from
the scope of section 56. In order to further
facilitate the transaction of money or
property between a wholly owned
subsidiary company and its holding
company, it is proposed to amend the
section 56 so as to exclude such transfer
from its scope."
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
The CBDT while issuing Circular No.
1/2013 dated 17.01.2013 in relation to tax
benefit under section 10AA/10A/10B
stated that mere change of ownership
under a slump sale of business would not
affect the entitlement to the tax benefit
under section 10AA or 10A or 10B.
Subjecting slump sale between parent and
wholly owned subsidiary and vice-versa to
the anti-abuse provisions under section
32AC puts such slump sale on an unequal
footing to intra-group mergers, demergers
even though there is no abuse of law
involved.
14. Section 35D - Currently, amount paid for increase in It is suggested that fee
Amount paid authorized capital is not allowed as paid to Registrar of
for increase in deduction. companies for
authorized increase in authorized
After a company is incorporated with a
capital capital may be allowed
minimum paid up capital (for which there
is no minimum limit now), and it wishes to as revenue
increase its authorised capital, the expenditure in 5 equal
company is required to pay registration fee installments u/s 35D.
to Registrar of Companies. (SUGGESTION FOR
RATIONALIZATION
Fee on incorporation of a company is OF THE PROVISIONS
allowed as per specified limits in 5 OF DIRECT TAX
installments u/s 35D, however amount LAWS)
paid for increase in authorized capital is
not allowed as deduction at all, though the
amount is paid to government as a fee.
15. Due date for Section 2(24)(x) of the Act, inter alia It is suggested that the
crediting the defines "Income", to include any sum due date defined under
contribution of received by the employer from its Explanation to Section
employees to employees' as contribution towards certain 36(1)(va) shall be
the respective specified funds. However, deduction for amended and
fund Section such income are available under section accordingly the due
36(1)(va) read 36(1)(va), provided that the contributions date shall mean the
with Section collected by the employer are credited to due date for filing
2(24)(x) the respective fund within the due date return of income under
specified under the relevant legislation of section 139(1), thereby
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Sr. No Section Issue/Justification Suggestion
the fund. bringing it at par with
The employee's contribution credited to the due date specified
the employees account in the relevant for the Employer's
fund after the due date specified under contribution under
section 36(1)(va) are disallowed to the Section 43B of the Act.
employer. Further, any payments made by (SUGGESTIONS FOR
the employer after the due date is also RATIONALIZATION OF
NOT allowed as a deduction in the year of THE PROVISIONS OF
payment. This causes undue hardship to DIRECT TAX LAWS)
the assessee especially during the
economic turbulence.
Further, the Employer's contribution made
after the due date specified under the
relevant social security legislation but
deposited within the due date of filing
return of income are allowed under the Act
by virtue of Section 43B.
It may be noted that the statutory laws
under the respective contribution schemes
have provisions to levy interest, penalty
etc. for the delayed payment. Hence,
disallowing a genuine business
expenditure merely on the ground that it
has been paid after relevant due date is
not justified.
On the subject there have various
conflicting judgments. Where Hon'ble
Uttarakhand High Court and Hon'ble Delhi
High Court have considered the due date
under section 36(1)(va) to be read in sync
with the due date mentioned in section
43B, Hon'ble Gujarat High Court has given
a different view.
To remove the hardship caused to the
assessee and to reduce avoidable
litigations, it is suggested that deduction
be allowed on the employee's contribution
made before the due date of filing the
return of income.
16. Section Currently, the remuneration to working It is suggested that
40(b)(v) partners is allowed at Rs. 1,50,000 or 90 limit for allowable
Raise in percent of book profits whichever is more remuneration for each
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
allowable for first Rs. 3,00,000 of book profits and at of the working partner
expenses in 60 percent of remaining book profits which be changed at the rate
the form of is not justified. of Rs. 1,80,000 per
annum per partner or
remuneration
Raising the aforesaid limit will have no tax 90 percent of book
to working effect as it would be just appropriation of profits whichever is
partner profits. Further, there would be timing more for first Rs.
difference from the view point of tax. 10,00,000 of book
profits and 75 percent
of the remaining book
profits.
17. Explanation 5 Section 43 deals with actual cost. There In line with the other
to are 14 explanations provided in section
Section explanations to
43(1) 43(1) describing the method of
section 43(1), it is
"building" to computation of actual cost of asset under suggested that the
be replaced bydifferent situations. Explanation (5) deals term "Assets" be used
"assets" with actual cost in respect of building instead of the term
previously used by the assessee for "building" in
certain purposes & subsequently brought Explanation 5 to
into business or profession. According to section 43(1).
this explanation, the building so brought in (SUGGESTION FOR
should be notionally depreciated & the RATIONALIZATION
resultant WDV as at the date of OF THE PROVISIONS
introducing the building into business shall OF DIRECT TAX
be deemed to be the actual cost. LAWS)
While all other explanations use the term
"asset" or "capital asset", Explanation 5
uses the term "building" instead of
"assets". It has therefore been held that
this explanation would not apply to all
other assets other than building.
18. Section 43D - Section 43D of the Act provides that Amendment to section
Taxability of income by way of interest in relation to bad 43D
and doubtful debts of a public financial
interest on
institution or a scheduled bank or a co- In light of the above,
Non-
operative bank or a state financial an amendment should
Performing corporation or a state industrial investment be made to section
Asset corporation or a housing finance company 43D of the Act, to
is chargeable to tax in the previous year in extend the benefit of
which it is credited to the profit and loss section 43D to "Non -
account or, as the case may be, in which it Banking Financial
is actually received. Company" (other than
housing finance
The reason for introduction of section 43D companies which are
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
in the Act, was that interest from bad and already covered by the
doubtful debts in the case of banks and provisions of section
financial institutions is difficult to recover 43D), whereby interest
and taxing such income on accrual basis income on non-
reduces the liquidity of the bank without performing assets
actual generation of income. Therefore, should be taxed only
with a view to improve the viability of on receipt basis.
banks and financial institutions, the
provisions of section 43D were introduced Amendment to Rule
w.e.f. AY 1992-93. 6EA of Income-tax
Rules (`the Rules')
Subsequently with a view to boost the
viability of housing finance companies and Section 43D refers to
to provide a boost to the housing sector, the income by way of
w.e.f. AY 2000-01, the benefit of the said interest in relation to
provision was also extended to housing such category of bad
finance companies (a category of NBFCs) and doubtful debts as
which are regulated by the National may be prescribed in
Housing Bank. Rule 6EA of the Rules
having regard to
Further, w.e.f. AY 2018-19, to provide a guidelines issued by
level playing field to co-operative banks, RBI in relation to such
the provisions of section 43D have debts.
recently been rationalised to extend the
benefit of the said provisions to co- Accordingly,
operative banks as well. consequential
amendment should
While NBFCs (other than housing finance also be made in Rule
companies which are already covered by 6EA of Rules, which
the provisions of section 43D) have not provides special
been specifically covered by the aforesaid provision regarding
provisions, various judicial precedents 1 interest on bad and
have held that interest income on NPA's doubtful debts of
under the provisions of the Act should be banks and financial
chargeable to tax only on receipt basis institutions, to include
following the principle of real income. the "Non- Banking
However, in absence of specific provisions Financial Company"
under the Act, this matter has constantly as well.
been a subject matter of litigation.
Amendment to section
43B
1 UCO Bank vs. CIT [1999] 237 ITR 889 (SC); CIT v. Vasisth Chay Vyapar Ltd [2011] 330 ITR 440; CIT v.
India Equipment Leasing Co. Ltd. [2007] 293 ITR 350 (Mad); CIT v. Elgi Finance Ltd., [2007] 293 ITR 357
(Mad); Ted Co Investment and Financial Services (P.) Ltd. v. DCIT [2003] 87 ITD 298 (Delhi)
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 19
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
Impact of Income Computation and
Disclosure Standards (`ICDS') on Consequential
taxation of Interest on NPAs amendment should
also be made in
The CBDT has recently notified the section 43B of the Act
Income Computation and Disclosure which provides a list
Standards (`ICDS') which are effective of deductions which
from AY 2017-18. As per ICDS IV on are allowed to the
Revenue Recognition, interest income payer on actual
shall be recognised on time proportionate payment basis. As
basis i.e. on accrual basis. represented above,
given that interest
This has been further clarified by the income on NPA for
CBDT in its recent FAQs issued on 23 "Non-Banking
March 2017, which provides clarification Financial Company"
on various aspects of applicability of ICDS. should be taxed on
As per Question 13 of the FAQ, it has receipt basis,
been clarified that interest accrues on time deduction to the payer
basis. Further, as per Question 2 of the of interest on NPA to
FAQ, CBDT has also clarified that "Non-Banking
provisions of ICDS shall prevail over past Financial Company"
judicial precedents (thus overriding the should be allowed on
real income principle laid down by various actual payment basis.
judicial precedents). However, recently it
has been held by the Hon' ble Del hi HC in (SUGGESTION FOR
the case of Chamber of Tax Consultants v. RATIONALIZATION OF
Union of India, dated 8.11.2017 that, inter THE PROVISIONS OF
alia, ICDS cannot supercede past judicial DIRECT TAX LAWS)
decisions.
In view of the above CBDT clarifications, it
may be challenging for NBFCs (other than
housing finance companies) to adopt the
position of taxing interest on NPA on
receipt basis, severely impacting their
cash flows and liquidity.
Like Banks, even NBFCs are regulated by
Reserve Bank of India (`RBI') and are
mandated to follow RBI guidelines
including on the prudential norms. As per
RBI circular on NBFC (Deposit Accepting
or Holding) Prudential Norms, Banks as
well as NBFCs are required to create
provision for NPAs. Further, as per the
prudential norms, Banks as well as NBFCs
shall recognise interest income on NPA
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Sr. No Section Issue/Justification Suggestion
only when it is actually realised. However,
despite these similarities between a Bank
and a NBFC, there is a distinction in the
applicability of various tax provisions which
puts NBFCs in a disadvantageous position
vis-à-vis other financial institution including
Banks. Thus, the need for a uniform
practice and level playing field in terms of
tax treatment for NBFCs is indispensable.
In this regard, as mentioned above, in
accordance with the directions issued by
the RBI, similar to other financial
institutions, NBFCs also follow prudential
norms and are required to create provision
for NPAs and defer income in respect of
their non-performing accounts.
Considering the fact that similar to Banks,
NBFCs are also engaged in financial
lending to different sectors of the society,
the Finance Act 2016, has expanded the
scope of section 36(1)(viia) of the Act, by
providing deduction to the extent of 5% of
total income in respect of provision for bad
and doubtful debts to NBFCs.
However, in absence of specific coverage
of NBFCs (other than housing finance
companies which are already covered by
the provisions of section 43D) in section
43D and in light of the ICDS provisions,
NBFCs would be required to recognise
income on such NPAs for tax purposes on
an accrual basis, resulting in levy of tax on
income which may not be realised at all.
This would severely impact the liquidity of
NBFCs in terms of cash flow pay-outs,
impacts their profitability and also has a
consequent impact on their cost of
operations.
Given the same, it is appropriate in all
fairness that the provisions of section 43D
which recognises the principle of taxing
interest income on NPAs on receipt basis
to certain banks and financial institutions,
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 21
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
also be extended to NBFCs (other than
housing finance companies which are
already covered by the provisions of
section 43D).
19. Section 44AD - Section 44AD was repealed w.e.f. It is suggested that
Presumptive 01/04/2011 i.e. from AY 2011-12. instead of sub-section
Income According to the new provisions, in case 44AD(6), the definition
Some Issues of an eligible assessee engaged in eligible of "eligible business"
business, income shall be deemed equal be amended to
to a sum @ 8% of the turnover or higher exclude `specified
income as per books. Section 44AD is professionals' , agency
applicable to any business except the business and business
business of plying, hiring or leasing goods in respect of which the
carriages referred to in section 44AE, earnings are in the
agency business, commission / brokerage form of commission or
income business and whose total turnover brokerage.
or gross receipts in the previous year does (SUGGESTION FOR
not exceed an amount of Rs. 2crore. It RATIONALIZATION
was further amended by the Finance Act, OF THE PROVISIONS
2016.
OF DIRECT TAX
Applicability of section 44AD LAWS)
The Finance Act, 2012 had inserted sub-
section (6) with retrospective effect from
1st April, 2011 to clarify that the
presumptive tax provisions under section
44AD shall not be applicable to, inter alia,
persons earning income in the nature of
commission or brokerage or persons
carrying on an agency business.
Further, the section 44AD(6) apparently
seems to exclude the applicability to
persons carrying on profession, agency
business and earning commission or
brokerage. It is possible that such
persons have other businesses eligible for
presumptive taxation under section 44AD.
Therefore, it is suggested that the
definition of "eligible business" be
amended to exclude professions, agency
business and business in respect of which
the earnings are in the form of commission
or brokerage.
20. Benefit of Section 44AD relating to presumptive The benefit of section
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Sr. No Section Issue/Justification Suggestion
presumptive taxation applies only to businesses run by 44AD should also be
taxation to LLP residents Individual, HUF and Firms made available to LLP.
- Section 44AD excluding LLP. (SUGGESTION FOR
Tax on presumptive basis should be IMPROVING TAX
extended to all assessees, including a LLP. COLLECTION)
Only section 44AD excludes LLP, for which
there appears to be no cogent reason.
Otherwise under the Act, a LLP and a Firm
are treated at par.
21. Section 44ADA The Finance Act, 2016 has inserted a new
- Special section 44ADA providing for special
provision for provision for computing profits and gains
computing of profession on presumptive basis. This
profits and measure would definitely help the
gains of specified professionals in payment as well
profession on as compliances under the income-tax law.
presumptive
basis Issues
and concerns
arising there
from to be
addressed
a) Threshold The sub-section (1) provides that: It is suggested that the
limit of Rs 50 "Notwithstanding anything contained in threshold limit of Rs
lakhs may be sections 28 to 43C, in the case of an 50 lakh may be raised
increased assessee, being a resident in India, who is appropriately (say to
engaged in a profession referred to in sub- at least Rs 1 crore) so
section (1) of section 44AA and whose that a sizable
total gross receipts do not exceed fifty percentage of
lakh rupees in a previous year, a sum professionals in the
equal to fifty per cent. of the total gross small and medium
receipts of the assessee in the previous segment are covered
year on account of such profession or, as under the said
the case may be, a sum higher than the provisions; which
aforesaid sum claimed to have been would ultimately lead
earned by the assessee, shall be deemed to the achievement of
to be the profits and gains of such stated objective of
profession chargeable to tax under the introducing the new
head "Profits and gains of business or provision.
profession". (SUGGESTION FOR
The threshold limit of Rs 50 lakhs appears RATIONALIZATION
to be low. Consequently, this provision OF THE PROVISIONS
may not achieve the intended objective of OF DIRECT TAX
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
providing relief to professionals in the LAWS)
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.
b) Rate of The rate of 50% appears to be on the It is suggested that the
estimated tax higher side and may cause very high tax estimated rate of
@ 50% too incidence on such professionals income @ 50% of the
high particularly since the scheme is intended total gross receipts
to cover professionals with low gross may be reduced
receipts/total turnover resulting in low appropriately (say to
margins due to nature of work and high 30%) considering the
competition. This high rate may cause a high cost of providing
lot of professionals not to opt for this the services by
scheme thereby defeating the ultimate specified
objective of introducing this provision. professionals
Considering the above reasons, the profit specially the small tax
@ 50% is difficult to achieve specially for payers having income
intended professionals with low gross from profession.
receipts/total turnover. Also, the Income (SUGGESTION FOR
Tax Simplification Committee headed by RATIONALIZATION
Justice R V Easwar has recommended the OF THE PROVISIONS
rate of 33.33% of the receipts as the OF DIRECT TAX
income from profession. LAWS)
22. Section 44AE Relevant extracts of section 44AE are In view of the
Clarification reproduced below: ambiguity arising due
required w.r.t. to clause (i) of section
`gross vehicle "(2) For the purposes of sub -section (1), 44AE wherein it is
weight; or the profits and gains from each goods provided to compute
`unladen carriage, -- income @ Rs. 1,000
weight' per tonne of `gross
(i) being a heavy goods vehicle, shall be vehicle weight' or
an amount equal to one thousand `unladen weight', it is
rupees per ton of gross vehicle weight suggested to clarify
or unladen weight, as the case may be , with retrospective
for every month or part of a month during effect that in situations
which the heavy goods vehicle is owned where both `gross
by the assessee in the previous year or vehicle weight' or
an amount claimed to have been actually
`unladen weight' is
earned from such vehicle, whichever is
available for a heavy
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
higher;" goods vehicle, the
relevant weight to be
It is not yet clear whether computation of used for the purpose
income @ Rs 1,000 per tonne is to be of computation of
done w.r.t. `gross vehicle weight' or income should be
`unladen weight' of the heav y goods specified.
vehicle. (SUGGESTION TO
REDUCE / MINIMIZE
It is pertinent to mention that almost all LITIGATIONS)
heavy goods vehicles have both `gross
vehicle weight' and `unladen weight'.
In other words, every heavy goods vehicle
has both criteria in its registration
certificate:
· Gross Vehicle Weight as well as
· Unladen Weight
In such cases, it needs to be clarified
whether to use `gross vehicle weight' or
`unladen weight' for computation of
income in case both are available for the
heavy goods vehicle.
A clarification is required w.r.t how a
Heavy goods vehicle owner should
calculate its presumptive income u/s
44AE. A simple example is as under:
Mr. A has only one Heavy Goods Vehicle
(HGV). Vehicle's Registration Certificate
mentions both the weights i.e.:
· Gross Vehicle Weight 35 Tons;
and
· Unladen Weight 18 Tons
It means that the HGV can load maximum
17 Tons of Goods.
· If Unladen Weight is taken, tax
u/s 44AE would be minimum Rs.
18000/- p.m.
· If Gross Vehicle Weight is taken,
tax u/s 44AE would be minimum
be Rs. 35,000/- p.m.
What should be the presumptive income
of Mr. A u/s 44AE.
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 25
The Institute of Chartered Accountants of India
PART E-CAPITAL GAINS
Sr. No Section Issue/Justification Suggestion
23. Limited LLP though named as Limited It is suggested that similar
Liability Liability Partnership but for all provision need to be inserted
Partnership practical purposes it is a body for LLP allowing merger and
(LLP)- corporate having perpetual demerger and amalgamation
succession. As business grows to be revenue neutral.
there will be merger, (SUGGESTIONS FOR
(a) Merger and
amalgamation, demerger of RATIONALIZATION OF THE
Amalgamation
LLP's as well. At present merger PROVISIONS OF DIRECT TAX
of Limited
and amalgamation of companies LAWS)
Liability
is Revenue neutral.
Partnership to
be Revenue
Neutral
(b) Section 47 Clause (viab) is inserted in New clauses may be inserted
Insertion of section 47 so as to provide in section 47 to provide for
clause (viab) exemption in respect of any (i) consequent exemption in
to provide transfer in a scheme of respect of transfer of shares
exemption in amalgamation, of a capital asset, by the resident shareholders
respect of being a share of a foreign of the amalgamating foreign
transfer of company, which derives, directly company if transfer is made in
capital asset or indirectly, its value consideration of the allotment
consequent to substantially from the share or to him of any shares or shares
amalgamation shares of an Indian company, in the amalgamated foreign
of foreign held by the amalgamating company.
companies - foreign company to the
(ii) exemption in respect of
Consequent amalgamated foreign company.
transfer in a scheme of
exemption to
business re-organisation of a
be provided in
However, no clause has been capital asset, being a share of
respect of
inserted to provide consequent a foreign company, which
transfer of
exemption in respect of transfer derives, directly or indirectly,
shares by
of shares by the resident its value substantially from the
resident
shareholders of amalgamating share or shares of an Indian
shareholders
foreign company in company.
consideration of allotment of (SUGGESTION FOR
shares of amalgamated foreign RATIONALIZATION OF THE
company. This appears to be an PROVISIONS OF DIRECT
inadvertent omission, since in TAX LAWS)
case of exemption under section
47(vi) in respect of transfer of
capital asset in a scheme of
amalgamation by an
Page 26 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
amalgamating company to the
amalgamated company, where
the amalgamated company is an
Indian company, consequent
exemption has been provided
under section 47(vii) in the
hands of the shareholders of the
amalgamating company for
transfer of shares of
amalgamating company in
consideration of allotment of
shares of amalgamated
company.
Further, transfer in a scheme of
business reorganization of a
capital asset, being a share of a
foreign company, which derives,
directly or indirectly, its value
substantially from the share or
shares of an Indian company
should also be exempt under
section 47. Business
reorganization may be defined to
mean the reorganization of
business, otherwise than by way
of amalgamation or demerger of
foreign companies.
(c) The existing section 47(xiiib) Many companies are now
Consequential provides that no capital gains tax converting themselves to LLP.
amendment is payable on conversion of a With a view to popularize the
required in private limited or unlisted public concept of LLP and also in
section company into LLP subject to view of the fact that such
47(xiiib) certain conditions. Proviso (e) provision should apply to all
states that this provision will not cases of revenue neutral
apply if the total sales, turnover conversions from one form of
or gross receipts in the business entity to another form of
of any of the three preceeding entity, there should be no
years exceed Rs. 60 lakhs. threshold on turnover, to avail
Since this was an amendment to the benefit under section
facilitate conversion of private 47(xiiib) or alternatively, the
limited companies and unlisted limit of sixty Lacs rupees
companies into LLPs, ideally, should be substantially
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 27
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
there should be no restriction on enhanced or the condition of
the turnover to avail the benefit the turnover should be
of section 47(xiiib). It may also deleted.
be noted that the parent Act i.e. (SUGGESTIONS FOR
Limited Liability Partnership Act RATIONALIZATION OF THE
2008, allows this conversion PROVISIONS OF DIRECT TAX
without any such restrictions. LAWS)
(d) Section LLP is a preferred form of 1. In view of the aforesaid, it is
47(xiiib) - organization for smooth conduct suggested that the condition
Conversion of of business. Accordingly, section of asset base being less than
company into 47(xiiib) provides for an Rs. 5 crores be rationalized
LLP exemption enabling smooth and may be increased to Rs 10
Clarification conversion, subject to crore.
required compliance with the conditions.
relating to There was a case for making the
2. Also, the scope of the term
additional exemption more liberal by
`value of total assets as
condition relaxing the turnover limit which
appearing in the books of
is one of the present conditions.
accounts' be clarified to
However, conversion will
provide certainty and reduce
become all the more difficult as a
litigation.
result of an additional condition
which will deny exemption in a (SUGGESTION FOR
case where the company was RATIONALIZATION OF THE
possessed of total assets worth PROVISIONS OF DIRECT
Rs. 5 crores in any of the 3 TAX LAWS)
years.
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 eve n 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 advance tax paid
Page 28 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
shown on asset side (with
corresponding provisions for tax
on liability side), etc. are the
other issues which need to be
addressed.
24. Business Presently, section 47(x)/(xa) In view of the aforesaid, it is
reorganization clarifies that conversion of suggested that Section 79 may
s - Section bonds/debentures (including be appropriately amended
FCCBs/FCEBs) into shares or since abusive transactions of
47(x)/(xa) debentures shall not be regarded change in shareholding with a
as `transfer' and hence shall not view to avoid or reduce tax
trigger capital gains. liability shall be addressed by
GAAR from 1 stApril, 2017.
In absence of similar
clarification, there is ambiguity
(SUGGESTION FOR
when there is conversion of RATIONALIZATION OF THE
equity shares into preference PROVISIONS OF DIRECT
shares or conversion of one TAX LAWS)
class of shares into another
class of shares. Such
conversions do not trigger any
immediate cash flows for the
investors.
Section 79 denies carry forward
of loss for closely held
companies where there is
change in shareholding beyond
50% from shareholding which
prevailed in the year of loss. This
provision is intended as anti-
abuse provision to prevent
business reorganizations with
sole motive of benefit of tax
losses. However, this provision
acts as impediment in many
bonafide circumstances like
investment by PE investor in a
start-up company or
amalgamation or demerger of
shareholder company or intra-
group reorganization.
25. Sections. 47(x) Section 47 (xa) read with Section It is suggested that appropriate
& (xa) and 49(2A) effectively provide that amendment should be made in
49(2A) -
conversion of FCEB in to shares of Section 2(42A) to provide that
Capital Gain
any company will not give rise to holding period of such shares
on Conversion
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 29
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
of Foreign capital gain and for the purpose of should be taken from the date of
Currency computing capital gain arising on acquisition of FCEB/debentures/
Exchangeable sale of such shares at subsequent other bonds and not from the
Bonds (FCEB) stage, cost of acquisition shall be date of allotment of shares.
and other taken as the relevant part of cost
Bonds & (SUGGESTION FOR
of FCEB. There is no RATIONALIZATION OF THE
Debentures.
corresponding provision for taking PROVISIONS OF DIRECT
holding period of the shares from TAX LAWS)
the day of acquisition of the Bonds
[FCEB]. Similar difficulty exists in
case of conversion of debentures
and other bonds in to shares for
which also similar provision exists
in Section 47(x).
26. Section 54EC a) Time limit for investment in a) It is suggested to amend
- Time Limit specified bonds is presently 6 section 54EC so that time limit
for investment months from the date of transfer. for investment in specified
in specified bonds may be allowed upto
bonds the due date of filing of ITR.
1. In many cases, assessee is not
aware about exemption provision
and comes to know about it only (SUGGESTION FOR
when he approaches his/her tax RATIONALIZATION OF THE
consultant at the time of filling of PROVISIONS OF DIRECT
ITR. By this time, 6 months period TAX LAWS)
is already over and thus the
assessee inadvertently lose the
benefit of exemption.
2. Present time limit expires
exactly at 6 months from the date
of transfer. Due to this, even an
otherwise knowledgeable
assessee is also forced to be
very cautious about exact date
and sometimes he may miss it
unintentionally.
3. Bringing the time limit upto the
due date of filling of ITR shall also
bring parity with section
54/54B/54F etc. where assessee
is permitted to deposit the money
in Capital Gains Account upto the
Page 30 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
due date of filing of ITR. In fact,
assessee would be in a better
position to take a call as to which
exemption option is better suited
for him.
4. In number of transactions,
there is some difference in dates
of actual handing over of
possession, submission of
documents for registration of
transfer, actual date of registration
and even a subsequent
modification of registered
document due to demand of
additional stamp duty. All these
dates, though may fall in the same
year but still may differ from each
other, creating an unnecessary
dispute regarding actual date of
transfer and thereby time limit of 6
months. (Case of Anil Dulichand
Jain V. ACIT, ITAT Mumbai ITA
No. 4922/MUM/2016 is a good
example of this). If the date of
investment in specified bonds is
made upto the due date of filling of
ITR, such disputes can be saved.
(b) Capital gains exemption on (b) Considering the fact that
investment in Specified Bonds the new proviso takes care of
during the financial year the true intent of the law, and
In furtherance of the existing appears to be contrary to the
proviso to section 54EC, a new existing proviso, thereby
proviso has been inserted to causing hardship to the
clarify that the investment made genuine taxpayers, it is
by an assessee in the long-term suggested that the act be
specified asset, from capital gains amended to substitute the first
arising from transfer of one or proviso with the newly
more original assets, during the inserted proviso.
financial year in which the
original asset or assets are Further, considering the
transferred and in the subsequent inflationary conditions in the
economy, it is further
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 31
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
financial year does not exceed fifty suggested that the said limit of
lakh rupees. Rs.50 Lakhs may be raised to
Rs. 1 crore.
The change is proposed to plug (SUGGESTION FOR
the revenue leakage and to clarify RATIONALIZATION OF THE
the real intent of the law. Since, PROVISIONS OF DIRECT
the new proviso is in furtherance TAX LAWS)
of the existing proviso; it may
cause hardship in genuine cases
where investment has to be made
in long term specified asset in
respect of two previous years in a
single financial year. For example,
an assessee selling a long-term
capital asset in February, 2015
(Previous year 2014-15) may
invest in Section 54EC assets
either in 2014-15 or 2015-16 (upto
August,2015). However, in respect
of any long-term capital asset sold
by him in the year 2015-16, he will
not be able to invest in 54EC
bonds since exemption will be
available to him due to
applicability of first proviso to
section 54EC.
27. Reference to This section empowers the It is suggested that the
the Valuation assessing officer to refer the meaning of variance under
Officer - matter to the valuation officer for clause (a) be defined and
the purposes of ascertaining the given a reasonable tolerance
Section 55A
fair market value of the capital limit. If the variance is within
asset. such limits, matter should not
be referred to the valuation
Under clause (a), the power has officer.
been given to the valuation
officer to refer the matter, where Further, section 55A(b)(i) may
the value of the asset has been be amended as follows:
claimed by the assessee in
accordance with the estimate "(i) that the fair market value
made by the registered valuer of the asset exceeds the value
and the assessing officer is of the of the asset as claimed by the
opinion that the value is in assessee AND HIGHER OF by
variance with its fair market more than such percentage of
value. the value of the asset as so
Page 32 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
claimed or by more than such
The variance has not been amount as may be prescribed
defined by the board and hence it in this behalf ; or"
is creating lot of difficulties to the (SUGGESTION FOR
assesses as even in case of RATIONALIZATION OF THE
minor variation, the matters are PROVISIONS OF DIRECT
getting referred to the valuation TAX LAWS)
officer.
Further under clause (b), the
assessing officer can refer the
matter where he is of the opinion
that the fair market value of the
asset exceeds the value claimed
by the assessee by more than
such percentage of the value of
the asset or by more than such
amount as may be prescribed.
