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ICAI submits Pre-Budget Memoranda-2019
June, 13th 2019
    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
          Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                     Page iii
                           The Institute of Chartered Accountants of India

                   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



         Page iv                Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                            The Institute of Chartered Accountants of India

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




         Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                        Page v
                           The Institute of Chartered Accountants of India

   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



         Page vi                Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                              The Institute of Chartered Accountants of India

                      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



          Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                           Page vii
                           The Institute of Chartered Accountants of India

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



       Page viii                Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                           The Institute of Chartered Accountants of India

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




       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                          Page ix
                         The Institute of Chartered Accountants of India

                          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




Page x                        Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
              PART A

SUGGESTIONS RELATING TO THE POLICY &
 PROVISIONS OF INCOME-TAX ACT, 1961
         The Institute of Chartered Accountants of India




                       CHAPTER I
                     PRELIMINARY




Page 2      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.     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.




      Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                   Page 3
             The Institute of Chartered Accountants of India




                            Chapter III

         INCOMES WHICH DO NOT FORM PART OF
                   TOTAL INCOME




Page 4          Pre-Budget Memorandum ­ 2019 (Direct Taxes and International Tax)
                           The Institute of Chartered Accountants of India

                                        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.


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                   Page 5
                            The Institute of Chartered Accountants of India

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


      Page 6                    Pre-Budget Memorandum ­ 2019 (Direct Taxes and International Tax)
                        The Institute of Chartered Accountants of India

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


      Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                   Page 7
                            The Institute of Chartered Accountants of India

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


      Page 8                   Pre-Budget Memorandum ­ 2019 (Direct Taxes and International Tax)
                          The Institute of Chartered Accountants of India

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)




      Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                   Page 9
            The Institute of Chartered Accountants of India




                          CHAPTER IV

          COMPUTATION OF TOTAL INCOME




Page 10         Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                          The Institute of Chartered Accountants of India

                                            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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                  The Institute of Chartered Accountants of India

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

Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                   Page 13
                    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."



Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)           Page 15
                    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


Page 16                     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                    The Institute of Chartered Accountants of India

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


Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                 Page 17
                    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


Page 18                     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                      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

Page 20             Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                  The Institute of Chartered Accountants of India

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


Page 22                    Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                   The Institute of Chartered Accountants of India

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


Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                   Page 23
                    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

Page 24                     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                  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

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                          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

  Page 40                  Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                        The Institute of Chartered Accountants of India

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)
                  The Institute of Chartered Accountants of India




                               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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                         The Institute of Chartered Accountants of India

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




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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)




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           The Institute of Chartered Accountants of India




                       CHAPTER XII-

     DETERMINATION OF TAX IN SPECIAL CASES









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                                           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

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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


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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)




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          The Institute of Chartered Accountants of India




                     CHAPTER XII-D

   SPECIAL PROVISIONS RELATING TO TAX ON
DISTRIBUTED PROFITS OF DOMESTIC COMPANIES




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                                           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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Sr.     Section                    Issue/Justification                                Suggestion
No
                             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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                      The Institute of Chartered Accountants of India

Sr.    Section                Issue/Justification                          Suggestion
No

                  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




Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)   Page 65
                      The Institute of Chartered Accountants of India

                                     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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                    The Institute of Chartered Accountants of India

Sr.     Section                    Issue/Justification                    Suggestion
No
                     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.




  Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)          Page 67
          The Institute of Chartered Accountants of India




                    CHAPTER XII-EB

   SPECIAL PROVISIONS RELATING TO TAX ON
  ACCREDITED INCOME OF CERTAIN TRUSTS AND
                INSTITUTIONS




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Sr. No        Section               Issue/Justification                       Suggestion
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)


Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                      Page 69
               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.