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 33
The Institute of Chartered Accountants of India
PART F-INCOME FROM OTHER SOURCES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
28. Definition of Under the existing provisions of section Suggestions:
the term 56(2)(vii), any sum or property received by an (i) The provisions of
relative - individual or HUF for inadequate consideration clubbing of income as
Explanation to or without consideration is deemed as income contained in Chapter V
Section 56(2) and is taxed under the head `Income from other of the Income-tax Act,
(vii) sources'. However, in case of any individual, 1961 should not be
receipts from specified relatives are excluded attracted once the sum
from the purview and hence, are not taxable. of money or value of
The Explanation to section 56(2)(vii) was assets are subject to tax
amended by the Finance Act, 2012 so as to under section 56(2) in
provide that any sum or property received the hands of the
without consideration or inadequate recipient.
consideration by an HUF from its members (ii) Lineal descendants of
would also be excluded from taxation. brothers and sisters of
The provisions of clubbing of income as self and spouse may
contained in Chapter V of the Income-tax Act, also be included in the
1961 are attracted in respect of income from definition of "relative"
any sum of money or value of assets in line with the
transferred to a non-relative. Once the sum of provisions of section
money or value of assets are subject to tax 13(3). Also, maternal
under section 56(2) in the hands of the grandparents may be
recipient, the income from such assets should included in the
not be subject to the clubbing provisions definition of relatives.
contained in Chapter V. (iii) The application of the
Further, it may be noted that, in relation to an provision should also
"individual", the term relative, as it stands at be extended to the
present, does not include nieces and nephews. relatives of the
This may not be the legislative intent as they members of HUF.
also form part of the close circle of relatives and (SUGGESTIONS FOR
accordingly have been considered as "relative" RATIONALIZATION OF THE
in the Direct Taxes Code Bill, 2010 and 2013. PROVISIONS OF DIRECT
TAX LAWS)
29. Section Section 56(2)(viii) refers to income by way of It is suggested to give
56(2)(viii) interest received on compensation or on reference of Section 145B(1)
reference to enhanced compensation referred to in clause and to remove the reference
section (b) of section 145A. However, section 145A has of Section 145A(b) in section
145A(b) be been substituted by a new Section 145A and a 56(2)(viii).
changed to
Page 34 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
145B(1) new Section 145B is inserted vide the Finance (SUGGESTION FOR
Act, 2018. REMOVAL OF
ADMINISTRATIVE AND
PROCEDURAL
DIFFICULTIES RELATING TO
DIRECT TAXES)
30. Section Section 56(2)(x) contains provisions related to It is suggested that sub-
56(2)(x) charging of income to tax where a person clause (IX) of 4th Proviso to
Certain receives any money, immovable property or section 56(2)(x) may be
exceptions to property other than immovable property without amended to include
be provided consideration or with inadequate consideration. following clauses of section
w.r.t. 47
conversion · (xiii)
4th Proviso to section 56(2)(x) provides the
cases to which this clause would not apply. · (xiiib)
· (xiv)
(SUGGESTION FOR
Sub-clause (IX) to 4 th Proviso to section
RATIONALIZATION OF THE
56(2)(x) provides certain transactions not
PROVISIONS OF DIRECT
regarded as transfer to which this section would
TAX LAWS)
not be applicable.
Certain transactions, seems to be missed out
even though covered u/s 47 specially related to
conversions, where even though they are not
regarded as transfer and Capital Gain would not
be attracted but if, it includes Immovable
Property or property other than immovable
property (eg shares), they could be covered u/s
56(2)(x). These include:
- Clause (xiii) conversion of firm into
company
- Clause (xiiib) conversion of company
into LLP
- Clause (xiv) conversion of sole
proprietorship into company
31. Section The combined effect of these 4 sections is as It is suggested that, in the
56(2)(x) read under: interest of equity, the
with sections (i) If a Real Estate Company sells an aforesaid provisions require
43CA, 50C, Immovable Property to its client at a price to be amended as under:
50CA below the stamp duty valuation, the difference
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 35
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
Issues to be between the stamp duty valuation and the (i) If the transactions
addressed actual sale price (subject to the margin of 5%) covered u/s 43CA, 50C or
is taxable in the case of Real Estate Company, 50CA are between relatives,
u/s 43CA. The same amount is taxable in the the seller may be granted
case of the purchaser of the property u/s exemption which is available
56(2)(x). to the purchaser u/s 56(2)(x).
(ii) Similarly, when a person sells an Immovable
Property to another person at a price below the (ii) If the transactions are
Stamp Duty Valuation, the difference between between non-relatives, it
the Stamp Duty Valuation and actual sale price may be provided that only
(subject to the margin of 5%) is taxable in the 50% of the difference
case of the seller u/s 50C and in the case of the between the Fair Market
purchaser u/s 56(2)(x). Value and the actual sale
(iii) If a person sells Shares in a company, price (Notional income) will
which are not quoted on the Stock Exchange, be taxable in the hands of
at a price below Fair Value determined in the the seller and 50% of the
prescribed manner, the difference between notional income will be
such Fair Value and the actual sale price will be taxable in the hands of the
taxable in the hands of the seller u/s 50CA and purchaser of the asset.
in the hands of the purchaser u/s 56(2)(x). (SUGGESTION FOR
From the above provisions, it is evident that the RATIONALIZATION OF THE
difference between the Fair Market Value / PROVISIONS OF DIRECT
Stamp Duty Valuation and the actual sale / TAX LAWS)
purchase price is only a notional income.
Further, under the above provisions, such
notional income is taxed in the hands of the
seller as well as the purchaser. In other words,
in respect of the same notional amount, arising
in one transaction, there is double taxation,
once in the hands of the purchaser and again in
the hands of the seller.
Further, if such transaction is between two
relatives, as defined u/s 56(2)(vii), the seller will
have to pay tax u/s 43CA, 50C or 50CA,
whereas the purchaser will be able to claim
exemption u/s 56(2)(x).
Page 36 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
CHAPTER VI
AGGREGATION OF INCOME AND SET OFF OR
CARRY FORWARD OF LOSS
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 37
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
32. Section 72A - Currently, all industrial undertakings in the It is suggested to amend
Carry forward of Manufacturing, Software, Electricity, Section 72A(7)(aa) to also
losses in case Telecom, etc. sectors are allowed to carry include Broadcasting, Media
of forward of losses in case of merger / and Entertainment sector.
amalgamation amalgamation. (SUGGESTION FOR
or merger for Services industry undertaking in general RATIONALIZATION OF THE
service industry are not allowed such carry forward with the PROVISIONS OF DIRECT TAX
exception of Software and Telecom LAWS)
services.
Media and Entertainment Industry requires
huge investments in digitization,
technology set up and distribution network.
Seeking level playing field with other
services like Telecom, Software etc.
As per the Notification issued by the Govt.
in 2004, Broadcasting and Cable Services
are a part of Telecommunication Services.
Consolidation of media industry will help in
rapid growth and generation of substantial
employment opportunities and faster
digitization.
33. Section 78 Currently, a firm assessee is not allowed It is suggested that section
Issue of carry to carry forward and set-off its losses to 78 and 79 may be suitably
forward and set the extent of the share of the partner who amended to allow / restrict
off of losses of has retired/ resigned as a partner. This is carry forward of losses and
an LLP so, as firm and partners are treated as set-off of an LLP assessee
same under the civil law and a firm does under section 79 and not as
not have a separate legal entity, unlike a per section 78.
company being a body corporate. (SUGGESTION FOR
Under Income Tax, firm is a separate RATIONALIZATION OF THE
person and it includes an LLP. PROVISIONS OF DIRECT TAX
LLP is a body corporate under LLP Act, LAWS)
2008 and has separate legal entity and
perpetual succession. An LLP may have
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
100 or 1000 partners, as there is no limit
on maximum number of partners under
LLP.
Being a body corporate like company, an
LLP having separate legal entity, the carry
forward of losses and set-off should not be
similar to a firm but should be similar to a
company.
34. Section 79 The Finance Act, 2017 amended section It is, therefore, suggested
(a) Carry 79 to provide that where a change in that the condition of
forward and set shareholding has taken place in a previous continuous holding of the
off of loss in year in the case of a company, not being a promoters/investors (being
case of eligible company in which the public are persons holding shares in
start-ups - substantially interested and being an the year of loss) be relaxed.
Condition to be eligible start-up as referred to in section Inter-se transfers between
further relaxed 80-IAC of the Act, loss shall be carried such shareholders be
forward and set off against the income of permitted. Also, it should
the previous year, if all the suffice that the group of
shareholders of such company which promoters/investors hold
held shares carrying voting power on the upto 26% of the voting power
last day of the year or years in which the in the year of set-off. In any
loss was incurred, being the loss incurred case, the turnover condition
during the period of 7 years beginning for a company to be an
from the year in which such company is `eligible start up' may be
incorporated, continue to hold those omitted in Explanation (ii)(b)
shares on the last day of such previous to section 80-IAC.
year.
The existing provisions provide for Also, the period for carry
restrictions on carry forward of losses in forward and set-off of losses
case of substantial change in shareholding can be extended based on
of the Indian company. As per the current period of gestation in the
provisions, shareholders of the company at particular industry instead of
the end of the financial year in which the initial period of 7 years.
loss was incurred must continue to own at
(SUGGESTION FOR
least 51% of the shares in that company in
RATIONALIZATION OF
the year in which such carry forward loss
THE PROVISIONS OF
is to be set off; otherwise, the company
DIRECT TAX LAWS)
loses the ability to carry forward such loss.
The Government, in pursuance of the
start-up action plan and facilitating ease of
doing business, introduced a beneficial
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 39
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
regime for start-up to carry forward and set
off losses. It has been provided that as
long as all the original shareholders of the
Company at the end of the financial year in
which the loss was incurred continue to be
shareholders of such shares in the
financial year in which the loss is to be set
off, the benefit of carry forward of loss
would be available.
Another issue is on account of turnover
condition specified in Explanation (ii)(b) of
section 80-IAC for a company to qualify as
`eligible start up'. The condition is that
turnover of such company should not
exceed Rs. 25 Crore anytime between F.Y.
2016-17 to F.Y. 2020-21. This condition
also creates uncertainty for startups in the
matter of section 79 limitation as generally
applicable to closely held companies i.e.,
whether the turnover limit has to be
adhered to in the year of set-off as well.
The condition of continuing to hold all
shares appears to be applicable not only
to the initial promoters but also all persons
investing subsequently in the startup,
which may cause genuine practical
hardship. This may also be practically
difficult for the start-up company to
achieve since PE investors generally look
at time frame of 3 to 5 years for exit at a
higher price. The exit may happen either
through secondary sale in subsequent
round of PE funding or through IPO. Any
such exit will trigger section 79 limitation
for the start-up company.
(b) Insertion of Section 79 of the Income-tax Act,1961 It is suggested that the
third proviso in restricts the carry forward and set off of language of the third proviso
Section 79 - losses in the hands of a closely held to section 79 be modified to
relief for change company, if the shares carrying more than clarify that it applies both to
in shareholding 51% of voting power of such company are the company undergoing
of subsidiaries not beneficially held by persons who resolution process as well as
pursuant to beneficially held such shares on the last its subsidiaries. The
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Sr. Section Issue/Justification Suggestion
No
resolution plan day of the previous year in which such loss provision may be modified as
was incurred. follows:
In general, implementation of resolution "Provided also that nothing
plan in respect of a company undergoing contained in this section
resolution process may involve either shall apply to a company as
issue of additional shares or other well as its subsidiary where a
restructuring exercise resulting in change change in the shareholding
in the shareholding of such company takes place in a previous
beyond the permissible limit u/s 79. year pursuant to a resolution
plan approved under the
Insolvency and Bankruptcy
In addition, thereto, the company may also
Code, 2016, after affording a
be required to hive off its investments in
reasonable opportunity of
subsidiaries by selling its stake to
being heard to the
interested investors. This may result in
jurisdictional Principal
change in shareholding of the subsidiaries
Commissioner or
triggering consequences u/s 79 of the
Commissioner holding
Income-tax Act,1961 in the hands of
jurisdiction over the
subsidiaries as well. Hence, this may
applicant".
discourage the interested
acquirers/bidders from making investments (SUGGESTION FOR
in loss making subsidiaries and also in RATIONALIZATION OF
offering higher bids. THE PROVISIONS OF
DIRECT TAX LAWS)
Finance Act 2018 has amended the
provisions of section 79 by inserting third
proviso to section 79, to state that section
79 will not apply to companies, where the
change in the shareholding is pursuant to
implementation of a resolution plan
approved by adjudicating authority (AA).
This benefit is to be provided after an
opportunity of being heard is given to the
jurisdictional Commissioner or Principal
Commissioner.
Issue:
Thus, in terms of the third proviso to
section 79, carry forward and set off of
losses of a company undergoing
insolvency resolution process as well as its
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 41
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
subsidiaries will not be impacted by
section 79, if the change in shareholding
takes place pursuant to a resolution plan
approved by AA.
While such be the case, it is likely that
NCLT will not hear Principal
Commissioner/Commissioner holding
jurisdiction over the subsidiaries. Hence,
the reference to an opportunity of being
heard to be given to the Principle
Commissioner/Commissioner by AAs may
raise a doubt that the third proviso to
section 79 only refers to the company
which is undergoing a resolution process
under IBC.
Page 42 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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CHAPTER VIA
DEDUCTIONS TO BE MADE IN COMPUTING TOTAL
INCOME
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 43
The Institute of Chartered Accountants of India
PART B-
DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
35. Section PPF is used as a means of savings by It is suggested that:
80C entrepreneurs and professionals. While a) the annual limit for contribution to
the assessees in employment have the PPF be increased to Rs.3 lakhs from
compulsion of saving 12% of their salary the present ceiling of Rs.1.5 lakhs.
(with matching contribution from
employers), the only safe and tax
efficient saving option available for self- b) the maximum limit for deduction
employed assessees is PPF. Hence, the under section 80CCF may be
suggestion to increase the ceiling of PPF increased from Rs.1.5 lakhs to Rs.3
contribution to Rs.3 lakhs. This may also lakhs.
boost the domestic savings as a
percentage of GDP and will have an anti- c) full deduction for health insurance
inflationary impact. premium paid u/s.80D may be
allowed and not to tag it with
deduction for medical expense.
Apart from deduction for health
insurance premium, a separate
deduction for medical expenses
incurred should be made available.
The justification for such separate
deduction is lack of social security
cover and the inability of public
health sector to cater to the needs of
the tax payers by providing efficient
hygienic and timely medical
treatment.
d) the limit for deduction under
section 80DDB for expenses
incurred on treatment of certain
chronic diseases may be increased.
As per section 80CCC, if any
contribution is made by the
assessee to a pension fund and
deduction is claimed under that
section, all withdrawals from the
scheme by the assessee (including
Page 44 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
the principal amount) ARE
SUBJECTED TO TAX. This is
causing hardship in respect of those
assessees who have simply made
contributions to this scheme and
have not claimed any deductions.
Hence, the suggestion to amend this
section to the effect that in cases
where deduction is not claimed
under this section, only the
appreciation component of the
investment will be subjected to tax.
Even if deduction is claimed, only
the amount of deduction claimed
should be added to the income at the
time of withdrawal from the scheme
and not the entire maturity proceeds.
Of course, any appreciation over the
principal invested can also be taxed
as capital gain.
(SUGGESTION FOR REMOVAL OF
ADMINISTRATIVE AND
PROCEDURAL DIFFICULTIES
RELATING TO DIRECT TAXES)
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 45
The Institute of Chartered Accountants of India
PART C-
DEDUCTIONS IN RESPECT OF CERTAIN INCOMES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
36. Deduction in Section 80TTA was inserted by the Finance Act, Interest on all types
respect of 2012 to provide deduction of up to Rs.10,000 in the of deposits (eg
interest on hands of individuals and HUFs in respect of interest FDRs) may also be
deposits in on savings account with banks, post offices and co- included within the
savings operative societies carrying on business of banking. scope of section
account - However, it is unlikely that salaried individuals would 80TTA.
Section 80TTA keep their entire savings in a savings bank account, (SUGGESTIONS
which earns a much lower rate of interest as FOR
compared to term deposits. They are likely to transfer RATIONALIZATION
some portion of their savings to several deposits to OF THE
earn comparatively better returns. Therefore, since PROVISIONS OF
the money is anyway kept within the banking DIRECT TAX LAWS)
channels, it is suggested to include all types of
deposit interest within the ambit of section 80TTA.
37. Section 80TTB The Finance Act 2018 inserted a new section 80TTB It is suggested that
Deduction in so as to allow a deduction upto Rs 50,000/- in income by way of
respect of respect of interest income on deposits made by interest on National
Savings Certificate
interest on senior citizens.
also be included
deposits in The aforesaid new section, inter alia, provides that within the ambit of
case of senior where the gross total income of an assessee, being a provisions of
citizens senior citizen, includes any income by way of interest section 80TTB, so
Request to on deposits with a banking company to which the that senior citizens
extend the Banking Regulation Act, 1949, applies (including any who have
benefit by bank or banking institution referred to in section 51 of purchased NSCs
that Act) or a co-operative society engaged in the from post offices
including
are also able to
interest on business of banking (including a co-operative land avail the benefit of
National mortgage bank or a co-operative land development
enhanced
bank) or a Post Office as defined in clause (k) of
Savings deduction under
section 2 of the Indian Post Office Act, 1898, a
Certificate section 80TTB.
deduction of an amount up to Rs. 50,000 shall be
within the allowed. (SUGGESTION
ambit of FOR
This amendment will greatly benefit the senior RATIONALIZATIO
section 80TTB
citizens whose main source of income is generally N OF THE
from interest income. PROVISIONS OF
It is pertinent to mention that another main source of DIRECT TAX
income for senior citizens is interest income on LAWS)
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Sr. Section Issue/Justification Suggestion
No
National Savings Certificate which can be purchased
from Post Offices in India. In order to extend the
benefit of provisions of section 80TTB to senior
citizens, it is recommended that interest income
arising to Senior Citizens on National savings
Certificate may also be included within the ambit of
section 80TTB.
38. Section 80U Section 80U, inter alia , provide for a deduction to an It is suggested that
Consequential individual, being a resident, who, at any time during section 80U may be
amendments suitably amended
the previous year, is certified by the medical authority
so as appropriately
required due to be a person with disability. As per Explanation to
incorporate the
to the the said section, certain terms like "disability", provisions of the
enactment of "medical authority", "person with disability" and newly enacted law
`The Rights of "person with severe disability" have been defined i.e. `The Rights of
Persons with w.r.t. to provisions of the Persons with Disabilities Persons with
Disabilities (Equal Opportunities, Protection of Rights and Full Disabilities Act,
Act, 2016' Participation) Act, 1995. However, the said Act has 2016' repealing the
been repealed w.e.f. 28.12.2016 with the enactment law `the Persons
w.e.f.
of the `The Rights of Persons with Disabilities Act, with Disabilities
28.12.2016 (Equal
2016'. Accordingly, section 80U needs amendment in
consonance with the new Act. Some of the salient Opportunities,
features of the new law are: Protection of Rights
and Full
i. Disability has been defined based on an evolving Participation) Act,
and dynamic concept. 1995' w.e.f.
ii. The types of disabilities have been increased from 28.12.2016 as
existing 7 to 21 and the Central Government will referred in existing
have the power to add more types of disabilities. section 80U.
(SUGGESTION
FOR
REDUCING/MINIMI
ZING
LITIGATIONS)
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 47
The Institute of Chartered Accountants of India
CHAPTER VIII
REBATES AND RELIEFS
Page 48 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
39. Section 89 Currently, Interest u/s 234B and It is suggested to amend the
Interest u/s 234C are levied on appropriate provisions of
234B/C to shortfall/deferment of advance tax section 234B and 234C so to
be charged on the difference in the tax liability levy interest after
after relief computed on the total income computing/providing for
computed computed (before giving relief u/s relief u/s 89 with
89) but considering prepaid taxes in retrospective effect.
accordance with the explanation 1 to (SUGGESTION TO REDUCE /
Section 234B(1). However, relief u/s MINIMIZE LITIGATIONS)
89 is provided when salary, etc., is
paid in arrears or in advance.
Levy of interest even after payment
of taxes /dues in full by way of TDS
is not justified and causes
unnecessary hardship to affected
salaried assessees.
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 49
The Institute of Chartered Accountants of India
CHAPTER X
SPECIAL PROVISIONS RELATING TO AVOIDANCE
OF TAX
Page 50 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
40. Domestic Section 80-IA(8) deals with Conceptually, `price
Transfer Pricing "ordinary profits" whereas transfer principles' cannot apply
[DTP] Sections pricing compliance refers to the for benchmarking of
92, 92BA, 92C, "Arm`s Length Price" of the `profits'.
92CA, 92D & 92E transactions. (SUGGESTION FOR
RATIONALIZATION OF
a) Arm's Length
THE PROVISIONS OF
Price vs Ordinary
DIRECT TAX LAWS)
Profits
b) Advance Currently, APA provisions are The same should also be
Pricing being made applicable to only made applicable to
Agreements international transactions. domestic transactions
covered by DTP
provisions.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
c) Documentation Where the volume of specified It is suggested that the
Requirements domestic transactions is below the maintenance of
threshold limit, the maintenance of documentation as
documentation as required for required for transfer
transfer pricing should not be pricing should not be
applicable. applicable. Alternatively,
a threshold limit of Rs.
25 crores be introduced
for TP documentation
requirements.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 51
The Institute of Chartered Accountants of India
CHAPTER XII-
DETERMINATION OF TAX IN SPECIAL CASES
Page 52 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
41. Section 115BBDA The provision to tax dividend in the hands of It is suggested that this levy
the recipient results in economic four level amounting to multiple level
(a) Dividend taxation viz. taxation on profits may be
received by - once as corporate tax on profits, done away with.
resident - secondly as DDT in hands of the company,
individuals, HUFs Alternatively, the earlier
- thirdly as tax on dividends.
and firms system of taxation of
receiving - Fourth by disallowing expenses on dividend
dividend, prior to 1997,
dividend in u/s. 14A.
namely, tax in the hands of
excess of Rs.10 The economic tax ultimately borne by resident the shareholder can be re-
lakh to be subject shareholders may be as high as 54%. introduced and levy of
to tax @ 10% in Dividend Distribution Tax in
their hands the hands of the company
Consequence of may be removed.
the new levy-
Triple taxation
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
(b) Tax on certain In the Finance Act, 2016 new section As the timing of receipt of
dividends 115BBDA was introduced to levy tax on dividend is uncertain and
received from certain dividend income received by a resident estimation of the same is
individual, HUF and firms aggregating Rs.10 also not possible, it is
domestic
lakhs at the rate of 10%. However, the act has suggested that exemption
companies not clarified about the payment of advance tax from advance tax provisions
on the same. may be given for such
Dividend Income taxable
under section 115BBDA.
Further, it is suggested that
full and complete advance
tax in this respect may be
permitted to be paid by the
31st march of the previous
year.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
42. Section 115BBE Section 115BBE was amended during the It is suggested that rate of
Need to demonetization period where if income was tax u/s 115BBE be restored
reconsider the assessed u/s 68 to 69D, tax would be charged to 30% and surcharge
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 53
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
high rate of tax @ effective rate of 78%. thereon be reduced as per
In the current scenario, the rate is very applicable total income
high/harsh and needs to be reconsidered. It is levels/slab rates.
not required now to tax at such high rate. (SUGGESTION TO CHECK
TAX AVOIDANCE)
43. Section 115BBG - The introduction of section 115BBG vide the It is suggested that section
Income from Finance Act, 2017 providing for a 10 percent 2(24) may be amended to
transfer of carbon tax on income from transfer of carbon credits include income from
credits to be is a welcome move. This would go a long way transfer of carbon credits
taxed @ 10% - in helping to resolve the uncertainty and in the definition of
Inclusion in litigation over the taxability of income from the "income".
definition of transfer of carbon credits going forward.
income under Consequent amendment is required in the The option to pay tax on
section 2(24) and definition of the term `income' under Section such receipts at 10% could
clarification 2(24) of the Income-tax Act to include the be structured as a one-time
regarding tax income from transfer of carbon credits. scheme open for a limited
treatment for Further, the position regarding taxability of time.
prior assessment income from transfer of carbon credits for (SUGGESTION FOR
years earlier years may be clarified since there have RATIONALIZATION OF
been divergent decisions given by the courts THE PROVISIONS OF
on whether such receipts are capital or DIRECT TAX LAWS)
revenue in nature. If the tax treatment is
made applicable for earlier years also, it
would garner more revenue from assessees
who have not offered the same to tax on the
ground that the same represents capital
receipt. This would also help avoid future
litigation and complete pending assessments.
The Government has also been taking several
steps aimed at curbing litigation. These
include coming up with schemes for dispute
resolution both for legacy disputes arising out
of retrospective amendments as well as other
disputes that are pending in the appellate
hierarchy. These measures and schemes are
welcome steps and have been commended by
the taxpayers. A similar scheme for income
from transfer of carbon credits for the past
years would go a long way towards furthering
the Government's stated objective of curbing
litigation.
Page 54 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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CHAPTER XII-B
SPECIAL PROVISIONS RELATING TO CERTAIN
COMPANIES
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 55
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
44. Rationalization The purpose behind introduction of MAT was to Since government has
of MAT rates bring all zero tax companies within the tax net already started
and to neutralize the impact of certain implementing phase out
Section 115JB
benefits/incentives. The Finance Minister while of exemptions and
introducing the Finance Act, 2015 announced to incentives, it is
reduce the rates of corporate tax from 30 per suggested that the levy
cent to 25 per cent in a phased manner. The of MAT should be
Finance Minister further stated that the reduction withdrawn.
of tax has to be necessarily accompanied by Without prejudice to
rationalisation and removal of various kinds of above, since the
tax exemptions and incentives for corporate exemptions and
taxpayers. incentives being phased
out for corporate
The Finance Act, 2016 has also amended the taxpayers, it would be
relevant provisions of the Act that would ensure necessary that the MAT
provisions, which were
the phasing out of deductions and incentives
introduced to bring in
available to companies to realign with the
the tax net the corporate
governments' decision of reducing the corporate taxpayers which were
tax rates as mentioned above. Similar phasing otherwise not being
out has been done by the Finance Act, 2017. taxed, should also be
streamlined.
It is suggested that with
the phasing out of
exemptions and
incentives and reduction
of corporate tax rates,
the burden of MAT
should also be gradually
reduced from the current
levels of 18.5 per cent to
a rate (say 15%) which
will match with phasing
out of tax exemptions
and incentives.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
45. Section The newly legislated Insolvency and Bankruptcy It is suggested that:
115JB - code, 2016 (IBC) is a comprehensive legislation
Insertion of in India dealing with insolvency and bankruptcy
i. Suitable clarification
Page 56 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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Sr. Section Issue/Justification Suggestion
No
clause (iih) in of Corporates. The Code consolidates all the may be inserted in
Explanation 1 other laws in India dealing with insolvency. Section 115JB to
to section Pursuant to enactment of IBC, the Sick clarify that the
115JB - Industrial Companies Act (SICA) has been brought forward
Downward repealed and provisions are made to enable losses and
adjustment of sick companies undergoing resolution through unabsorbed
aggregate BIFR to approach National Company Law depreciation for this
brought Tribunal (NCLT). IBC provides for purpose should be
forward implementation of resolution plan which is considered as per
losses and intended to revive distressed companies in a books of account. It
depreciation time bound manner under the creditor in may be provided that
u/s 115JB command process. the aggregate of the
brought forward
losses and
Stakeholders have been facing enormous
unabsorbed
bottlenecks due to lack of clarity on tax issues.
depreciation as at
Unfortunately, there is no provision in IBC or
the end of the year
Income-tax Act which provides for an overriding
preceding the year in
impact of resolution plan sanctioned by NCLT.
which application is
admitted may be
The Finance Act, 2018 has provided that while allowed to be
computing book profits u/s 115JB of the Income- reduced from book
tax Act, a deduction will be allowed for profits.
aggregate of book profits and unabsorbed
depreciation in case of companies in respect of
which an application for initiating resolution
(SUGGESTION FOR
process has been accepted by the adjudicating RATIONALIZATION OF
authority. THE PROVISIONS OF
DIRECT TAX LAWS)
Issues:
i. The language used in Section 115JB
creates a confusion as to whether
aggregate of losses and depreciation as
per books is to be considered for
deduction or whether aggregate of
losses and depreciation as computed
for tax purposes is to be considered for
downward adjustment from book profits.
ii. The scheme of MAT is linked to book
profits. The legislative intent also
appears to be to refer to the amounts
as per books of accounts. However, the
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 57
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
language as is presently used in
Section 115JB creates ambiguity.
iii. Re-organisation by way of merger of
distressed company is one of the known
forms of reorganising distressed
companies against whom proceeding
under IBC has been initiated. There is a
concern that the benefit u/s 115JB has
been extended merely to the
defaulting/distressed company against
whom the application for resolution plan
has been admitted and thus may not
extend to the company into which the
defaulting company may merge
pursuant to the implementation of the
resolution plan.
46. Section 115JB It appears that Disallowance/Adding back of Clause (b) and (i) of
-Minimum provision for diminution in value of any asset for Explanation 1 to section
Alternate tax computation of "book profit" is to be made in 115JB may be amended
case of every class of company {clause (i) to as follows-
Explanation 1 to section 115JB(2)}. However, in "(b) the amounts carried
case of banking companies, the Government to any reserves, by
may reconsider applicability of the disallowance whatever name called
provision. This is because of the fact that in [other than a reserve
computation of business income under normal specified under section
provision, deduction in respect of provision for 33AC and a reserve
bad debts is allowed under express provision created and allowed in
contained in section 36(1)(viia) subject to the accordance with the
limit specified in the said section. If provision for provisions of section
bad debts is allowed as deduction in 36(1)(viii)]
computation of business income under normal
....
provision, there does not appear to be any
cogent reason for disallowing the same in (i) the amount or
computation of "book profit" under section amounts set aside as
115JB. Similarly, any special reserve created in provision for diminution
accordance with the provisions of section in the value of any asset
36(1)(viii) also does not require any (other than provision for
disallowance in computation of book profit under bad and doubtful debts
section 115JB. allowed as a deduction
under section
36(1)(viia))"
(SUGGESTIONS TO
Page 58 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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Sr. Section Issue/Justification Suggestion
No
REDUCE/ MINIMIZE
LITIGATIONS)
47. Rationalization As per section 115JB, where in case of a It is suggested that in
of provisions company, the income tax payable on the total case of companies under
of MAT for income as computed under the Income-tax the MAT regime, income
short term Act in respect of any previous year is less than tax liability for short term
capital gains 18.5% of its book profit, then such book profit capital gains be the
shall be deemed to be the total income of the lower of the following:
assessee and the tax payable on such total 1) Income tax computed
income shall be the amount of income tax at the as per provisions
rate of 18.5%. This income tax is further to be of Section 111A of the
enhanced by surcharge (as applicable) and Income-tax Act.
health and education cess(es) (@4%).
2) Income tax computed
However, specified short term capital gains are as per provision of
taxable @ 15% under section 111A. section 115JB of Income-
Due to this, companies under the MAT regime tax Act.
may not be able to get away with a lower tax (SUGGESTION FOR
rate of 15% on Short term capital gains. IMPROVING TAX
COLLECTION)
48. Section 115JB Under Ind AS, prior period adjustments are not It is suggested that a
MAT reflected in the financials in which error is specific provision for
implications discovered but earlier period financials are revising return in the
for Ind AS restated to which such errors pertain. There aforesaid situation may
compliant could be an issue if the return of income for be provided or prior
companies such earlier year has already been filed and due period adjustments may
date of filing revised return has lapsed. be allowed to be
adjusted from book profit
in the year in which
errors are discovered.
(SUGGESTION TO
REDUCE / MINIMIZE
LITIGATIONS)
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 59
The Institute of Chartered Accountants of India
CHAPTER XII-D
SPECIAL PROVISIONS RELATING TO TAX ON
DISTRIBUTED PROFITS OF DOMESTIC COMPANIES
Page 60 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
1.