Page 70             Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
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                               CHAPTER XIV-

                PROCEDURE FOR ASSESSMENT




Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)   Page 71
                            The Institute of Chartered Accountants of India

                                           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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                             The Institute of Chartered Accountants of India

Sr.       Section                         Issue/Justification                               Suggestion
No
                          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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                       Page 73
                     The Institute of Chartered Accountants of India

Sr.     Section                   Issue/Justification                       Suggestion
No
                  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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Sr.       Section                       Issue/Justification                               Suggestion
No
                             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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                     Page 75
                            The Institute of Chartered Accountants of India

Sr.       Section                        Issue/Justification                           Suggestion
No
      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




Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)   Page 77
                  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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 Sr.        Section                  Issue/Justification                     Suggestion
 No
                             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

Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                     Page 79
                   The Institute of Chartered Accountants of India

 Sr.        Section                 Issue/Justification                   Suggestion
 No
                            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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 Sr.       Section                 Issue/Justification                       Suggestion
 No
                           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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 Sr.         Section                  Issue/Justification                   Suggestion
 No
                           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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 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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 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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                          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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                                 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.




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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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                                   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)




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                               CHAPTER XXI

                       PENALTIES IMPOSABLE




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                                  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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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


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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.


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 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


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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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 Sr. No     Section              Issue/Justification                 Suggestion
                          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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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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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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                       CHAPTER XXIII

                     MISCELLANEOUS




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                                       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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           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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           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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                  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".


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                         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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      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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                                 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.




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           The Institute of Chartered Accountants of India




                            OTHERS




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                                       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%.


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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)




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                            PART B


     SUGGESTIONS FOR IMPROVING TAX
   ADMINISTRATION AND CITIZEN SERVICES




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                                    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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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.




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                                    PART C


             SUGGESTIONS PERTAINING TO
              INTERNATIONAL TAXATION




Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)   Page 123
                           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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Sr. No      Section                       Issue/Justification                            Suggestion
                              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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                     The Institute of Chartered Accountants of India

Sr. No     Section                     Issue/Justification                            Suggestion
                           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


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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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Sr. No     Section                    Issue/Justification                          Suggestion
                       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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)              Page 131
                       The Institute of Chartered Accountants of India

Sr. No       Section                      Issue/Justification                            Suggestion
                               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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Sr. No      Section                     Issue/Justification                            Suggestion
                                                                                   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


     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                Page 133
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Sr. No        Section                       Issue/Justification                          Suggestion
                                                                                     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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Sr. No        Section                       Issue/Justification                            Suggestion
                            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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                  Page 135
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Sr. No       Section                        Issue/Justification                            Suggestion
         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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 Sr. No        Section                      Issue/Justification                          Suggestion
  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

        Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)               Page 137
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 Sr. No        Section                         Issue/Justification                               Suggestion
                                                                                         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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Sr. No      Section                     Issue/Justification                           Suggestion
                          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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Sr. No     Section                  Issue/Justification                       Suggestion

                                                                     ·        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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 Sr. No       Section                       Issue/Justification                              Suggestion

                                                                                     (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
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Sr. No     Section                      Issue/Justification                     Suggestion
                       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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 Sr. No       Section                         Issue/Justification                           Suggestion
                             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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 Sr. No        Section                         Issue/Justification                           Suggestion
                                                                                       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

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 Sr. No        Section                      Issue/Justification                               Suggestion
                              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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 Sr. No        Section                       Issue/Justification                           Suggestion
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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Sr. No      Section                      Issue/Justification                  Suggestion
                          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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Sr. No           Section                    Issue/Justification                            Suggestion
                             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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Sr. No          Section                     Issue/Justification                             Suggestion
         (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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Sr. No            Section                    Issue/Justification                            Suggestion
                              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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Sr. No          Section                    Issue/Justification                             Suggestion
                            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


     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                    Page 151
                          The Institute of Chartered Accountants of India

Sr. No          Section                     Issue/Justification                               Suggestion
                                 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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 Sr. No       Section                        Issue/Justification                        Suggestion
                                  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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                       Page 153
                        The Institute of Chartered Accountants of India

 Sr. No       Section                    Issue/Justification                           Suggestion
                          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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 Sr. No        Section                           Issue/Justification                              Suggestion
                                 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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                         Page 155
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Sr. No          Section                     Issue/Justification                            Suggestion
                            (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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Sr. No           Section                     Issue/Justification                             Suggestion
                             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

     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                     Page 157
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Sr. No          Section                     Issue/Justification                              Suggestion
                            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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Sr. No           Section                    Issue/Justification                              Suggestion
                                                                                   ·    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


     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                     Page 159
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Sr. No            Section                    Issue/Justification                           Suggestion
                              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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Sr. No          Section                     Issue/Justification                               Suggestion
                                                                                          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):



     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                       Page 161
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Sr. No     Section                     Issue/Justification                        Suggestion
                       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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Sr. No          Section                    Issue/Justification                                 Suggestion
                            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.