49. Section 115- Section 2(22)(e) is now amended to provide It is suggested that:
O - DDT on that, in the event of grant of loans and
deemed advances by closely held company either to (i) The continuance of the base
dividend u/s the shareholders having 10% equity or to a provision itself in the current
2(22)(e) concern in which such 10% equity holder form may be re-considered. The
has 20% beneficial ownership, the company provision was introduced at a
itself will be liable to pay dividend time the tax rates were materially
distribution tax u/s.115-O at the applicable substantial, governance was
rate to the extent of accumulated profits, difficult and closely held
which the company possesses. Such tax will companies were almost
be payable regardless of the fact that the universally governed by a
loan may have been given against proper singular family.
interest and may have been repaid on due (ii) Assuming it is not re-considered,
date. by way of rationalisation, the
applicability may be restricted to
When a loan is given to a tainted concern, a case where the shareholder has
there has been a controversy whether the at least 25% stake in each
amount of dividend needs to be taxed in the company, so as to capture a loan
hands of equity holder (who holds a nexus or advance to a concern.
with the concern) or in the hands of the (iii) It would be desirable to address
concern. the genesis of the controversy
instead of punishing the closely
Issues: held companies. The current
controversy may be retained with
(i) There could have been basic debate by the legislature specifying
whether any such provision is at all whether the amount of dividend
fair where loans and advances are should be taxed in the hands of
given either on proper interest and the concerned shareholder or in
re-payment terms or when loans and the hands of the concern.
advances are given in connection (iv) From the scope of dividend, the
with the business needs or in the advances and loans which are in
ordinary course of business. connection with the business or
Avoidable litigation has arisen even which are in ordinary course of
in cases where the advances are business should be excluded.
given for the purpose of purchase of Currently, this exclusion is
goods in the ordinary course of available only to certain specific
business. The said amendment categories of taxpayers.
makes the provision stupendously (v) It would also be fair to exclude
unfair. loans and advances which are
(ii) The limit of 10% shareholding, which given on terms which are
can establish nexus with the concern regarded as ALP and / or
is considered in practice to be reasonable.
considerably low and impractical. It (vi) A liberal set off may be available
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 61
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
is quite possible that an investor like by amending section 2(22)(e) to
PE investor or a passive investor provide that, out of amount
may create such a situation without distributed by the company either
the concerns being aware of the in the same year or in the
same. Further, the requirement is succeeding year, the amount of
beneficial holding in the concern. It DDT paid earlier will be
may not be possible for a company considered as a credit against
giving loan to ascertain the beneficial DDT payable at the time of
holding of its shareholders in another distribution.
concern. The company will be (SUGGESTION FOR
dependent wholly on the certification RATIONALIZATION OF THE
of the shareholder. Further, if the PROVISIONS OF DIRECT TAX LAWS)
company proceeds on the basis of
the certification provided by
shareholder and the same were to
be untrue, there might be adverse
consequences considering the
company and its principal officer will
be regarded as assessee in default
and all consequences of interest,
penalty prosecution, etc. will
consequently follow.
(iii) One wonders whether the
controversy (which is at the genesis
of the said amendment) could have
been taken care of by specifying in
an explicit manner whether the
amount will be chargeable in the
hands of the concern or in the hands
of the concerned shareholder. That
alone was the controversy and a
difficult solution may be avoided to
get rid of the controversy
(iv) The company will have extreme
consequences of not being able to
comply with the provision. This may
often be due to unawareness.
Unwarranted litigation may accrue on
such subject.
(v) It could be within the corporate
governance for one company to give
a loan to another on fair terms.
Taxability in the hands of the
company in the form of DDT that
too, where a mere 10% holder has
shares in the company is a harsh
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blow to the remaining 90% of the
shareholders who lose their value on
simultaneous basis upto the amount
of tax paid. This would be a
permanent loss to the shareholders.
They are being punished for no fault
of theirs.
(vi) There is very limited scope available
for mitigating the liability by means of
set off provided for in the section.
This is unlikely to be a possibility
where loan is to a concern. As a
result, the corporate group will end
up with extraordinary liability which
can range up to 70.53 % of income
of the company. This will be a highly
discriminatory treatment against the
closely held company structures.
50. Section 115- Section 115-O was introduced vide the In order to encourage small
O - Finance Act, 1997 w.e.f 1.6.1997, with a shareholders to invest in domestic
Grossing up view to reduce the hardship caused to the companies, it is suggested to drop the
of rate of shareholders due to the procedural work for requirement of grossing up the dividend
dividend refund and a lot of paper work. It was distribution tax rate.
distribution provided that any dividend declared by an (SUGGESTION FOR
tax Indian company will be taxable in the hands RATIONALIZATION OF THE
of the company and it would be tax free in PROVISIONS OF DIRECT TAX LAWS)
the hands of the shareholders. The rate of
dividend distribution tax was increased over
the years to 15% (plus surcharge and
education cess).
However, the Finance (No. 2) Act 2014
provided for the rate of dividend distribution
tax to be grossed up w.e.f. 1 October, 2014.
Thus, the effective dividend distribution tax
rate would increase to 17.647% (plus
surcharge and education cess). Table below
will illustrate the difference in cash outflow
after the amendment:
Particulars Earlier Now
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Dividend 500 500
declared
DDT (Incl. 84.975 99.95
of
surcharge
and
education
Cess)
Total 584.975 599.95
Outflow for
the
company
If the company decides to keep the outflow
constant i.e. Rs 584.975/-, then as per the
amendment, dividend to be received in the
hands of shareholders would reduce to Rs
487.52/- [584.975*500 / 599.95] as
compared to Rs 500/-.
In other words, shareholders would receive
2.499% less as compared to what they
would have received under earlier
provisions. Even though dividend income is
exempt in the hands of shareholders, it will
mainly affect the large number of small
shareholders, whose income is below
exemption limit as they would have paid tax
on dividend received at a lower rate.
Further, the total outflow for the company
would also increase by 2.99% (including
surcharge and education cess).
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CHAPTER XII-DA
SPECIAL PROVISIONS RELATING TO TAX ON
DISTRIBUTED INCOME OF DOMESTIC COMPANY
FOR BUY-BACK OF SHARES
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
51. Section 115QA As per section 115QA of Income-tax Act 1961, In view of the concerns
Effect on (Chapter XII-DA), in the case of distribution of faced by foreign investors
after introduction of
foreign income by the unlisted company on Buy back of
section 115QA, suitable
investments shares the law casts an obligation on the
amendments may be
company to pay additional income tax @20% on carried out in the Income-
the distributed income in addition to the tax Act, 1961 so that
corporate tax. In the case of foreign investor, foreign investors do not
the tax of 20% becomes payable even though have to pay tax when their
the amount received by him in foreign currency holding results in losses
works out to less than the amount which was only due to foreign
brought in at the time of initial investment. To exchange fluctuation.
(SUGGESTION
elaborate, the following illustration has been FOR
given: RATIONALIZATION OF
THE PROVISIONS OF
1. Amount invested by foreign investor in DIRECT TAX LAWS)
unlisted company = USD 1 million
2. Amount for which shares were issued
(Exchange rate USD 1 = INR 40) = INR 4
Crores
3. No. of shares issued @10 per share =
40,00,000
4. No. of Shares bought back by the company
(25% of share issued) 10,00,000
5. Amount paid to foreign investor (buy back
price INR 12.50 per share) = INR 1,25,00,000
6. Amount received by foreign investor {USD 1
= INR 60} = USD 208,333
7. Loss to foreign investor (i.e. 250,000-
208,333) = USD 41,667
8. Additional tax payable by the company
(125,00,000100,00,000)*20% = INR 500,000
Tax to be paid by the company on Rs.
25,00,000 is the final tax in addition to corporate
tax and the amount of tax so paid is nothing but
tax paid by the foreign investor. The foreign
investor is thus required to pay tax even when
he makes losses. Private equity investor who
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had invested in India are facing double concern
- firstly in the form of sharp depreciation in
Indian Rupee and secondly in the form of tax
amendment in the form of section 115QA.
In this connection, it would be worthwhile to say
that distributable income for foreign investor
shall be worked out by making the foreign
currency adjustment as per the provisions which
exists in section 48 of Income-tax Act, 1961
used for computing capital gains, and tax
should be levied only on the excess of amount
received by investors over the amount brought
in at the time of investment.
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CHAPTER XII-EB
SPECIAL PROVISIONS RELATING TO TAX ON
ACCREDITED INCOME OF CERTAIN TRUSTS AND
INSTITUTIONS
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52. a) Recovery Section 115TD(5) reads as Applicability of recovery
provisions on follows: provisions on the trustees etc.
trustees etc. "(5) The principal officer or the should be made only if it is
Section 115TD(5) trustee of the trust or the proved that non-recovery is
institution, as the case may be, attributed to any gross neglect,
and the trust or the institution misfeasance or breach of duty
shall also be liable to pay the tax on his part in relation to the
on accreted income to the credit affairs of the charitable
of the Central Government within institution or trust.
fourteen days from,-..." (SUGGESTION FOR
The term 'principal officer' is very RATIONALIZATION OF THE
widely defined in section 2(35) as PROVISIONS OF DIRECT
follows- TAX LAWS)
"'principal officer', used with
reference to a local authority or a
company or any other public body
or any association of persons or
anybody of individuals, means--
"(a) the secretary, treasurer,
manager or agent of the
authority, company, association
or body, or
(b) any person connected with
the management or
administration of the local
authority, company, association
or body upon whom the
Assessing Officer has served a
notice of his intention of treating
him as the principal officer
thereof;"
The AO can consider almost any
person connected with the
management as the principal
officer of the institution.
It seems that primary liability to
pay tax is on principal officer or
the trustee and if they don't pay
then that would be of Trust.
b) Section Section 115TD(5) reads as Time limit may be suitably
115TD(5) - follows: modified /increased.
Period of 14 "(5) The principal officer or the (SUGGESTION FOR
days insufficient trustee of the trust or the RATIONALIZATION OF THE
institution, as the case may be, PROVISIONS OF DIRECT
and the trust or the institution TAX LAWS)
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
shall also be liable to pay the tax
on accreted income to the credit
of the Central Government within
fourteen days from, ----..."
a. Time limit is too short to pay
especially when institution is
required to dispose of its assets
to make payment.
b. It takes longer time to take
permission from Charity
commissioner appointed under
Maharashtra Public Trust Act,
1950.
c. Further when capital assets are
sold, proceeds would also be
subject to capital gains tax.
As per section 115TD(5),Tax
need to be paid within a period of
14 days.
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CHAPTER XIV-
PROCEDURE FOR ASSESSMENT
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
53. Section 139(4) Prior to amendment made by the Finance Act, It is suggested that-
and 139(5) 2016: Section 139(4) provided that a person who (i) Reference to sub-section (1)
Time limit for has not furnished a return within the time allowed of section 142 may be reinstated
filing belated to him under sub-section (1), or within the time in new section 139(4) i.e.,
return reduced - allowed under a notice issued under sub-section enabling provision to be made
Reference to (1) of section 142, may furnish the return for any for filing of belated return in
return in previous year at any time before the expiry of one response to notice under section
response to year from the end of the relevant assessment 142(1).
section 142(1) year or before the completion of the assessment,
may be included whichever is earlier.
in Sections (ii) Section 139(5) may be
Similarly, Prior to amendment made by the
139(4) and 139(5) amended to provide for revision
Finance Act, 2016, Section 139(5) provided that if
of return filed in response to
any person, having furnished the return under
notice under section 142(1), in
sub-section (1), or in pursuance of a notice issued
line with the intent expressed in
under sub-section (1) of section 142 discovers
the Explanatory Memorandum.
any omission or any wrong statement therein, he
may furnish a revised return at any time before (SUGGESTION FOR
one year from the end of the relevant assessment RATIONALIZATION OF THE
year or completion of assessment, whichever is PROVISIONS OF DIRECT TAX
earlier. LAWS)
The Finance Act, 2016 has substituted 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.";
"(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
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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 Act, 2016.
54. Section There is no provision as of now for amendment It is suggested that provision
139A /surrender of PAN. Lots of jurisdictional issues may be made for:
Amendment arise due to non-intimation of change in address (a) application within 30 days of
/ surrender etc. amendment in PAN data and
of PAN
(b) surrender on
- death (by legal representative),
- merger,
- conversion,
- liquidation,
- strike-off.
(SUGGESTION FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
55. Section 139A Currently, certain persons who are required to file It is suggested that aforesaid
need for certain ITR are not mandated to apply for PAN. These sections be added to section
persons to include persons required to file ITR u/s 139A(1)(iii) where only persons
mandatorily have · 139(4B) covered u/s 139(4A) are required
PAN · 139(4C) to obtain PAN.
· 139(4D) (SUGGESTION TO IMPROVE
· 139(4E) TAX COLLECTION)
· 139(4F)
56. 142A-
Section Under As per the provision prior to Finance (No. 2) Act, Keeping in view the settled law
Estimation of 2014 contained in section 142A, the Assessing on the subject, the legislature
value of asset by Officer may, for the purpose of making an must specifically provide that
assessment or re-assessment require the satisfaction may be recorded
Valuation Officer
Valuation Officer to make an estimate of the value before making any reference to
of any investment, any bullion, jewellery or fair the Valuation Officer.
market value of any property. On receipt of the
report of the Valuation Officer, the Assessing
Officer may after giving the assessee an Alternately, sanction of a higher
opportunity of being heard take into account such authority must be taken before
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report for the purpose of assessment or re- any reference is made by the
assessment. Assessing Officer.
(SUGGESTION FOR
Section 142A did not envisage rejection of books RATIONALIZATION OF THE
of account as a pre-condition for reference to the PROVISIONS OF DIRECT TAX
Valuation Officer for estimation of the value of any LAWS)
investment or property. Further, section 142A
does not provide for any time limit for furnishing of
the report by the Valuation Officer.
As per the amended section 142A vide Finance
(No. 2) Act, 2014, the Assessing Officer may, for
the purpose of assessment or re-assessment,
refer any asset, property or investment to a
Valuation Officer, necessary for estimating its
value. The Assessing Officer is not required to
record any satisfaction about the correctness or
completeness of the accounts of the assessee.
Further, the report of the Valuation Officer may be
accepted after giving the assessee opportunity of
being heard.
Probable hardships after amendment by
Finance (No. 2) Act, 2014
(a) As per the earlier section 142A, the
Assessing Officer may refer to valuation for
the purpose of estimating the value of any
investment referred to in section 69 or 69A or
69B or 56(2). The law, as far as the trigger for
valuation is concerned, was settled and
permitted. The Assessing Officer was to
resort to valuation only after he was satisfied
that the books of account were not correct or
were incomplete. Henceforth, as per the
amendment made, the Assessing Officer
need not record any reason for making a
reference. In fact, as is the experience, the
Assessing Officer may even fear an audit
enquiry or objection if they do not refer cases
for valuation.
(b) The amended section may open flood gates
to valuation in each and every case resulting
in unnecessary litigation and inappropriate
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use of valuable resources of the Department.
(c) The Valuation Officer will become yet another
authority who will sit over judgements on what
should be the value of any property. As per
the discretion available with him for valuation,
it may also result in abuse.
(d) The power and scope of reference to a
Valuation Officer has been extended to any
asset, property or investment, thus giving vast
powers in the hands of the assessing
authority without any check.
57. Section 271AAB · Amended Section 271AAB provides for It is suggested that the
- Need to imposition of penalty @ 10% on undisclosed provisions of section 271AAB
simplify penal income found during the course of search and needs to be simplified. The time
provisions admitted at the stage of search subject to of admission may not be
fulfilment of other specified conditions in section considered for imposition of
271AAB(1A)(a) 60% penalty is to be imposed in penalty amount as once admitted
other cases u/s 271AAB(1A)(b). all culprit assesses should be
· The above system of penalty is very complex to treated on the same footings.
implement in reality. In search cases, penalty (SUGGESTION FOR
should ideally be the same irrespective of the time RATIONALIZATION OF THE
of admission/declaration by the culprit assessee. PROVISIONS OF DIRECT TAX
Assessing officers sometimes puts undue LAWS)
pressure on the assessees during search
proceedings to extract the maximum amount of
declaration. One of the reasons for the same is
the pressure of target achievement by the
assessing officers.
· In such cases, quality of assessment suffers a
lot and high-pitched assessments are made
unnecessarily.
58. Credit of Tax Currently, many government/ semi-government It is suggested that considering
Collected at authorities (viz. Mining Department) have been the hardship being faced by
Source relating demanding TCS of earlier years for which assessees in respect of cases
to earlier years assessments have already been completed, since mentioned aforesaid, the
(for which they had not collected the TCS in those relevant department should give credit
Assessments years. After making payments of TCS the for such TDS/TCS even if the
are already over certificates for the same are issued in current year assessments have been
& time period giving reference of expenditure incurred by payer completed and also the period
mentioned in for earlier financial years. mentioned u/s 155(14) has
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Section 155(14) As per the provision of section 155(14) "the credit expired.
has elapsed) of TDS/TCS certificates is available to assessee (SUGGESTIONS FOR
demanded by within 2 years from the end of the assessment RATIONALIZATION OF THE
the Government year in which such income is assessable" but PROVISIONS OF DIRECT TAX
authorities at a since the payment & certificates are received after LAWS)
later date the above-mentioned period, it is difficult to get
the credit for the same. The demand at such later
date itself is causing undue hardship to the
assessee and further the credit for the same is
not available to the assessee because the
assessments have already been completed.
Hence, department should give credit for such
TDS/TCS even if the assessments have been
completed and also the period mentioned u/s
155(14) has expired.
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CHAPTER-XVII
COLLECTION AND RECOVERY OF TAX
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The Institute of Chartered Accountants of India
PART B-DEDUCTION AT SOURCE
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
59. Section 194A - Section 194A(3)(iii)(a) provides that To provide relief to the
Interest payments the tax on interest other than genuine taxpayers paying
to NBFC interest on securities is NOT interest to NBFC's, it is
required to be deducted by a person suggested that the
responsible for paying the same to a section 194A(3)(iii)(a) be
resident, if the income is credited or amended to treat NBFC's
paid to any banking company to at par with other banking
which Banking Regulation Act, 1949 companies. Further, in
applies or any co-operative society order to ensure
engaged in the business of banking compliance of the
(including a co-operative land provisions of the Act for
mortgage bank). timely collection of taxes,
It may be noted that Section 194A provisions of Tax
does not treat Non-Banking collection at source be
Financial Institutions (NBFCs) at par made applicable to
with the Banking companies or Co- NBFC's in respect of such
operative Banks. Due to this, the interest.
middle-class businessmen who have (SUGGESTION FOR
borrowed money from NBFC's are RATIONALIZATION OF
disallowed interest paid on the same THE PROVISIONS OF
due to non-deduction of tax at DIRECT TAX LAWS)
source under section 194A of the
Income-tax Act, 1961. It is
suggested that section 194A should
not apply to NBFCs as:
a) NBFCs principal business
is of lending money under various
products just like Banking Company
or a co-operative Bank.
b) There is no mechanism for
deduction of tax on interest paid by
the assessees as the NBFCs collect
cheques of EMI for the tenure of
loan.
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c) NBFCs are also regulated
by RBI just like Banking Company
and a Co-operative Bank.
Considering the fact that there is no
mechanism for deduction of tax on
interest paid by the assessees as
the NBFCs collect cheques of EMI
for the tenure of loan, the non-
compliance of the provisions of this
section is inevitable. However, the
said provision creates problem for
the assessee who has borrowed
money as he is unable to claim
deduction in respect of said interest
due to operation of section 40(a)(ia).
60. Section 193 - No As per section 10(23FC), any It is suggested that as
tax withholding on income of a business trust by way of provided in section 194A,
`interest on interest received or receivable from a similar exclusion may
securities' earned a `special purpose vehicle' shall be be provided in section
by a business trust exempt. 193 with respect to no
defined as per Special purpose vehicle has been applicability of tax
section 10(23FC) defined as `an Indian company in withholding on any
which the business trust holds income by way of interest
controlling interest and any specific referred to in section
percentage of shareholding or 10(23FC).
interest, as may be required by the (SUGGESTION TO
regulations under which such trust is REDUCE / MINIMIZE
registered'. LITIGATIONS)
Further, Circular 1/2015 dated 21
January 2015 and the Memorandum
to the Finance Bill, 2014 with
respect to the taxation regime of
business trust states the following-
"The income by way of interest
received by the business trust from
SPV is accorded pass through
treatment i.e., there is no taxation
of such interest income in the
hands of the trust and no
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withholding tax at the level of
SPV.
(emphasis supplied)
Accordingly, section 194A(3)
Interest other than Interest of
securities provides that tax
withholding shall not apply in case
of any income by way of interest
referred to in section 10(23FC).
61. Section 194H The Digital India programme is a It is suggested that TDS
Request to flagship programme of the exemption limit u/s 194H
increase TDS Government of India with a vision to may be increased to Rs
exemption limit to transform India into a digitally 40,000 in cases of
Rs 40,000 empowered society. In order to recipients having PAN.
transform the entire ecosystem of It will eliminate the
public services, banking etc. following difficulties /
through the use of information challenges for the
technology, the Government of India Merchants, Companies as
has launched the Digital India well as Income-tax
programme. department:
One of the key initiatives of the - It takes huge amount of
government is to channelize all calculations and on top of
payments through Digital mode. It it, compliance of TDS on
has come up with many incentives the small amounts on
for using digital mode of payments millions of transactions
and with certain dis-incentive for which is a very
using cash mode of payments. cumbersome task and the
As part of promoting cashless TDS on the amounts may
transactions and converting India be in paisa as well. With
into less-cash society, various the above volume, filing
modes of digital payments are of TDS Returns and
available. One of the modes is a generation of TDS
point of sale (PoS). It is the place certificates is a
where sales are made. On a macro challenge;
level, a PoS may be a mall, a - TDS provisions are
market or a city. On a micro level, applicable once the
retailers consider a PoS to be the threshold limit crosses. In
area where a customer completes a the given business
transaction, such as a checkout scenario, incentives
counter. It is also known as a point payable to the merchants
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of purchase. is based on the business
It is a well-known fact that people given by the merchants
still consider cash as the safest way and thus, the projection
to buy things. Hence, when of incentive payable by
somebody goes to a small shop, the Company is not be
cash is the preferred way of possible. If the Company
payment. starts TDS deduction
before the threshold limit
However, some companies are
crosses, it will not be
trying to change the way people
acceptable by the
transact and even on small outlets
merchants;
like Pan-shops, nearby grocery
shops, the companies are pushing - There are enormous
to transact digitally using e-Wallet. number of transactions
with these small outlets /
It requires a lot of push as this
merchants, due to which
entails a behavioural change for the
the exercise of Income-
customer who needs to change his
tax department also gets
preferred mode of payment from
burdened (i.e.,
cash to digital mode as well as for
humongous data in the
the merchant who is also supposed
TDS return, issuance of
to accept payments digitally instead
TDS certificates,
of traditional cash.
transactions in Form
While convenience and 26AS). The administrative
accountability is the key to digital burden on the TDS
payments, for the customer and officers also increases for
merchants to change their the verification /
behaviour, government is giving reconciliation of such
incentives. Similar incentives are humongous data.
proposed by the private players
(SUGGESTION FOR
also. These small incentive will go a
long way to make behavioural
REMOVAL OF
changes. ADMINISTRATIVE AND
PROCEDURAL
It is to be noted here that there are
DIFFICULTIES
voluminous transactions, but the
RELATING TO DIRECT
incentive in absolute amount is very
TAXES)
low. The number of merchants to be
benefitted from the incentive
programme is also huge, however,
the amount payable to any single
merchant may not be large. These
incentives may be termed as
"Commission" under the Income -tax
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Act, 1961 and thus, applicability of
TDS provisions will arise.
62. Section 194-IA- The provisions for tax deduction is It is, therefore, suggested
Issues causing hardship to those sellers that section 197A may be
who claim full capital gains
amended to permit the
exemption by investing the capital
assessee to make an
gains or the net consideration, as
the case may be, in the manner application to the
provided in section 54, 54F, 54EC Assessing Officer for
etc., since in such cases, there issuing a certificate for
would be no tax liability on account no deduction of tax or
of capital gains. Further, for the deduction of tax at a
purposes of section 54F and 54GB, lower rate. In the
the entire net consideration is alternative, the seller may
required to be invested, which would be permitted to give a
pose a difficulty, since tax would declaration to the
already have been deducted from Assessing Officer and
the net consideration. furnish a copy of the
same to the buyer.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
63. Section 194J - The amendment to section 194J by It is suggested that
Fees for the Finance Act, 2012 requires section 194J be amended
professional or deduction of tax at source @ 10% to provide an
technical services on any remuneration or fees or independent limit of
commission, by whatever name Rs.30,000, above which
called, to a director of a company, remuneration or fees or
other than those on which tax is commission to director
deductible under section 192. may be subject to tax
However, the independent limit of deduction at source.
Rs.30,000 each provided for under
section 194J in respect of other (SUGGESTIONS FOR
payments covered therein, namely, RATIONALIZATION OF
royalty, fee for technical services, THE PROVISIONS OF
fee for professional services and DIRECT TAX LAWS)
non-compete fees, as a threshold,
beyond which TDS @ 10% would be
attracted, is not being provided in
respect of director's remuneration.
This unintended inequity may be
removed.
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Sr. Section Issue/Justification Suggestion
No
64. Section 197A - As part of promoting cashless (i) It is suggested that
Rationalizing TDS transactions and converting India MDR retained by bank
into less-cash society, various from Merchant
applicability on
modes of digital payments are Aggregator and by
Merchant Discount
available. These modes are regular Merchant Aggregator
Rate (`MDR') banking channel which is Credit from Merchant
Card and Debit Card, where Establishment may be
generally, Bank is the merchant exempted from TDS.
acquirer.
In the light of government's push on (ii) The exemption u/s
digital payments, the concept of 197A(1F) may be
Merchant Aggregator/Acquirer has extended to cases:
come up where the Merchant - where the
Aggregator is not the bank, but a commission is retained
separate entity. Merchant by the bank while making
Aggregator acquires various payment to Merchant
merchants and ties up with banks Aggregator (as the
for processing of payments. The Income-tax department
Merchant Aggregator collects money may consider Merchant
from banks on behalf of its Aggregator on a different
merchants and then makes the final footing with Merchant
settlement with its merchants. The Establishment); and
Merchant Aggregators are integral - where the
part of the overall Digital Payment commission is retained
system which act as a conduit by the Merchant
between customers, bank and Aggregator while making
merchant. These Merchant payment to Merchants
Aggregators collect money from
customer's bank/PPI Wallet and The above suggestion will
make payment to merchants. remove the deterrent for
In a move aimed at encouraging the merchant aggregators as
transition towards a cashless they will be in line with
economy, the CBDT has exempted merchant establishment.
some payments made to banks and This move will encourage
payment service providers from online transactions by
deducting tax at source. These reducing the compliance
payments include credit card or burden as the merchant
debit card commissions for establishment will not
transactions between a merchant have to deduct TDS
establishment and the bank. before making the
CBDT vide its Notification No. SO payment to the Merchant
3069(E), dated 31-12-2012, has Aggregators.
notified that no deduction of tax This will also make the
under Chapter XVII shall be required whole process seamless
on payments of the nature given and the merchants will
below, in case such payment is not be wary to accept the
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
made by a person to a bank, new modes of payment
namely:- due to the additional
(vii) Credit card or debit card compliance of
commission for transaction between withholding tax. This will
merchant establishment and encourage the merchants
acquirer bank . to move from cash to
Exemption under Sec 197A(1F), as digital money, which is
given above, was introduced key pillar of the
considering the problems being Government of India
faced by merchants, where, initiative of Digital India.
merchants received the transaction (SUGGESTION TO
value, net of Bank commission from REDUCE / MINIMIZE
Bank and there was no instance LITIGATIONS)
where the merchant made any
payment to the Bank and hence it
was not feasible for any merchant to
withhold tax under the TDS
provisions from Bank. Due to the
above technical reason, merchants
were exempted from the provisions
of TDS when the commission was
payable to Banks. With new
technology and newer ways of
making and accepting payments, it
is imminent to widen the scope of
this exemption.
When Merchant Aggregator receives
payment from bank for ultimate
settlement with merchant, bank
makes the payment to Merchant
Aggregator after deducting its
commission. The Merchant
Aggregator, at no instance, get any
chance to withhold Tax since it is
only receiving payments and not
making any payment to Bank.
In the above instances, while the
scenario is similar to the exemption
given under powers as per section
197A(1F) and appearing in clause
(vii) of the exemption list, still the
exemption is limited to cases where
the commission is received by bank
from the merchant establishment.
65. Section 204 Issue As per section 204, person It is suggested that in
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Sr. Section Issue/Justification Suggestion
No
w.r.t. appeal filing responsible for paying TDS is order to mitigate the
by Principal Officer Principal Officer or Drawing and aforesaid issue, a
u/s 201/201A Disbursing Officer and as per provision may be inserted
Section 201 and 201A, proceedings to facilitate filing of
are initiated against Principal appeal against orders
Officer. However, to appeal against passed under 201/201A
the order u/s 201 and 201A, the by Principal officer as per
signing authority is the person Section 204.
responsible to file return u/s 139 (SUGGESTION FOR
i.e., company Managing director or REMOVAL OF
Director authorised in his absence. ADMINISTRATIVE AND
In case of default committed by PROCEDURAL
Principal Officer of a branch of bank DIFFICULTIES
the appeal has to be filed by RELATING TO DIRECT
Managing director. TAXES)
It is not always possible for a
branch official to get an appeal filed
by Managing Director of the Bank.
In order to avoid the litigation and
sometimes default, if any, is
discharged by them personally.
66. TDS on Recharge Telecom companies distribute their It is suggested to
Vouchers pre-paid services by transferring introduce a new section
pre-paid service products to an in the Income-tax Act,
independent third party distributors 1961 prescribing
at a discount over MRP. withholding tax rate of 1%
Independent third party distributor in on discount extended to
turn sells to sub-distributor or the the distributors of pre-
end customer. The transaction paid service products.
results in transfer of the right to (SUGGESTION TO
receive pre-paid mobile REDUCE / MINIMIZE
telecommunication services from LITIGATIONS)
telecom operators to the distributors
on a principal to principal basis.
It may be noted that the distributors
are not agents to the telecom
operators and no tax is required to
be withheld by the telecom
companies on the discount
extended to the prepaid distributor.
However, the tax authorities have
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
adopted a contrary position and
have been holding that discount
extended by the telecom companies
to the prepaid distributors as
commission and thus, provisions of
section 194H would apply. This has
resulted in long drawn litigation and
multiple TDS for telecom companies
and also distributors.
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PART C-ADVANCE PAYMENT OF TAX
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
67. Section The Finance Act (No. 2), 2009 raised The limit to pay advance tax
208 - the limit to pay advance tax under under section 208 be raised
Revision of section 208 to Rs. 10,000. appropriately. Infact, any
Limit of Considering the inflationary assessee whose advance tax
advance conditions prevailing in the country, it payable does not exceed Rs.
tax is felt that the said limit needs to be 30,000 may be allowed to pay
revised upwards so that the amount full amount in the last
payable in one instalment of the instalment.
advance tax exceeds at least Rs. (SUGGESTIONS FOR
5,000. The present amount of Rs. RATIONALIZATION OF THE
2,500 is too low. Infact, any PROVISIONS OF DIRECT TAX
assessee whose advance tax LAWS)
payable does not exceed Rs. 30,000
should be allowed to pay full amount
in the last instalment. It is
appreciable that the Finance Act,
2016 has provided for an exception
to an eligible assessee in respect of
an eligible business referred to in
section 44AD to pay the whole of the
advance tax in one go by 15 th March
of the financial year itself.