     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                        Page 163
                             The Institute of Chartered Accountants of India

 Sr. No            Section                      Issue/Justification                               Suggestion

          (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

       Page 164                   Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                           The Institute of Chartered Accountants of India

 Sr. No        Section                       Issue/Justification                          Suggestion
          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;


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                Page 165
                     The Institute of Chartered Accountants of India

Sr. No     Section                     Issue/Justification                                Suggestion
                       ·     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

     Page 166              Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                               The Institute of Chartered Accountants of India

Sr. No          Section                           Issue/Justification                        Suggestion
                                 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.


     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                               Page 167
                          The Institute of Chartered Accountants of India

 Sr. No       Section                         Issue/Justification                               Suggestion
                                                                                       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.



       Page 168                 Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                            The Institute of Chartered Accountants of India

 Sr. No       Section                           Issue/Justification                              Suggestion
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

       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                        Page 169
                            The Institute of Chartered Accountants of India

 Sr. No        Section                          Issue/Justification                              Suggestion
                                     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


       Page 170                     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                       The Institute of Chartered Accountants of India

Sr. No      Section                     Issue/Justification                          Suggestion
                          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


     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)              Page 171
                         The Institute of Chartered Accountants of India

 Sr. No       Section                       Issue/Justification                            Suggestion
                                                                                   · 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



       Page 172                Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                         The Institute of Chartered Accountants of India

 Sr. No       Section                       Issue/Justification                          Suggestion
                             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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                Page 173
                     The Institute of Chartered Accountants of India

Sr. No     Section                     Issue/Justification                            Suggestion
                       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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 Sr. No       Section                        Issue/Justification                               Suggestion

                              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

       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                      Page 175
                          The Institute of Chartered Accountants of India

 Sr. No       Section                      Issue/Justification                         Suggestion
                            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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Sr. No        Section                       Issue/Justification                            Suggestion
         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


     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                    Page 177
                         The Institute of Chartered Accountants of India

Sr. No       Section                       Issue/Justification                              Suggestion
                           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


     Page 178                Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                       The Institute of Chartered Accountants of India

Sr. No      Section                      Issue/Justification                             Suggestion
                          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.



     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                  Page 179
                         The Institute of Chartered Accountants of India

Sr. No       Section                       Issue/Justification                            Suggestion
         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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 Sr. No        Section                         Issue/Justification                           Suggestion
                                                                                     (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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                    Page 181
                           The Institute of Chartered Accountants of India

Sr. No        Section                          Issue/Justification                              Suggestion
         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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 Sr. No        Section                        Issue/Justification                          Suggestion
          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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                  Page 183
                         The Institute of Chartered Accountants of India

 Sr. No       Section                       Issue/Justification                            Suggestion
                                                                                       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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                          The Institute of Chartered Accountants of India

 Sr. No       Section                       Issue/Justification                             Suggestion
                            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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)                   Page 185
                     The Institute of Chartered Accountants of India

Sr. No     Section                    Issue/Justification                    Suggestion
                       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


     Page 186            Pre-Budget Memorandum­ 2019 (Direct Taxes and International Tax)
                       The Institute of Chartered Accountants of India

Sr. No      Section                      Issue/Justification                     Suggestion
                              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

     Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)         Page 187
                           The Institute of Chartered Accountants of India

 Sr. No        Section                         Issue/Justification                            Suggestion
                                    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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                           The Institute of Chartered Accountants of India

 Sr. No       Section                      Issue/Justification                         Suggestion
                                                                               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


       Pre-Budget Memorandum­ 2019 (Direct Taxes and International Taxation)               Page 189
                           The Institute of Chartered Accountants of India

 Sr. No        Section                       Issue/Justification                               Suggestion
                           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.
                                                       X-X-X

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