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The Institute of Chartered Accountants of India
PART G-LEVY OF FEE IN CERTAIN CASES
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
68. Section According to the provisions It is suggested to follow day wise slab
234E of section 234E, where a system & it may be taken as:
Day person fails to deliver or
wise cause to be delivered a
Period of Default Max. Fees u/s 234E
slab statement within the time
prescribed then he shall be Rs. 500/- or tax
liable to pay, by way of fee, amount, whichever is
a sum of Rs. 200 for every Upto 15 Days higher, but subject to
day during which the failure maximum of Rs.
continues. But the amount 20,000/-.
of fee shall not exceed the Rs. 1000/- or tax
amount of tax deductible or amount, whichever is
collectible, as the case may From 15 Days to 1 higher, but subject to
be. Month maximum of Rs.
20,000/-.
Considering the hardships Rs. 1000/- + Rs. 200/-
being faced by the per day or tax
From 1 Month
taxpayers due to various amount, whichever is
Onwards
reasons, penal fees for late higher, but subject to
filing of TDS returns need maximum of
to be changed to period Rs.20,000/-.
wise/ slab of days instead
(SUGGESTION FOR
of current system.
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX LAWS)
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CHAPTER XX
APPEALS & REVISION
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
69. Section 246A Section 246A provides that any It is suggested that
Necessary assessee aggrieved by any of necessary amendment may
amendment the orders mentioned therein be made in section 246A so
required enabling may appeal to the Commissioner as to make an order passed
filing of Appeal (Appeals). by an Assessing Officer
against penalty under section 271J
imposed by appealable to the
The Finance Act 2018 has
Assessing Officer Commissioner (appeals)
amended clause (a) of section
under section u/s 246A.
253(1) so as to make an order
271J (SUGGESTION FOR
passed by a Commissioner
(Appeals) under section 271J RATIONALIZATION OF
also appealable to the Appellate THE PROVISIONS OF
Tribunal. DIRECT TAX LAWS)
This amendment is applicable
from 1st April, 2018.
Issue:
The said amendment in section
253(1) allows an appeal to be
filed before ITAT, if the order
imposing penalty is passed by
CIT(A). However, if the order is
passed by Assessing Officer, the
same would not be appealable
either before CIT(A) u/s 246A or
before ITAT u/s 253(1), thereby
leading to denying principles of
natural justice. This may be an
unintended omission.
Page 90 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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CHAPTER XX-B
REQUIREMENT AS TO MODE OF ACCEPTANCE,
PAYMENT OR REPAYMENT IN CERTAIN CASES TO
COUNTERACT EVASION OF TAX
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
70. Section The expression, `amount' has been It is suggested that a uniform
269ST - used u/s 269ST whereas the expression, `amount' or `sum of
Issues (i) expression `sum' has been used u/s money' may be used at both the
271DA, which may create confusion places i.e. under section 269ST as
and result in avoidable litigation. well as under section 271DA.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
(ii) In Note no. 83 of notes on clauses It is suggested that the above
to the Finance Bill, 2017, the highlighted transaction as referred
following amounts/ nature of to in notes to clauses be excluded
transactions are excluded: - from the operation of section
269ST by suitably amending the
"Any receipt from sale of agricultural proviso to section 269ST.
produce by any person being an
individual or Hindu Undivided family It is also suggested that the benefit
in whose hands such receipts of the above exclusion be not
constitute agricultural income " restricted only to individual and
HUF but also to other assessee's
This transaction has been also who are deriving agricultural
inadvertently omitted from the list of income only.
exclusions in section 269ST. (SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
Page 92 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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CHAPTER XXI
PENALTIES IMPOSABLE
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 93
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
71. Section The Finance Act, 2016 has It is suggested that section
270A inserted a new section 270A 246A may be suitably amended
inserted to providing for penalty in case of so as to provide that penalty
provide for under-reporting and misreporting order under section 270A
levy of of income. As per the provisions, passed by Assessing Officer
penalty in the said penalty order under below the rank of
case of section 270A has not been made Commissioner may be made
under appealable under section 246A appealable under section 246A
reporting of i.e., no appeal would lie against before Commissioner
income and the penalty order under section (Appeals).
misreporting 270A before the first appellate (SUGGESTION FOR
of income - authority i.e., Commissioner IMPROVING TAX
Issues to be (Appeals). Although an COLLECTION)
addressed amendment has been made in
section 253 providing for appeal
to Tribunal against such penalty
order, no such amendment has
a) Penalty been made in section 246A.
order under
In a case where the said penalty
section 270A
order is imposed by an Assessing
be made an
Officer below the rank of
order
Commissioner, it is desirable that
appealable
an appeal may be filed against
before
the same to Commissioner
Commission
(Appeals). It may be noted that
er (Appeals)
the penalty order under the
under
erstwhile section 271 is an
section 246A
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.
b) Penalty There are certain concerns Without prejudice thereto, with
for under- arising out of the provisions of regard to this methodology of
reporting of new section 270A, due to which it levying penalty, the following
income is likely that the implementation suggestions may be
may not yield the desired result considered.
and fresh litigation is likely to · By way of express
arise while interpreting the new requirement, the Assessing
provision. Officer may be required to
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Sr. No Section Issue/Justification Suggestion
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 this
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.
· Penalty proceedings may be
permitted only when specific
conditions are satisfied. e.g.
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
the adjustment made exceeds a
minimum threshold or say 10%
of taxable income, etc.
(SUGGESTION FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT
TAX LAWS)
c) Order to Section 270A has done away It is suggested that suitable
specify the with the undue discretion in the amendments be introduced or
specific hands of Assessing Officer by alternatively administrative
clause of imposing penalty at the rate of instructions may be issued so
under - either 50% or 200% depending that each order contains the
reported or on whether the income is under specific fact of either
misreported reported or misreported. Certain misreported income or under-
income for controls may be required in the reported income or both along
levy of effective implementation of the with the mention of specific
penalty new section. clause of section 270A(2)/(9)
under In order to reduce the practice of against each
section 270A Assessing Officers treating every disallowance/addition. Such
concealed income as misreported measures would act as a
as well as the fact that the new suitable control mechanism in
section does not require the absence of recording of
recording of satisfaction before satisfaction to initiate penalty
imposition of penalty proceedings proceedings and would also
(as was required under the enable assessee to opt for
erstwhile section 271), it is section 270AA providing for
desirable that a suitable control immunity from penalty and
mechanism may be put in place. prosecution in case income is
Certain measures like making it not misreported.
mandatory for the Assessing (SUGGESTION FOR
Officers to mention in the Order RATIONALIZATION OF THE
that every disallowance or PROVISIONS OF DIRECT
addition be specified as either TAX LAWS)
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
Page 96 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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Sr. No Section Issue/Justification Suggestion
immunity from penalty and
prosecution under section 270AA
in case order specifies that he
has not misreported the income.
d) Mere Scope of penalty under section It is suggested that section
making of a 270A has been widened and it 270A may be suitably amended
claim which would now include within its so that penalty is not
is not scope, claims made by the automatically attracted for
sustainable assessee but disallowed by the merely making of a claim which
in law would Assessing Officer. Where no is not sustainable in law.
not information given in the return is (SUGGESTION FOR
tantamount found to be incorrect or RATIONALIZATION OF THE
to furnishing inaccurate, and the assessee has PROVISIONS OF DIRECT
inaccurate disclosed all material facts
TAX LAWS)
particulars relevant for assessment, he
for attracting cannot be held guilty of furnishing
levy of inaccurate particulars. This
penalty 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 of inaccurate
particulars for attracting levy of
penalty. However, such cases
are now to be included within the
ambit of under reported income
under the new section 270A and
penalty would be attracted @
50%.
72. Section (a) Where penalty is levied on Suitable provision be inserted to
270AA - certain additions on ground of solve this anomaly.
Immunity (SUGGESTION FOR
mis-reporting and certain
from RATIONALIZATION OF THE
Imposition of additions on ground of only
under-reporting than assessee PROVISIONS OF DIRECT
penalty
will have to make a choice TAX LAWS)
whether to file appeal or make
application for immunity as he
cannot file appeal on penalty
levied on mis-reported income
and immunity application for
under-reported income.
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 97
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
(b) Also, there is no guarantee Suitable provision may be
that appeal against quantum inserted.
order with application for (SUGGESTION FOR
condonation of delay after IMPROVING TAX
rejection of application for COLLECTION)
immunity, will be admitted.
73. Section Section 271AAB(1) (till Sub-section (3) may be
271AAB - 15.12.2016) provides for amended to provide that the
Penalty imposition of penalty @ 10% on prosecution provisions under
where undisclosed income found during sections 274 and 275 would
search has the course of search and apply in relation to penalty
been admitted at the stage of search. levied only under clause (b) of
initiated Undisclosed income not admitted section 271AAB(1A), and not in
at the stage of search but respect of cases covered under
disclosed in the return of income clause (a).
filed after the search to attract (SUGGESTIONS FOR
penalty @ 20%. These are RATIONALIZATION OF THE
covered under clauses (a) and (b) PROVISIONS OF DIRECT TAX
of section 271AAB. In other LAWS)
cases, i.e. cases covered under
clause (c), penalty to be imposed
@ 60% of undisclosed income.
Aforesaid provisions of section
271AAB are applicable till
15.12.2016 due to insertion of
sub-section (1A) vide the
Taxation Laws (Second
Amendment) Act, 2016. Section
271AAB(1A) provides penalty @
30% under sub-clause (a) and
60% under sub-clause (b).
Sub-section (3) provides that the
prosecution provisions under
sections 274 and 275 would apply
in relation to penalty levied under
this section.
However, it may not be justified to
execute prosecution proceedings
where a person has disclosed
such income in the course of
search or before filing his return
of income. Therefore, the
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Sr. No Section Issue/Justification Suggestion
prosecution provisions should be
made applicable only in respect
of cases covered under clause
(b).
74. Rationalizati As per section 271D & 271E, if a It is suggested to restrict the
on of person accepts/repays a loan or levy of penalty to the maximum
Section deposit or specified marginal rate of tax i.e. 30% or
271D & 271E sum/advance, as the case may the slab rate applicable to the
be in contravention with the assessee instead of 100% of
provisions of section the amount of loan or deposit
269SS/269T, he shall be liable to taken or repaid in violation of
pay, by way of penalty, a sum provisions u/s 269SS & 269T.
equal to the amount of loan or (SUGGESTION FOR
deposit. RATIONALIZATION OF THE
The penal provisions of section PROVISIONS OF DIRECT
271D & 271E may be restricted to TAX LAWS)
maximum marginal rate of tax i.e.
30% or the slab rate applicable to
the assessee instead of 100% of
the amount of loan or deposit
taken or repaid in violation of
provisions u/s 269SS & 269T.
75. Section Section 271FA provides that if a It is suggested that an
271FA person who is required to furnish amendment be made in relevant
Clarity the statement of financial sections (246A or 253) to
required transaction (SFT) or reportable clearly specify the authority to
regarding account (RA) under section whom an appeal may lie
appealabilit 285BA(1), fails to furnish such against an order passed by DIT
y of penalty statement within the prescribed under section 271FA.
order time, then the income-tax
authority prescribed under section (SUGGESTION FOR
285BA(1) may direct such person REDUCING/MINIMIZING
to pay penalty of five hundred LITIGATIONS)
rupees for every day of default.
Prescribed Income-tax authority
as per section 285BA(1) is
Director of Income-tax
(Intelligence and Criminal
Investigation) {DIT} or the Joint
Director of Income-tax
(Intelligence and Criminal
Investigation) as per Rule
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 99
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
114(4)(a).
Further, section 246A(1)(q)
provides that any assessee or
any deductor or any collector
aggrieved by an order imposing a
penalty under Chapter XXI may
appeal to the Commissioner
(Appeals).
Due to certain conflicting judicial
decisions, an issue has arisen
regarding the authority to whom
an appeal shall lie in case of
penalty order passed under
section 271FA by DIT.
As per DIT v Ravi Vijay [2012] 25
taxmann.com 176 (Raj.), the
Rajasthan High Court has held
that an appeal against order of
penalty passed under section
271FA by Director, who holds
rank of a Commissioner, is
maintainable before
Commissioner (Appeals) with
reference to section 246A(1)(q).
Similar view is supported in SRO,
Meppayur-Kozhikode v DIT
[2013] 37 taxmann.com 36
(Cochin - Trib.) wherein it was
held that where Director of
Income-tax (Intelligence) levied
penalty under section 271FA
upon assessee, appeal against
impugned order was not
maintainable before Tribunal.
Similarly, in the District Co-
operative Central Bank Ltd., R.R.
Peta, Eluru, W.G. District v DIT
ITA Nos. 576 to 578/VIZ/2018 ,
the Visakhapatnam Bench held
that penalty order under section
271FA is an appealable order
before CIT(A).
However, Lucknow bench in
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Raibareilly District Co-operative
Bank Ltd. v DIT [2015] 54
taxmann.com 382 (Lucknow -
Trib.) held that appeal against an
order of Director of Income-tax
passed under section 271FA is to
be filed before Tribunal who is
higher in rank and not before
Commissioner (Appeals) who is
equivalent in rank with Director of
Income-tax. The aforesaid view is
also supported by the Hyderabad
Bench in the Nizamabad District
Cooperative Central Bank Ltd,
Nizamabad v DIT ITA Nos.1291
to 1296/Hyd/2017 , wherein it held
that ITAT is not the forum to
entertain the appeal against the
penalty order under section
271FA.
In order to reduce litigation with
regard to this provision,
clarification is sought on the
aforesaid issue.
76. Section 271H The Finance Act, 2012 had It is suggested that:
- Penalty for inserted the penalty provisions i. Sub-section (3) may be
failure to under section 271H providing for amended to provide that
furnish penalty ranging from Rs.10,000 to penalty provisions under
TDS/TCS Rs.1,00,000 for failure to furnish section 271H would not be
statements quarterly statements of TDS and attracted if the person
TCS within the time prescribed proves that after paying tax
under the Income-tax law. deducted or collected along
However, such penalty would not with the fee and interest, if
be levied if the person has paid any, to the credit of the
the taxes deducted or collected Central Government, he has
along with fee and interest to the delivered or caused to be
credit of the Central Government delivered the statement
and has filed the statements referred to in section 200(3)
within a period of one year from or the proviso to section
the respective due dates i.e., 206C(3) before the expiry of
namely, 31st July, 31 st October, due date of filing of return
31st January and 31 st May, of income of the previous
respectively for the quarters year in which the tax was so
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
ending 30 th June,30 thSeptember, deducted or collected,
31st December and 31st March. irrespective of the quarter
The TDS/TCS statements form to which the tax relates.
the basis of preparation of annual ii. Penalty may be prescribed
tax statement in Form No 26AS. having regard to quantum
The deductee is required to of default and the period of
confirm the exact tax delay, and no discretion
deducted/collected at source and may be given to the
remitted to the Government by Assessing Officer in this
verifying Form No 26AS online, regard. In any case, it
and thereafter pay the remaining should not exceed the tax
taxes by way of self-assessment deductible or collectible at
tax. However, if TDS/ TCS source, in respect of which
statements are permitted to be the quarterly statement has
filed within one year of the due not been filed.
date prescribed for each quarter (SUGGESTIONS FOR
on account of non-levy of penalty, RATIONALIZATION OF THE
then the same would extend PROVISIONS OF DIRECT TAX
beyond the due date of filing LAWS)
return of income of that
assessment year in respect of the
second, third and fourth quarters.
It may cause genuine hardship to
the deductees as they would not
be able to verify the TDS/TCS
credited to their account, for
payment of self-assessment tax
before the due date of filing of
return of income.
Therefore, it is felt that penalty
provisions should be attracted if
such statements are not filed
before due date of filing return of
income.
Further, Section 271H provides
for the minimum and maximum
penalty, within which range,
penalty can be imposed. The
discretionary powers provided to
the Assessing Officer in levying a
penalty ranging from Rs.10,000 to
Rs.1,00,000 may lead to hardship
to the assessee.
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Sr. No Section Issue/Justification Suggestion
Discretion element in levying
penalty should be removed.
Penalty may be prescribed having
regard to quantum of default and
the period of delay. In any case, it
should not exceed the tax
deductible or collectible at
source, in respect of which the
quarterly statement has not been
filed.
77. Genuine Under section 276B, the It is suggested that the matter
hardship consequence of failure to comply may be looked into and
faced by tax with the provisions of Chapter appropriate measures may be
deductors on XVII-B is rigorous imprisonment taken so that prosecution
account of for a term which shall not be less proceedings under section
provisions of than three months, but which may 276B are not initiated against
section 276B extend to seven years and with genuine tax deductors, who
of the fine. The provisions of section have deposited the TDS
Income-tax 276B are basically intended to voluntarily after the prescribed
Act, 1961 discourage tax deductors from time limit but before service of
attracting retaining the legitimate any notice by the department.
prosecution government dues unjustly. Further, certain threshold limits
proceedings However, at ground level may be prescribed to avoid
for delay in implementation, notices are being genuine errors in estimations.
remittance of issued for initiation of prosecution (SUGGESTION FOR
tax to the proceedings under section 276B RATIONALIZATION OF THE
credit of the even in cases where tax PROVISIONS OF DIRECT
Central deductors have deposited the tax TAX LAWS)
Government deducted by them voluntarily after
the stipulated time but before any
notice has been served upon
them. This may be due to the
modified guidelines issued in
2013 for identification of cases for
initiating prosecution, wherein the
criterion of minimum retention
period of 12 months has been
dispensed with. However,
initiation of prosecution
proceedings in cases of voluntary
deposit of TDS after the
stipulated time but before service
of notice is causing undue
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
hardship to genuine tax
deductors. Voluntary remittance
of TDS before issue of notice
clearly indicates the absence of
any malafide intention on the part
of the tax deductors to retain the
taxes due to the government.
The tax deductors are, in any
case, being subject to higher
interest @ 1.5% per month or part
of a month under section 201(1A)
for the period of delay in
remittance. The TDS statements
submitted by them also clearly
reflect the taxes deducted, the
date of deduction and the date of
remittance along with interest,
which indicates the bona fide
intent on the part of the deductors
to report the correct details to the
Department. However, it appears
that the notices for prosecution
are issued on the basis of these
information provided by the tax
deductors in their TDS
statements. It is a settled law that
prosecution proceedings are
appropriate only in cases where
deductors deliberately do not
deposit the TDS, since Mens rea
or a guilty mind is a sine qua non
for attracting prosecution
provisions.
In this regard, it may be noted
that the erstwhile service tax law
which provided for a threshold
limit of Rs.2 crores for initiating
prosecution proceedings in case
of failure to pay service tax
collected to the credit of the
Central Government within a
period of 6 months from the date
on which such payment becomes
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Sr. No Section Issue/Justification Suggestion
due. This implies that only if the
service tax collected but not
remitted within the prescribed
period exceeds Rs. 2 crores,
prosecution provisions would be
attracted. However, section 276B
of the Income-tax Act, 1961
neither prescribes any threshold
limit beyond which the
prosecution provisions thereunder
would be attracted, nor does it
prescribe any retention period,
after the expiry of which,
prosecution proceedings would
be initiated. Thus, absence of
threshold limit and retention
period under this provision of the
Income-tax Act, 1961 causes
undue hardship even to genuine
tax deductors.
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The Institute of Chartered Accountants of India
CHAPTER XXIII
MISCELLANEOUS
Page 106 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No.
78. Request to We wish to bring to your kind attention the In view of the aforesaid, the
consider concerns of ICAI in respect of definition of definition of the term
amendment in `Accountant' as provided in Explanation to `accountant' as per
Explanation to section 288(2). The definition of `Accountant' in Explanation to section 288(2)
section 288(2) Explanation to section 288(2) was last amended of the Income-tax Act, 1961
pertaining to vide the Finance Act, 2015. The relevant extract may be modified suitably to
definition of of the amended Explanation to section 288(2) is remove the applicability of
`Accountant' as follows: section 141(3) of the
"Explanation.--In this section, "accountant" Companies Act, 2013 so
means a chartered accountant as defined in that:
clause (b) of subsection (1) of section 2 of the
Chartered Accountants Act, 1949 (38 of 1949) a. A CA providing tax
who holds a valid certificate of practice under certification services to a
sub-section (1) of section 6 of that Act, but does company of which he is not
not include [except for the purposes of the statutory auditor has the
representing the assessee under sub-section same opportunity to provide
(1)]-- the NAS to a company as a
(a) in case of an assessee, being a company, CA who is not providing tax
the person who is not eligible for appointment certification services but is
as an auditor of the said company in providing tax advisory
accordance with the provisions of sub- services and other NAS to a
section (3) of section 141 of the Companies company of which he is not
Act, 2013 (18 of 2013); or a statutory auditor to avoid
(b) in any other case, --....................." unreasonable compliance
{Emphasis provided} requirements.
The reason for amending the definition of an
"accountant" as per the Explanatory b. Requirements
Memorandum to the Finance Bill 2015 was to prescribed for non-company
avoid conflict of interest and for better assessees should be made
governance. Infact, this amendment was brought applicable to company
in for the limited purpose of disqualifying a assessees to ensure parity
relative from conducting the tax audit report in applicability of the
based on a CAG report finding. eligibility requirements for
In case of an assessee, being a company, the being an `accountant'.
disqualification for being appointed as an Further, te rm "Relative" as
`accountant' for tax certification services applies used in sub-clause (iv) and
to the person who is not eligible for appointment (vii) of clause (b)
as an auditor of the said company in accordance Explanation to section 288(2)
with the provisions of section 141(3) of the may be replaced with
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The Institute of Chartered Accountants of India
Companies Act, 2013. Relevant extract from "Immediate Family"
section 141(3) is reproduced below: Members as is used in the
"(3) The following persons shall not be eligible IESBA Code of Ethics.
for appointment as an auditor of a company, (SUGGESTION FOR
namely:-- RATIONALIZATION OF
........... THE PROVISIONS OF
(i) a person who, directly or indirectly, DIRECT TAX LAWS)
renders any service referred to in section 144
to the company or its holding company or its
subsidiary company.
Explanation. --For the purposes of this clause,
the term "directly or indirectly" shall have the
meaning assigned to it in the Explanation to
section 144." {Emphasis provided}
Considering the above, there is a possibility of
two situations where a Chartered Accountant
(hereinafter referred to as CA) in practice
(individually or through a firm of CA) is called
upon by a company to provide tax certification
services as an "accountant".
A. Situation 1 Where the CA is the
statutory auditor of the company
From the governance perspective, as per section
144 of the Companies Act 2013, a statutory
auditor shall provide to the company only such
other services which are approved by the Board
of Directors or the audit Committee. However,
the statutory auditor cannot provide certain
specified non-audit services (NAS) directly or
indirectly to the company and entities related to
it.
It is pertinent to mention that the list of the
prohibited services (NAS) by the statutory auditor
of a company does not contain provision of
taxation services including tax certification
services. Therefore, there is no restriction on the
statutory auditor to provide tax certification
services subject to approval of the Board of
Directors/Audit Committee under section 144 of
Companies Act, 2013.
B. Situation 2 Where the CA is NOT
the statutory auditor of a company
In such a case, the CA can be appointed to
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provide the NAS, by the management on such
terms as it considers appropriate as there is no
restriction under the Companies Act 2013.
ISSUES FACED DUE TO RESTRICTIONS
IMPOSED BY APPLICATION OF SECTION
141(3)(i) OF THE COMPANIES ACT, 2013
I. Difference in scope of statutory audit and
tax certification services
It is here that the amended definition of the term
`accountant" under explanation to Section 288(2)
becomes more onerous than the original intention
of the amendment made vide the Finance Act
2015, which as stated earlier, was for the limited
purpose of disqualifying a relative from
conducting the tax audit report based on a CAG
report finding.
Pursuant to the amendment to the definition of
"accountant" under section 288, once a CA, who
is not the statutory auditor of the company, is
appointed (or is in the process of being
appointed) to provide tax certification services as
an `accountant', he is being subject to the same
service restrictions specified in section 144 of the
Companies Act 2013 as the statutory auditor of
the company although the scope of work of tax
certification is much narrower than statutory audit
{by virtue of applicability of section 141(3)(i) of
Companies Act 2013 read with clause (a) of
Explanation to section 288(2)}. The statutory
auditor is required to audit the whole of financial
statements and opine as to whether the same
present a true and fair view. However, opining on
the financial statements as a whole is not
required in case of issuance of a tax
certificate/report by a non-auditor wherein the
scope of enquiry is specific to the concerned
provisions/sections of the Income-tax Act.
However, the CA even in a case where the scope
of service is limited to tax certification, is
prohibited from providing other NAS specified in
section 144 of the Companies Act 2013 which he
could have provided but for section 288 of the
Income-tax Act 1961.
The aforesaid issue can be more clearly
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The Institute of Chartered Accountants of India
understood by way of an example as below:
Situation 1- Where the CA is issuing a
CERTIFICATE under the Income tax Act,
1961
As per Rule 37BB, a person responsible for
making a payment exceeding Rs 5 lakh to a non-
resident inter alia has to furnish Form 15CA (Part
C) after obtaining a certificate in Form 15CB from
an `accountant'.
Let's suppose a CA in practice (Mr. X) is
appointed as an `accountant' by a company `A' to
certify and issue Form No. 15CB (Certificate of
an accountant) during a particular financial year.
Since Mr. X is proving tax certification services
as an `accountant', Mr. X has to comply with the
provisions of section 141(3) of the Companies
Act, 2013 {due to definition of accountant in
Explanation to section 288(2)}.
In effect, Mr. X cannot provide any of the Non
Audit services to company A as specified in
section 144 of the Companies Act, 2013 (like
accounting and book keeping services, internal
audit services etc.) due to application of section
141(3)(i) of the Companies Act, 2013.
Despite the fact that Mr. X is not a statutory
auditor of the company A, he is being restricted
from providing NAS as specified in section 144 of
the Companies Act, 2013 {by virtue of application
of provisions of section 141(3)(i) of the
Companies Act, 2013}.
Situation 2- Where the CA is providing TAX
ADVISORY SERVICES
Continuing the above example, Mr. Z (a
practicing CA) is appointed by company A to
provide the tax advisory services in relation to a
tax litigation cum assessment.
Since Explanation to section 288(2) is not
applicable to Mr. Z, he is free to offer Non audit
services as specified in section 144 of the
Companies Act, 2013 like accounting and book
keeping services, internal audit services etc.
Clearly, Mr. X (providing tax certification
services) is at a disadvantage to Mr. Z (providing
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The Institute of Chartered Accountants of India
tax advisory services) although both of them are
providing similar nature of services and none of
them is the statutory auditor of the company A. It
is discriminatory if a CA who is providing tax
certification services to a company of which he is
not the statutory auditor is subject to greater
restrictions for provisions of NAS than a CA who
is appointed to provide tax advisory (not tax
certification services) to a company of which he
is not the statutory auditor.
It is pertinent to mention that the restrictions
under section 141(3) are basically meant for the
statutory auditor of the company so that the audit
opinion is not influenced and auditor remains
independent while performing the audit function.
II. Discrimination between company
assessees and non-company assessees
In case of assessees other than company
assessee, Explanation to section 288(2)
prescribes the eligibility requirements only for the
assessee and not for any other related entities.
Further, there is no prohibition from providing
other NAS specified in section 144 of Companies
Act 2013. By making eligibility criteria for
company assessees with reference to section
141(3) of Companies Act 2013, the scope of
restrictions has been broadened to extend to
other related entities of the company as well as
prohibition of NAS under section 144 of
Companies Act 2013. A comparison of the
restrictions as applicable to an accountant in the
case of an assessee, being a company, and in
the case of other assessees is quite clear from
the bare perusal of explanation to section 288(2)
of Income-tax Act 1961.
The IESBA (International Ethics Standards Board
for Accountants) Code of Ethics issued by IFAC
(International Federation of Accountants) / the
ICAI Code of Ethics distinguishes between audit
services and non-audit assurance services. As
there is no expression of opinion on the financial
statements as a part of tax certification services,
at best, such tax certification services would fall
under "non -audit assurance services".
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 111
The Institute of Chartered Accountants of India
In such situations, the personal independence
prohibitions/restrictions are applicable to
"assurance engagement team members".
Further, NAS are subject to threats and
safeguards, only if the NAS relates only to the
subject matter of the assurance service i.e., tax
certification. Given the nature of services, it
would be prudent to apply "non -audit assurance"
independence policies instead of "audit"
independence policies.
79. (a) Waiver of The companies undergoing CIRP, while Currently, only the banks are
liabilities by implementing the resolution plan may enter into allowed to claim deduction
settlement with its creditors. This could result in for the amount of bad loans
companies
waiver of loans/liabilities. and hence the amount of
undergoing
bank loans waived are
Corporate Taxability of waiver of loan/liability is a litigated taxable under section 41(1).
Insolvency issue. It could result in tax liability on the acquirer
Resolution of the insolvent company. To ease the process of
Process (CIRP)
insolvency, the amount of
loans waived should not be
taxed as income of the
insolvent company.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
(b) Computation As per the extant provisions under section 115JB The profits earned during the
of MAT profit in pertaining to computation of book profits for MAT CIRP and the period during
purposes, the amount of profits of sick industrial which the resolution plan is
case of
company from the assessment year in which the implemented should be
companies
said company had become sick industrial excluded from `Book profits'
undergoing company under SICA, till the year in which the computed for MAT purposes.
Corporate entire net worth equals or exceeds the
Insolvency accumulated losses, is reduced from the profit as The amount of loan/liability
Resolution shown in the profit and loss statement. waived and credited to profit
Process under
and loss account should be
the Insolvency
reduced from the `Book
Code, 2016
Profits' computed for the
purpose of MAT.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
80. Conversion Section 47(x) exempts conversion of bonds or Indian start-ups were
of debentures or debenture-stock or deposit allowed to issue CNs to
resident individuals. RBI has
convertible certificate in any form, into shares or debenture
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The Institute of Chartered Accountants of India
notes into of that company, from capital gains tax liability. permitted a person resident
shares outside India to purchase
CNs issued by an Indian
However, the conversion of Convertible Notes start-up company for INR 25
(CNs) issued by an Indian start- up into shares or lakhs or more in a single
debentures is not specifically exempted. tranche (Notification No.
FEMA.377/2016-RB, dated
10th January, 2017)
To bring CN at par with other
instruments, a specific
exemption should be
provided for its conversion
into equity.
81. Regarding - Co - Tax rates for Co-operative societies are very Therefore, it is suggested
Operative harsh as follows: that tax rates for individuals
Housing Total Income Tax Rate be made applicable to Co-
Societies Upto Rs. 10000 10% operative housing societies
Rs. 10001 to Rs. 20000 20% as well.
Above Rs. 20000 30%
(SUGGESTION FOR
These rates have remained unchanged for past RATIONALIZATION OF
several years. It may be noted that for a total THE PROVISIONS OF
income as low as Rs. 20001 tax rates of 30% is DIRECT TAX LAWS)
attracted.
Over the period of past few years, Tax
slabs/rates for individuals, HUF, AOP etc. are
very moderate with basic exemption of Rs.
250000 and rates of 5% /20%/ 30% (highest rate
is attracted when income is above Rs 10 lakhs).
Therefore, there is a need to moderate/reduce
tax rates applicable to societies especially
housing societies which are not carrying out any
business and do not exist for profit but essentially
exist and formed for collecting contribution from
members, for meeting outgoings such as
property tax, water charges, common electricity
expenses. In cities and towns, common people
essentially live in co operative housing societies
and there is no rationale to taxing income of
housing societies @ 30% for total income as low
as Rs 20001 and upwards.
82. Harmonize all Already the present IT return forms for various It is suggested to harmonize
those disclosure types of assessees have been made all those disclosure
requirements comprehensive to capture detailed information requirements and
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The Institute of Chartered Accountants of India
concerning the incomes and assets of the incorporate them in the I.T.
assessees. Apart from that, assessees are return form itself with
required to file various returns under different separate sections for
legislations like Benami Transactions disclosure so that the filing
(Prohibition) Act, Foreign Assets Disclosure Act, obligations of the assessees
PMLA and also as per Section 285BA of Income will be one time every year.
Tax Act 1961. (SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
2.
83. Section 43CA, The existing provisions of section 43CA i. The erstwhile provisions
50C and 56 (business profits), 50C (capital gains) and 56 dealing with transfer of
Allowance of (income from other sources) while taxing income immovable property for
variation of 5%
arising out of transactions in immovable property lower consideration had
between stamp
require adoption of the sale consideration or delta of 15% and 25%
duty value and
the sale stamp duty value, whichever is higher. respectively in section
consideration 52(2) and section
Increasing the 269C(2)(a) of the Act.
However, to minimize hardship in case of
permissible The present delta of 5%
genuine transactions in the real estate sector, the
variation and is accordingly far too
Finance Act 2018 amended the said sections to
need for inadequate and may be
provide that no adjustments shall be made in a
retrospective increased to atleast 15%.
case where the variation between stamp duty
amendment
value and the sale consideration is not more than
five percent of the sale consideration. ii. Also, since the
amendment is
rationalisation measure
The Finance Act 2018 provided that in cases
it may be made
where the stamp duty value of immoveable
applicable from the date
property does not exceed 105% of consideration
the provisions were
received/receivable on transfer of capital
inserted.
asset/stock in trade being land or building or
both, consideration received/receivable shall be (SUGGESTION FOR
full value of consideration. RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
Similarly, it provided that where the stamp duty
value does not exceed 105% of consideration
paid to acquire immovable property, there will be
no trigger of taxation u/s 56(2)(x) of the Income-
tax Act.
Issues:
i. In certain states, there is generally a
significant/considerable difference
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The Institute of Chartered Accountants of India
between the stamp duty value/rate and
the actual sale consideration and
consequently in such cases gap
between the two values is more than
5%. Hence, it is suggested to further
increase the permissible variation.
ii. The delta of 5% of consideration is
highly inadequate as stamp duty value is
determined as per area and not as per
property. The circle rate may vary due to
several reasons.
iii. In the context of section 50C, Tribunals
have adopted a view that where the
difference between consideration and
stamp duty value does not exceed 10%,
provisions of section 50C are not
applicable
· Smt. Sita Bai Khetan vs. ITO (ITA
No. 823/JP/2013) (delta of 10%)
· John Fowler (India) Private Ltd v
DCIT (ITA No. 7545/Mum/2014)
(delta 10%)
· Krishna Enterprises v ACIT [ITA No.
5402/Mum/2014) (delta 10%)
84. Exemptions Section 11 and 12 Exemption of Income of It is suggested to include
Skill specified public charitable and religious trusts institutions exclusively
Development At present, Skill development Program activity is engaged in "Skill
not included with in the ambit of Charitable Development programmes"
activities. The existing ambit of the law should under the ambit of section
include Institution exclusively engaged in "Skill 11 exemptions.
Development programmes" of all kind and in the (SUGGESTION FOR
Research Activities. Income of such programme REDUCING/MINIMIZING
should be exempted in full. This will encourage LITIGATIONS)
more of institutes to do Skill Development
Program activity and Research activity due to
exemption of section 11 and 12.
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 115
The Institute of Chartered Accountants of India
OTHERS
Page 116 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
85. Increase in the The Finance Act, 2015 increased the rate of The increased rate of
rate of surcharge levied on domestic companies by 2 surcharge on tax and
surcharge per cent. The surcharge at the rate of 7 per DDT makes cost of doing
increases cost cent shall be levied in case of a domestic business in India
of doing company if the total income of the domestic significantly high. It is
business for company exceeds INR one crore but does not recommended that the
domestic exceed INR ten crore and at the rate of 12 per levy of additional
companies cent in case total income exceeds INR ten surcharge on tax rates
crore. should be removed
The comparative scenarios of tax rate for (regardless of the ceiling
domestic companies (including surcharge and of income) on domestic
education cess) is as follows: - companies. Further the
Particulars Income Income Income additional surcharge on
upto above INR above DDT should also be
INR 1 1 crore but INR 10 removed.
crore upto INR 10 crore
crore
Pre 2015 30.9% 32.445% 33.99% Since the government
surcharge has already declared that
scenario it will be reducing
Post 2015 30.9% 33.063% 34.608% corporate tax rates from
surcharge
30 per cent to 25 per cent
scenario
in a phased manner,
The Finance Act, 2015 has also increased the without prejudice to the
surcharge rate from 10 per cent to 12 per cent above suggestion, the
on DDT. The increase in surcharge by 2 per tax rates should be made
cent will bring the effective DDT rate to 20.358 inclusive of all
per cent as against the present rate of 19.995 surcharge.
per cent.
(SUGGESTION FOR
The increased rate of surcharge on tax makes RATIONALIZATION OF
cost of doing business in India significantly THE PROVISIONS OF
high. The increased tax cost will adversely DIRECT TAX LAWS)
impact the investors' sentiments and economic
growth.
Further, the effective tax rate applicable to
domestic companies also happens to be one of
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 117
The Institute of Chartered Accountants of India
the highest in the world with a very few
countries2 levying a higher tax rate (of 34.6%)
for income levels of more than INR 10 crore.
DDT is a levy on the company which was
earlier levied in the hands of the shareholders.
The increased DDT rate (inclusive of surcharge
and education cess) creates disparity when
compared with the tax rate of dividends
received by an Indian company from specified
foreign subsidiaries.
In the past, the government has introduced
additional surcharge for a limited period, for
example the Finance Act, 2013 had increased
the surcharge from 5 per cent to 10 per cent on
domestic companies whose taxable income
exceeds 10 crore per year. Further in case of
foreign companies, who pay the higher rate of
corporate tax, the surcharge was increased
from 2 per cent to 5 per cent. In case of
dividend distribution tax or tax on distributed
income, surcharge was increased from 5 per
cent to 10 per cent. However, such additional
surcharge was in force only for one year i.e. for
Financial Year 2013-14.
86. Issues arising a) Section 72A of the Income-tax Act, which It is suggested that
from deals with treatment of unabsorbed losses sectoral restrictions u/s
applicability of and unabsorbed depreciation, in case of 72A may be removed and
Companies amalgamation, is restrictive in its provisions of this section
Act, 2013 - application. Presently benefits of Section be made applicable for
Amalgamation 72A are available only to company owning all the sectors.
industrial undertaking or a ship or a hotel (SUGGESTION FOR
or banking company. Due to this IMPROVING TAX
restriction, other sectors namely service COLLECTION)
sector and real estate sectors are not
eligible for benefits in the form of handing
over of loss from one company to another.
2
For the purposes of comparison, the tax rate in the case of the other BRICS nations is as follows:
Brazil 34%; China 25%; Russia 20%; and South Africa 28%.
Page 118 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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b) Presently MAT credit u/s. 115JAA cannot The Income-tax Act
be carried forward by the amalgamated needs to be amended so
company. as to allow carry forward
of MAT Credit in the
hands of amalgamated
company for remaining
number of years.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 119
The Institute of Chartered Accountants of India
PART B
SUGGESTIONS FOR IMPROVING TAX
ADMINISTRATION AND CITIZEN SERVICES
Page 120 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No.
87. Section 154 - Even after due efforts taken by the Government It is suggested that
Mistake to ensure compliance relating to filing of TDS section 154 may be
apparent returns by the deductors, the defaults on behalf amended so that
from record of deductors continue for one or the other rectification applications
reason. This deprives the deductee from u/s 154 in cases where
claiming the Tax so deducted in his return of Form No. 26AS reflects the
income filed before due date of filing return. entries relating to TDS but
However, situations do arise where the returns the same has not been
are belatedly filed or a correction statement has claimed in the return of
been filed at a later date by the deductor income be treated as
resulting into a credit in Form No. 26AS of the errors/omissions.
deductee at a later date say after the time limit (SUGGESTIONS FOR
of filing a revised return has also expired. REMOVING
Considering the fact that such an omission in ADMINISTRATIVE AND
the return of income, duly supported by the PROCEDURAL
entries of Form No. 26AS, is a mistake DIFFICULTIES RELATING
apparent from record, it is suggested that the TO DIRECT TAXES)
Assessing Officers may be intimated to accept
the rectification application under section 154 in
such cases. This will surely be helpful in
removing the administrative hindrances being
faced by the assessees as well as the
Government.
88. Section 200 - Section 200 provides for the payment of TDS Since the details are
Furnishing and filing of TDS Returns. The Income Tax Law already available with the
of TDS requires payment of TDS every month by 7th of deductor at the time of
returns the following month and by 30th April of the payment of taxes, the e-
Assessment year for tax deducted in the month challan itself can be so
of March of the Previous year. The said designed that it captures
payment is to be made under various codes as all the details at that time.
per the sections under which the tax is The details so submitted at
deducted. Currently, the payment under each that time may respectively
code is to be made under a separate challan be reflected in the Form
which requires filling up the same PAN, TAN, 26AS of all deductees as
name, address etc details over and over again. an alternative Return
This is clubbed with the internet connection system.
problems and it becomes a very cumbersome (SUGGESTIONS TO
job especially for the small and medium REMOVE
assessees. ADMINISTRATIVE
Practically, for payment of tax so deducted
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No.
details of parties with PAN and section under DIFFICULTIES)
which it is to be deducted is maintained.
However, except the section under which tax is
required to be deducted, no other detail is
required to be mentioned in the challan. The
statement containing all such details is to be
submitted for every quarter. This leads to
duplication of work and also a cumbersome
task of furnishing so many statements and
challans.
Page 122 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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PART C
SUGGESTIONS PERTAINING TO
INTERNATIONAL TAXATION
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
89. Place of Effective The Finance Act, 2015 amended the definition of It is suggested to omit the
Management a company resident in India under section 6(3) Of concept of Poem from
the Income Tax Act 1961. Indian companies have section 6 of the Act.
(POEM)
foreign subsidiaries carrying on business in the
(SUGGESTION TO
foreign country. There are cases where 100%
shares may be held by Indian residents. In cases REDUCE / MINIMIZE
of dual residency, double taxation cases are high LITIGATIONS)
and criteria set for Poem is altogether complex for
every industry. The concept of Poem is difficult to
define and it is a matter of judgment whether
Poem is in India or in foreign jurisdiction countries
like USA also do not have Poem as the criterion
to determine the residential status of a company.
90. Provisions The Finance Act, 2015 has amended provisions · Since the objective of
regarding dealing with indirect transfer of capital asset the amendment is to
indirect transfer situated in India. The amendment provides clarity tax indirect transfer
on certain contentious aspects with regards to through shell
of capital asset
taxation of income arising or accruing from such companies, a listed
situated in India - indirect transfers. The following amendments company should not
Section 9 have been introduced in the Act. be considered as a
shell or conduit
· Share or interest in a foreign company or company. The same
entity shall be deemed to derive its value was also suggested by
substantially from Indian assets only if the the Shome Committee.
value of Indian assets (whether tangible or It is recommended that
intangible) as on the specified date exceeds exemption should be
the amount of INR 10 crores and represents provided in respect of
at least 50 per cent of the value of all the transfer of shares in a
assets owned by the foreign company or foreign company
entity. (listed on a stock
exchange outside
· The value of an asset shall be its Fair India) having
Market Value (FMV). Subsequently, the substantial assets
CBDT notified the Rules prescribing the located in India.
manner of computation of FMV of assets of
the foreign company or entity and the
reporting requirements by the Indian · Intra-group transfers
concern. as part of group re-
organisations (other
than amalgamation
· The date of valuation of assets (without and demerger) should
reducing the liabilities) shall be as at the end also be exempt from
of the accounting period preceding the date the indirect transfer
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of transfer. However, in case the valuation of provisions.
assets as on the date of transfer exceeds by
at least 15 per cent of book value of the
assets as on the date on which the · While Explanation 5 to
accounting period of the company/entity Section 9(1)(i) of the
ends preceding the date of transfer, then the Act provides that
specified date shall be the date of transfer. shares of a foreign
company which
· Exemption from applicability of the aforesaid derives directly or
provision has been provided in the following indirectly its
situations substantial value from
o Where the transferor along with its the assets located in
related parties does not hold (i) the right India shall be deemed
of control or management; (ii) the voting to be situated in India.
power or share capital or interest Section 47(vicc) of the
exceeding 5 per cent of the total voting Act provides
power or total share capital in the exemption only if the
foreign company or total interest in the shares of foreign
entity directly holding the Indian assets company derive
(Holding Co). substantial value from
shares of an Indian
company. While the
o In case where the Indian assets are not intent may be to
directly held, then if the transferor along exempt all cases of
with related parties does not hold (i) the demerger where
right of management or control in foreign company
relation to such foreign company or the derives substantial
entity; and (ii) any rights in such foreign value from assets
company which would entitle it to either located in India, the
exercise control or management of the reading of Section
holding company or entitle it to voting 47(vicc) of the Act
power exceeding 5 per cent in the indicates that the said
holding company. exemption would be
available only in cases
· The Finance Act, 2015 has introduced where the shares of
Section 47(vicc) in the Act which, subject to the foreign company
fulfillment of certain conditions provides that derive substantial
transfer of shares of a foreign company value from shares of
(which directly or indirectly derives its value Indian company. Due
substantially from shares of an Indian to this inconsistency
company) by the demerged foreign company in the language of
to the resulting foreign company under a Section 47(vicc) vis-à-
scheme of demerger will not be regarded as vis Explanation 5 to
transfer. Section 9(1)(i), transfer
· The Indian entity will be required to furnish of shares of a foreign
information relating to indirect transfers. The company which
same has also been notified. In case of any derives its value
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failure, the Indian company will be liable for predominantly from
a penalty of INR 5 lakhs or 2 per cent of the assets located in India
value of the transaction as specified. (other than shares of
an Indian company)
under a scheme of
demerger may be
deprived of the
aforesaid exemption.
It is recommended that
Section 47(vicc) of the
Act should be
amended to provide
that "any transfer in a
demerger, of a capital
asset, being a share of
a foreign company,
referred to in
Explanation 5 to
clause (i) of sub-
section (1) of section
9, which derives,
directly or indirectly,
its value substantially
from the assets
located in India, held
by the demerged
foreign company to
the resulting foreign
company, if,--
...................."
It is suggested that a
similar amendment should
also be made under Section
47(viab) of the Act (in case
of amalgamation).
· Section 234A, 234B,
234C and 201(1A) of
the Act should not be
applied in cases where
a demand is raised on
a taxpayer on account
of retrospective
amendment relating to
indirect transfer. An
appropriate
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Sr. No Section Issue/Justification Suggestion
amendment should be
made in the respective
provisions of the Act.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
91. Section 9(1)(i) - The Finance Act, 2012 amended Section 9(1)(i) of It is suggested that:
Benefit of non- the Act with retrospective effect from 1st April
applicability of 1962 to provide that any share or interest in an While issuance of
indirect transfer entity incorporated outside India shall be deemed Circular no. 28/2017 is a
provisions in to be situated in India if such share or interest welcome clarification for
case of Category derives, directly or indirectly, its value non-residents in respect
I and II FPIs - substantially from assets located in India. of redemption or buy-
Provisions for back of shares held
avoidance of indirectly through
The Finance Act, 2017 provided that the aforesaid
double taxation specified funds (FPIs
deeming provisions shall not apply to an asset or
registered as Category -I
in case of such capital asset mentioned in Explanation 5 of
or Category II), in
indirect transfer section 9(1)(i), which is held by a non-resident by
respect of other offshore
provisions, way of investment, directly or indirectly, in a
funds the indirect
where direct Foreign Institutional Investor as referred to in
transfer provisions may
transfer has clause (a) of the Explanation to section 115AD
still lead to double
already been and registered as Category-I or Category-II
taxation
foreign portfolio investor under the Securities and
subject to tax
Exchange Board of India (Foreign Portfolio
Therefore, a suitable
Investors) Regulations, 2014 made under the
amendment should be
Securities and Exchange Board of India Act, brought in to the effect
1992. that exemption is
extended to all offshore
The Finance Act, 2017 exempted investors (direct funds (interalia Category-
/ indirect) in category I (sovereign funds) and III FPIs) and should not
be restricted to specified
category II (broad-based funds) FPIs from the
funds.
application of indirect transfer tax provisions.
(SUGGESTION FOR
RATIONALIZATION OF
The CBDT has, recently, issued a Circular No. THE PROVISIONS OF
28/2017 dated 7 November 2017 clarifying that DIRECT TAX LAWS)
the indirect transfer provisions shall not apply to
income arising to a non-resident on redemption or
buy-back of shares held indirectly through
specified funds, if such income is consequent to
transfer of shares held in India by the specified
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 127
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Sr. No Section Issue/Justification Suggestion
funds and such direct transfer is taxable in India.
The Circular applies to specified funds (VCF,
Category I or II AIF) and not to offshore funds in
general. Further, the exemption will be restricted
to pro-rata share (of the non-resident) in the total
consideration realized by the specified funds from
the said transfer of shares or securities in India.
92. Scope of Royalty (a) Right to use a copyright vis-à-vis Right to It is suggested that
Income - Section use a copyrighted article payments for copyrighted
9(1)(vi) Internationally, as evidenced by OECD article like shrink-
Commentary and opinion of eminent experts, wrapped software as also
the following two basic principles with regard to payments made by
software payments are recognized and well distributors of software
settled: be specifically excluded
from the definition of
(i) The proposition that "right to use a copyright"
"royalty".
is different from "right to use a copyrighted
(SUGGESTION FOR
article" is recognized and it is only the `right to
REDUCING/MINIMIZING
use a copyright' which is covered within the
LITIGATIONS)
definition of royalty.
(ii) The distributor of computer software does
not pay to exploit any rights in the software but
only for acquisition of the software for further
circulation. In view of these, payments made by
a distributor to the copyrighter holder are in the
nature of business income and not royalty
income.
Also, `Packaged /Canned Software' means
ready-made software that could be sold off the
shelf. Sale of such software products represent
sale of copyrighted articles as against a
copyright i.e. such transactions represent sale
of goods. Packaged software has been held to
be `Goods' even by the Supreme Court in case
of TCS vs. State of AP (271 ITR 401) . The
Central Board of Excise and Customs ("CBEC")
has recognized `Information Technology
Software' as `Goods' and classified the same as
Central Excise Tariff Item 8523 80 20 in
Schedule I to the Central Excise Tariff Act,
1985. Further, `Packaged Software/Canned
Software' is recognized as `Goods' for the
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Sr. No Section Issue/Justification Suggestion
purposes of Central Excise Law by the CBEC,
which is another wing of the Ministry of
Finance. These facts lead to the conclusion that
`Packaged Software /Canned Software' are in
the nature of `Goods' and the legislation also
recognizes the same.
Given the above, it is recommended that a
specific amendment be made to the Income-tax
Act to exclude `Packaged/Canned Software' from
the purview of `royalty' defined under Section
9(1)(vi). Further, in certain cases, these software
products are downloadable from the internet and
not necessarily delivered in tangible media such
as a CD or a DVD. However, irrespective of the
mode of delivery, the fact remains that what is
sold is a `copyrighted article' and not a `copyright'.
(b) Use of Standard facilities In view of decision of
Apex Court in CIT Vs.
Kotak Securities Limited
The Apex Court in CIT Vs. Kotak Securities
an exception should be
Limited has clarified that the common services
carved out in
which are necessary for carrying out trading in
Explanation 6 to Section
securities for which transaction charges are
9(1)(vi) so as to exclude
paid, do not amount to technical services.
payments for use of
standard facilities to the
general public at large
like payments for
telephone service,
internet service, cable
television services and
other similar services.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
(c) Exclusion of packaged software from To bring utmost clarity,
applicability of TDS under Section 194J of the it is also suggested that
Income-tax Act a specific amendment be
made to Section 194J to
exclude sale of software
Circular No. 13/2006, dated 13.12.2006
products from the ambit
issued by the CBDT states that TDS shall be
of tax withholding. In
applicable only when there is a `contract for
this regard, it is
work' and not where there is a `contract for
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sale'. This proposition has also been upheld suggested that the
in various judicial precedents like BDA following provision be
Limited vs. ITO (TDS) 281 ITR 99 (HC Bom), included in Section 194J
CIT vs. Dabur India Limited (283 ITR 197) of the Act:
(HC Del). Amendment required
Considering the facts and arguments above, it "194J. (1) Any person, ...
is clear that transaction of sale of Provided that no
`Packaged/Canned Software' is a `contract for deduction shall be made
sale' as against a "contract for work' and under this section --
consequently, should not attract TDS
1. ...
provisions. It is relevant to note that
`Packaged/Canned Software' is also subject 2. ...
to excise duty. There are no other goods in from any sums, if
India which are subject to both excise duty credited or paid for
and TDS. the transfer of a
An amendment to the Income-tax Act to computer software
exclude `Packaged/Canned Software' from (including the
granting of a
the purview of `royalty' would automatically
licence), along with
exclude the transactions from the purview of
or without a
Section 194J of the Income-tax Act and would
computer or
help resolve the withholding tax issue faced
computer-based
by traders of hardware with embossed
equipment or for
software. The distribution network and
ancillary services
channel partners for off the shelf packaged
such as up
software also deal with hardware like gradation or
computers, desktop etc. The packaged subscriptions,
software is mostly sold along with the which does not
hardware, on the same invoice. There is no involve transfer of
obligation of TDS on any hardware items, and all or any rights in
the traders are finding it confusing and difficult respect of any
to discharge the TDS obligation arising out of copyright."
the sale of the `Packaged Software/Canned
Software'. Resolution of the definition of
royalty to exclude `Pac kaged (SUGGESTION FOR
Software/Canned Software' would also help RATIONALIZATION
traders and boost ease of business. OF THE
PROVISIONS OF
Separately, Software Ancillary Services such as
DIRECT TAX LAWS)
Upgrade Fees, Subscriptions, etc. which do not
involve transfer of rights, or grant of license but
involve only payments of consideration for
services is not `Royalty' for the purposes of
Section 194J read with Section 9(1)(iv)
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Sr. No Section Issue/Justification Suggestion
Explanation 2 of the Income-tax Act. Clarification
may be issued that AMC's, Upgrade Fees,
Subscriptions, etc. which do not involve transfer
of rights, or grant of license, but involve only
payments of consideration for services is not
"Royalty" for the purposes of Section 194J read
with Section 9(1)(iv) Explanation 2 of the Income-
tax Act and that such transaction are not liable for
TDS under Section 194J of the Act.
93. Explanation 5 to · Explanation 5 to Section 9(1)(vi) has been · In view of the above, it
Section 9(1)(vi) introduced by Finance Act 2012 w.e.f. is recommended that
e commerce 1 June 1976 to clarify that royalty includes revised definition is
and has always included consideration in
services withdrawn to keep the
respect of any right, property or information,
definition as it was
whether or not the right, property or
information is used directly by the payer or is before the amendment
located in India or is in the control or by Finance Act
possession of the payer.
· Finance Act 2012 also brought in another · In a bid to fuel the
retrospective amendment to the definition of highly competitive
the term `Royalty' by introducing Explanation Telecom Industry as
6 to Sec 9(1)(vi) thereby enlarging the scope well as to bring in
of the term `process' to include transmission
clarity, the Government
by satellite, cable, optical fiber or by any
other similar technology, whether or not such should clarify that
process is secret. Explanations 5 and 6
should not be
· The above amendments could be interpreted interpreted in a way to
to bring within its ambit, payments made by bring payments,
Telcos to other domestic operators for whether made to
services like interconnect, roaming, etc. Tax domestic operators or
withholding on such payments would result in international operators,
significant cash flow issues for Telcos. for standardized
telecom services
Rationale including basic/ mobile
telephony, internet,
· As regards payments made to non-resident roaming, interconnect,
operators, a position may be taken that since etc. under the ambit of
the term `process' has not been defined in the definition of `Royalty'.
treaty, meaning of the same can be imported
from domestic tax law for interpreting (SUGGESTION FOR
provisions of the tax treaty [relying on Article RATIONALIZATION OF
3(2) of treaty read with section 90 and 90A of THE PROVISIONS OF
the Act]. The above would result in payments DIRECT TAX LAWS)
being made to foreign operators located in
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treaty countries also subject to tax
withholding in India.
· Treaty override - The term used in the treaty
is `secret process' whereas in the domestic
law the term is `process' and hence not pari
materia. Any such interpretation would lead to
treaty override since such position is not in
line with principles of Vienna Convention of
Law on Treaties and would be tantamount to
unilateral rewriting of the treaty.
· Non availability of tax credit Without a
corresponding amendment in the treaty, tax
deduction due to amended definition of
royalty under the provisions of the Act may
not be treated as tax paid in accordance with
the provisions of tax treaty. Accordingly,
foreign government may refuse to grant credit
of taxes withheld by Indian payer, resulting in
double taxation for the payee. In the absence
of clarity on the subject, foreign partners
would increase the pricing by 10-15% with the
Indian companies to factor in the impact of
withholding tax. This would adversely impact
the negotiating power of Indian telecom
companies.
· The SC court in a recent decision in the case
of CIT vs. Kotak Securities Ltd. held that
provision of standard service or facility should
not be classified as technical services under
section 9(1)(vii) of the Act.
94. Tax withholding · Finance Act, 2012 amended the section 9 · Clarification to be
on transponder retrospectively to include payment for issued that
hire charges - transponder hire and other charges as royalty Transponder hire
w.e.f. 01.06.1976. charges are not
Section 9(1)(vi)
"royalty" in order to
Explanation 6
· However these are not regarded as royalty avoid protracted
under DTAA as definition of royalty in the litigation. Further, a
DTAA remains same and has not been clarification should
amended, which results in denial of tax credit also be issued that the
of withholding tax/tax paid in India, to the definition of `process'
Satellite Service Providers. under the treaty
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should be read
· The contracts with Satellite Service Providers independently and the
are on "net of tax" basis leading to 12 -13% definition of `process'
extra cost burden on Indian service recipients under Section 9 of the
(at the present level of WTH rate of 10%). Act should not be
interposed in the
treaty definition.
· Various courts in India
have held that such
charges are not
`royalty' or FTS as
these are standard
services and involve
no transfer of
technology.
· Even globally, OECD
commentary also does
not treat such
payments as "royalty"
or "FTS".
· The Media Industry
which includes the
Satellite Broadcasting,
DTH, HITS and
Satellite News
gathering (DSNG &
VSAT) leases over 100
transponders on
foreign satellites,
which on a gross basis
are priced at $190
Million dollars per
year. Owing to the
satellite transponder
leases being treated as
Royalty, which is not
being held admissible
for benefit of DTAA in
different jurisdictions,
the Indian industry is
being forced to gross
up the withholding tax
levied in India, as the
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benefit of the same is
not available to the
foreign satellite
provider in its country,
despite having a DTAA
with India. This leads
to a gross up to the
tune of $20 - $22
Million to be borne by
Indian industry over
and above the fees for
transponders as the
foreign satellite
operators need to be
paid on a net basis the
price of the
transponder use. This
is putting an undue
burden on the industry
without any benefit to
the Indian entity or the
foreign satellite
provider. This is also
against the spirit of
the DTAA.
(SUGGESTIONS FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
95. Section 9(1)(i) Section 9(1)(i) Explanation 6 (b) the value of an To remove this double
Explanation 6(b) asset shall be the fair market value as on the taxation, anomaly and
specified date, of such asset without reduction of hardship in such genuine
liabilities, if any, in respect of the asset, cases, it is recommended
determined in such manner as may be prescribed; that the provision be
"specified date" means the -- amended as follows:
(i) date on which the accounting period of the
This provision should not
company or, as the case may be, the entity ends
be attracted where:
preceding the date of transfer of a share or an
interest; or
(i) the Indian asset
(ii) date of transfer, if the book value of the owned by the foreign
assets of the company or, as the case may be, company is sold between
the entity on the date of transfer exceeds the the specified date & the
book value of the assets as on the date referred
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to in sub-clause (i), by fifteen per cent. date of transfer of the
[EMPHASIS PROVIDED] shares of the foreign
company and the Indian
capital gains tax thereon
This and connected provisions were brought on is paid as applicable.
the statute book as an anti-avoidance measure to NOTE: In view of the anti-
curb the practice of foreign companies changing avoidance provisions of
control at significantly high value which decidedly sections 50CA and
came from Indian business and such structure section 56(2)(x),
was essentially adopted to avoid Indian capital avoidance of capital
gains tax. gains tax on sale of the
Indian asset or shares at
However, this provision is attracted even where low value prior to the
there is no such intention. The definition of date of transfer of the
specified date being the date of the end of the shares of the foreign
latest accounting period prior to the date of company is unlikely to
transaction of transfer of the shares of the foreign happen. Hence this risk
company, particularly poses a problem. is avoided.
(ii) The value
A Multinational company, which is reorganising or
contributed by the Indian
restructuring its global business may be doing so
asset to the foreign
for a number of reasons, least of which may be
company has reduced by
connected with Indian taxation. Hence, even
more than 15% between
where such foreign company has already sold off
the specified date and
its Indian subsidiary (or asset) separately to a
the date of transfer of the
third-party buyer just before transferring its own
shares of the foreign
shares, it may still be liable to this indirect
company,
taxation because on the specified date it owned
the Indian company (or asset). (SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
· This provision is anomalous and results in DIRECT TAX LAWS)
double taxation in this situation since post the
specified date, when the Indian asset is sold,
the foreign company would have paid its
capital gains tax in India. Yet, because such
Indian asset was on its balance sheet on the
specified date, the transfer of its share may
still attract capital gains tax in India on
account of indirect Indian asset transfer.
·
96. Definition of · SEP was introduced to tax non-resident Considering the intent to
Significant entities conducting business through digital tax digital business carried
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Economic medium. out by non-resident entities
Presence (SEP) in India, the definition of
for the purpose SEP should be amended to
· However, definition of SEP is not clear that it
of business restrict its applicability to
is applicable only to non-resident entities
connection business carried through
conducting business through digital medium.
digital medium.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
97. Introducing India has adopted the minimum standard Article It is suggested that for the
safeguards while 7(1) of the Multilateral Instrument (MLI) which cases where PPT test under
applying introduces Principal Purpose Test (PPT) in its tax MLI is invoked, the
Principal treaties. PPT test is akin to the Indian General Government should provide
Purpose Test Anti-Avoidance Rules (GAAR). However, while similar treatment as GAAR-
under the tax introducing PPT (once MLI becomes effective), safeguards. This will
treaty there are no safeguards provided under the provide certainty to the
Income Tax Act, 1961. In fact, GAAR provides foreign investors and will
additional safeguards like pre-approvals and facilitate ease of doing
process under GAAR-panel, etc. business in India.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
98. Grandfathering India has adopted the minimum standard Article Therefore, it is suggested
of Principal 7(1) of the Multilateral Instrument (MLI) which that the Government should
Purpose Test introduces Principal Purpose Test (PPT) in its tax provide the grandfathering
application treaties. PPT test is akin to the Indian General for the application of PPT
Anti-Avoidance Rules (GAAR). GAAR provides test to the past
grandfathering to the specified transactions transactions. This will
entered into before 1 April 2017 (the date on provide certainty to the
which GAAR became effective). A similar foreign investors and will
grandfathering, however, is absent in case where facilitate ease of doing
PPT under the treaty is invoked. This creates business in India.
uncertainty for past transactions once MLI (SUGGESTION FOR
becomes effective. RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
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99. Carry forward of The Income-tax Act, 1961 allows for set off in It is suggested that
excess foreign respect of foreign taxes paid on overseas income. assessees be permitted to
tax credit However, in case of loss/inadequate profits, no carry forward (say for five
set off may be possible. In the current economic years) such unutilized
scenario of the global economy, business outlook credit (in USA such relief is
has become extremely uncertain and results have granted vide section 904(c)
become very volatile . of Federal Tax Act) for
adjustment in future years.
(SUGGESTIONS FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT
TAX LAWS)
100. Tax Sparing Grant of tax sparing credits not dealt with in the · Many treaties signed by
Credits notified Foreign Tax Credit Rules. India provide for tax
sparing clauses under
which India will give a
deemed credit for taxes
on exempt income in
the source country. The
notified Foreign Tax
Credit Rules do not
deal with such
instances.
· It is therefore
submitted that with a
view to avoiding
potential issues
surrounding the
determination of the
credit in absence of
actual taxes paid
abroad, it should be
expressly clarified that
tax sparing credit
should be available
based on a certificate
of relevant authority of
the overseas
jurisdiction.
(SUGGESTION TO
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REDUCE / MINIMIZE
LITIGATIONS)
101. Disallowance for In relation to section 40(a)(ia), Explanatory In line with section 40(a)(ia)
TDS defaults on Memorandum to Finance (No.2) Bill 2014/CBDT of the Act, it is
payments to non- Circular No. 1 of 2015 explained that disallowance recommended that
of whole of the amount of expenditure in case of s.40(a)(i) should also be
resident
payments to residents for whom TDS is a merely amended restricting the
Section 40(a)(i) mode of collection of tax and not discharge of disallowance to 30 percent
final tax liability results into undue hardship for the of the amount of
taxpayers and accordingly, s.40(a)(ia) is amended expenditure.
to restrict disallowance only to 30% of the (SUGGESTION FOR
expenditure amount. Thus, disallowance should RATIONALIZATION OF
be in proportion to the TDS rates which apply to THE PROVISIONS OF
residents which ranges from 2% to 30%. DIRECT TAX LAWS)
However, similar changes are not made in section
40(a)(i) which governs the non-deduction of TDS
on payments to non-residents. It may be noted
that TDS rates applicable to majority of payments
to non-residents by way of interest, royalty and
FTS also are in the range of 5% to 10% which are
also final tax payable by non-resident payees.
Disallowance of 100% of expenditure involving
payments to residents effectively results in
recovery of 30% tax by the Revenue from the
payers whereas the final tax payable by non-
residents is only in the range of 5% to 10%.
102. Cross-border Exemption from Capital gains The merger of an Indian
merger company with a foreign
A transaction of amalgamation, where the company in a specified
amalgamated company is an Indian company, is jurisdiction is now
exempt from capital gains tax liability. permitted as per section
Further, in case of an inbound merger, the capital 234 of the Companies Act,
gains arising to the shareholders of the 2013 r.w. Rule 25A of the
amalgamating company is also exempt. Companies Merger Rules.
Similar tax exemption is not available to the
amalgamated company or its shareholders in The FEMA Merger Rules
case of an outbound merger. have also been amended to
permit an outbound merger,
Exposure to a permanent establishment (PE) subject to conditions. One
such condition is that a
Post an outbound merger, the assets, liabilities foreign company can
and employees of the amalgamating Indian acquire and hold only
company may continue to physically exist in India. certain assets in India
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This may create a PE exposure for the which are permitted under
amalgamated foreign company. In that event, the relevant FEMA
business profits attributable to the foreign regulations for the
amalgamated company's PE in India will be liable acquisition of property in
to tax at the rate of 40% (plus applicable India.
surcharge and cess).
Such cross-border mergers
would not be attractive till
the time there exists tax
liability or ambiguity
around taxability for such
transactions. The income
tax provisions, therefore,
need to be aligned with
corporate law and FEMA to
achieve the objective of
increasing the ease of
winding up operations in
India.
The following tax treatment
is recommended for
consideration:
Removal of a condition
specified in section 47(vi):
· The condition that
the amalgamated entity
should be an Indian
company for claiming
exemption from capital
gains tax arising on
transfer of the undertaking
should be removed.
No taxability for the
shareholders of the
amalgamating company.
· The shareholders
receiving shares of the
foreign amalgamated
company should not be
subject to capital gains.
Relaxation of a condition
specified under section
2(1B)
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· Due to restrictions
in FEMA Regulations, ALL
assets and liabilities
pertaining to the
undertaking may not be
transferred to the
amalgamated foreign
company. Considering the
impossibility of
performance, the condition
for transfer of all assets
and liabilities of the
undertaking as required
under section 2(1B) should
be relaxed.
Clarity on `Business
Connection' under section
9(1)(i):
· Post
amalgamation, the foreign
amalgamated company
would carry on business in
India. A specific provision
could be added to the
definition of `business
connection' under section
9(1)(i). This would bring
clarity to future taxability of
the foreign amalgamated
entity.
Transfer of carried forward
losses and unabsorbed
depreciation under section
72A.
· The carried
forward business losses
and unabsorbed
depreciation of the
amalgamating Indian entity
should be available to the
permanent establishment of
the amalgamated foreign
entity.
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(SUGGESTION FOR
REMOVAL OF
ADMINISTRATIVE AND
PROCEDURAL
DIFFICULTIES RELATING
TO DIRECT TAXES)
103. Master File a) The threshold for applicability of master file The threshold should be
Regulations regulations has been kept at consolidated group aligned with that for CBCR.
turnover of INR 500 crore accompanied with (SUGGESTION FOR
aggregate international transaction(s) of INR 50 RATIONALIZATION OF THE
crore. PROVISIONS OF DIRECT
TAX LAWS)
This is significantly lower than the OECD
recommendations/global trend. This has brought a
lot of mid-sized taxpayers into the net of master file
compliance, increasing the compliance burden on
them.
b) Section 92D(1) first proviso r.w. rule 10DA Provisions related to
Master File Constituent Entity of International applicability of additional
Group to file form 3CEAA i.e. Master File. This documentation requirements
requirement is inserted as a proviso to section for transfer pricing cases
92D(1) which requires every person who has into the Income Tax Act shall
entered into international transactions to keep and be aligned to the provisions
maintain information and documents in respect of of applicability of transfer
international transactions. On the basis of rule of pricing provisions in the
interpretation that the proviso is to be read in Income Tax Act.
continuation of the main section, it is understood (SUGGESTION FOR
that the requirement of first proviso applies when: RATIONALIZATION OF THE
PROVISIONS OF DIRECT
· there are associated enterprises having TAX LAWS)
international transactions
· there is group and international group
· there is constituent entity of international group
(These terms are defined in section 286(9).
On the basis of plain reading of the definitions of
"associated enterprises", "International Group",
"Group", "Constituent Entity", it can be understood
Pre-Budget Memorandum 2019 (Direct Taxes and International Taxation) Page 141
The Institute of Chartered Accountants of India
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that various situations like following examples can
arise. Example ABC India, ABC USA and ABC
Japan are having relation in such a manner that it
can be terms as a group and international group as
per the definitions given in section 286(9).
Requirements of preparing CFS and inclusion in
CFS are the theme of the definitions of group,
International Group and Constituent Entity. Now
ABC UAE is company owned by the promoters of
ABC India. This means that ABC UAE is associated
enterprise of ABC India but not the part of
International Group as defined under section 286(9)
relevant clause. Now let us assume that there are
international transactions between ABC India and
ABC UAE but no such transactions between ABC
India, ABC Japan and ABC UAE. This means there
are no international transactions within the
international Group. However, still there exist :
· International Transactions between associated
enterprises
· International Group
· Constituent Entity of International Group.
But the international 142standardized are not with
the entity which is part of international group.
Confusion exist whether in such cases, the master
file reporting is required to be done? Also whether
the entity which is associated enterprise but not part
of the international group shall be included in the
form 3CEAA?
Before budget, 2016, documentation and reporting
were limited to International Transactions. OECD
(Organisation of Economic Co-operation and
Development) has issued report on 15 BEPS Action
Plans. The OECD report on Action 13 of BEPS
Action plan provides for revised standards for
transfer pricing documentation. It is recommended in
the BEPS report that the countries should adopt a
142standardized approach to transfer pricing
documentation. India has Implemented these
suggestions by inserting first proviso to section
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92D(1) and Section 286. However, the applicability
criteria for these new documentation requirements
might not cover all the cases where transfer pricing
regulations (International Transactions at ALP)
applies. This might keep large number of cases
where transfer pricing applies out of the ambit of
additional documentation requirements.
104. Reporting of Clause 16 of the Form 3CEB requires the In view of Vodafone India
issuance of reporting of particulars in respect of the purchase Services Pvt. Ltd. vs. UOI
Share Capital or sale of marketable securities, issue and (Dated 10th October
Transaction in buyback of equity share, optionally convertible/ 2014)" and PIB dated 28th
Form 3CEB partially convertible/ compulsorily convertible January 2015 issued by
debentures/ preference shares. Bombay High CBDT, it is suggested that
Court in the case of "Vodafone India Services clause 16 of Form No. 3CEB
Pvt. Ltd. vs. UOI (Dated 10th October 2014)" should be amended so as
has held that Chapter X of the Income Tax Act clarify that share Capital
1961 i.e. Transfer Pricing Provision does not transaction is not required
apply on any transaction involving issue/receipt to be reported /justified in
of share capital money (including issued on Form 3CEB.
premium) as no income/expense will arises from (SUGGESTION FOR
such transaction. RATIONALIZATION OF
Government of India in its PIB dated 28th THE PROVISIONS OF
January 2015, has accepted the order of DIRECT TAX LAWS)
Bombay High Court in the case of Vodafone and
came to the view that the transaction involved is
on capital account and there is no income to be
chargeable to tax. So, applying any pricing
formula is irrelevant.
However even after the acceptance of the
Bombay High Court Judgment by Government of
India, Share Capital transaction is still required
to be reported /justified in Form 3CEB.
105. Advertising From last many years, companies advertising It is suggested that
Marketing & foreign brands in India are been scrutinized in clarifications be issued in
Promotion TP audits, for the AMP expenditure made by respect of AMP expenditure
Expenses (AMP) them. On this issue large TP adjustments are made by companies
being made. This has led to litigation between advertising foreign brands
the companies and TPOs resulting in the in India so that litigation
disallowance all marketing expense and the can be avoided.
same is been challenged in higher authorities. (SUGGESTION FOR
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RATIONALIZATION OF
Still after several cases been disposed by the THE PROVISIONS OF
High Court and the Appellate Tribunals, there is DIRECT TAX LAWS)
no clear resolution to this issue and it is still one
of the most litigated TP issues before the courts.
106. Permissible The second proviso to Section 92C(2) of the Act · It is recommended to
variation permits a variation between arm's length price so clarify by way of an
available in case determined and price at which International amendment or a circular
of Single Transaction or Specified Domestic Transaction has that considering the
comparable used actually been undertaken. revised proviso the
determining the benefit of variation from
arm's length The amended proviso of section 92C(2) of the Act, transfer price is
price clearly allows the assesse a benefit of availing the available even in case of
permissible variation even if single price is single comparable. It will
determined as an arm's length price. Further reduce the litigation,
permissible variation applies for the difference which is one of the
between the `Arm's length price so determined' and agenda items of the
the price at which the international transaction/SDT existing government.
is actually undertaken and not from the "arithmetic
mean" in the pre amended proviso. The amended · The above
proviso as it stands now nowhere mentions that the recommendations are
term "arithmetic mean" as a precondition for availing also in line with the
the permissible variation benefit. However, there is observations of Hon'ble
still an ambiguity in the interpretation as to Income Tax Appellant
availability of the permissible variation where single Tribunal in the case of
comparable is used in determining the arm's length The Development Bank
price. The ITAT has given conflicting rulings on the of Singapore (ITA No.
issue and this is leading to unnecessary litigation. 6631/Mum/2006) and in
the case of Reliable
Cashew Co.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
107. Section 92C(2) Arm's length range is the 35th to 65th percentile of · The arm's length range
and Rule 10 CA - the dataset. in India be aligned with
Range concept the globally accepted
Globally, arm's length range is the Inter quartile inter quartile range of
range (25th to 75th percentile of the dataset). This is 25th to 75th percentile of
Page 144 Pre-Budget Memorandum 2019 (Direct Taxes and International Tax)
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practiced in most of the countries, for eg. US, the dataset.
Canada, UK, etc.
· It will reduce the
compliance cost for the
Assessee as a
benchmarking from one
country perspective can
be applied from the
other country
perspective as well.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
108. Tolerance Band By Finance Act 2012, the Government notified that · The tolerance band be
Second proviso to the flexibility of the range as was provided in the restored to the earlier
section 92C(2) second proviso to Section 92C(2) cannot exceed 3 limit of 5 percent.
percent.
· The arithmetic mean is
In case where the arithmetic mean is adopted to used as an alternative
compute the arm's length price (as an alternative to where range concept is
adopting the identified range as introduced in inapplicable. Allowing
Finance (No 2) Act 2014), limiting the tolerance higher tolerance band
band to 3 percent (1 percent for wholesalers) is
will provide better
extremely restrictive.
flexibility.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
109. Mutual MAP provisions as agreed in the respective tax · The law may provide that
Agreement treaties were discussed several years ago and where a MAP application
Procedures the same needs to be relooked at in light of the has been preferred, the
(MAP) changing dynamics of business environment in demand may be stayed on
India and globally. Accepting bank guarantee will furnishing of bank
make MAP more effective for resolution of tax guarantee or other security
disputes, irrespective of jurisdiction involved. US, till completion of MAP
UK and Denmark are some of the jurisdictions process.
where an option is available to the tax payer to (SUGGESTION FOR
provide bank guarantee for the tax demand. REDUCING/MINIMIZING
LITIGATIONS)
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110. Section 92CE - The Finance Act, 2017 introduced the concept of Sub-sections (1), (2) and (3)
Introduction of secondary adjustment on Transfer Pricing (TP) need to be revisited to
secondary adjustments. A taxpayer is required to make a streamline and
adjustment secondary adjustment, where the primary appropriately link up the
adjustment to transfer price has been made in three sub-sections to
the following situations: - provide adequate clarity as
to the specific
requirements from the
· Suo moto by the taxpayer in the return of
taxpayers on this front.
income;
· By the AO during assessment proceedings, (SUGGESTION FOR
and has been accepted by the taxpayer; RATIONALIZATION OF
· Adjustment determined by an Advance THE PROVISIONS OF
Pricing Agreement (APA) entered into by the DIRECT TAX LAWS)
taxpayer;
· Adjustment made as per the safe harbour
rules under section 92CB; or
· Adjustment arising as a result of resolution
of an assessment by way of the mutual
agreement procedure (MAP) under an
agreement entered into under section 90 or
section 90A for avoidance of double
taxation.
Further, the section 92CE(3)(v) defines
`Secondary adjustment' as an adjustment in the
books of account of the assessee and its
associated enterprise to reflect that the actual
allocation of profits between the assessee and
its associated enterprise are consistent with the
transfer price determined as a result of
primary adjustment, thereby removing the
imbalance between cash account and actual
profit of the assessee.
The additional amount receivable from the AE as
a result of the primary adjustment should be
repatriated by the taxpayer into India within a
prescribed time limit. If the same is not received
by the taxpayer within the time-limit, then the
primary adjustment will be deemed as an
advance extended to the overseas AE and a
secondary adjustment in the form of notional
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interest on the outstanding amount should also
be offered to tax as an income of the taxpayer.
The above requirements for repatriating the
adjustment amount into India and imputing a
notional interest are triggered if the TP or
primary adjustment exceeds rupees one crore.
The manner of computation of interest on the
amount deemed as advance made by the
taxpayer to the AE would be prescribed.
The situation of excess payment treated as loan
given to AE on which notional interest in
computed and added to the income of the
assessee till the excess amount is repatriated by
AE.
It would be difficult for AE to repatriate the
money to India on account of secondary
adjustment as the income-tax laws and any other
relevant laws pertaining to such country may not
allow to repatriate money. Further the AE would
have paid tax on such amount in its home
country. This would lead to double taxation. This
would lead to double taxation.
Further, the same cannot be treated as advance
in the books of account maintained in India as
the books of account are prepared as per the
provisions of Companies Act, 2013 read with
Indian Accounting Standards.
(i) Sub-section (1) of the proposed section 92CE
provides for secondary adjustments to be made
in respect of primary adjustments in certain
situations. The phrase "secondary adjustment"
has been defined in Clause (v) of Sub-section (3)
to mean an adjustment in the books of account
of the assessee and its associated enterprise to
reflect that the actual allocation of profits
between the assessee and its associated
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The Institute of Chartered Accountants of India
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enterprise are consistent with the transfer price
as determined as a result of primary adjustment,
thereby removing the imbalance between cash
account and actual profit of the assessee. Sub-
section (2) lays down the requirement for excess
monies to be repatriated to India and for interest
to be levied thereon, if not repatriated within the
prescribed time. However, Sub-section (2) does
not refer to `secondary adjustment' as envisaged
under Sub-section (1) and defined in Clause (v)
of Sub-section (3). The absence of references to
Sub-section (1) and/or `secondary adjustment' in
Sub-section (2) results in an apparent disconnect
between Sub-sections (1) and (2) which may
have unintended consequences.
(ii) In respect of Unilateral APAs that have been A specific clarification
entered till date, there was no provision relating should be issued under the
to secondary adjustments in the statute. As a APA Rules as well as in
result, APAs have been concluded wherein terms Section 92CE that the
that are not consistent with the Section 92CE consequences for a delay
have been imposed on taxpayers. In view of a in bringing money into
specific provision having been introduced, India pursuant to a
taxpayers should be entitled to follow the unilateral APA would be
mandate of Section 92CE in respect of APAs only under Section 92CE(2)
signed till date. and the APA would not be
disqualified merely on this
account.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
(iii) For better clarity and in order to avoid any The Government may issue
confusion regarding the assessment year from a clarification that section
which the secondary adjustment provisions 92CE will be applicable
would be applicable, it may be clarified that the from A.Y.2018-19, in
section will be applicable from AY 2018-19, in relation to primary
relation to primary adjustments for fiscal years adjustments for fiscal years
2016-17 and thereafter. 2016-17 and thereafter.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
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(iv) Clause (ii) to sub-section (1) of the section 92CE Government should clarify
provides that a taxpayer is required to make a the term `has been
secondary adjustment where primary adjustment accepted by the taxpayer'
to transfer price has been made by the AO in order to provide certainty
during assessment proceedings and has been on the applicability of these
accepted by the taxpayer. There is lack of clarity provisions in such
on what exactly the term `has been accepted by situations. For e.g. if the
the taxpayer' means. taxpayer is in appeal
against the assessment
order to Tribunal, in such
cases, will secondary
adjustment provisions be
applicable only after the
Tribunal proceedings are
completed or the same will
be applicable after Court
proceedings are completed
i.e. if the taxpayer further
appeals to High Court/
Supreme Court.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
(v) Since adjustments are made subsequently when The said issues may be
returns are taken up for scrutiny, any considered and appropriate
requirement to make secondary adjustment remedial measures may be
would depend upon whether the Associated incorporated to avoid
Enterprise is willing to accept the secondary genuine hardship.
adjustments to be made in its books abroad. (SUGGESTION FOR
Non-acceptance of the same will lead to inter- RATIONALIZATION OF
company issues during consolidation. It could THE PROVISIONS OF
also require restatement of financial statements DIRECT TAX LAWS)
of an Indian entity if adjustments are material.
This in turn might lead to filing of revised returns.
Implication on shareholders value and lenders
agreement (where there are borrowings) would
need to be evaluated besides implications under
the Companies Act, 2013. Further, FEMA
requires money to be remitted within 6 months
from the end of the accounting year. Also, if the
Associated Enterprise (AE) located abroad does
not pass entries in the books, inter-company
adjustments/eliminations could be a challenge if
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the AE is a holding company.
(vi) The proviso to the section 92CE(1) states that It is suggested that the
nothing contained in this section shall apply, if;- proviso may be restated as
under:
(i) the amount of primary adjustment made in any
previous year does not exceed one crore rupees; (i) the amount of
and primary adjustment made in
(ii) the primary adjustment is made in respect of any previous year does not
an assessment year commencing on or before exceed one crore rupees;
the 1st day of April, 2016. and OR
From a bare reading of the section, it appears (ii) the primary
that both conditions i.e. primary adjustment adjustment is made in
made before 1.4.2016 and it being less than 1 respect of an assessment
crore need to be complied, because the word year commencing on or
"AND" is written between two conditions. It ought before the 1st day of April,
to be "OR". Else, in future years, there will be no 2016.
threshold limit for secondary adjustment. (SUGGESTION FOR
IMPROVING TAX
COLLECTION)
(vii) Applicability of section 92CE has to be restricted In order to remove this
only to cases satisfying the base erosion test. anomaly it is recommended
The provisions, as presently worded, may give that section 92CE(2) be
rise to an interpretation that even where the amended to clarify that the
primary adjustment is made in the hands of non- section applies only in case
resident, secondary adjustment follows. As a where the primary
consequence, it may be interpreted as allowing adjustment is made in the
repatriation of funds outside India, which may not hands of the Indian AE.
be permitted even in terms of FEMA/ RBI (SUGGESTION FOR
regulations. IMPROVING TAX
COLLECTION)
(viii) Section 92CE provides for secondary adjustment In order to avoid any
in case where excess money (difference unwarranted litigation, it
between transaction price and arm's length may be clarified that
price), which remains outside India, due to the section 92CE applies only
primary adjustment under TP is not repatriated to to international transaction
India. and not domestic
transactions as covered
under section 92BA.
Taxable funds may remain outside India only in
case where a foreign party is involved. In other (SUGGESTION FOR
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words, there may be possible base erosion only IMPROVING TAX
in case where one of the parties to the COLLECTION)
transaction is foreign AE. A transaction between
two domestic entities, will not lead to profits
allocable to India, remaining outside India.
(ix) Section 92CE deems the difference between the It may be specifically
transaction price and arm's length price as an provided that the advances
advance (which is to be recorded in the books) appearing in the books of
and provides for imputation of interest on such the parties be reversed in
advances. following cases where AE
However, there is no specific provision to relationship ceases to
reverse the advances appearing in the books exist, or excess money is
even in case where the AE relationship ceases repatriated.
to exist or in case where the excess money is (SUGGESTION FOR
repatriated. REDUCING/MINIMIZING
LITIGATIONS)
(x) Constructive loan v/s constructive dividend · It is recommended that
the provisions of
· Primary adjustment to the income of an secondary adjustment
Assessee dealing with a foreign AE is treated be amended to treat
as interest bearing loan given to the AE, if the excess profits in the
amount of money equivalent to the adjustment hands of the foreign AE
is not repatriated within the time limits as equity contribution or
prescribed in Rule 10CB and interest at deemed dividend, at the
prescribed rate is imputed on said deemed option of the Assessee.
loans. Deemed dividend can be
brought to tax in the
· Further, adjustments in books of accounts of the hands of the recipient
Assessee and its foreign AE are required to (Assessee).
reflect actual allocation of profits between the
Assessee and its AE which is consistent with · It is also recommended
transfer price determined as a result of primary that the cumbersome
adjustment. requirement of adjusting
the books of accounts of
· As per OECD Transfer pricing guidelines, the Assessee in India as
secondary adjustment may take the form of well as the overseas AE,
constructive (or deemed) loan/ dividend/ equity should be done away
contributions. with, as the foreign AE
may be prohibited to
· Most countries follow the constructive dividend make adjustment in
approach, for example, USA, Korea, Germany, books by local laws of
France, and South Africa. The most significant its country of
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advantage of constructive dividend is that it is incorporation.
one time event without a carry-forward impact
on future years, unlike the loan approach,
where it may remain in place for several years if · It would ease the burden
not acknowledged by AEs. on the Assessee to
repatriate the adjusted
· Repatriation of profits may not be feasible as amounts.
AE relationship may cease to exist when the
primary adjustment attains finality. The AE
relationship may cease to exist on account of
liquidation/winding up of AEs, or transfer of the
(SUGGESTION FOR
AE to another entity. Alternatively, remittance of
RATIONALIZATION OF
money on account of primary adjustment
THE PROVISIONS OF
attaining finality may not be possible due to DIRECT TAX LAWS)
restrictions of the Central Bank in the
jurisdiction where the AE is incorporated.
· Most countries that apply secondary adjustment
do not recognize deemed loan approach, many
countries do not have secondary adjustment
legislation at all. Therefore, the deemed loan
approach is likely to increase the risk of double
taxation.
(xi) Time limit for secondary adjustment · It is recommended that
the time limit prescribed
· The time limit prescribed under Rule 10CB for under rule 10CB, in
repatriation of excess money is 90 days from respect of primary
the due date of filing of return under sub-section adjustments made
(1) of section 139 of the Act in the case of consequent upon
agreement for advance pricing entered into by entering into an APA, be
the Assessee under section 92CD. set to 90 days from the
signing of the APA or
· The APA negotiation process usually takes 2-3 the due date of filing of
years or even more. The due date of return return of income u/s
under section 139(1) of the Act in respect of 139(1) of the Act,
couple of initial years covered under the APA whichever is later.
has expired by the time the APA is concluded.
· It would ease the burden
on the Assessee under
· This would result in secondary adjustment for the APA program
most of the companies under the APA even
though the APA program requires the Assessee
(SUGGESTION FOR
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to file modified return of income in respect of RATIONALIZATION OF
covered past years. THE PROVISIONS OF
DIRECT TAX LAWS)
111. Advance Pricing · The guidelines provide for conducting the · It is recommended the
Agreements assessment proceedings simultaneously, during transfer pricing
(`APA') the pendency of APAs. proceedings be kept in
abeyance till the
· This may result in duplication of time and effort conclusion of the APA,
of TPO and Assessee, once APA is concluded. qua covered
transactions. In case on
conclusion of the APA,
the modified returns
could be summarily
scrutinized. In case the
APA proceedings fail,
the assessment
proceedings can be
revived for the proposed
covered transactions.
The period between date
of filing of APA
application and date for
signing of the APA can
be excluded for the
purposes of
computation of the
limitation.
· Ease the burden on the
Assessee and the Tax
Authorities
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
112. Rollback of APA The CBDT introduced the rollback rules under It is recommended that this
the APA program on 14 March 2015. There were provision should be relaxed
some ambiguities about the implementation of to the extent that the
the rollback rules, and therefore, CBDT issued taxpayers with similar
Frequently Asked Questions (FAQs) clarifying transactions with no
certain issues. In this regard, some of the substantial changes in the
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aspects that need to be further addressed are as functional, asset and risk
under: profile should be allowed to
The international transaction proposed to be take benefit of this
covered under the rollback is to be the same as provision. Further, if the
covered under the main APA. The term `same same/ similar transaction is
international transaction' implies that the undertaken with another
transaction in the rollback year has to be of the AE, the benefit of rollback
same nature and undertaken with the same AEs, should be provided.
as proposed to be undertaken in the future years
and in respect of which APA has been reached. Thus, it is recommended
that the provision should
be made applicable to
similar nature of
transactions and with
different AEs.
Further, the rules provide
that if the applicant does
not carry out any actions
prescribed for any of the
rollback years, the entire
APA shall be cancelled.
It is recommended that this
provision should be relaxed
and should not result in the
cancellation of the entire
APA.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
113. Dispute The Indian APA authorities have been refusing to India may introduce a
resolution accept applications for bilateral APAs from clarification, giving effect
countries like Germany, France, Singapore and
to the point 2 above, to
Italy as the Double Taxation Avoidance
enable taxpayers from the
Convention (DTAC) of India with these countries
do not contain Article 9(2) which provides for countries like Germany,
corresponding adjustment to be allowed to the France, Singapore and Italy
taxpayer for any economic double taxation that to file for bilateral APAs.
arises on account of transfer pricing adjustments. (SUGGESTION FOR
The OECD has in its commentary given two RATIONALIZATION OF
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options if such an issue arises: THE PROVISIONS OF
DIRECT TAX LAWS)
The Article 25 on Mutual Agreement Procedures
in various DTACs covers such instances of
allowing a corresponding adjustment for TP,
hence bilateral APAs should be allowed, or the
countries (like India) that do not agree that Article
25 of DTACs cover corresponding TP
adjustments, should make unilateral changes in
their regulations to allow such adjustment.
114. Section 94A - One of the tax consequences of a country or area Section 94A and/or section
Special measures being notified as NJA is that payments to persons 206AA may be suitably
in respect of located in that NJA would be subject to a higher amended to clarify that
transactions with withholding @ 30%. The relevant provision which section 94A would prevail
persons located provides for this implication i.e., section 94A(5), in case tax is to be
in notified would be applicable notwithstanding anything to deducted with respect to
jurisdictional area the contrary contained in the Act. any payment to a person
Section 206AA which provides for higher located in a NJA.
withholding @ 20% in absence of PAN of payee is (SUGGESTION FOR
also applicable not withstanding anything to the RATIONALIZATION OF
contrary contained in the Act. THE PROVISIONS OF
Though the intent appears to be that section 94A DIRECT TAX LAWS)
would override section 206AA, there may be
some difficulties in interpretation.
115. Section 94B - The Finance Act, 2017 introduced limitation of In view of the above policy
Limitation of interest benefit (deduction) provisions in where an level issues, it is suggested
interest benefit Indian company, or a permanent establishment of that the restrictions
provisions a foreign company in India, being the borrower, imposed on the interest
introduced pays interest exceeding rupees one crore in benefits on overseas
certain concerns respect of any debt issued/guaranteed (implicitly borrowings may be done
to be addressed or explicitly) by a non-resident AE. The interest away with entirely or at
shall not be deductible in computing income least deferred for 5-10
chargeable under the head `Profits and gains of years to give India a chance
business or profession' to the extent, it qualifies to achieve high growth and
as excess interest. achieve significant
infrastructural development
and maturity.
Excess interest shall mean total interest
paid/payable by the taxpayer in excess of thirty (SUGGESTION FOR
per cent of cash profits or earnings before RATIONALIZATION OF
interest, taxes, depreciation and amortisation THE PROVISIONS OF
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(EBITDA) or interest paid or payable to AEs for DIRECT TAX LAWS)
that previous year, whichever is less.
There will be restriction on the deductibility of the
interest in the hands of the taxpayer in a
particular financial year to the extent it is excess
as explained above. However, the same shall be
allowed to be carried forward for a period of eight
years and allowed as deduction in subsequent
years. The above restrictions shall not be
applicable to the taxpayer engaged in the
business of banking or insurance. These
provisions will be applicable for FY 2017-18 and
subsequent years.
(i) India is a developing country with a need for
foreign investment to fund various initiatives, in
particular, the development of India's
infrastructure. The Government has given its
support at a policy level, inter-alia, consistently
reducing tax withholding rates on ECBs by Indian
entities from non-residents, which indicates
encouragement by the Government towards debt
obtained by Indian entities by overseas parties.
However, the restrictions imposed under the
proposed Section 94B above in respect of interest
of overseas loans is giving mixed signals to
foreign as well as Indian parties at a policy level
on overseas borrowings. This inconsistency may
lead to further policy level uncertainty in the
minds of the business community in India and
may undermine the attempts at enhancing the
"ease of doing business" by the Government.
Under existing ECB guidelines, there is already a
mechanism in place to limit the Borrower's
Debt/Equity ratio, which effectively safeguards
India's interests with regard to excessive debt. As
such, there is no need for any additional measure
to protect India's interests in this regard.
(ii) Without prejudice to the aforesaid, if at all it is It is recommended to carve
considered necessary to have provisions to limit out exceptions for
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the deductibility of interest, the exclusions granted inherently highly
to banking and insurance companies may be leveraged industries from
extended to other sectors such as Infrastructure the aforesaid
and Non-Banking Finance Companies. Large restrictions. The
capital-intensive companies with long gestation exclusions granted to
periods, Non-Banking Finance Companies, banking and insurance
companies in the real estate sector and companies may be
companies in the infrastructure sector (requiring extended to other sectors
significant foreign capital which may not always such as Infrastructure,
come in the form of equity) are typically highly Non-Banking Finance
leveraged on account of the business Companies and loss-
requirements (either by way of external or related making companies.
party debt) and might be negatively impacted by
the interest restriction. Also, the provisions
should not be made
applicable to new
companies/start-ups (i.e.
companies formed after 1
April 2016) for initial
period of 3 years. This
would help them to build
good track record and be
able to independently
obtain debt without
support of AE.
Alternatively, the
provisions may not be
applicable, subject to
certain conditions in line
with BEPS Action Plan 4.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
(iii) The proviso to sub-section (1) provides that where The said section should be
debt is issued by a non-associated lender but an amended to specify
AE either provides implicit or explicit guarantee to limitation of benefits in
such lender, such debt shall be deemed to have guarantee cases only to the
been issued by an AE. extent of the guarantee
commission (if any) paid by
the Indian entity to the
In respect of explicit guarantees, the transaction
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relating to associated enterprises is only towards overseas guarantor (being
a guarantee commission (in case charged by the its AE) and not the interest.
overseas guarantor). The interest towards the Further, the word implicit
borrowing is paid in this case only to a third party guarantee may be dropped
wherein the rate and terms are decided purely from the provisions. The
through negotiation. Hence, restriction of benefit term `explicit guarantee'
in relation to guarantees ought to be only to the may also be appropriately
extent of the guarantee commission (if any) defined to obviate future
claimed as a deduction by the Indian entity and litigation on this front.
not interest paid to the third-party lender. (SUGGESTION FOR
RATIONALIZATION OF
Further, including implicit guarantees under the THE PROVISIONS OF
above restrictions would lead to significant DIRECT TAX LAWS)
hardship for the taxpayers and may result in
protracted litigation in the coming years. It is
pertinent to note that there is no clear definition of
implicit guarantee and it would be an onerous task
for the taxpayers and tax authorities to determine
existence of an implicit guarantee. E.g. when a
letter of comfort or simply an undertaking is
provided by one AE to a lender or a bank, the tax
authorities may contest that guarantee exists,
without going into details whether the same has
benefited the borrower and whether the AE has
actually rendered any service or assumed any
liability.
(iv) Based on the definition of the term `debt' as It is recommended that:
provided in clause (ii) of sub-section (5) of · Appropriate guidelines
proposed section 94B, interest may include many may be issued to clarify
other payments made on various kinds of financial what the term `interest
arrangements and instruments. There may be an or similar
issue as to what payments made by the taxpayer consideration' should
needs to be included in the term interest e.g. include or exclude as
which payments on account of finance lease and the definition provided
financial derivatives should be included in the in the existing Section
term `interest or similar consideration' etc. which 2(28A) of the Act may
may again lead to litigation. not be adequate for the
purposes of thin-
capitalisation rules
based on the definition
of the term `debt'.
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· the provisions of this
section should be made
applicable to new debts
taken on or after 1 April
2017.
· Interest disallowed
under other provisions
(sections 40(a)(i) or
43B) should be
specifically excluded
from definition of "total
interest".
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
(v) There is lack of clarity on the mechanism to It is suggested that the
calculate EBITDA i.e. say, on the basis of book mechanism to calculate
profits calculated on the basis of accounting EBITDA be clearly laid
standards, Ind-AS or otherwise. This may result in down.
unnecessary litigation. (SUGGESTION FOR
IMPROVING TAX
COLLECTION)
(vi) The BEPS Action Plan 4 provides for a Group It is suggested in place of a
Ratio Rule wherein the Group's overall third -party fixed 30 per cent EBITDA
interest as a proportion of the Group's EBITDA is restriction, a Group Ratio
computed and that ratio is applied to the could be considered in
individual company's EBITDA to determine the order to apply the interest
interest restriction. This would take into account deduction restriction under
the actual third-party debt and leverage at global the above provision.
level vis-à-vis third parties. This also addresses (SUGGESTION FOR
the issue relating to inherently highly leveraged RATIONALIZATION OF
industries since the global leverage ratio would THE PROVISIONS OF
take into account the significant debt and would DIRECT TAX LAWS)
be commensurate to the leverage ratio required at
individual country level. Given this, a relatively
fair leverage requirement at India level would
emerge.
(vii) Sub-section (1) of Section 94B specifically It is suggested that
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requires the lending to be from a non-resident AE borrowings by Indian
for the section to trigger. However, branches or companies from Indian
permanent establishments of foreign banks are branches or permanent
also "non -residents" for the purposes of the establishments of foreign
Income-tax Act. Whilst branches or permanent banks may be wholly
establishments of foreign banks operate excluded from the purview
essentially as Indian companies and compete of the aforesaid Sec 94B
directly with Indian banks, debt by related Indian (either by way of direct
branches of banks or guarantees given by AEs borrowing from or by way
towards borrowings by Indian companies from of guarantee by AE to such
branches or permanent establishments of foreign branches or permanent
banks would qualify for disallowance under the establishments of foreign
above provision. This place the Indian branches banks).
of foreign banks at a disadvantageous position (SUGGESTION FOR
vis-à-vis competing Indian banks. RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
(viii) Section 94B(4) provides that where for any · The CBDT may
assessment year, the interest expenditure is not consider allowing
wholly deducted against income under the head carry forward of
"Profits and gains of business or profession", so excess interest
much of the interest expenditure as has not been without any restriction
so deducted, shall be carried forward to the on the number of
following assessment year or assessment years, years similar to
and it shall be allowed as a deduction against the provisions adopted in
profits and gains, if any, of any business or case of depreciation.
profession carried on by it and assessable for that However, in case the
assessment year to the extent of maximum same is not feasible
allowable interest expenditure in accordance with carry forward of
sub-section (2): excess credit should
Provided that no interest expenditure shall be be allowed for a
carried forward under this sub-section for more longer period, say 15
than eight assessment years immediately years, instead of the
succeeding the assessment year for which the prescribed 8 years to
excess interest expenditure was first computed. cushion the long
gestation periods for
such industries.
· It may further be
clarified that set off
will be available even
if the section is not
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triggered in the
subsequent year due
to interest expense
being less than INR 1
Crore.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
(ix) Carry forward of unused interest capacity: · It is suggested that
Section 94B(2) provides that the excess interest there should be a credit
shall mean an amount of total interest paid or mechanism to offset
payable in excess of thirty per cent of earnings the unutilized limit in
before interest, taxes, depreciation and subsequent years.
amortisation of the borrower in the previous year
or interest paid or payable to associated
· The period of set-off
enterprises for that previous year, whichever is
may be restricted to 3-5
less.
years.
(SUGGESTION FOR
Business may not earn consistent profit year on RATIONALIZATION OF
year. However, the interest expenditure may be THE PROVISIONS OF
consistent. Given that EBITDA may vary on DIRECT TAX LAWS)
account of economic considerations, it may be
that the cap of 30% may not be exhausted in a
particular year (say year 1).
(x) Section 94B deals with limitation on interest Thus with a view to resolve
deduction in certain cases. The relevant extract of the issue discussed, it is
the same is reproduced below: suggested that for the
purpose of computing
"94B. (1) Notwithstanding anything contained in this `excess interest' under
Act, where an Indian company, or a permanent section 94B(2), the term
establishment of a foreign company in India, being `total interest paid or
the borrower, incurs any expenditure by way of payable' should only include
interest or of similar nature exceeding one crore interest paid to the
rupees which is deductible in computing income associated enterprise.
chargeable under the head "Profits and gains of (SUGGESTION FOR
business or profession" in respect of any debt RATIONALIZATION OF
issued by a non-resident, being an associated THE PROVISIONS OF
enterprise of such borrower, the interest shall not be DIRECT TAX LAWS)
deductible in computation of income under the said
head to the extent that it arises from excess interest,
as specified in sub-section (2):
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Provided that where the debt is issued by a lender
which is not associated but an associated enterprise
either provides an implicit or explicit guarantee to
such lender or deposits a corresponding and
matching amount of funds with the lender, such debt
shall be deemed to have been issued by an
associated enterprise.
(2) For the purposes of sub-section (1), the excess
interest shall mean an amount of total interest
paid or payable in excess of thirty per cent of
earnings before interest, taxes, depreciation and
amortisation of the borrower in the previous year
or interest paid or payable to associated
enterprises for that previous year, whichever is
less."(emphasis supplied).
I. Issue
Whether for purpose of determining amount of
excess interest under section 94B(2), interest paid
to third party lenders (i.e. other than associated
enterprises) should be included in `total interest paid
or payable' or it should only include interest paid or
payable to associated enterprises?
Rationale:
· Sub-section (2) to section 94B refers to "an
amount of total interest paid or payable". The
literal reading of the section does not create any
limitation on inclusion of interest paid or payable
to associated enterprises only. The words
referred to are `total interest paid or payable'.
· The legislature in its wisdom has separately
referred to "an amount of total interest paid or
payable" and "interest paid or payable to
associated enterprises" within the same sub-
section itself.
Thus, basis the literal reading of the section, interest
paid to third party lenders shall be included in `total
interest paid or payable' for the purposes of
computing the excess interest under section 94B(2).
Having said the above, it may be possible to
contend that interest paid to third party lenders may
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not be included in `total interest paid or payable' for
the purposes of computing the excess interest basis
the intention of the legislature as per the
Memorandum explaining the provisions of Finance
Bill
Basis the intention of the legislature as per the
Memorandum explaining the provisions of Finance
Bill, it may be possible to contend that interest paid
to third party lenders may not be included in `total
interest paid or payable' for the purposes of
computing the excess interest.
Reference could also be made Commentary on
Finance Act, 2017 published in Taxmann's Master
Guide to Income Tax Act [at page 1.91 para 1.7-8a]
(xi) The proviso to sub-section (1) of Sec 94B provides Section 94B section should
that where debt is issued by a non-associated be amended to specify
lender but an AE either provides implicit or explicit limitation of benefits in
guarantee to such lender, such debt shall be guarantee cases only to the
deemed to have been issued by an AE. extent of the guarantee
In respect of explicit guarantees, the transaction commission (if any) paid by
relating to associated enterprises is only towards a the Indian entity to the
guarantee commission (in case charged by the overseas guarantor (being
overseas guarantor). The interest towards the its AE) and not the interest.
borrowing is paid in this case only to a third party
wherein the rate and terms are decided purely Further, the word implicit
through negotiation. Hence, restriction of benefit in guarantee may be dropped
relation to guarantees ought to be only to the extent from the provisions. The
of the guarantee commission (if any) claimed as a term explicit guarantee may
deduction by the Indian entity and not interest paid also be appropriately defined
to the third party lender. to obviate future litigation on
this front. Based on present
Further, including implicit guarantees under the clause, even the banking
above restrictions would lead to significant hardship facilities which are backed
for the taxpayers and may result in protracted by Letter of Awareness from
litigation in the coming years. It is pertinent to note the AE can also qualify as
that there is no clear definition of implicit guarantee guarantee given by AE for
and it would be an onerous task for the taxpayers the facility.
and tax authorities to determine existence of an (SUGGESTION FOR
implicit guarantee. E.g. when a letter of comfort or RATIONALIZATION OF
simply an undertaking is provided by one AE to a THE PROVISIONS OF
lender or a bank, the tax authorities may contest that DIRECT TAX LAWS)
guarantee exists, without going into details whether
the same has benefited the borrower and whether
the AE has actually rendered any service or
assumed any liability.
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(xii) There is lack of clarity on the mechanism to It is suggested that the
calculate EBITDA i.e. say, on the basis of book mechanism to calculate
profits calculated on the basis of accounting EBITDA be clearly laid down.
standards, Ind-AS or otherwise. This may result in (SUGGESTION FOR
unnecessary litigation. RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
(xiii) Sub-section (1) of Section 94B specifically requires It is suggested that
the lending to be from a non-resident AE for the borrowings by Indian
section to trigger. However, branches or permanent companies from Indian
establishments of foreign banks are also non- branches or permanent
residents for the purposes of the Income-tax Act. establishments of foreign
Whilst branches or permanent establishments of banks may be wholly
foreign banks operate essentially as Indian excluded from the purview of
companies and compete directly with Indian banks, the aforesaid proposed Sec
debt by related Indian branches of banks or 94B (either by way of direct
guarantees given by AEs towards borrowings by borrowing from or by way of
Indian companies from branches or permanent guarantee by AE to such
establishments of foreign banks would qualify for branches or permanent
disallowance under the above provision. This places establishments of foreign
the Indian branches of foreign banks at a banks).
disadvantageous position vis-a-vis competing Indian (SUGGESTION FOR
banks. RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
(xiv) As per FDI Policy, 100% FDI towards infrastructure It is suggested that
falls under automatic route. Foreign investor invest borrowings by Indian
in India with combination of equity and debt. Further companies backed by
maximum debt is back by parent guarantee. The corporate guarantee shall be
parent guarantee helps Indian borrowers to reduce fully excluded in this clause.
the interest rate on their borrowing. Given high (SUGGESTION FOR
capital intensive nature of the infrastructure sector, RATIONALIZATION OF
reduced interest costs makes the project further THE PROVISIONS OF
viable. Disallowance / limitation of allowance of DIRECT TAX LAWS)
interest expense on instances where such borrowing
is secured by guarantee by AE will adversely affect
the viability of infrastructure projects.
116. Section 95 Section 95 was amended via the Finance Act, It is suggested that:
Applicability of 2015 to provide that provisions of Chapter X-A (a)All transactions entered
GAAR to be relating to General Anti-Avoidance Rule (GAAR) into before 01.04.2017 be
effective from are made applicable from A.Y. 2018-19. In provided protection from
A.Y.2018-19 - effect, the applicability of GAAR is deferred by applicability of GAAR, so
Protection from two years. as to further improve the
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applicability of In this regard, the following further amendments investment climate in the
GAAR should not are required: country.
be restricted to (a) As per the Explanatory Memorandum to the
only investments, Finance Bill, 2015, investments made up to
(b)Section 144BA,
but may extend to 31.03.2017 are to be protected from the
providing for reference to
all transactions applicability of GAAR by amendment in the
Principal Commissioner or
upto 31.03.2017 relevant rules in this regard. Accordingly, Rule
Commissioner in certain
10U has been appropriately amended, and all
cases, be consequently
investments made before 1.4.2017 are protected
deferred by two years and
from the applicability of GAAR.
made applicable with effect
from A.Y.2018-19.
However, all transactions entered before
01.04.2017, and not only investments made, (SUGGESTION FOR
need to be protected from the applicability of RATIONALIZATION OF
GAAR, so as to further improve the investment THE PROVISIONS OF
climate in the country DIRECT TAX LAWS)
(b) Further, the applicability of section 144BA
providing for reference to Principal
Commissioner or Commissioner to declare an
arrangement as an impermissible avoidance
arrangement in order to determine the
consequence of such an arrangement within the
meaning of Chapter X-A, also needs to be
consequently deferred by two years and made
applicable from A.Y.2018-19.
117. Section 95 - a) Meaning of the terms `Substantial' and · It needs to be clarified
General Anti- 'Significant' in Section 97(1) of the Act what shall constitute as
Avoidance Rule "substantial
The Finance Act, 2015 deferred implementation of commercial purpo se'
General Anti Avoidance Rules (GAAR) by two and "significant effect'
years so as to introduce provisions of GAAR with for the purpose of
effect from Financial Year (FY) 2017-18. The section 97 of the Act.
Finance Act, 2016 provides for the effective date
as 1 April 2017. · Substantial commercial
purpose may be
Section 97(1) of the Act provides that an explained with
arrangement shall be deemed to be lacking reference to the terms
commercial substance, if inter alia; - used viz. location of an
· it involves the location of an asset or of a asset/transaction or
transaction or of the place of residence of place of residence of a
any party which is without any substantial party (for e.g. whether
commercial purpose other than obtaining a it would be specified
tax benefit for a party; or value of assets located;
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· it does not have a significant effect upon value of a transaction
business risks, or net cash flows apart from as comparable to the
the tax benefit. total assets of the
business or any other
The terms `substantial commercial purpose' and such related
`significant effect' in the context of GAAR have not parameter).
been defined in the Act.
· Similarly, what will
constitute as
`significant effect' vis -
a-vis business risks /
net cash flows needs to
be clarified.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
b) Clarification on the term `tax benefit' as Clause (e) and (f) should be
defined under section 102(10) of the Act appropriately worded to
correspond with the `tax'
The term `tax benefit' as defined under section amount. In other words, the
102(10) of the Act includes, -- reference to income/loss
should not be the base for
"(a) a reduction or avoidance or deferral of tax or defining the term `tax
other amount payable under this Act; or benefit'.
(b) an increase in a refund of tax or other amount In line with the Expert
under this Act; or Committee
recommendations, it is
(c) a reduction or avoidance or deferral of tax or suggested that:
other amount that would be payable under this Act, a) the tax benefit should be
as a result of a tax treaty; or computed in the year of
deferral and the present
(d) an increase in a refund of tax or other amount value of money should be
under this Act as a result of a tax treaty; or ascertained based on the
rate of interest charged
(e) a reduction in total income; or under the Act for shortfall
of tax payment under
(f) an increase in loss,
section 234B of the Act.
in the relevant previous year or any other previous
year;"(Emphasis supplied) b) for the sake of clarity,
it may be specified that
Clause (e) and (f) in the definition refer to "reduction tax benefit for the
of total income" and "increase in loss" as tax benefit. purposes of the
An ambiguity arises as to how tax benefit is threshold shall include
conditioned at income / loss level. This may also only income tax, dividend
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defeat the objective of INR 3 crore tax benefit distribution tax and profit
threshold as provided in Rule 10U of the Income-tax distribution tax, and shall
Rules, 1962 (the Rules). not include other
Computation of tax benefit on deferral of tax (which is
amounts like interest,
merely a timing difference) needs to be clarified. As etc.
observed by the Expert Committee
recommendations3, in cases of tax deferral, the only (SUGGESTION FOR
benefit to the taxpayer is not paying taxes in one year RATIONALIZATION OF
but paying it in a later year. Overall there may not be THE PROVISIONS OF
any tax benefit but the benefit is in terms of the DIRECT TAX LAWS)
present value of money.
Further, as observed by the Expert Committee4, the
term tax benefit has been defined to include tax or
other amount payable under this Act or reduction in
income or increase in loss. The other amount could
cover interest.
c) India has signed the `Multilateral Instrument' (MLI) It is suggested that GAAR
in accordance with the Base Erosion Profit Shifting provisions should not be
(BEPS) Action Plan 15 of the OECD, which, inter made applicable to abusive
alia, deals with the denial of tax treaty benefits in transactions (in the case on
certain cases of anti-abuse MNE's) which are subjected
arrangements/transactions entered into by the to anti-abuse provisions
taxpayer. The MLI provides for insertion of anti- under the tax treaty pursuant
abuse provisions (the PPT and the LOB provisions) to adoption of the MLI
in the tax treaties so as to deny tax treaty benefits in provisions. Once the anti-
case of abusive arrangements/transactions being abuse provisions are
entered into by the taxpayer. The anti-abuse inserted in the respective tax
provisions inserted through the MLI would be treaties through the MLI, the
effective once the same are ratified by both the government could then
signatories to the MLI. With India having signed the assess the situation and
MLI, there could be a possibility that the same examine if GAAR provisions
transaction/arrangement could be subjected to should be made applicable
multiple anti-abuse provisions, one would be in the case of the said non-
through the anti-abuse provisions inserted in the tax resident taxpayers'. This
treaty network through the MLI and second by way would also pave the way for
of the same transaction being subjected to the a conducive economic
GAAR provisions which also targets anti-abuse environment and persuade
provisions. the global multinationals to
establish their foot print in
3
Page 48 and 49 of the Final Report by the Expert Committee on GAAR chaired by Dr. Parthasarathi Shome.
4
Page 47 of the Final Report by the Expert Committee on GAARchaired by Dr. Parthasarathi Shome.
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India with a clarity on the
domestic tax laws prevalent
in the country.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
118. Section In line with Rule 128(7), the Finance Act 2017 The restriction on carry
115JAA(2A) - inserted second proviso to section 115JAA(2A) forward of MAT/AMT credit
Restriction on restricting quantum of MAT credit to be carried may be removed.
forward to subsequent years. The proviso (SUGGESTION FOR
carry forward of
provides that where the amount of FTC (Foreign RATIONALIZATION OF
MAT/AMT credit Tax Credit) available against MAT/AMT is in THE PROVISIONS OF
and claim of FTC excess of FTC available against normal tax, DIRECT TAX LAWS)
in relation to MAT/AMT credit would be reduced to the extent
taxes under of such excess FTC.
dispute -
Restriction to be Similar restriction is imposed in S. 115JD(2) on
AMT credit.
removed
Both the provisions are made effective from 1
April, 2018 i.e. will apply in relation to A.Y. 2018-
19 and onwards.
The rationale of aforesaid restriction/limitation is
not clear. The restriction on quantum of MAT/AMT
credit to be carried forward subjects taxpayer to
duplicated MAT liability while denying the rightful
carryover of MAT/AMT credit.
The FTC is an alternative form of tax payment.
For all purposes including for grant of refund or
levy of interest, FTC is treated as advance tax
paid to the extent the same is creditable against
tax liability in India. Once MAT liability is admitted
to be tax liability on income in India, there is no
justifiable reason for treating FTC separately
depending on whether FTC is creditable against
normal tax liability or MAT liability. The said
amendment is inconsistent with the Government's
assurance that MAT is to be effectively phased
out and incidence of MAT is to be counter
matched by grant of extended period of MAT
credit.
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119. Section 139(5) The Finance Act 2017 amended section 139(5) to Keeping in mind the
Reduction in time provide that the time for furnishing of revised aforesaid hardship of
limit for filing return shall be available upto the end of the double taxation which may
revised return relevant assessment year or before the arise to the individual
Request to bring completion of assessment, whichever is earlier. assessee as he may not be
back erstwhile This particularly impacts claims for any Foreign able to claim foreign tax
time limit for filing Tax Credit (FTC) in respect of the taxes paid by credit in the absence of
of revised tax the individual assessee(s) in the overseas tax overseas income-tax
return at least in jurisdiction. Generally, the information/ final return, there is a need to
cases of claim of payment of foreign taxes/ tax return is unlikely to retain the time limit for
foreign tax credit be available within the timeline for filing the filing of revised tax return
revised tax return i.e. by the end of the relevant at any time before the
assessment year. expiry of one year from the
end of the relevant
As an example, USA follows calendar year as
assessment year or before
their tax year and the first due date of filing a
the completion of
USA income-tax return is April 15th of the
assessment, whichever is
following calendar year, meaning thereby, the
earlier. Therefore, the
USA income-tax return for calendar year 2018 will
earlier time limit may be
be required to be filed by 15th April, 2019.
brought back at least in
In a case of Indian income-tax return for tax year respect of revision required
2017-18, the due date to file a revised return as for claiming foreign tax
per the said amendment will be 31st March, 2019. credit.
In the above situation, the assessee may not (SUGGESTION FOR
have his final tax return available with him till 15th RATIONALIZATION OF
April 2019, hence, such assessee will not be able THE PROVISIONS OF
to claim the FTC of the final USA taxes paid by DIRECT TAX LAWS)
him in his Indian income-tax return as he may not
have the final USA tax details by 31 March 2019.
120.
Application for · W.e.f AY 18-19, as per section 206AA of the · It is recommended to
Permanent Act,every person (including foreign entities), withdraw the
Account Number not being an individual, which enters into a requirement for
(PAN) in certain financial transaction of an amount obtaining PAN in case
cases aggregating to Rs. 2,50,000 or more in a of foreign entities
financial year (FY) shall be required to apply entering into financial
for PAN by the end of the FY in which it transaction for a value
enters into such transaction. Further, the of Rs 2,50,000 or more
term `Financial transaction' is not defined. as it is in contradiction
· This is in contradiction to the provisions of to the provisions of
Section 206AA of the Act read with Rule Section 206AA of the
37BC which exempt the foreign entities from Act.
obtaining PAN in case where the payment is
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in the nature of Royalty, Fees for Technical (SUGGESTION FOR
Services and payment in case of transfer of RATIONALIZATION OF
Capital Asset. THE PROVISIONS OF
· There may be instances where the foreign DIRECT TAX LAWS)
entities enters into financial transaction for a
value more than Rs. 2,50,000 and there
would be no tax liability due to favourable
DTAA provisions. They will now be required
to obtain PAN. This will create unnecessary
hassle to the foreign entities and not be in in
line with of `ease of doing business.
121. Section 155(14A) Section 155(14A) provide that where the payment (i) The time limit applicable
- Claim of FTC of foreign tax is under dispute, credit of such for rectification of order
pertaining to taxes will be available in India in the year in which may be clarified. Since all
taxes which are the dispute is settled, on satisfaction of certain the sub-sections in section
under dispute in conditions. To give effect to this an enabling 155, provide for the time
the foreign provision shall be inserted through which Tax limit to be applied and
country Authority will rectify the assessment orders or an some of the sub-sections
Clarification intimation order and allow credit of taxes in the provide for a different time
required on year in which the taxpayer furnishes the evidence limit, it may be expressly
certain issues of settlement of dispute and discharge of foreign clarified that what is the
relating to period tax liability. period of limitation which
of limitation and However, the said amendment does not provide may apply to cases covered
documents which for time limit within which the Assessing Officer by the section 155(14A).
shall constitute has to rectify the assessment order. This (ii) It may also be clarified
evidence of provision only gives a reference to section 154. that the period of limitation
settlement Section 154 provides a time limit of 4 years for (e.g. if it is 4 years), should
reassessment, excluding anything specifically be 4 years from the end of
provided under section 155. Issues may arise on the year in which the
what is period of limitation which may apply for amended order is passed
section 155(14A) and how it should be applied. and it should not be the
The said provision provides that the Assessing date of the original order.
Officer shall amend the earlier order which denied This is for the reason that if
FTC, if the taxpayer, within six months from the the dispute in the foreign
end of the month in which the dispute is settled, country takes more than 4
furnishes to the Assessing Officer, evidence of years to get resolved and if
settlement of dispute and evidence of payment of the limitation period is
tax. Time threshold of six months from date of considered to be 4 years
dispute settlement gives a very small window for from the date of the original
taxpayers to claim the benefit for previous years, order, the taxpayer may not
hence, giving a limited scope to the benefit. get credit for taxes which
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It is also not clear as to what could constitute he has actually paid. Such
sufficient evidence on the part of taxpayers to may not be the intent of the
claim the FTC benefit on dispute settlement. said provision.
A similar provision is
contained in Section
155(16) which provides that
where the compensation for
compulsory acquisition is
reduced by any Court or
Tribunal, then the period of
limitation shall be reckoned
to be 4 years from the end
of the year in which the
order of the Court or
Tribunal is passed.
(iii) The time limit may be
amended to provide for 6
months from date of
settlement of dispute or
date of effect of the
amended order passed u/s.
155(14A), whichever is
later.
(iv) Clarification may be
provided on what is the
documentation which shall
constitute as sufficient
evidence for justifying that
the dispute has been
settled. This may be done
by specifying an illustrative
set of documents, which
shall constitute as evidence
for settlement of dispute.
Illustratively the following
may be considered as
evidence for settlement of
dispute:
· Final assessment order/
final demand notice of the
tax authority of the foreign
country
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· Judgment of the Court of
Law along with the final
demand notice of the tax
authority based on the
judgement
· Proof of payment of taxes
· Self-declaration
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
122. Section 194LC - a) Income by way of interest from Indian a) In order to bring out the
Income by way of Company real intent of the law, it is
interest from The Finance Act, 2012 inserted section 194LC to suggested that the section
Indian Company provide that the interest income paid by specified 194LC(2)(ii) may be
company or business trust to a non-resident shall reworded to provide that
be subjected to tax deduction at source at the the interest referred to in
rate of 5%. Section 115A was also amended to sub-section (1) shall be the
provide that such income will be taxed at the rate income by way of interest
of 5%. payable by the specified
company or business trust
Section 194LC(2)(ii) provides that for the purpose
"IF such interest does not
of deduction of tax at source at the rate of 5%,
exceed the amount of
the interest payable by the specified company or
interest calculated at the
business trust to a non-resident, not being a
rate approved by the
company or a foreign company, shall be the
Central Government in this
income payable by the specified company TO
regard, having regard to the
THE EXTENT TO WHICH SUCHINTEREST
terms of the loan or the
DOES NOT EXCEED the amount of interest
bond and its repayment"
calculated at the rate approved by the Central
Government in this regard, having regard to the (SUGGESTIONS TO
terms of the loan or the bond and its repayment. REDUCE / MINIMIZE
LITIGATIONS)
It is imperative to note that usage of the term "To
the extent to which such interest does not
exceed" may be interpreted to mean that in case
the borrowings are made at a rate higher than the
rate approved by the Central Government, the
interest income on the difference will be
chargeable to tax at the rate of 20%. As per the
explanatory memorandum, this amendment was
made in order to augment long-term low-cost
funds from abroad. It is felt that this is an
inadvertent mistake and thus needs to be
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reworded.
b) Expansion of scope and extension of time b) The concessional tax
limit rate of 5 per cent on
The Finance Act, 2012 had introduced Section interest should be made
194LC in the Act to provide for lower deduction of applicable on other debt
tax @ 5 per cent on interest payments by Indian securities including
companies on borrowings made in foreign debentures, trade credit
currency (under a loan agreement or by way of issued/ availed by any
issue of long term infrastructure bonds) before 31 Indian company.
July 2017. (SUGGESTION FOR
RATIONALIZATION OF
The Finance (No 2) Act, 2014, amended Section THE PROVISIONS OF
194LC of the Act to include all long-term bonds DIRECT TAX LAWS)
(including infrastructure bonds).
Apart from loans and bonds, debentures are also
widely used for raising funds by the Indian
companies. Currently, there is no clarity whether
interest payment on such debentures would be
eligible for reduced tax deduction rate under
Section 194LC of the Act.
Also, the cut-off date as provided in the section
(31st July 2017) is impendent. In line with the
objective of the government to attract foreign
investments and a higher growth rate, the current
time lines may be extended.
123. Section 194LC Currently as per the provisions of section 194LC It is therefore, suggested to
and Section of the Act, interest paid by an Indian company to make the aforesaid
a non-resident, in respect of approved borrowings amendments to the Act
206AA - Scope of
made (during the period 1 July 2012 to 30 June effective from 1 April 2014
concessional
2015) in foreign currency from sources outside to enable corporates to use
rate of tax on India (under a loan agreement or on issue of long- this rare window of
overseas term infrastructure bonds) is taxable at a opportunity to raise long
borrowings concessional rate of 5% (plus applicable term capital at competitive
surcharge and education cess). price, for their capital
expenditure. There are
Further, as per section 206AA(7) of the Act, quite a few proposals in the
interest paid on the long-term infrastructure bonds pipeline for raising long
would be subject to a concessional rate of tax term capital from the
irrespective of whether the lender has a international debt markets
Permanent Account Number (PAN) in India or not. which could get adversely
impacted if this amendment
In order to further augment low cost long-term is implemented as per the
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overseas borrowings, the amendments to section currently enacted timeline
194LC and section 206AA of the Act respectively of 1st October 2014.
are made effective from 1st October 2014 . Under Therefore, there is an
the aforesaid proposed amendment, the benefit of urgent need to make the
lower withholding tax @5% for overseas amendment effective as
borrowing is extended up to 1 July 2017 and it suggested.
shall apply to all long-term bonds and not merely (SUGGESTION FOR
restricted to infrastructure bonds as is the case RATIONALIZATION OF
under the relevant provisions of the existing THE PROVISIONS OF
Income tax Act. DIRECT TAX LAWS)
Further, the benefit of section 206AA(7) of the Act,
shall be extended to all types of long term bonds
including infrastructure bonds, which means PAN
of beneficial holders of bonds shall not be
mandatory for all types of long term bond issues in
the international market.
Hardships
While the fiscal measure taken by the
Government to encourage the corporates to raise
long term capital at competitive price for their
capital expenditure are appreciated, there is an
urgent need for making the proposed
amendments effective from 1 April 2014 so that
companies can take advantage of the prevailing
opportune market conditions.
In this connection, the global market conditions
have been summarized below:
The international debt markets are very
strong and buoyant, with the Asia ex Japan
G3 market seeing over US$116bn in 2014 till
date in issuance volumes, nearly 83% of total
issuance in 2013.
Investor liquidity remains very strong, and
there are consistent fund flows back into
emerging market and Asian bonds for the
past 14 consecutive weeks.
US treasury yields remain significantly lower
than at the start of the year, as the markets
gauge the outlook for the global economy,
geopolitical risks and the expected actions of
the Central Banks. 2.55% / 3.37%.
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US rates at 2.55% for 10 years and 3.37% for
30 years remain conducive for issuers looking
to extend duration, with the 30-year US
Treasury currently close to a 9-month low.
Global credit market conditions remain very
strong with credit spreads having tightened
sharply over the past year.
The demand for Indian credits has been
extremely strong, with Indian credit spreads
having tightened by 30-40 bps since 1 April
and 80-100 bps since 1 February 2014. This
has been driven by supportive technical,
relative lack of supply and improved macro
indicators.
These favourable financial market conditions could
get impacted in the short term by changes in the
economic data emanating from the major
economies as well as due to geopolitical factors
such as the continued unrest in the Middle East.
124. Section 194LD - As per Section 2(28A) of the Income-tax Act It is suggested that Clarity
Income by way of 1961, "interest" means interest payable in any on the definition of
manner in respect of any moneys borrowed or effective interest rate i.e.
interest on
debt incurred (including a deposit, claim or other whether or not it includes
certain bonds
similar right or obligation) and includes any premium on redemption
and Government service fee or other charge in respect of the may be provided.
securities moneys borrowed or debt incurred or in respect of (SUGGESTION FOR
any credit facility which has not been utilised;" RATIONALIZATION OF
THE PROVISIONS OF
As per the provision of major DTAA ,"interest" as DIRECT TAX LAWS)
used in this Article means income from debt-
claims of every kind, whether or not secured by
mortgage and whether or not carrying a right to
participate in the debtor's profits; and in particular,
income from Government securities and income
from bonds or debentures, including premiums
and prizes attaching to such securities, bonds or
debentures. Penalty charges for late payment
shall not be regarded as interest for the purpose
of this Article.
As per ICDS, Interest shall accrue on the time
basis determined by the amount outstanding and
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the rate applicable. Discount or premium on debt
securities held is treated as though it were
accruing over the period to maturity.
The above 3 definitions have led to the following
confusion in both borrowers and lenders domain.
1. Borrower would now have to deduct tax on
what amount?
2. If TDS is deducted on premium wouldn't that
tantamount to tax on capital gains
3. Per provisions of section 194LD, the lower
withholding rate would be applicable only on
interest paid on bonds whose interest rates do not
exceed the rate as specified by the Central
Government in this regard (at present 15%). The
debentures instruments comprise of two aspects
a. interest rate
b. redemption premium
125. Section 195 Finance Act, 2012 extended the obligation to Keeping in view the
a) Scope and withhold taxes to non-residents irrespective of observations of the
applicability whether the non-resident has - Supreme Court, it is
(i) a residence or place of business or business suggested that the
connection in India; or amendment should be
modified to restrict the
(ii) any other presence in any manner whatsoever
applicability of withholding
in India.
tax provisions to residents
and non-residents having a
The aforesaid amendment was introduced with tax presence in India.
retrospective effect from 1 April 1962. At least, it should be
The amendment results in a significant expansion clarified that the
in the scope of withholding provisions under the amendment will not have
Act and will cover all non-residents, regardless of retrospective application.
their presence/ connection in India. (SUGGESTION FOR
The Supreme Court in the case of Vodafone RATIONALIZATION OF
International Holdings B.V. had observed that the THE PROVISIONS OF
provisions of Section 195 of the Act would not DIRECT TAX LAWS)
apply to payments between two non- residents
situated outside India. The Supreme Court also
referred to tax presence as being a relevant factor
in order to determine whether a non-resident has
a withholding obligation in India under Section
195 of the Act.
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b) Time limit for Section 195(2) provides where a payer considers It is suggested that an
Issuance of that whole of the sum being paid to a non-resident appropriate time limit say
"general or is not chargeable to tax, he may make an thirty (30) days may be
special order application to the Assessing Officer to determine imposed for passing such
by general or special order, the appropriate general or special order by
portion of the sum so chargeable. the Assessing officer.
It may be noted that no time limit of passing such Further, where an
order has been prescribed in the Act, which application is rejected, the
causes undue hardship in genuine cases. Assessing Officer may be
required to pass a speaking
order after providing a
reasonable opportunity of
being heard to the
applicant.
(SUGGESTIONS FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT
TAX LAWS)
c) Withholding Cross border transactions may result in It is suggested that a
tax on reimbursements of expenditures / costs incurred clarification, perhaps by
reimbursements on behalf of the Indian company by the foreign way of a CBDT circular,
- Section 195 parent/group company. stating that withholding tax
Contrary positions have been taken by various would not be applicable for
judiciaries on the issue of withholding tax on specific cases of
reimbursements made by an Indian company to reimbursements, would
its foreign parent / group company. help reduce undue
litigation in this regard.
There is no clear view with respect to the same.
Further, non-compliance with withholding tax (SUGGESTION FOR
provisions will attract disallowance under section IMPROVING TAX
40(a)(i) of the Act including interest and penal COLLECTION)
proceedings.
d) Consequential Section 195(6) is amended w.e.f. 01.06.2015 to (i) Section 204 may be
amendment provide that the person responsible for paying to amended as follows -
required in a non-resident (not being a company) or a foreign
section 204 company, any sum, whether or not chargeable
For the purposes of the
under the provisions of the Income-tax Act, 1961,
foregoing provisions of this
shall furnish the information relating to payment of
Chapterand section 285, the
such sum, in such form and manner, as may be
expression "person
prescribed.
responsible for paying"
However, consequential amendment has not been means
made in section 204(iii), defining "person
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responsible for paying" in case of credit, or, as the `(iii) in the case of credit,
case may be, payment of any other sum or, as the case may be,
chargeable under the provisions of this Act, to payment of any other
mean the payer himself, or, if the payer is a sum chargeable under
company, the company itself including the the provisions of this
principal officer thereof. Act, or in the case of
The above definition of "person responsible for furnishing of
paying" given in sectio n 204(iii) is in relation to information relating to
credit or payment of any sum chargeable under payment of any sum to
the provisions of this Act, and is hence, relevant a non-resident (not
in the context of section 195(1). However, the being a company), or to
said definition has to be amended to make the a foreign company,
same relevant in the context of section 195(6) whether or not such
also. sum is chargeable
under the provisions of
Further, in section 204, the "person responsible
the Act, the payer
for paying" has been defined for the purposes of
himself or if the payer
the foregoing provisions of Chapter XVII and
is a company, the
section 285. Since section 285 is in respect of
company itself
submission of statement by a non-resident having
including the principal
liaison office, the definition of "person responsible
officer thereof.'
for paying" given in section 204 is not relevant in
the context of section 285.
Consequently, taking into consideration the above (ii) The penalty may be
issues, section 204 needs to be appropriately reduced, in case non-
amended. furnishing of information
relates to a transaction not
A penalty of Rs. 1 lakh is leviable under section
chargeable to tax.
271-I for failure to furnish information or for
furnishing inaccurate information under section
195. The penalty is quite high, considering that (iii) The meaning of "person
the reporting requirement may be relating to a responsible for collecting"
transaction which is not be chargeable to tax. may be incorporated in the
Also, while the meaning of "person responsible for Act.
paying" has been defined under the Act, "person (SUGGESTION FOR
responsible for collecting" has not been defined RATIONALIZATION OF
anywhere in the Act. The meaning of "person THE PROVISIONS OF
responsible for collecting" may be incorpo rated in DIRECT TAX LAWS)
the Act for clarity.
e) Section 195 - In section 195, Clarification on TDS from In order to avoid litigation,
Clarification payments to non-residents having no Indian it is suggested that a
required branch/ fixed place/ Permanent Establishment in suitable amendment in form
India should be inserted. In various cases, of Explanation should be
Income-tax department attracts the provision of inserted in section 195 of
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section 195 and ask the assessee to deduct TDS. the Income-tax Act or
For example, when expenses such as commission alternatively an appropriate
payment is done by the Indian Residents to clarification by way of
Foreign Residents having no branch/fixed place circular may be given.
or Permanent Establishment in India and who (SUGGESTION FOR
work outside India and they help in promoting and RATIONALIZATION OF
sales of Indian Goods then the Income-tax THE PROVISIONS OF
department attracts the provision of section 195 DIRECT TAX LAWS)
and ask the assessee to deduct TDS.
Hitherto, the export commissions paid to foreign
agents were never in question of taxation in India.
This was fortified by CircularNo.23 dated 23 July
1969 which stated that where a foreign agent of
India exporters operates in his own country and
his commission is usually remitted directly to him
and is, therefore, not received by him or his behalf
in India, such an agent is not liable to income tax
in India on the commission.
Later Circular No. 786 dated 7 February 2000
emphasized the clarification in the
above circular and laid down the law that where
non-resident agent operates outside the country,
no part of his income arises in India and since the
payment is usually remitted directly abroad, it
cannot be held to have been received by or on
behalf of agent in India. Such payment was
therefore, held to be not taxable in India.
In 2009, vide circular No 7, both the
above circulars namely Circular No. 23 dated 23-
07-1969 &Circular No. 786 dated 07-02-2000
were withdrawn, reasoning that interpretation of
the Circular by some of the taxpayers to claim
relief is not in accordance with the provisions
of section 9 of the Income-tax Act, 1961 or the
intention behind the issuance of the Circular.
With the withdrawal of the circulars, it was left to
the courts to decide the issue afresh.
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f) Applicability of Remittance under Liberalised Remittances Capital account
Rule 37BB read Scheme of RBI transactions should be
with Section 195 Amended Rule 37BB(3)(i) of the Rules exempts specifically included in the
for making remittances as per the provisions of Section 5 of exclusion list of Rule
remittances the FEMA read with Schedule-III i.e. only current 37BB(3)(i) of the Rules read
outside India account transactions. with Section 195(6) of the
Act.
As per Section 5 of the FEMA, any person may
sell or draw foreign exchange to or from an (SUGGESTION FOR
authorised person if such sale or drawl is a RATIONALIZATION OF
current account transaction provided that the THE PROVISIONS OF
Central Government may, in public interest and in DIRECT TAX LAWS)
consultation with the Reserve Bank of India,
impose such reasonable restrictions for current
account transactions as may be prescribed.
The Master Direction No. 7/2015-16 dealing with
the Liberalised Remittance Scheme (LRS) is a
liberalisation measure to facilitate resident
individuals to remit funds abroad for permitted
current or capital account transactions or
combination of both.
The press release issued by the CBDT on 17
December 2015 states that Form 15CA and 15CB
will not be required to be furnished by an
individual for remittances which do not require
RBI approval under the LRS. However, it may be
noted that LRS does not find any specific mention
in the amended Rules.
LRS is a wider term as it includes within its scope
both permissible capital and current account
transactions. The amended Rules is silent with
respect to the capital account transactions under
LRS.
g) Penalty for The Finance Act, 2015 has introduced penalty It is not clear whether the
failure to (Section 271-I of the Act) in case of failure to penalty is qua the payment
furnish furnish information or furnishing of inaccurate made or qua the
information or information as required to be furnished under transaction or qua the
furnishing Section 195(6) of the Act, to the extent of INR one contractual obligations for
inaccurate lakh. a specific financial year.
information Therefore, the same should
under Section be clarified in a suitable
195 manner.
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(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
126. Section 201 Invocation of section 201 in case of a payer to a Limitation period should be
Limitation period non-resident for not withholding appropriate tax provided as follows:
and depositing the same in the Indian treasury (I) 4 years from the
for Non-resident
end of the financial year in
There is no limitation period for invocation of this which the transaction
provision. requiring tax to be
withheld, took place;
This creates need for increasingly impractical (II) Absolving the
period of indemnity being sought by a payer from payer from this obligation if
the recipient. Where the payer is conducting very the payee non-resident files
few or one-off transactions involving India, this tax return in India and
creates inordinate uncertain Indian tax exposure hence is now approachable
for such payer. by the tax department to be
pursued for tax recovery, if
any.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
127. Consequences of Where in case any person fails to deduct or pay The benefit of the first
failure of deduct the whole or any part of the tax on the sum paid proviso has only been
or on the sum credited to the account of a person, provided to a person in
or pay
he shall be deemed to be an assessee in default respect of payments made
withholding tax -
in respect of such tax. to resident and the
Section 201 conditions mentioned in
Extension of the first proviso have been
benefit in respect However, proviso to S. 201 states that a person
shall not be considered to be an assessee in fulfilled.
of payments made
to non-residents default in respect of such taxes, if the resident
has furnished his return of income under Section With a view bring more
139, has taken into account such sum for relief to assessee, the
computing income in the return of income, has benefit of the said proviso
paid the tax due on such income in the return of shall also be extended in
income and the person has obtained a certificate respect of payments made
from an accountant in the prescribed form. by persons to non-
residents. (SUGGESTION
FOR IMPROVING TAX
COLLECTION)
128. a) Relieve return Pursuant to recommendations in the first report of In line with recent exemption
filing obligation if the Income Tax Simplification Committee, provided to non-residents
royalty/ FTS/ Finance Act 2016 has liberalized the provisions of from obtaining PAN for
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capital gains has s.206AA by inserting s.206AA(7)(ii) which avoiding higher TDS u/s.
suffered TDS and provides that s.206AA shall not apply to payments 206AA if they furnish TRC,
also clarify that to non-residents subject to conditions as may be they should also be relieved
s.206AA(7)(ii) read prescribed. from return filing obligation
with Rule 37BC where payer has already
has retrospective withheld taxes and reported
Recently, CBDT has notified Rule 37BC which in Form 15CA/CB.
effect
provides that if the non-resident payee furnishes
certain information and documents like TRC or Additionally, the non-
Unique Identification number in his home country, residents shall also be
s.206AA shall not apply to specified payments viz. relieved from filing Form
interest, royalty, FTS and capital gains. 3CEB and maintaining
transfer pricing document in
case of transactions with
This is a welcome relief to the taxpayers and associated enterprises on
considerably improves ease of doing business which appropriate TDS has
with non-residents by obviating the need to obtain been deducted.
PAN for non-residents. (SUGGESTION FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT
However, the requirement of filing returns by such
TAX LAWS)
non-residents still continues (except for interest
payments covered by s.115A(1)(a)) and without
PAN, it is also possible to file return.
Thus, the position which presently exists is that
while PAN is not necessary at withholding stage,
it is still necessary for filing return. Non-filing of
return attracts penalty u/s. 271F has also risk of
prosecution u/s. 276CC
The TDS rates applicable for non-residents is
generally the final tax payable by such non-
residents. The information of payments to non-
residents gets transmitted to Tax Department on
real time basis through compliance u/s. 195(6)
read with Rule 37BB (Form 15CA/B) and quarterly
withholding tax returns. Hence, requirement of
filing return has no real benefit to the Tax
Department. On the contrary, it increases
compliance burden for the non-residents and
makes them liable for penalty or prosecution.
b) PAN for foreign India has entered into number of DTAA under the It is suggested that section
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parties i.e. non- Viena Convention and the domestic law under 206AA should not override
residents section 206AA should not override such the DTAA entered in to by
agreements with other countries. Therefore, it India.
should be provided that wherever the rate of tax (SUGGESTION FOR
under the DTAA is lower than 20% under section RATIONALIZATION OF
206AA, same should be applicable irrespective of THE PROVISIONS OF
the non-resident having PAN in India. DIRECT TAX LAWS)
129. TDS on interest Presently, Indian residents who earn interest on Commercial banks may be
on NRO account their Indian bank accounts are liable to pay TDS instructed by proper
on amounts over and above Rupees 10,000. authority, not to deduct
However, when it comes to NRIs they are not TDS on NRO account
allowed this benefit on their NRO accounts. All earning interest upto INR
interest earned in NRO accounts is subject to a 10,000 per annum.
TDS rate of whopping 30%. (SUGGESTION FOR
RATIONALIZATION OF
In majority cases, the NRI's are not able to file for THE PROVISIONS OF
refunds due to small amount as the cost of filing is DIRECT TAX LAWS)
more than deduction.
130. Equalization levy The Finance Act, 2016 has introduced a levy of · The responsibility for
6% on consideration paid or payable by an Indian payment is cast on
resident carrying on business or profession, or by resident payer to
an Indian permanent establishment of a non-
deduct and deposit the
resident to a non-resident not having a permanent
establishment in India, for providing specified levy. Interest and
online advertisement services. penalty are levied for
delay or failure of
compliance. This
involves additional cost
of compliance to Indian
businesses.
· The equalization levy is
a separate levy under
the Finance Act and is
not a part of the Act.
The non resident liable
to equalization levy will
not be able to claim
credit for the levy paid
in India in the country
of his residence. This
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will lead to double
taxation of the same
income.
It is recommended that
Chapter VIII should be
omitted.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
131. Chapter VIII of The Finance Act, 2016 has inserted a new In view of the issues
the Finance Act, Chapter VIII titled "Equalisation Levy" to provide detailed, it is suggested
2016 - for an equalisation levy of 6% of the amount of that suitable amendments
consideration for specified services received or may be carried out in the
Equalisation
receivable by a non-resident not having Chapter VIII of the Finance
Levy - Issues to permanent establishment ('PE') in India, from a Act, 2016. Particularly, after
be addressed resident in India who carries out business or 1 April 2017, GAAR will
profession, or from a non-resident having ensure that artificial
permanent establishment in India. In other words, avoidance of taxable
the Finance Act, 2016 enacted a levy of 6% on presence is not likely to
consideration paid or payable by an Indian remain tax protected for the
resident carrying on business or profession, or by non-residents.
an Indian permanent establishment of a non- (SUGGESTION FOR
resident to a non-resident not having a permanent RATIONALIZATION OF
establishment in India, for providing specified THE PROVISIONS OF
online advertisement services. DIRECT TAX LAWS)
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 would be levied for delay or
failure of compliance. This would involve
additional cost of compliance to Indian
businesses. It is an indirect levy.
· The equalization levy is a separate levy
under the Finance Act, 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
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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.
132. Tax In India, separate entities are incorporated based In view of the aforesaid
consolidation on their specialization in various lines of benefits it is suggested that
Scheme businesses (like manufacturing, trading, retail, a tax consolidation scheme
infrastructure etc.) by the parent company. may also be adopted in
Separate companies are incorporated to attract India. This would create a
investors which suits their needs. Investors are positive impact on
more likely to invest in a well-structured business with significant
organisation. reduction of compliance
Because of commercial compulsions, the and litigation cost.
business houses are forced to have many (SUGGESTION FOR
subsidiaries under one parent. The group as a RATIONALIZATION OF
whole and the tax Department face many THE PROVISIONS OF
challenges. Some of them are:- DIRECT TAX LAWS)
· Each Entity is considered as separated entity
and therefore required to file a separate
income tax return, involving huge cost of
Income Tax compliance by tax payer.
· Each entity is assessed/ scrutinized
separately resulting in litigation cost for each
entity. Significant administrative costs are
incurred by the Income tax Department in
keeping track of records and assessing
multiple subsidiaries.
· Apart from cost, a lot of efforts are required
by both tax payer as well as Income tax
Department for undertaking compliance.
Tax consolidation or combined reporting is a
regime adopted in the tax or revenue legislation of
a number of countries which treats a group of
wholly owned or majority-owned companies and
other entities (such as trusts and partnerships) as
a single entity for tax purposes. The head entity of
the group is responsible for all or most of the
group's tax obligations such as paying tax and
lodging tax returns.
In terms of mechanics, all transactions between
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The Institute of Chartered Accountants of India
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the group companies of the consolidated group
are ignored for tax purposes.
Benefits
i. Tax consolidation scheme would help to
centralize the planning and payment of tax by
the parent company.
ii. It is common in India that the parent company
engaged in various lines of businesses
incorporate many subsidiary companies.
Since the market is volatile, it may happen
that one company is incurring losses and
other is earning profits. At a group level, the
tax outgo would be more as under the
Income-tax Act at present, there are no
provisions to set off loss of one group-
company with another profit making group-
company.
Under tax consolidation, the company can set
off the losses of one inter group company
with the profits of another company.
Tax consolidation would take care of such
situations which facilitate development of new
businesses of challenging nature such as
retail or telecom. Where financial risks are
isolated in a new company but at the same
time tax revenues and losses can be
consolidated.
iii. Any unused foreign tax credit by one
company can be used by the other affiliates
within the group.
iv. Currently, in the Income-tax Act, 1961 the
Domestic Transfer Pricing provision requires
all the intercompany transactions to be at
Arm's Length Price and need to be reported.
Under the consolidated tax scheme such intra
group transactions would be net off and
thereby will reduce the time and compliance
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cost of the tax payer and administrative cost
of the Income-tax Department.
v. In group taxation all transactions between
group companies are ignored for tax
purposes. This will help in tax free movement
of assets across the group which would aid in
internal restructuring.
vi. In India, each company is individually liable
for separate tax assessments. By introducing
the tax consolidation scheme, the parent
company would act as an agent in all the tax
matters.
vii. The number of litigations pending with the tax
department would also reduce and thereby
reducing the administrative cost of the
Income-tax Department.
viii. In the long run such a regime would not
negatively impact the overall tax revenues as
tax offset of carry forward losses/depreciation
is already allowed under the Income-tax Act,
1961, accordingly any tax offset claimed by
the individual taxpayer would be offset when
the aggregate approach for the economy as a
whole is considered.
ix. Member of the group companies obtaining for
tax consolidation can enter into an
arrangement with Income Tax Department/
CBDT for a nominated member of the group
to be in liaison with Income Tax Department/
CBDT, such that all payments of tax flow
through that nominated company.
x. It is believed that for capital intensive sectors
like infrastructure and financial services
introduction of such a progressive tax regime
would be beneficial and fair to the taxpayer.
xi. The tax consolidation regime has been
adopted in tax legislations of a number of
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The Institute of Chartered Accountants of India
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foreign countries like Australia, France,
Germany, Italy, Japan, Korea, Spain, USA
etc. These countries have not only
successfully implemented the said regime but
also created a positive impact on business
with significant reduction of compliance and
litigation cost.
xii. This will create a positive impact on business
and provide a level playing field to the Indian
companies. The tax consolidation regime also
endorses the Government's efforts of "Ease
of doing business in India" and assist in
aligning the business and tax objectives of
the industry.
xiii. No. of tax exemptions are being reduced and
very soon, no deduction/exemption will be
allowed in computing taxable income. It is
very logical to introduce tax consolidation
scheme. Many mergers, demergers which are
being done only to take advantage of tax
losses will not be required.
A snapshot of the tax consolidation regime in
various jurisdictions is summarized in Annexure A
133. Deputation of An issue is under debate as to whether payments It is suggested that a
employees - made by the Indian company to foreign company specific clarification may
[Taxability as towards reimbursement of the salary costs of be provided by the
fees for technical persons deputed to India would be treated as fees Government to the effect
services/ for technical services. that as long as the
Permanent Further, such deputations are often tested for a employee works
Establishment risk of creation of a PE for the foreign enterprise exclusively for the Indian
issues] in India. company during the period
Employees deputed to the Indian company work of deputation and
under the control and supervision of the Indian operationally works under
company and are essentially employees of Indian the 'control and
company. Any payments made by the Indian supervision' of the Indian
company towards the amounts cross-charged by company, payments made
the Foreign Company would be in the nature of by the Indian company to
re-imbursement of the salary costs and ought not the foreign company would
to be taxable. not qualify as FTS. Further,
it should be clarified that
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such an arrangement would
not trigger a creation of PE
for the foreign enterprise in
India.
(SUGGESTION FOR
IMPROVING TAX
COLLECTION)
134. TDS on payment a) Section 195(1) of the Income-tax Act, 1961 It is suggested that
made to non- provides for the applicability of TDS provisions on
a) the fact that any person
residents "any person" responsible for paying to a "non - including individuals,
resident" subject to exceptions as provided in the making any payment to
section. Practically, the fact that every person non-residents, is liable to
including individuals, making any payment to non- deduct tax at source should
residents, is liable to deduct tax at source is not be widely publicized by the
known to many. There have been instances Department.
where the payment of rent is made to a non-
b) To remove
resident through online banking by a salaried
administrative hassles, the
employee who is claiming HRA, without knowing
payer or the payee should
that he is required to deduct tax. This not only
be allowed to issue
leads to loss of revenue but also causes hardship
certificate for short or non-
to the assessee only due to ignorance of law,
deduction of tax at source)
which but of course is not an excuse.
Since a benefit has been
b) Section 195(2) provides that where the person extended to the assessees
responsible for paying any sum chargeable under by way of the provisions of
this Act to a non-resident considers that whole of section 54 to 54F, the same
such sum would not be income chargeable in the should be taken into
case of the recipient, he may make an application account by the Assessing
to the Assessing officer to determine by general officers while issuing
or special order, the appropriate portion of sum so certificate of lower
chargeable. Further section 195(3) gives the deduction of tax at source
recipient an option to make an application to or no deduction under
Assessing Officer for the grant of certificate section 195 and 197.
authorizing him to receive any sum without
(SUGGESTION FOR
deduction of tax at source, subject to the rules
RATIONALIZATION OF
notified in this regard. Making an application to
THE PROVISIONS OF
the Assessing officer and follow ups thereafter
DIRECT TAX LAWS)
leads to administrative hassles.
c) The provisions of section 54 to 54F relating to
investments allow the assessee to save tax on
capital gains arising from transfer of property.
However, such investments are made over the
period of time i.e. within 6 months or 1 year.
Certain assessees face hardship on this account
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The Institute of Chartered Accountants of India
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since their income becomes non-chargeable to
tax only after taking into consideration the
proposed investments. The issue arises since the
investments proposed to be made under sections
54 to 54F are not taken into account by the
Assessing Officer while giving a certificate of
lower deduction of tax at source or no deduction
of tax.
135. Time limit for Presently, there is no time limit specified by the It is suggested to fix a
TDS Act for initiating & completion of TDS proceedings specific time limit for
assessments of under section 201 of the Act in respect of initiating & completing TDS
payments made to non- residents. Thus, the TDS
payments made proceedings under section
returns are scrutinized by the assessing officers
to non-residents for past years without any limit, which has 201 of the Act in respect of
resulted into enormous difficulty for the assessee payments made to non-
as it becomes practically difficult to store & residents which should not
retrieve data beyond four years of filing of TDS be more than 4 years from
returns. the relevant financial year.
(SUGGESTION FOR
IMPROVING TAX
COLLECTION)
136. Provision for the Under the current tax regime, there is no It is recommended to
employer to provision under the Act which enables an provide for claiming relief
provide tax treaty employer to consider admissible benefits under available under the tax
benefits while the respective Double Taxation Avoidance treaty, at the time of TDS.
calculating TDS Agreements (e.g. credit for taxes paid in another (SUGGESTION FOR
country/ treaty exclusions of income etc.), while RATIONALIZATION OF
computing tax to be deducted under Section 192 THE PROVISIONS OF
at the time of payment of salaries to employees. DIRECT TAX LAWS)
Further, the foreign tax credit rules notified by the
CBDT in June 2016 also does not contain explicit
provision for providing credit for taxes paid in
another country by the employer at the time of
deduction of tax on salary payments.
Due to the above, it creates cash out-flow issues
to the employees (migrating employees coming to
and leaving India) who are initially subject to full
TDS by their employers and thereafter required to
claim refunds on account of tax treaty benefits
while filing their income tax return. Many of these
employees may complete their assignments and
leave India prior to obtaining their tax refunds
which also creates hardships with respect to
receiving back the refund amounts.
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